There are certain insurances that all contractors should consider; amongst them is Professional Indemnity (PI) insurance. While this cover is useful to contractors and freelancers across all industries, there are certain professions within the self-employment sphere that have a greater risk of a claim than others. For accountants, a PI claim is a very real possibility.

Why exactly do accountants need PI, what can a policy protect them from, and what other insurances might they need in particular?

What is Professional Indemnity insurance?

You can read in-depth about what Professional Indemnity insurance is here. However, as a quick overview, PI cover offers protection to contractor accountants from a range of scenarios, including:

Professional negligence

This is when a mistake is made when servicing the client, to an extent that costs the client money, good reputation or custom. For example, if an accountant files a tax return wrong or gives bad tax-saving advice, their client could face an HMRC investigation and a hefty tax bill.

Loss of documents or data

While this one is relatively self-explanatory, the risk is more present for accountants more than a lot of other contractor professions. Accountants typically deal with large volumes of both client data and documents, which means that the likelihood of losing either is increased.

Unintentional breach of copyright or confidentiality

Accountants are more likely to breach confidentiality in their line of work - however, it might not be intentional. Even if a laptop with client information is stolen, the accountant would still be held responsible for the breach.

Defamation and libel

This is more a case of common sense for accountants, but it's still useful to be covered against should a client misconstrue something said to a mutual agency that could be perceived as potentially damaging to their reputation, for example.

How can Professional Indemnity protect accountants?

As previously mentioned, all contracting professions run the risk of a PI claim so what makes accountants particularly susceptible?

For one, accountants handle huge amounts of personal data; if a mistake is made (a data breach, mishandling client documents, missing deadlines), the results can be far-ranging and costly. For example, you could have your laptop, full of client’s financial data, stolen whilst on the train. Should that information be used, you could be faced with having to pay damages along with court costs, which PI insurance would cover.

Accountants may provide advice and consultancy to clients. If this advice is poor or incorrect, it could be seen as a failure to meet an expected standard of work, which could easily grow into an expensive professional negligence case. You could also face compensation claims should the client make a financial loss due to your consultancy.

There’s also a good chance that it’s required as part of a contract. PI is considered an industry formality regardless of your profession – after all, clients want to make sure that it’s up to the contractor to correct any mistakes they make. This means they’re often reluctant to hire contractors that don’t have the correct Professional Indemnity cover and include the insurance as a specification in their contract.

What types of accountants are at most risk of a PI claim?

Accountancy covers a huge area of contractor work, from tax returns to corporate budgeting. A significant portion of all Professional Indemnity claims relate to tax issues, but where do the majority of claims come from under the accountancy umbrella?

  • Low risk: general accountancy work, personal tax returns, bookkeeping
  • Moderate risk: insolvency, company tax, payroll, audit
  • High risk: corporate finance, financial advice, trusts, wills, tax schemes, mergers, acquisitions

The more personal the numbers you handle are, the more likely you are to face a PI claim at some point. Professional Indemnity cover is absolutely essential for contractors that operate in the moderate or high risk areas of accountancy – and it’s still advisable for those in the low risk category.

Let's give some real-life examples:

An accountant failed to inform their client that their income had exceeded the VAT threshold and they should therefore register for VAT. As a result the client claimed against the accountant for the eventual liability. The claim was settled for £17,000.

A client purchased a company which turned out to be a bad investment. They claimed their accountants had been involved in the due diligence process and failed to warn them of certain fundamental issues. The claim was settled for £182,000.

An accountancy firm was recommending a local firm of independent financial advisers (IFA) to their clients, for which they were receiving referral commissions. The IFA went into liquidation and it soon became apparent that poor product advice had been given. Various clients then claimed against the accountant for having referred them to the IFA. The claim was settled for £352,000.

Can PI insurance help in an IR35 investigation?

While no PI policy will cover IR35 specifically, the fact that you’ve taken the insurance out at all is a good indicator that you’re a genuine contractor.

To be outside IR35 means to prove that you’re not an employee. Employees would never need PI insurance because their employer would provide that protection; having to pay for your own mistakes is one of the most sure-fire signs of self-employment you can have.

PI is also a regulatory requirement for members of the Institute of Chartered Accountants and the ACCA, who have strictly enforced rules that dictate the levels of cover required by registered accountants. Once again, this is a great indicator of a genuine accountancy contractor.

Insurance for accountants

No matter how scrupulous you are in your practice, Professional Indemnity not only offers peace of mind but also makes it much easier to attain new clients. Find out about the PI insurance we offer here.

For more information on how Professional Indemnity insurance can help your business, feel free to take a look around our Knowledge Hub. Alternatively, you can call us on 01163 800 400 or email us.

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