Avoid the danger of a late notification

Accountants are required to inform their insurers of any circumstances that may result in a claim. Where notification is delayed, it can constitute a breach of firms’ policy terms, and may leave them without cover. By notifying promptly – and ensuring that insurers receive all the information they need – firms will give themselves the best chance of protection.

Understanding the notification process

Under the terms of their policy, insureds are typically required to provide their insurer (or their broker) with notification of any loss, claim or any circumstances which may give rise to a claim.

For accountancy firms covered under Professional Indemnity (PI) insurance, examples of circumstances may include:

• complaints or criticism of service or performance
• suggestion from a client that a claim is to be made against the firm (eg a letter before action)
• service that falls below the required standard of which the firm is aware, even if clients may not be.

Policies will often specify how soon and the manner in which an insurer must be notified. As a rule, firms should notify insurers as soon as they become aware of circumstances which may give rise to a claim, regardless of their views on liability or the sums involved. Any subsequent claims arising as a result of those circumstances will then be covered by the policy.

Late notification introduces risk

Despite the above, it’s common for firms to delay notifying their insurer. Instead, the firm may simply hope that any circumstance doesn’t evolve into a claim, or they may wrongly believe that notification can wait until their policy is due for renewal. Alternatively, firms may try unsuccessfully to resolve a circumstance themselves, before notifying an insurer later down the line. Where the value of a claim is expected to fall within a policy’s excess, they may incorrectly assume that notification is unnecessary.

At the same time, circumstances often take a long time to reach fruition, and many will never result in claim. As a result, firms may be unsure of the right time to notify an insurer and may opt to wait for a better idea of how a circumstance might develop.

Whatever the reason, a late notification can have significant implications for firms’ coverage under their PI policies. This is because PI operates on a ‘claims made’ basis – meaning that it is the policy in force when a claim is made, not when the advice was given or the work completed, that will respond.

Potential risks arising from late notification include:

• expiration of the policy
• insurers may not accept the notification if it is after the date of renewal, or after a change of insurer
• if the insured has tried to settle the matter themselves, they may have prejudiced the insurer’s position and they may not cover the claim.

Notification best practice

Luckily, there are steps that firms can take to minimise the likelihood of a late notification.

Primarily, it’s important for firms to foster an environment of openness and clarity around the notification process. By encouraging employees and partners to be open about any circumstances that come to their knowledge, they can be brought to the attention of the relevant persons and the notification process can be triggered. Firms should not think of notifications as an annual request to be completed as part of their PI proposal form.

When a notification is made, it should include the following information:

• copies of any correspondence received – including (but not limited to) emails, letters, file notes or any legal documents such as a writ
• the date of first awareness of the circumstance
• the identity of the potential claimant and any other parties involved
• a brief outline of the problem and the firm’s views on liability
• an indication of the potential financial value of the claim.

Firms should also observe certain rules to ensure they don’t break the terms and conditions of their policy. Actions that should be avoided include:

• admitting liability
• taking any action which could prejudice an insurer’s position, or their ability to investigate the claim or circumstance
• entering into correspondence with the claimant without the permission of an insurer – they must approve all correspondence before it’s released
• settling or offering to settle
• disclosing the involvement of an insurer, or details of their PI insurance.

Where firms have received a claim, they can speak to their broker to explain the circumstances and share any relevant information. The broker will be able to review the information and provide advice, including whether to notify an insurer. Where part of their agreement, brokers can also notify an insurer on the firm’s behalf.

Catherine Davis – ACCA relationship manager, Lockton

If you have any questions about professional indemnity insurance, please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com.

Lockton is ACCA’s recommended broker for professional indemnity insurance