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Why should an accountant invest in Professional Indemnity Insurance?
An accountant needs professional indemnity cover as much as a skydiver needs a parachute, says freelancer for ConstructaQuote Tara West.
Typically working in a high-pressure, mission-critical environment, accountants may need to rely upon insurance when their work is argued to be erroneous or negligent. The following are five reasons why an accountant might require professional indemnity insurance.
It is commonly accepted that people make mistakes; even the most skilled and diligent of accountants are not immune. Miscalculating a client's sales figures and translating these mistakes onto a tax return can require only the most trivial of mistakes: minor lapses in skill, concentration or judgement can easily omit a digit or misplace a decimal point. Unfortunately, relatively minor errors of this nature can prove extremely costly for the client.
In the case of the tax return, for example, the client could face a serious financial penalty if a mistake leads to his or her return being incorrectly filed. Similarly, the client might misjudge spending for the next financial year if the previous term's accounts are inaccurate. If the client realises the mistake and decides to take legal action, the accountant will need to rely on a professional indemnity policy to cover subsequent damages.
Sometimes mistakes are so erroneous as to be held to be negligent. Professional negligence differs from the general laws of negligence in England and Wales, but the principles with which action is taken in court remain largely the same. If an accountant represents himself or herself as a skilled professional, a stance that is essential in acquiring clients, this suggests an individual or firm with special knowledge, skill or understanding.
If the accountant subsequently acts in breach of their duty of care to the claimant, a court must decide whether they acted in accordance with the skills and expertise reasonably expected in this line of work. Regardless as to the outcome of any such case, the accountant will need to have professional indemnity insurance in order to cover legal costs and damages.
An accountant may also be guilty of misrepresentation, which should not be confused with deceit or fraud. Professional misrepresentation can occur in various circumstances but is typically defined as a false or wholly inaccurate statement that is relied upon to the detriment of the client. A client may have been misrepresented, for example, if their accountant informs them that a certain business activity is financially viable when, to the reasonable person (of the skills and expertise befitting a professional accountant), this is not held to be the case.
While the laws pertaining to misrepresentation are varied, the professional accountant must ensure that they are suitably covered by a professional indemnity policy whenever (and after, as will be discussed in more depth below) they give direction to clients.
4. Breach of confidence
A breach of confidence can occur unintentionally, but this is not to say that the injured party cannot claim damages in court. In the context of a professional accountant, a breach of confidence is likely to occur when information pertaining to a client is inadvertently made known to others. This unintentional breach of confidence or trust can result in serious financial harm. This is why accountants procure professional indemnity cover to insure against such risks.
5. Extended cover
Finally, it should be noted that professional indemnity cover may be required even after an accountant has left their role. If a mistake occurred in 1999, for example, but the accountant in question left the business one year later (cancelling professional indemnity cover in the process), it is quite possible that he or she may be sued some time later.
Having no professional indemnity cover seriously exposes an individual to financial ruin, so it is important to ensure that indemnity is extended for a suitable term after retirement. The Limitation Act 1980 sets the time period during which claimants are able to sue for certain types of tort such as the tort of deceit from the point at which the claimant realises the error. It is also worth stressing the importance of shopping around for the best deals on professional indemnity cover, using online services.
Tara West is currently working as a freelancer for ConstructaQuote.