Time to rethink professional indemnity insurance

This article was current at the time of publication.

Not all professional indemnity insurance is created equal. It is mandatory for CPA professional practitioners but warrants far more than just ticking another compliance box.

In an age of “no win no fee” plaintiff lawyers, accountants are prime targets for aggrieved clients.

“They’re more aware of their rights and they’re more willing to turn to litigation,” says Drew Fenton CPA, director of Melbourne-based broker and CPA Australia PI Insurance provider Fenton Green & Co.

“There’s an endemic belief that it can never be my fault, so I’ll blame somebody – and everybody knows accountants have professional indemnity insurance, so they also know there’s money to be had,” Fenton says.

“With plaintiff lawyers working on ‘no win no fee’, why not pursue it? You might end up with a few extra dollars in your pocket.”

Or even a lot more.

Key risks for accountants

Inevitably, claims have spiked and not only in Australia but across the ditch in New Zealand.

“The legal systems and accountants’ obligations to clients are effectively the same, as is the risk profile,” Fenton says. 

“There are nuances with legislation but at the end of the day, everybody’s getting sued because the plaintiff has lost money – or thinks they have.

“In a general sense, professional indemnity insurance is about tax errors,” Fenton says. 

The advice provided was either incorrect or the people who provided it didn’t quite understand it to the extent they should have.

“We’re also seeing it now with valuations and liquidations, where the receiver or liquidator pursues an accountant for providing advice to a client who then gets into financial difficulty.”

Notably, this is because of simple tax or investment advice to negatively gear a property, for example, or perhaps extend a loan, but not financial advice on an Australian Securities and Investments Commission-registered financial product, for which an appropriate licence is essential. 

“The situation at the moment is that maybe we’re advising clients to take out a larger loan and then things collapse, meaning that the advice provided by the accountant has effectively incurred more losses.”

If that happens, the accountant is at risk of being taken to task.

The curse of continuing COVID

COVID-19 just won’t go away and Fenton acknowledges it’s a big – and will possibly become a bigger – problem.

“Mentally, the oversight of colleagues isolated at home certainly increases risk,” he says. 

“Continual interaction is important and to not let them go outside their zone of knowledge. If they were in the office where there is a greater skill set and [were] dealing with a client, they could ask someone instead of having to bluff their way through and maybe risk getting something wrong. You can only keep moving on and hope that it never comes back to bite you.”

Pushing everything into the cloud is a potential fail-safe. 

“Locking your files away in the cloud is without question the No.1 risk profile prevention strategy,” Fenton says. 

“The files will be secure but when you’re at home, don’t forget that your children could still get on your computer at night and access websites that aren’t secure.”

Silent PI claims

Fenton offers a great analogy when it comes to professional indemnity insurance.

No one will think too much about it if you say to your peers, “Hey guys, I just had a bingle in my car”.

On the other hand, no one wants to say, “Hey, you’d never believe what happened to me today – I just got nailed for professional indemnity”. 

“That’s why the profession generally thinks that nobody faces these types of claims,” Fenton says.

“The problem with professional indemnity is that it has a silent claims profile because nobody ever wants to admit that they just got sued.”

Contingent liability

“We work in a common law environment,” Fenton summarises. “When you hold yourself out for a fee for service, there are liabilities on the other side of that work that may come home to roost, and rightly or wrongly somebody can take you to task for it. 

“It’s what we call contingent liability.”

After that, everything depends on how things play out in the legal system.

What should accounting practitioners do?

With professional indemnity insurance, Fenton believes the first question too many practitioners ask is, “how much is it going to cost?”.

“Before you start, you need to understand your risks, how effectively you can handle them, and whether your practice has the internal systems to reduce them,” he says.

“Under common law, your liabilities are [potentially] unlimited. The problem with going on the internet and just buying a policy is that they’re generic, but do they meet the needs of your practice?”

It is, he says, imperative to transfer whatever these risks might be via insurance, but without a broker there probably won’t be anyone fighting for you in your corner. 

“So, yes, a lot of accountants are just ticking the box, thinking they’re never going to have to fight a claim.”

It may be that you won’t, but in an increasingly litigious environment, there’s every chance you might.

Key points to remember

CPA Australia’s Professional Standards Scheme may limit the level of a civil claim, relevant to the amount of PII you are required to hold under the by-Laws.

• If you fail to display the notification of limited liability statement “Liability limited by a scheme approved under Professional Standards Legislation” (in at least 8 point Times New Roman font on all promotional material, including emails, website and engagement letters), you will not be eligible to participate in the scheme. 
• You must also continue to hold PII suitable for the services provided and practice’s income, as stated in the CPA Australia By-Laws.