Professional indemnity insurance costs set to rise
Practitioners are being urged to re-examine their risk profiles in the light of increasing insurance costs.
Price rises of at least 20 to 25 per cent on professional indemnity insurance (PII) policies are expected across the board this year, according to Drew Fenton, principal of insurance broking firm Fenton Green.
Fenton attributes the price hikes to reinsurers reassessing risk given poor underwriting results due to the number and costs of claims in the past year and those expected this year as JobKeeper ends.
Fraudulent claims remain problematic, accounting for some of the highest payouts. Ensuring effective fraud controls are in place is vital.
Surge in litigation
The price rises are not just attributable to a post-COVID-19 economic climate.
Insurer QBE notes that its accountant portfolio claim costs have increased over the last three years, which it attributes to a few emerging contemporaneous factors.
It believes Australia is becoming an increasingly litigious environment due to increasing regulation, the skills as well as the prevalence of plaintiff law firms and litigation funders.
One such issue, highlighted during COVID-19, was the swift introduction of regulatory changes and recovery schemes in response to the economic slowdown.
A QBE spokesperson states: “Even though intricate work is an area of concern, getting the basics right is just as important. Having the right business processes and procedures set up correctly, such as a robust filing system and diligent communications in your records, are crucial to our legal and claim team supporting you in the event of a claim.”
Ensure PII cover is adequate
To determine whether your PII policy is adequate and commensurate with the heightened risk environment, Fenton urges practice principals to assess the type and complexity of the work undertaken, the scale of the operation, and the length of time their firm has been in business. These factors will help determine the amount of cover needed.
Download a CPA Australia fact sheet on Professional Indemnity Insurance (PDF)
Get independent advice
For those still unsure whether their PII is adequate, Fenton recommends seeking professional and independent risk assessment from advisers and insurers who have a good understanding of the accounting profession.
“The post-COVID-19 trading environment puts the accounting profession in a very difficult position,” he says.
“Given this is the most important [professional] insurance you will ever buy, look to the qualitative aspects of the cover and don’t be obsessed with driving the price down.”
Minimum cover is mandatory
Under CPA Australia by-laws, Australian-based public practice accounting firms are required to have a minimum of $2 million in PII cover from an APRA-authorised general insurer or insurers. It could be more, depending on income and the services provided.
Sole traders are not exempt, with all members earning over $10,000 in gross fees per calendar year also required to have a PII policy.
Regardless of whether they’re paid or not, members providing public, honorary or private accounting services must have PII cover.
There are also other key by-law provisions, including cover for everyone affiliated with the practice, cover for losses arising from dishonesty (fidelity cover), and cover for defence costs in addition to the minimum limit.
Tips to manage your risk
The Professional Standards Scheme may limit your liability in the case of litigation.
Ensuring the professional standards limited liability disclosure statement – “Liability limited by a scheme approved under Professional Standards Legislation” – appears on all promotional material, including your website, advice, tax invoices and receipts is crucial. If your client has not been notified that you participate in the scheme, a court may not apply the limitation.
Another good reason to display the disclosure statement is that it’s mandatory for public practice certificate holders without an exemption to display it or face a fine from the regulator.
Keeping CPA Australia informed of your insurance and claims assists CPA Australia to understand risks and control them with early intervention strategies where possible.
Importantly, your insurance arrangements should not be static. COVID-19 has changed how we work and what products and services we deliver. Any of these changes can affect your firm’s risk profile and therefore your insurance needs to change accordingly.