PII consultation – what cover is needed?
Professional indemnity insurance (PII) is a fundamental part of the ICAS regulatory requirements for any member in practice – it is required under the Public Practice Regulations and the PII cover needs to conform with the minimum requirements in the PII Regulations. A review of PII requirements is currently being undertaken – and your views on this are sought.
PII helps to protect the practitioner if claims are brought against them by a client due to a problem with the work that has been done for them which, unfortunately, can occur.
The client is also protected as there is recourse to the firm's PII insurance if the client has grounds for being dissatisfied with an aspect of the work undertaken.
The current requirements
A member’s PII policy must be arranged with a Participating Insurer from the List of Participating Insurers as these insurers issue policies that comply with the minimum approved wording. This includes the amount of cover and, broadly, provides cover for claims arising in relation to work carried out by the firm during the past 6 years.
The requirements regarding PII are common across the three chartered accountancy bodies – ICAS, ICAEW and CAI.
Over the years, there have been some amendments to the requirements, but there has been no systematic review since 2008. There’s also not been any change in the current limits. Given the changing nature of the structure of some firms, the pressures to manage costs and a number of other factors, ICAEW decided to review the requirements.
The key topics initially discussed in the review included:
- How much insurance should firms have, and how should the amount be calculated/vary depending on firm size etc?
- How to address the use of very large commercial insurance programmes (including captives).
- What run-off cover should be required for firms ceasing to trade?
- Arrangements and qualifying conditions for dispensations.
The ICAS Authorisation Committee, which oversees the PII requirements for ICAS practising certificate holders, has contributed to ICAEW’s review of PII requirements.
Consultation – your views are sought regarding future requirements
The review of PII requirements has led to a number of proposals (see below), which are now being consulted upon. We are now asking our members to review the consultation because any resulting changes might impact on your regulatory requirements, given that the professional indemnity insurance arrangements are shared across the three chartered accountancy bodies – ICAEW, ICAS and CAI.
Please find the consultation on Professional Indemnity Insurance Consultation 2023 | ICAEW. Any comments should be sent directly to ICAEW, through the feedback form (the survey will ask you to identify yourself as an ICAS members). If you have any comments to ICAS regarding this review, please email regulatoryauthorisations@icas.com.
The consultation is open until 14 December 2023.
Summary of proposed changes
- The minimum limit of indemnity should be increased, so that generally, firms will be required have a £2million any one claim and in total limit of indemnity. Defence costs will continue to be in addition to the limit of indemnity.
- If a firm's gross fee income is less than £800,000, the minimum limit of indemnity for any one claim and in total should be equal to two and a half times its gross fee income, with a minimum of £250,000.
- If a firm's gross fee income is over £50m it will be classified as a "large firm". Large firms will not be required to put in place qualifying insurance but they will continue to have the obligation to have in place reasonably appropriate arrangements for their exposure to risk which is qualitatively assessed.
- The self-insured amount should be structured to permit an excess rather than a deductible (so that the full extent of the limit of indemnity would be available above any excess).
- Generally, defence costs should not be applicable to the excess (except in the case of FCA authorised work, as is currently the case). However, if a firm's gross fee income is over £800,000 then the excess may be applied to defence costs.
- For firms required to put in place qualifying insurance, the maximum permitted aggregate excess will be the higher of £2,500 or 3% of the firm's fee income.[3]
- If a firm fails to pay a claimant any amount which is within the excess due to its insolvency, the insurer will become liable to remedy the default on the insured firm's behalf.
- Further guidance will be provided regarding 'compound firms' to make it clear in what circumstances firms can insure multiple entities within a group under a single policy of insurance.
- Qualifying insurance should provide automatic run-off cover for six years, which is non-cancellable by insurers for non-payment of premium.
- Automatic run-off cover would be for a single aggregate limit of indemnity across the entire six-year run-off period. This limit would be calculated in the same way as the annual aggregate minimum limit required by the firm's qualifying insurance directly preceding the cessation of the practice.
- Participating insurers should be required to outline at inception of a policy how the premium for run-off cover will be calculated.
