Professional indemnity for accountants: 9 checks your insurer makes
Accountancy is one of the more 'established' professions, but this hasn't stopped the sector becoming fragmented with a confusing mix of several professional bodies and unqualified but highly experienced advisors.
You will also know that firms vary greatly in size and services, which is why insurers have to take extra steps with accountants before accepting a professional indemnity policy.
To make sure your accountancy firm is ready to submit a new or renewing policy, here's 10 pieces of information insurers scrutinise including the risk associated with each check when signing off professional indemnity for accountants.
Written by Kate Slater on 3rd October 2014
1 - Qualifications
Priority - First and foremost, insurers look for qualifications or insurance. If an accountant is unqualified then insurers will want to see a CV, normally demonstrating at least 5 years' practical experience. This may need to be more depending upon the services offered.
2 - Audit, accountancy and company tax
High hazard - Insurers will be particularly interested in what type of work the proposer is doing, particularly in financial institutions. Reporting requirements are usually greater and in the public eye too. The scope and size of potential claimants is large and losses can be enormous.
Other audit and accountancy working, including related tax work, is seen as standard practice for accountants therefore the hazard is reduced accordingly.
3 - Corporate and personal taxation
Variable hazard - Depending upon the clients and nature of the work, corporation tax hazards can vary. Unique to every firm, weighing up your client base will give you an insight into how the insurer will judge your policy.
For personal tax, this is viewed as another standard practice, however it can become complex in certain areas, for example those making a living in the entertainment industry.
4 - Management consultancy
Very low hazard - At strategic level, this is deemed low risk. At the level of interim management or IT consultancy, this can be viewed as more significant.
5 - Insolvency, liquidation and receivership
Very high hazard - Every project is a problem because the client is in trouble and owes people money. Creditors can be aggressive and questions are regularly asked, as you may know from your line of business.
6 - Insurance commissions
Low hazard - As accountants do not generally get involved with insurance brokering, this has an insignificant effect on the policy but is still something insurers check.
For commissions from investment business regulated under the Financial Services Act, risk can vary. Deemed as an 'introducer', you as the accountant could have given financial advice that may lead to significant losses.
7 - Mergers, acquisitions and disposals
High hazard - High sums of money, deals going wrong and hidden liabilities can equate to a high risk area of accountancy that your insurer will scrutinise.
Due diligence and any overseas business can also add to the confusion and costs, which is why insurers see mergers and acquisitions as such a hazardous area. To find out more about the issues surrounding mergers, download our free accountant's checklist for professional indemnity here.
8 - Cover partner liability
Most accountants remain partnerships which means there are many people with a need to cover liability arising from former practices.
This needs to be addressed carefully, not just from the perspective of getting the right cover in place but also from the perspective of looking at former practices' claims record.
9 - Claims record
Variable hazard - Depending on your company size and client base depends on your experience of claims made.
Many small firms are entirely clean, some large firms have experience some claims, the importance in this scenario is to be up front on all knowledge of the claim before entering into a new policy.