ICAEW.com works better with JavaScript enabled.

Taking risks with PII run-off is a false economy

Author: ICAEW

Published: 05 Sep 2022

Run-off cover for your professional indemnity insurance (PII) is critical to protect your clients, your firm and yourself. We look at why this cover is so important, and how ignoring the issue could put you at financial and compliance risk.

PII is compulsory for all ICAEW members who have a practising certificate and engage in public practice. It is also a requirement for specific regulated areas, such as audit, probate and insolvency.

If you or your firm cease to practise, you need to arrange for sufficient run-off cover so that you comply with ICAEW’s PII Regulations and protect yourself and your business. ICAEW also recommends that the terms and conditions of run-off cover be equivalent to any previous PII policy.

“Run-off cover protects a practitioner or firm for claims received after they stop practising for work done while they were practising,” explains Edward Partridge, Senior Vice President, Marsh Commercial. “PII is underwritten on a ‘claims made’ basis, which means it's the insurer who is on cover when the claim is actually notified who is responsible for considering the claim.”

Continuity of cover

“A member or firm will purchase PII for the lifetime that they're trading,” Partridge explains. “But if, when they decide to cease trading, they cancel their PII cover and a claim comes in tomorrow for some advice they gave a year ago, they're not covered.”

“If you cease trading, sell your business or retire, it’s really important that you continue to cover yourself for past exposure from the advice you've given,” he emphasises. “And run-off cover provides that.”

Under ICAEW’s PII Regulations, when firms cease to practise, the members in the firm must ensure that compliant cover is in place for at least two years, and after that they must use ‘their best endeavours’ to maintain compliant run-off cover for a further four years.  

“It’s preferable to have compliant cover for the whole six years,” says Sarah-Jane Owen, PII and Regulatory Manager, ICAEW. “That’s a good benchmark because it’s the period usually permitted for a claim to be brought.”

“We see claims coming in three, four or five years after people have ceased to practise because sometimes it takes that long for the negligent advice, error or omission to come to fruition,” adds Partridge.

“And just because you've not had a claim before, doesn't mean one won't come through after you cease to practise,” stresses Owen. “This could happen, for example if there's a new focus on a particular issue, which happened in relation to HMRC and tax mitigation schemes. Similarly, just because you've wound a company down, it doesn't mean a claim can't be made.”

Plan for the future

“It’s very important to factor in the costs of PII run-off when you’re planning your exit strategy or retirement from the profession,” advises Owen. “That way you know you have it covered early on.”

If you cease to practise, but your firm is carrying on, run-off cover may be provided under the policy of the continuing practice or you may need to take out an individual policy. So it’s important to double-check the arrangements and act to secure compliant cover if necessary.

“Run-off is fairly easy to budget and plan for,” says Partridge. “You don't get the same market impact on run-off as on live policies where rate fluctuations can cause quite severe swings in cost.”

“For the most part, run-off policies are either priced at the outset for the period or you will know what the annual cost is going to be,” he adds. “And in some instances, annual cost actually reduces over time. So it's fairly straightforward to budget for that as you approach retirement or make plans to cease trading.”

“Another point to bear in mind,” says Owen, “is that failing to have compliant run-off cover is a breach of the PII Regulations and might give rise to disciplinary action.”

“Under the minimum terms, insurers are required to notify ICAEW if run-off cover does not incept for non-payment of premium,” she adds. “So we usually know when firms cease without taking run-off.”

“There is also a provision within the minimum wording that means a firm’s insurer has to provide a quote for run-off cover if a firm ceases,” she adds. “So firms shouldn't really ever be in a situation where they haven't had an offer.”

False economy

“Failing to invest in appropriate and sufficient run-off cover is ultimately a false economy,” says Partridge. “If you've invested in buying PII for your business while you're trading, you still have that exposure when you cease. So why would you stop covering your liabilities at that point?”

“If you don’t have proper run-off insurance, you, as an individual, could end up having to pay all the direct and indirect costs of any claim brought after you cease trading,” he explains. “But if you have purchased good run-off cover, you’ll still have access to all the protection and back-up you need: experienced claims teams, legal advice, and a broker there to support you.”