This article was first published in the April 2011 Ireland edition of Accounting and Business magazine
Personal indemnity insurance (PII) is frightening to some accountants, annoying to others and is viewed by many as a ‘grudge’ purchase. This view may be due to its compulsory nature but, given this, a surprising number of common misconceptions exist around PII, usually due to a lack of understanding of the product and its benefits in the event of a negligence allegation. Even in the perverse world of underwriting, PII is unusual as, practically without exception, the insurer, at the time a claim is made against you, is the one who provides the indemnity, irrespective of the date of the alleged error, omission or negligence giving rise to the claim. This is known as a claims-made basis.
Legal liability at law – this policy type provides cover for breach of professional duty by reason of neglect, error or omission arising out of the conduct of the business.
Civil liability – this policy type is the most commonly used and includes:
- Negligence, breach of professional duty; • Infringement of intellectual property rights;
- Liability for dishonesty; and,
- Any other liability which is not criminal or excluded by policy.
Liability can arise under common law, statute or contract. Under tort, liability can arise under common law or statute. The most common negligence in relation to PII arises under this heading but also includes defamation. For an action to succeed, a plaintiff must prove that:
- The defendant owed a duty of care;
- The defendant was in breach of that duty of care;
- The plaintiff suffered loss or damage as a result of that breach; and,
- The loss suffered is not too remote.
In the author’s experience of 30 years of PII, the greatest mistake made by accountants is not reporting the potential of a claim occurring as soon as it becomes obvious that it could be made or when the client makes a complaint. Typical attitudes include ‘I can fix this myself’, ‘there is no way that client will claim because of our long-standing relationship’ or ‘this is rubbish, I did nothing wrong’.
Worst of all are those accountants who simply bury their head in the sand, hoping the issue will go away. Experience shows that fear of the unknown, fear of the effect on their PII policy and, often, simple embarrassment are behind these reactions. Experience also shows that, on most occasions, the claim results not from a lack of technical expertise but rather from, firstly, a breakdown in communication and trust between the practitioner and client, carelessness and professional arrogance.
Practitioners also should be aware that numerous claims brought against accountants are successfully defended. The defence mechanism and a vast wealth of experience is available to them via their PII provider and should be utilised. The defence costs of many claims can often far outweigh the cost of awards made to claimants.
The current climate
Since 2007, there has been unprecedented economic upheaval, the combined effect of which has given rise to suggestions in some quarters that financial reporting has been unreliable, and even fraudulent. Concerns have also been expressed regarding the role of audit. The inevitable consequence is a substantial increase in litigation against all professionals but particularly solicitors and accountants. This has meant:
- Significant increase in PII claim frequency and severity;
- Deterioration in most PII underwriters’ books;
- Reduced capacity in some quarters as underwriters revisit their PII book;
- Inevitable premium increases;
- More selective business acceptance;
- More restrictive terms and conditions; and,
- Greater focus on risk management.
The following provides a flavour of some recently experienced claims:
- Negligent advice provided to a client regarding a substantial investment where the product proved to be totally unsuitable and there was no paper trail record of meetings detailing the discussions held. Cost: €600,000.
- An innocent telephone question regarding a mortgage type, with no note of the conversation or checking of facts carried out, led to a claim from a client who suffered loss as a result of the advice given. Cost €60,000.
- An innocent telephone conversation regarding VAT on property, with no note of conversation kept. The client actually pursued a different course to that which he had questioned. Nonetheless, liability was agreed. Cost €85,000.
- Incorrect capital gains tax advice given to client, resulting in fines and penalties charged by Revenue. Cost €100,000.
- No returns made within critical dates, resulting in fines and penalties being imposed by Revenue. Estimated cost €100,000+.
- An error in completing VAT returns over a number of years, as a result of misinterpreting the rules. Discovered in a Revenue audit, with fines and penalties imposed. Estimated cost €200,000+.
The outcome of Revenue audits can be the catalyst for potential PII claims, particularly where the client feels aggrieved and blames their accountant for the impact on their business. Meaningful risk management is now a critical feature for every practitioner to take on board. It also features as a major consideration with insurers. In the long term, it should deliver added value to your practice, increased efficiencies, improved customer service and allow you to identify and understand the weaknesses that could threaten your business. This will be discussed in a future article.
John Murphy is managing director of JDM Insurance