Why run-off cover is so important to accountants
The risks facing accountants are abundant, ranging from the potential for making a simple mistake, to providing a client unintentionally with incorrect advice.
Fortunately, this is where professional indemnity insurance (PII) comes in. PII offers protection in the event that a third-party claim is made against a firm, both during operation and after a firm has ceased trading.
In the case of the latter, run-off insurance (a form of PII) will offer continued protection against claims relating to work carried out before the end to trading.
Such cover is necessary because of the ‘claims made’ nature of PII. This means that it’s the cover in place at the time a claim is made, rather than when the negligent act was committed, that will apply.
However, when it comes to insolvency, administrators or liquidators have the power to cancel PII cover for accountants who have ceased trading or to simply stop paying the premiums if funds are unavailable.
As such, insolvent firms often find themselves without cover for any new claims being made in the future, and clients have little chance of getting their claims paid out.
This issue is particularly pertinent in the current challenging economic environment.
Company insolvencies in England and Wales have been rising since 2021. Total company insolvencies, on a seasonally adjusted basis, reached its highest quarterly level since third quarter (July to Sept) 2009 in the second quarter of 2022, according to National Statistics by the Insolvency Service.
In November 2022, the number of registered company insolvencies was 21% higher than in the same month in the previous year and 35% higher than three years ago (pre-pandemic; November 2019).
For many accountants, the risks of a lack of cover in the event of their insolvency may not be obvious.
Liability for accountants trading as either a Private Limited Company (Ltd) or Limited Liability Partnership (LLP) is assumed by the company itself, as opposed to its constituents or shareholders. When that firm becomes insolvent, a lack of cover presents few direct implications.
But just because a firm has ceased trading doesn’t mean there aren’t consequences. Customers are the party most obviously impacted by the cessation of PII cover, and it is they who shoulder most of the risk. In the event of a firm’s insolvency, they will be left with few rights of recourse for any outstanding claims, and slim prospects of financial recovery.
When a customer does wish to make a claim against an insolvent accountancy firm, the only available avenue is for that customer to make a claim during the liquidation process.
Although this may bring success, the likelihood of compensation is fairly low. Sole traders or incorporated firms could find themselves personally liable and their assets at risk if a claimant chooses to pursue recovery against them individually to recover their losses.
It is therefore important that practitioners should draw to the attention of the liquidator or administrator that they are required to maintain six years run-off cover for the protection of their clients.
Catherine Davis – ACCA relationship manager, Lockton companies
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