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?

Professional indemnity insurance – often referred to as PI insurance – protects you and your business should your client allege that you’ve provided inadequate advice, services or designs. It covers legal expenses in defending the claim as well any compensation needed to fix the problem.

While you may have complete confidence in your abilities, knowledge and skill set, you’re still human. There’s always a possibility that you or a member of your team could make a mistake, which falls to you as the contractor to correct.

Luckily, professional indemnity insurance covers a range of scenarios, including:

  • professional negligence (i.e. making a mistake in a piece of work for a client)
  • loss of documents or data
  • unintentional breach of copyright or confidentiality
  • defamation and libel
  • loss of goods or money (your own or for which you are responsible).

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 accountant 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.

Additional notes 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.

We offer PI cover starting from just £144.00, as well as a whole suite of business insurances including IR35 Tax Investigation insurance. We also offer comprehensive IR35 contract reviews and specialist tax advice from our Head of Tax and resident IR35 expert Andy Vessey ATT.

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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