Factsheet. Professional Indemnity Insurance. AAT is a registered charity. No

Transcription

1 Factsheet Professional Indemnity Insurance AAT is a registered charity. No

2 Disclaimer Although all reasonable care have been taken to ensure that the content of this factsheet is accurate and reflects industry best practice and regulations, members should always consider their individual circumstances when using this document. The content of this document does not constitute legal advice and in certain circumstances, it may be necessary for members to seek expert legal advice. AAT will accept no liability for loss caused to any person or entity as a result of acting or refraining to act in accordance with any material in this factsheet. Third party websites Although all reasonable care have been taken when selecting third party websites, AAT is not responsible for the contents or reliability of the linked web sites. AAT accepts no liability for any linked sites and their content and it is important that you take necessary precautions, especially to ensure appropriate safety from viruses and other potentially destructive items. We cannot guarantee that the links will work all of the time and we have no control over the availability of the linked pages. As in all cases, when visiting external websites, you should review those websites' privacy policies and other terms of use to learn more about how they collect and use any personally identifiable information. 1

3 Professional Indemnity Insurance (PII) PII is generally a form of liability insurance that protect professional advice and service. More commonly, PII provides individuals and companies with protection from bearing the full cost of defending a negligence claim made by a client and damages awarded in a civil case. Members in practice and PII It is a mandatory condition for all AAT members in practice to have arranged appropriate PII cover before providing any accountancy services to clients. This requirement is contained in the Guidelines and regulations for members in practice. Having appropriate PII in place ensures that members of the public do not suffer a loss as a result of your liability without having recourse to adequate compensation. This is important in maintaining public confidence in the integrity of AAT members in practice. AAT PII requirements apply to individual members in practice. However if you are in a partnership, a co-director in a limited company or a principal in any other such arrangement (as a firm), the firm must be covered by the PII policy as a policy holder. Level of PII The minimum level of cover for individual members in practice including sole traders is the greater of 2.5 times the annual gross fee income or 50,000. For firms, the minimum level of cover is the greater of 2.5 times the firm s annual gross fee income or 100,000. It is your responsibility to arrange appropriate PII cover and you should carefully consider the circumstances of your practice before deciding the level of cover you require. Although the maximum level of cover for members in practice with annual incomes over 400,000 is 1,000,000, it is important that such businesses carefully consider their liability risks and speak to an insurance broker before deciding an appropriate level of cover. All AAT members are required to have insurance on an any one claims basis rather than insurance limited by an annual aggregate. This means that each individual claim will be covered up to your insurance limit avoiding the danger of your insurance cover being exhausted by several claims. There will always be the risk that one single claim may be greater than your insurance limit. It is therefore important that you assess your indemnity limit when taking on new engagements, especially when dealing with complex high net worth engagements. While there is no exhaustive list of issues that may be relevant in determining the appropriate level of insurance for your practice, here are a few points to consider: 2

4 Certain types of client may have a particularly high likelihood for producing single claims for very large quantities of money. For example, work for the entertainment industry, particularly work connected to films, has a tendency to produce very large claims. Accountants who undertake critical work for a small number of clients are more likely to be involved in large cases than accountants who perform bits of work for a large number of clients. It is important to read through your insurance contract carefully. Pay special attention to issues such as the particular contracts definition of a single claim, along with considering if any of the exclusions or small print may be inappropriate for your type of business. If there is an issue that you believe would be relevant to your quantity of insurance but the client involved is a friend or family member who you feel confident would not make a claim against you, you should not let the nature of the relationship influence your judgment and you should still increase your insurance level. It is unfair and unprofessional to deny a client s business the opportunity of receiving adequate recompense for an error you may make in your work on the grounds of family loyalty or friendship. Be aware that you may be liable for work you are carrying out for free, either for friends and family or unpaid work carried out for charities. This liability can even extend to relatively casual advice, so be careful whenever someone is asking for your advice as a professional. You can however limit your liability in these situations by notifying the client in writing at the start of the engagement that your advice will not be covered by professional indemnity insurance protection. You should ensure that you are in a position to pay the full quantity of your excess in any particular period. Since the Guidelines and Regulations specify that the excess must have an aggregate limit, there is a limit on how much can be required in any one period, but you must be capable of paying this quantity or else your business is at risk. If arranging a self-insured excess, this must not exceed 10,000 in the case of an individual member in practice or a firm. You must be particularly careful in the case of areas of work that you only rarely undertake; for example, many accountants only rarely encounter issues relevant to Inheritance Tax, and yet this is an area where legal claims can arise from unexpected quarters. Many claims can be avoided through carefully worded letters of engagement that lay out your specific responsibilities. Be careful to note if a condition of your insurance is that such letters are in place, as it is possible that you may not be covered against claims where no such formal letter is in place. It is important that you inform your broker of potential claims immediately, and that you handle any potential claims against you in an appropriate manner in accordance with the guidance that your broker will give you. For example, you must not admit liability to a client unless you have been advised to do so by your broker or insurers as this may invalidate the terms of your policy. 3

5 It is important to note that AAT PII Regulations only apply to accountancy professional services provided under the terms of your licence or registration. If your business offers services that would not fall within your licence or registration, then you may require additional professional indemnity insurance covering the non-aat services you offer. Also, you may require other forms of insurance, some of which may be legally required while others may be particularly sensible for your practice. Your own assets and business are at risk if you have an inappropriate level of insurance, as are the businesses and assets of your clients and their third parties. It is therefore extremely important that both your initial risk assessment is thorough and that your assessment is ongoing both when taking on new clients and when clients move into new areas of work. If you offer Limited Assurance Engagement as a service, then you must ensure that the PII policy covers this service and potential third party claims. Putting PII in place Having PII in place is one of the requirements for issuing a licence or registration on the members in practice scheme. You are required to provide confirmation of PII during the licence and registration renewal process. You must have PII cover at all times when providing services. New members in practice must ensure that PII is obtained before commencing in practice. A gap in PII policy is a breach of the conditions of the licence or registration and may result in the licence being revoked and disciplinary proceedings. Having gaps in PII may also be a costly oversight as you may be held personally liable for any losses suffered by your client in the period when you were not insured. Where to get PII cover You can obtain PII cover from various commercial insurance providers. Although AAT has negotiated favorable rates with some providers, AAT is not authorised by the FSA to act as an insurance introducer or mediator and offers no opinion on the insurance products offered. AAT does not endorse any particular product over another and it is your responsibility to choose appropriate PII cover based on your circumstances. You may find the advice of independent brokers useful when deciding on the best policy for you. If you are arranging PII cover, you should ensure that your provider has the appropriate FSA authorisation to conduct insurance business in the UK. 4