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When renewing professional indemnity cover practitioners should be wary of reducing their level of cover, writes Ian Richards.

Despite worsening professional indemnity insurance (PII) market conditions, the cost of PII cover for ACCA member firms – when expressed as a percentage of firms’ income – continues to be lower than that of most other professions.

Like other professions, accountancy has suffered the effect of significant premium increases in the past couple of years. For those firms insured on the ACCA endorsed PII scheme, many were well prepared at the time of renewal, and understood the underlying reasons for the increases after reading the publications from Alexander Forbes and general coverage in the press and professional journals. Nevertheless, it has been an unwelcome experience for members after the relative stability of premiums in real terms delivered by ‘soft market’ conditions throughout the 1990s.

Limit of Indemnity
Faced sometimes with a sharp premium increase, many firms have looked more closely at the amount of cover (limit of indemnity) and uninsured excess on their policy, in an attempt to keep the cost to a minimum. Reducing the level of cover is a decision not be taken lightly and the firm should carefully assess the risk exposure represented by the client base.

When selecting the limit of indemnity, factors to consider include the following:

• the number of claims against professionals appears set to continue to increase, given the more litigious environment that exists today
• claimants can consult ‘experts’ in making their case against you, and you have no control over these often expensive costs. These claimant’s costs will form part of any award made against you and your limit of indemnity will need to be adequate to cater for them
• remember that your PII operates on a ‘claims made’ basis which means that the policy (and limit of indemnity) in place at the time the claim is first notified and accepted by your insurer will apply to the claim until it is concluded. The policy and cover in place at the time when the work was performed are irrelevant
• claims can take many years from first notification to final settlement and you should ensure that the level of cover you arrange contains some ‘future proofing’
• statutory interest can also form part of a claimant’s loss, and you have no control over this element if the case goes against you. Your limit of indemnity must also be adequate to cover this where it arises.

Many ACCA member firms look to the minimum PII requirements set out in the practising regulations of ACCA’s Rulebook. Members often appear to incorrectly interpret these as being a guarantee of adequate cover. This could be a very dangerous assumption and the rules should only be regarded as a guideline for the minimum level of cover.

Consider, for example, a sole practitioner or small firm undertaking mostly low-risk general practice work, but also with one or two specialist ‘higher-risk’ consignments for long-standing clients. The firm may decide to insure at the minimum level to satisfy the rules at £50,000 or £100,000. It is quite possible for the firm to sustain a claim in excess of the cover arranged in these circumstances.

Bear in mind also that earning a modest fee does not mean that the resulting legal liability flowing from a breach of professional duty will be equally small. We have dealt with many claims running into six figures where the firm’s fee was only a matter of a few hundred pounds.

In the circumstances, at a time when the cost and adequacy of professional indemnity cover is clearly in the spotlight, members should decide on their level of cover very carefully indeed.

ACCA’s recommended broker, Alexander Forbes Professions, is available to offer guidance to ACCA members and firms and can be contacted via telephone on 0117 906 5000 or at www.afprofessions.com/acca. To discuss any of the issues raised in this article, please contact me on 0117 906 5033 or at richardsi@aforbes.co.uk.

Ian Richards – Director of Alexander Forbes’ Bristol Office

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