Does your business have adequate cover? What to Look for in your Professional Indemnity Insurance Policy.
Why have cover?
It is critical that accounting businesses have PI insurance that provides financial protection for liabilities they may face.
In the course of providing accounting and taxation services and advice, circumstances can arise and result in claims for professional liability against a business. These claims come from third parties (such as a client or others who have relied upon advice) for financial loss suffered as a result of negligent advice, including errors or omissions.
These claims may lead to a liability to pay compensation, and businesses will also be exposed to the cost of defending these claims, which can be significant.
Who is covered?
The parties who are covered varies from policy to policy. Generally, those covered include the company or firm, and their past, present and future 'Subsidiaries' or 'Related Entities' and any 'Insured Person' (all of which are typically defined terms).
An 'Insured Person' usually includes a principal, partner, director or employee when acting in the course of the business. Further, some policies available on the market include additional cover for consultants, subcontractors or agents (parties who do not fall under any of the above definitions).
What to look for: it is necessary to review these definitions and any definition of 'Insured' to confirm who is covered.
What does the policy cover?
A traditional PI insurance policy covers liability to pay compensation for claims for professional liability arising from the conduct of an accountant's professional business practice. 'Business' or 'Professional Services' is defined in the policy schedule and is subject to negotiation because this determines the scope of cover.
What to look for: it is important that all services provided (for example business services, valuations, company secretarial work, taxation advice and audits, superannuation fund administration) are specifically included to avoid coverage issues.
While cover varies between insurers, policies may include coverage for what are typically referred to as 'wrongful acts', including:
- breach of duty, including breach of confidentiality
- unintentional defamation, libel, slander
- unintentional breaches of the Australian Consumer Law (formerly the Trade Practices Act), for example, misleading or deceptive conduct
- unintentional infringement of intellectual property rights
An entitlement to cover will be triggered by a 'Claim'. This is usually defined to mean a written demand for damages or a civil or administrative proceeding by a third party against the insured business or any one of those other insured parties mentioned above.
The financial loss covered by a PI policy will usually include liability to pay damages to a third party (as well as their legal costs) and defence costs.
What to look for: the definitions of what amounts to a 'Claim' and a 'Loss' under a policy will be critical to determining the scope of cover that is available and should be checked carefully to ensure that they are sufficiently broad for the activities of the business.
When should a claim be notified?
PI insurance policies operate on a 'claims made' basis. This means that all 'claims' made against the business or during the policy period (which is typically 12 months) must be notified to the insurer, also during the policy period or any applicable extended reporting period. In addition, PI policies may also permit or require insureds to notify the insurer of any circumstances reasonably expected to give rise to a claim. This is because situations arise which fall short of being a 'claim' but give cause for concern that a claim may later develop.
Notifying circumstances is equally important because doing so will trigger cover in the policy period the notification is made, even though the claim may emerge at a later time, and avoid disputes about late notification of the claim.
What is excluded from cover?
A PI policy will exclude cover for risks that either cannot be insured or which are covered by some other class of insurance.
In those categories, it is usual for a PI policy to exclude cover for claims for fraudulent or dishonest acts by the insured person or the business. However, such exclusions will usually not operate until the conduct in question is finally adjudicated by a court. This allows the advancement of defence costs by the insurer to the insured so that they can defend themselves against the allegations. Claims for bodily injury or property damage are excluded from cover as these may be covered by other policies. Claims arising from financial planning, investment advice or fund management by the company to a third party are also excluded from cover in most PI policies in the market, with the exception of some insurers who offer endorsed cover for such claims. Further, some policies exclude cover for claims arising out of the audit of a publicly listed company or financial institution.
Prior known claims or circumstances relating to an act or omission which took place before the commencement of the policy and which could have been notified to an insurer under a previous policy will also be excluded.
Limit of liability and retentions
Coverage limits are specified in the policy schedule.
- The limit of liability is the maximum amount that the insurer will be liable for in the event of a claim, over and above any applicable retention. The limit of liability is often inclusive of defence costs.
- There may be an aggregate limit of liability set out in the policy. This means that the overall amount of cover available during the policy period is limited to the specified amount, regardless of how many individual claims arise during that policy period.
- There may also be sub-limits, which are limits within the overall limit of liability, that apply to certain costs and expenses in the event of a claim including, for example, claim preparation costs and public relations expenses.
It is common for PI policies to require that the company pay a 'retention' or deductible amount first, before the insurer is required to pay under the policy. The better policies on the market operate on the basis that one retention or deductible is payable in the event of multiple/related claims.
What to look for: care must be taken to ensure that the policy provides an adequate limit of liability, having regard to the nature and extent of the business operations and its perceived risks. Additional cover may be available under the policy or on a 'top up' basis.
State of the market
The market for PI insurance is cyclical with periods where broad cover is readily available at reasonable rates (soft market) and at other times, the cost is high with a narrower scope of cover available (hard market). The state of the market is influenced by a range of factors such as the number of insurers willing and able to provide capacity as well as by the prevailing claims environment, and the broader economy. At present, the market conditions for PI insurance for most businesses is challenging.
For example, there are reports that insurers are expecting an increase in professional indemnity claims due to economic uncertainty created by COVID-19. Insurers are seeking to impose increases in retentions and are generally taking a tougher stance on underwriting or withdrawing capacity as a result of that uncertainty.
What to look for: it is important that businesses demonstrate to their insurers that they have appropriate risk management in place when negotiating its insurance.
How we can support you
McCullough Robertson and our insurance advisory service, Allegiant IRS can provide comprehensive policy checks and analysis to ensure your cover is adequate and to assist you to navigate through the currently challenging PI insurance market conditions.
In our next article, we will look at audit insurance and outline what to look for when purchasing these policies and how to get the most out of what they offer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.