Chapter 17: PRPG: Professional Indemnity Insurance Flashcards
17.1 Compulsory Professional Indemnity Insurance Relations
Professional indemnity insurance is compulsory for CIOT and ATT members. The following definitions apply for these regulations:
• council means council of ATT/CIOT
• director means someone who is on the board of directors of a company providing taxation services
• gross fee income is the aggregate of professional fees and all other income earned in respect of and in the course of business during the accounting year but excluding any commission
• honorarium means a fee paid in respect of a formal honorary post for charities and not for profit organisations
• personal capacity means work where members are not acting as a CIOT/ATT member, most typically where they are providing services to clients of a charity, services to local organisations and services free of charge to family and friends. Members providing tax services to clients of charities are responsible for ensuring the charity has PII cover or should inform the recipient of any non-paid tax services they do not have PII cover and receive consent to continue
• principle means sole practitioner, partner, member or director in a firm providing tax services
• pro bono work means work for no payment with the exception that reasonable expenses are reimbursed
17.1 Compulsory Professional Indemnity Insurance Relations - compliance and requirements
Compliance –
Every member should comply. The exemptions are members who receive an honorarium of less than £1,000 in total per annum or members carrying out pro bono work do not need PII. A member who works on a self-employed basis for a firm need not to hold professional indemnity insurance in their own right providing they have written confirmation from the contracting firm that they have PII that complies with the ATT/CIOT and that it covers them as a self-employed consultant.
Members shall be obliged to provide to the CIOT/ATT as and when required or under the authority of the relevant council evidence that they have meet the PII regulations. They must provide when required their professional indemnity insurance certificate and a copy of their insurance policy. Failure to comply many results in disciplinary action being taken against the member.
PII requirements –
Insurance needs to be either underwritten by an insurer who us authorised by law to carry on in a member state of the EU insurance business in respect of the specified risks. If not authorised is an insurance arrangement recognised and approved by the Consultative Committee of Accounting Bodies, The Law Society or the Bar Council. Covers all civil liberty including costs and expenses. Meets the required limit of liability, the annual minimum limit of indemnity for each and every claim is £1 million. Is not avoidable by reason of any misinterpretation and in respect of which all premiums have been paid.
Where the firms gross fee income is less than £400,000 the required minimum limit of indemnity is the greater of 2.5 x the gross fee income or £100,000. The insurance policy may have an excess provided it does not exceed £20,000 per principal, a group PII policy the excess may be calculated on a group policy. If the excess exceeds £20,000 the member should notify the ATT/CIOT.
17.1 Compulsory Professional Indemnity Insurance Relations - no cover available and cessation
Cover not available – when a member cannot get PII complying with the regulations they must notify the ATT/CIOT.
Cessation – members must have arrangements that exist for the continued existence of PII for a period of no less than 6 years after they cease to engage in public practice. The PII should satisfy regulations that applied to their firm during the year immediately preceding such cessation.
17.2 Professional indemnity insurance guidance notes
- you should carry out a risk assessment before deciding on the amount of cover. You should consider: the risk profile of your clients, resources available to the firm to meet any claims in excess of the insured amounts and if your firm have effective systems and controls in place to minimise the risk of a claim. The CIOT/ATT recommend that members should have cover of £1,000,000.
- Gross fee income calculated by the aggregate of professional fees and all other income earned in respect of and in the course of business during the accounting year, but excluding any commission passed on to the client in full. In the first year of practice an estimate of your gross fee income should be used. You should notify your insurer of major changes to your business to make sure the PII still covers you in full
- As an employee you should be protected by your employer’s PII policy or other insurance arrangements. But if you provide tax services in any capacity other than an employee you will need PII cover unless it is done on a pro bono or honorary basis. Or if you are a director or employee with a financial interest of 5% of equity capital in your employer’s tax services firm you need to check PII cover protects you
17.2 Professional indemnity insurance guidance notes - pro bono work, PII, civil liberty, cost inclusive, misrepresentation and non tax work
you need to check PII cover protects you
Honoria and pro bono work – if you give advice outside of your employment terms it is unlikely the firm’s PII will cover you. If you are not covered and make a mistake you are at risk of a claim being made against you personally, you should consider if you need PII. If you act for a charity you should check whether the charity has PII cover and if you are included on that.
PII compliance – a members PII policy must be on an each and every claim basis. A PII can be on an aggregate basis which means if a £1m policy is taken the maximum the insurer will pay is £1m. With an each and every basis policy the insurer will pay out up to £1m for each claim.
Civil liability – a members PII must cover all civil liability, examples of this include claims made solely in contract and not negligence. Some policies only cover negligence and not a claim in contract.
Cost inclusive or cost addition – some covers are provided with costs inclusive, the costs of defending a claim is included in the limit of indemnity. Costs in addition are where the costs are paid in addition to the limit. Both complies with ATT/CIOT regulations but cost in addition provides better protection.
Misrepresentation or non-disclosure – policy is non avoidable by reason of any misinterpretation or non-disclosure or any act ir default of the insured. This cover is conditional upon it being innocent and free from intent to deceive and cover on this basis is acceptable.
Nontax work – where a member works in a role which is predominantly non tax it can be difficult to see if they need PII. If they hold themselves as a member of the CIOT/ATT and provide tax services, you must have PII. If you have an additional professional qualification such as a solicitor or barrister and you give advice in your capacity as a solicitor or barrister, it is your PII cover for being a solicitor or barrister that is relevant. If you go beyond your role you may require additional PII cover.
17.2 Professional indemnity insurance guidance notes - fidelity guarantee insurance, excess, liability capping and retroactive cover
Fidelity Guarantee Insurance – covers against any acts of fraud or dishonesty by any partner, director or employee in respect of any money or property held in trust by the firm. Whilst it is not compulsory for members in practice to take out this cover but is recommended.
Excess – you may have a £20,000 excess per principal, the firm must be satisfied they can meet the excess element of any claim that may arise. The higher the excess the lower the premium, as insurer tend to see firms with a higher excess to have more of an interest in risk management. It is not acceptable to opt for a higher excess to reduce the premium unless you are confident of the ability to meet the excess in the event of a claim. If your firm has subsidiaries or associated firms and you have a group PII the excess may be calculated on a group basis.
Liability capping – some firms include a clause in the engagement letter capping the firms liability to its client in the event of a claim. It is unwise to rely wholly on the liability cap being effective in every case.
The liability cap is not effective when there is no engagement letter in place. It is not effective for work that is carried out but not covered in the engagement letter. It is not effective when it is a claim by a third party. It is not effective when the cap has been rejected by the courts.
Retroactive cover – PII policies should cover for past acts. Insurers may have a retroactive date on the policy, limiting the period of cover for past acts. If a claim is made during the policy period on a loss that occurred before the retroactive date, the firm will not be covered. The date must be at least 6 years before the date of the current policy or when the practice started if sooner.
