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July 29, 2015

Professional indemnity insights: policies and pitfalls

The market available for professional indemnity (PI) insurance in respect of accountants has enjoyed a deep pool of willing insurers, in the recent past. This is because unlike other professions, such as surveyors and lawyers, there has not been an event that has led to a claims frequency issue for the profession and insurers.

However, due to a recent increase in claims activity across the industry, insurer’s appetite for accountants PI has started to change. This has resulted in an increase in insurer’s rates as well as causing insurers to review their position in the market and in some circumstances, to withdraw from the market completely.

This change has primarily been brought on by an increase in claims relating to tax for both personal and corporate. Recent years have seen a rise in tax mitigation schemes marketed for individuals wishing to limit their personal tax exposure. In the last 24 months HMRC, the UK taxman, have become increasingly aggressive in investigating and pursuing schemes which they interpret as tax evasion rather than mitigation and there have been a number of high profile individuals named in the press.

Consequently, public opinion is largely supportive of these actions. Investigations have found many schemes which don’t fall within HMRC’s definition of the rules. These schemes have subsequently been subjected to accelerated payments/fines and major penalties. Whilst the majority of accountancy practices did not market these schemes, many have acted as introducers and have been drawn into these claims as a result of these investigations.

Insurers are finding that they are receiving multiple claims due to the systemic nature of the losses once a particular scheme has been found to lie outside the rules. This is very similar to the experience of many insurers within the financial services PI market. Accountants’ PI insurers are increasingly mimicking the actions of the financial services insurers by applying each claimant excesses to claims arising from tax mitigation schemes.

This means that although the proximate cause of the claim was the introduction to the scheme, for the purposes of the PI policy, a separate excess will apply to each claim arising from the scheme by an individual.It is impossible to say that there is an exact solution to successfully defending a claim brought against your practice in these circumstances, however, as a minimum, PI insurers would like to see your practices’ Letter of Engagement be as clear as possible, ideally stating that the practice does not accept liability for any advice that may be given by the third-party specialist tax advisor.

It is also preferable for the practice to reject an introductory payment from the third-party tax advisor. This will hopefully provide the insured accountant with a reasonable defence if they are held accountable by HMRC and/or their client in the future.Insurers are also seeing an increase in claims arising from corporate restructures carried out in an attempt to mitigate corporation tax charges. These losses do not tend to be systemic, but are larger and more complex in nature. These losses are also putting pressure on insurers, which directly affect their appetite for risk going forward and rates being offered by those who remain committed to the class.

In sum: professional indemnity insurance for accountants is an increasingly hot topic and readers should be alert – both to the possibility of an increase in rates, and to their professional risk areas. The recent rise in claims activity may or may not have peaked but it is likely that its effects will continue to be felt for a while.

Paul Afteni and Duncan Philpott are divisional and executive directors, respectively, at Willis, an insurance broker.

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