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Accountants’ insurance premiums on the rise

As the severe economic downturn creates a steep rise in professional indemnity claims, practitioners must be vigilant and have appropriate mitigation strategies in place. Here are some steps you can take. 

Gary Anders | August 2020

The COVID-19 pandemic and the economic downturn caused by it (some might say recession) has triggered a spike in professional indemnity insurance (PI) claims against accountants across Australia and New Zealand.

It is a warning sign for all practitioners of the importance of vigilance and underscores the imperative of sound risk mitigation processes.

Accountants targeted by third party lenders

As well as a jump in damages claims by clients, accountants are increasingly being targeted by third parties, including banks and other lenders, as well as company administrators and receivers.

“Every time there’s a downturn in the economy, professional indemnity claims go up,” says Drew Fenton CPA, managing director of specialist insurance brokers Fenton Green & Co. “It’s as simple as that.

“Everybody knows accountants have professional indemnity, so if money is lost, invariably somebody will cast their eye over the work the accounting or advisory firm has done for that particular entity. That’s the landscape we’re in at the moment.”

PI insurance claims are long-tail liabilities for insurers, with typical claims taking between three and six years to resolve.

Professional indemnity premiums set to rise

The current surge in PI claims could shortly precipitate a rise in insurance premiums, although insurers are generally holding back on increases at this stage in light of the precarious economic conditions facing all businesses.

While the grounds of PI insurance claims can be specific or varied, a fairly common theme at present is around the substance of advice provided to businesses that have recently fallen on hard times. 

This has highlighted a compliance gap in some practices, where legal claims have centred on the non-existence of legal disclaimers on advice or forecasts provided.

“Unless you put a disclaimer [on your advice] and qualify what it is to be used for, you could be drawn into the matter if a company goes broke,” Fenton warns. 

CPA member requirements

All CPA Australia public practice certificate holders are required to hold a current and enforceable PI policy, with a minimum coverage requirement of A$2 million based on turnover for Australian members and NZD$1 million for New Zealand members. The requirements are detailed in CPA By-Law 9.8 and can be found at CPA Australia.

Practitioners have the option of taking out PI insurance independently, as long as the coverage meets CPA Australia’s by-law specifications.

CPA Australia has developed a packaged civil liability PI insurance policy for members that meets the minimum insurance coverage requirements for members. It covers employees and others affiliated with practices and includes provisions for defence costs and cover for retroactive liability.

Also, practising CPAs and FCPAs holding a current public practice certificate and providing public accounting services in Australia are covered by a new Professional Standard Scheme, which commenced in December last year.

The scheme is a legal instrument that may limit civil claims to the level of PI insurance public practitioners are required to hold. Accountants participating in the scheme are required to disclose this to all clients.

“Scheme participants must have an effective risk management framework in place to control inherent risks in the provision of accounting services,” says CPA Australia’s regulatory risk and compliance specialist, Nicole North-Vanner.

Mitigating the risk of insurance claims

A high proportion of PI insurance claims are being made against practices that have been providing services beyond the scope of their expertise or the terms of their appointment.

Fenton highlights this as one of the key areas where accountants need to be very cautious, and points to several risk mitigation strategies public accountants should adopt:

Letter of engagement. It’s important to know your mandate and to document in your letter of engagement the services you will and won’t be providing. This needs to be reviewed regularly to ensure it is up-to-date and documents the applicable fee structure.

Outsource non-core work. As an extension to this, while taking on additional advisory work can be lucrative, it is important to recognise your limitations and outsource work for which you have limited expertise.

Appropriate documentation. Ensure detailed client file notes are kept concerning meetings and telephone calls, along with all email communications, in case a PI claim is made.

Review your client list. All clients change over time, so it is important to review the integrity of your client base regularly to identify potential risks. Consider whether the engagement should be maintained or terminated.

Know your colleagues. The biggest risk in any practice is its people. Appropriate due diligence needs to be applied when hiring employees and to have effective management processes in place to minimise issues that may expose the practice to PI claims.

“The manifestation of increased claims is a call to action to revisit your risk management strategies and to seek the help you [may] need to control those risks,” North-Vanner says.

“CPA Australia is focusing on analysing member data to better understand to better help them identify risks in their business before an issue occurs. The more CPA Australia knows about you and your practice, the greater the support, and together we can make a difference,” she says. 

A professional indemnity portal that allows you to check your cover and claims history is now available through the CPA Australia website.