While there are many good points to be being self-employed – being in control of your time, choosing who you work with, pursuing projects that spark your interest – there are also a whole host of responsibilities that come with it. One of the most important of these responsibilities is making sure you’re correctly insured, including Professional Indemnity (PI) cover.
Most contractors may never need it but the risk of a claim is always present. If you work for yourself and you don’t have insurance, you could be bankrupted by the cost of defending yourself (let alone any damages you may be liable to pay) should your services cause a client any financial loss – usually through simple human error. As a self-employed accountant, you’re in a particularly high-risk profession.
What can a PI policy protect accountants from, and what other insurances might you need in particular?
What is Professional Indemnity insurance?
Contractor Professional Indemnity insurance covers the cost of legal fees where it is alleged that a client has suffered a financial loss as a result of a contractor's error, omission or negligence. It also extends to provide further cover for compensation, or damages payable, to rectify those errors. Put simply, this insurance is a contractor’s safety net; it protects them from business-crippling claims if things happen to go wrong.
Accounting is a high-risk occupation, with ever-increasing possibilities for professional error. Invariably, mistakes will be made, and disputes will arise. Contractor accountants should, therefore, understand the risks they face, how their business may be affected, and insure accordingly.
What does Professional Indemnity insurance cover?
The main things that Professional Indemnity covers are:
- 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).
Even if the mistake isn’t your fault, you could still wind up with a PI claim that you have to defend. Let’s have a couple of 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.
How can Professional Indemnity protect accountants?
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.
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 a 'disguised 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 contractor accountant.
Insurance for contractor 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.