Fidelity guarantee insurance

Fidelity guarantee insurance (FGI) exists to protect your firm or organisation against theft of the firm’s own money, securities or property by an employee, partner, contractor, or volunteer. FGI can also be known as first-party fraud, theft, employee dishonesty or simply fidelity cover.

While FGI will be familiar to most accountancy firms, recent increases in fraud claims has led many insurers to alter their policy coverage, or introduce onerous terms and conditions. Firms must check these carefully to mitigate against the possibility of an uninsured claim, should a first-party fraud occur.

What are the requirements for FGI cover?

ACCA’s regulations require that member firms in public practice with more than one member of staff must have at least £100,000 of cover in place for any one claim, to help protect the business and enable it to continue trading following a fraudulent act.

In line with the revised ACCA regulations effective from 1 September 2023, your FGI cover must also extend to cover your sub-contractors. 

FGI has traditionally been covered by a separate section or clause within professional indemnity insurance (PII), with ACCA practising regulations stating that ‘FGI may, but need not, form a single policy with such PII and all such PII and FGI must remain in force for all of the period during which a relevant practising certificate is held’.

Importantly, FGI cover should not be confused with third-party fraud and dishonesty cover. Third-party fraud and dishonesty refers to theft of the client’s money, as opposed to the accountancy firm's own money, and is usually covered within the main insuring clause (civil liability) of a professional indemnity policy.

Why is fraud risk causing concern?

Fraud claims have increased in both frequency and value in the past few years. There are several reasons for this, but the main factor is that online banking makes it so much easier to fraudulently transfer money.

Lockton has handled numerous claims for first-party fraud. In one case, a long-standing member of staff was able to transfer funds from both the accountancy firm’s own bank account and those of its clients directly into the bank accounts of their close relatives. This took place over a period of eight years and over £600,000 was misappropriated. The member of staff held a trusted position as a bookkeeper within the firm.

In order to reduce their exposure to fraud losses, some insurers have altered their policy coverage and others have applied particularly onerous terms and conditions.

How are insurers altering their FGI cover?

There are several ways in which insurers are altering their cover:

• A number of insurers will only offer FGI on an aggregate basis. This limits the amount insurers are exposed to in a policy period, as once the aggregate limit is eroded by losses, they will not be required to pay any more. This kind of aggregate cover would not be compliant with ACCA regulations as cover must be on an ‘any-one-claim’ basis.
• Policy conditions may state that the accountancy firm’s own accounts must be independently certified or audited on an annual basis. Since most firms don’t otherwise need their accounts audited, this has the effect of excluding first- party fraud losses, thereby becoming non-compliant with ACCA’s regulations.
• It’s becoming more common for insurers that offer FGI to ask for dual authorisation for any financial transactions over a certain amount. For example, insurers may insist that there are two independent signatures on cheques, or that any electronic transfer of funds is witnessed and documented by another director or employee. If this second authorisation check is not made, any subsequent first-party fraud may not be covered by the policy and insurers may refuse the claim.

Often, an insurer will ask on their proposal form or statement of fact whether the annual accounts have been audited and if dual authorisation is in place. This acts to alert the firm that these procedures must be in place for FGI cover to apply. Other insurers will simply include these terms within the conditions or exclusions of their policy wording, so this should always be checked to ensure coverage is compliant with ACCA regulations.

As fraud becomes increasingly prevalent, many insurers are beginning to leave FGI cover out completely in their accountants' PII policies.

Recommendations to prevent uninsured liability:

To ensure that you have cover that meets the ACCA’s requirements and to adequately protect your firm, we recommend:

• Check that your policy provides FGI – all insurers construct their policy wordings differently, but generally you can find this under a heading such as ‘Insuring Clause’, ‘Insurance Clause’, ‘Scope of Cover’, ‘What is Covered’ or ‘Extensions of Cover’. The insuring clause should contain language along the lines of: ‘insurers will indemnify the insured for any loss which the insured shall first discover they have sustained by reason of any dishonest or fraudulent act or omission’ 
• Check the policy wording to ensure there are no onerous terms or conditions that must be fulfilled for FGI cover to be valid – these are often found under a separate section of the policy, which may be headed ‘General Conditions’, ‘Policy Conditions’, ‘Special Conditions’, or ‘Conditions Precedent’
• It is always worthwhile in checking the ‘Exclusions’ section of the policy to make sure FGI is not excluded.

If you are in any doubt, please feel free to call the Lockton helpline on 0117 906 5057, and we will be happy to assist and provide a free health check on your insurance.

Chloe Sweet, vice president, Lockton Companies

As ACCA’s recommended and approved broker, Lockton offers an ACCA insurance scheme that is backed by Arch Insurance (UK) and fully complies with the ACCA’s regulatory requirements.

Quotations can be obtained by calling the number above, emailing ACCAaccountants@uk.lockton.com, or visiting Lockton's website.