Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Take cover! Intelligent indemnity insurance. By Richard Joseph

by
27th Nov 2007
Save content
Have you found this content useful? Use the button above to save it to your profile.

Like most insurance products, the only time you can assess the value of professional indemnity insurance is when something goes wrong. While the hope is that you will never need to call on it, every year when the renewal arrives, questions come back to haunt. How much cover do I really need? What about increasing the excess? Can I get the same cover for less?

Claims are relatively rare and although they can sometimes appear extremely unfounded, they should never be treated lightly no matter how unsubstantiated they may seem.

The following tips offer practical advice on professional indemnity insurance and can help to minimise the risks of future claims:

1. If a claim arises, notify your insurer as soon as possible and preferably before you respond to the claimant or their advisers. You should ensure that you have your insurer’s consent to contact the claimant as it is common for the insurer to request that you keep out of direct contact with them. Ensure that you follow the policy terms precisely whenever a claim arises to avoid the risk of invalidating your policy or of the claim being rejected.

2. Maintain a sequential log of all details following the claim. This is important to maintain clarity on the issue especially since such matters sometimes have a tendency to take significantly longer than expected.

3. It is always worthwhile to take a look through your internal procedures and working methods to help identify why the claim arose in the first place. This can sometimes be down to the following reasons:

  • Lack of time - you may not have taken enough time to properly consider and reflect on all the details
  • Too closely involved with the detail - your review may have lacked objectivity because you were too personally involved in doing the work
  • Failure to communicate effectively - you may have failed to appreciate what the client may have told you. They in turn might have misunderstood you and a failure to communicate your intentions in writing could have made this worse
  • You are being targeted by an outrageous opportunist

4. Carefully consider whether or not you should have taken on the work in the first place. The satisfaction gained from acquiring a new client or more work from an existing client sometimes makes it difficult to say no when perhaps you should. Time pressures, a lack of resources and a need to catch up on technical details should really make you reconsider this if it is something of an issue.

5. Practitioners sometimes find themselves being sued by third parties (i.e. non-clients) who assert that the firm owed them a non-contractual duty of care. If the firm knows that a third party will have access to the output of its work and will place reliance on it, then it should consider including an effective disclaimer, to the effect that the firm will not owe a duty of care to the third party.

6. Carefully consider prospective clients to be sure that they will not hinder your work through any time and/ or commercial pressures that they may have. Problems can be avoided if you know that the prospective client is unreliable and is not likely to be forthcoming with information. This is especially important if a third party might be involved.

7. A common source of professional liability claims stem from the engagement letter so fully understanding and agreeing the engagement terms between yourself and your client is highly important. The engagement letter represents the written contract between the client and the firm and provides an opportunity to record matters that you have both agreed. It also allows for clarification of aspects of the work that might form the basis of any misunderstanding.

8. Including appropriate terms within the engagement letter will help limit your exposure to professional indemnity claims. This is possible for most professional services though audit remains legally barred until the provisions of the Companies Act 2006 are implemented. However, the main problem with this approach, particularly where a firm might apply limitation agreements in a wholesale or routine way, surrounds the Unfair Contract Terms Act. Under the provisions of this Act, a client, despite agreeing to and confirming acceptance of a limit to a firm’s professional liability for services to be provided, could subsequently challenge the limitation.

9. The most significant way to limit your exposure to the risk of professional liability is to take a critical look at the work before you send it out. You should check for the following:

  • That all the relevant professional standards have been applied
  • That there has not been any significant events taking place that might provide grounds for the client or someone else to claim that the firm is responsible for an alteration
  • Arrange for a second partner review if you have a second partner available. If you don’t, you may wish to look outside the firm and engage a suitably qualified external accountant to conduct a ‘hot’ review. Ensure that you have allowed yourself an adequate amount of time for this provision

10. Finally, do consider the amount of cover required. It not just a matter of how much tax you could cost a client. Think how much could be involved if, for example, some inadvertent error on your part actually stopped the sale of a business - the amounts involved could be enormous.

Professional indemnity claims are thankfully rare, a fact supported by relatively low premiums. With care and the adoption of good practice, the incidence can be further reduced which will benefit both your client and your insurers.

Richard Joseph is honorary secretary and a former chairman of the London Society of Chartered Accountants (which represents all ICAEW members in the London region) and is the principal practitioner of his own practice, Richard Joseph & Co, which specialises in helping new businesses to establish themselves and develop. He is also a member of the ICAEW’s Support Members Service where he provides help and advice to chartered accountants who may have problems of a personal or professional nature.

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.