ICPA Analysis: PI, Run-off cover, and the cessation of your practice

Insurance and the cessation of your accountancy practice

As the economic forecast, unfortunately, remains gloomy, it is increasingly likely that you will be considering a change to your practice, writes Rob Ward. This may be a merger, a sale or retiring after a controlled period of wind down. Whatever the reason before you take that final step you will need to be sure that no one can spoil your party by bringing a claim against you for allegations of negligence and being without any protection.

The simple fact is that as the law stands your liability does not stop just because your practice has ceased. Under the Limitation Act 1980 the law allows your clients and anybody else to whom you owe a duty of care a minimum of six years in which to start court proceedings from the date that the alleged negligence occurred. The only exception to this limitation is in the case of fraud which has no limitation at all and a claim can be brought at any time – even death will not stop this!

So what are the remedies? In the case of a sale I would recommend that you try passing the practice on with responsibility for your past acts being picked up by the purchaser, who ought to be able to add this to their own PI policy. There will, of course, be a natural resistance to this as they have had no control over what you did in the past and may find themselves defending a claim that they have had no dealings with, but from a seller’s point of view it is the neatest thing to do.

If this cannot be achieved then the most effective solution is to buy ‘run off’ cover. This is a professional indemnity policy that provides cover for your past work to cover possible future claims.

Many believe that it is a waste of time as their fees have been diminishing in their later years of trading, but the ICAEW requires its members to continue to buy run off for a period of six years. I am aware that PI insurance is a grudge purchase while an accountant is practising and the resentment increases when they retire, so despite the rules many do not continue to buy after the expiry of their current policy. This is folly, as owing to the claims made the nature of the PI policy wording cover is only operative for claims made and reported to insurers during the policy period.

The problem for many practices is that most insurers are unable or unwilling to offer a one-off six-year policy which means that a renewal declaration is required annually and although the premium will reflect the diminishing liability as time goes by, reductions vary and may still be subject to overall market conditions and may increase if a claim is notified during the run off period. As a rough guide my suggestion is that in the current market you should allow 350%-400% of your final year’s premium to pay for the six years of run off.

Happily there are now one or two companies who are willing to offer a one-off policy, but from my experience these tend to come and go as the insurance market conditions change. However, without these companies it is highly unlikely that any insurer other than the one that you are currently with would be willing to take on a run-off policy, and it would be very unusual if they undertook this part way through the six-year period. So choose your insurer wisely!

 Rob Ward, Managing Director, Sennet. See www.sennet-insurance.co.uk for more

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at  www.icpa.org.uk  or email info@icpa.org.uk  or by ‘phone on 0800-074-2896