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Risk management: avoiding a costly PII claim

Author: Professional Standards Department

Published: 25 Aug 2021

No business or individual wants to receive a professional indemnity (PI) claim. But in a hard PI insurance (PII) market, where a claims history can significantly affect renewal terms, reducing the likelihood of receiving a claim is more important than ever.

Being well prepared is critical if you want to avoid or mitigate the risk of claims. Difficult economic trading conditions are commonly associated with an increase in PII claims. So there is an element of inevitability in current circumstances. But this doesn’t mean a claim or complaint is valid, and insurers are aware of that, so don’t panic.

In the accountancy profession, the majority of claims are not driven by technical errors. “You’re not getting your advice wrong or breaching your duty of care,” says Liz Norris, Technical Lead and Solicitor at Marsh Commercial, specialist PII broker and an ICAEW member rewards partner. “They are more clerical or administrative errors. So it can be something as simple as missing an HMRC deadline.”

This is good news because it means there are some simple – mainly administrative – steps you can take, which will at best eradicate the likelihood of a claim occurring, and at worst minimise the impact, severity or value of a claim.

Put it in the diary

A well-managed and monitored diary management system is the key starting point. It is very easy for practices to focus on fee earning and engaging with clients, while allowing seemingly mundane tasks to slip down the priority list. So Norris advises putting a non-fee earning employee in charge of the diary system, and they can then give “a gentle nudge in the right direction when deadlines approach, so it’s all ticked off”.

Sitting alongside this is good file management and contemporaneous documentation. “It’s really important to record discussions with clients with file notes,” says Norris. “It doesn’t have to be verbatim – just some simple bullet points of what was discussed and the response from the client.”

If a client decides not to follow advice you have given – and they are entitled to do that – always follow that up in writing. This should set out the advice you have given and say exactly what the client decided, and instructed you to do. “Nothing is more frustrating, not just for you as a practitioner but also for us when defending a claim and assisting you, than when we know advice was given and we just can’t prove it,” emphasises Norris.

Don’t ignore cost grumbles

Norris also advises giving credence to what at first might seem to be unimportant queries about costs. Many claims start off life as innocuous grumbles about a bill, she explains, and if the client feels their complaint or grumble has not been given due consideration, their perception can be negative, their position can become entrenched and the situation can snowball.

No one likes surprises over costs. So if you have offered a fixed fee, make sure your diary system flags when you reach 75% of the fee, and if necessary you can then go back to the client and explain why the work required may mean added costs. “Don’t be afraid to have that conversation,” advises Norris. “Because, if you don’t, it will turn out worse if the bill comes in and it is unexpected.”

A proper engagement

Engagement letters are another useful tool in helping to avoid costly PII mistakes. Norris warns against viewing these letters simply as a routine administrative task. “It really sets the tone for the relationship with the client,” she says. “And it is the starting point whenever any claim comes in: what did you agree to do for the client and did you do that; did you go beyond that?”

The engagement letter presents an ideal opportunity to limit your liability. This might be via a liability cap equal to your PII policy cover that limits the amount of liability you have to a client. Or it could be a disclaimer. For example, if you are relying heavily on information from a client to produce a tax calculation, the letter could set out the extent of liability for any losses arising as a result of the information they supplied being incorrect.

This can also be a good point to include a net contribution clause if you are working alongside other professionals, such as solicitors. These limit your liability to adjust the proportion of losses for which you, as an accountant, are responsible.

Notify, notify, notify

Delays in notification are by far the most common problem between insurers and insured. You are required to notify not just claims but also circumstances that might give rise to a claim. This means that any error or omission that could elicit a claim, but isn’t a claim yet, must be notified.

If you fail to do this, it can really damage the relationship between an insurer and the insured, says Norris, which “is something you definitely want to avoid in a hard market”. If you have any doubts about what needs reporting, talk to your broker.

Another common pitfall is to underestimate the indemnity you require. Just because there is a minimum level, it doesn’t mean it is appropriate for your needs. So you need to think about the worst case scenario and whether the minimum indemnity will cover that. “For the vast majority, the minimum level might be OK,” says Norris. “But engage with your broker to see if your work might give rise to higher claims.”

If you want to reduce your claims exposure, it is imperative you prepare well, keep on top of the paperwork and stay aware of your policy obligations. This might seem obvious advice, but these are also issues that can easily get overlooked as day-to-day business demands take over.


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