Audits of public companies, insolvency and financial planning are in scope for many accounting professionals. But did you know that, generally, insurers do not accept these activities under a standard accountant policy. Those that do purport to accept them should be looked at carefully.
The activities below could be considered a ‘normal’ part of accounting practice, but may be excluded from many policies.
• Auditing of non-public companies
• Directorships
• Company Secretarial
• Business valuations
• Divestments
• Provision of financial statements to financial institutions
• SMSF advice and SMSF audits.
Some policies also have a Part IVA) Tax Act exclusion. Broadly interpreted, this can preclude you from offering any tax advice – core business for many accountants.
Insurers exclude these activities because history shows this is where the most expensive claims have arisen, and in future they believe a higher proportion of claims will arise.
Policies might allow specific activities to be covered up to a certain percentage of fees – or not at all. In arranging cover you should analyse your key business activities, the resulting revenue mix and the proportion of time spent on each.
How much is too much? As a guide, work involving auditing of public companies, financial planning or insolvency should be disclosed to your insurer and will require a specialist policy. If you spend more than 10-15% of your time on any of the other activities, disclose this to your insurer.
What’s the risk? Your insurer could decline a claim based on the fact that your policy does not provide cover for the activity.
TIP: Disclose all business activities when applying for cover.
Risk 2: Misclassification – it’s your problem.
My broker told me what cover I need.
Your broker can advise you, but it’s your responsibility to make sure you are correctly covered.
It’s important to classify your business activities accurately. A common mistake occurs when practitioners acquire cover as Bookkeepers or Tax Agents but, in the normal course of business, are providing business, tax, payroll or SMSF advice or other services to their clients. In this case the correct classification is ‘Accountant’.
This problem is exacerbated by online application forms that ask you to self-assess, but it can also be caused by poorly educated brokers giving the wrong guidance and information.
While it’s certainly cheaper to insure as a Tax Agent or BAS Agent, misclassifying activities could be costly if the policy you take out does not provide the cover you need.
What’s the risk? If you have selected or accepted a policy which does not cover you for all services, you will not be covered in the event of a claim. A short term cost advantage can be devastating.
TIP: Classify your business activities accurately and correctly to ensure the right type of cover.
Risk 3: Check the fine print.
But I disclosed everything in my application form.
Always read your policy and your schedule – ultimately this is what you will be covered for. Even if your broker or your underwriter has messed up – it’s your problem. As in this example:
John submits an application and correctly discloses to the underwriter the business activities he engages in, including insolvency. He receives the policy document and schedule, but fails to see that the policy excludes insolvency. He subsequently has a claim related to insolvency work; it is not covered, and his underwriter denies liability. He now needs to engage and fund a legal team to defend the matter. If he loses he will need to pay any fines, compensation or other costs associated with a settlement. He decides to take action against the broker and the underwriter for negligence; again, he must pay his legal team to initiate and pursue action. This recovery action can’t be completed until the initial claim against him has settled. Ultimately he could be successful and receive some or all of the costs associated with the first and the second actions, however this could be long after he has paid the monies out. Most small businesses do not survive this scenario.
What’s the risk? If you have failed to adequately cover your business activities with the correct policy, the underwriter can refuse indemnity, leaving you with the cost of settlement.
TIP: Take time to check your insurance paperwork, and get details of your cover in writing.
Risk 4: Limits and Excesses
Exactly when do I need to pay costs?
There’s a world of difference between ‘Inclusive’ and ‘Exclusive’ when it comes to claims limits and excesses. But what is the difference?
Let’s look at an example of a $600,000 claim that incurs $500,000 in legal fees, making a total claim of $1,100,000.
With a $1 Million ‘costs inclusive’ policy, both the payout and the legal fees will come out of your limit. You have consumed your limit with one claim and you will also need to fund the extra $100,000.
With a $1 Million ‘costs exclusive’ policy, $600,000 of your limit is used in the payout but the legal fees are paid by the insurer and do not reduce your limit.
A similar principle holds with policy excesses. Take a policy which carries a $5,000 excess. A claim is initiated, but ultimately does not proceed or is dismissed, and incurs $7,000 in legal defence fees. A ‘cost inclusive’ excess will require you to pay the excess $5,000 associated with the legal fees, even though the claim did not proceed. The underwriter will pay the additional $2,000. A ‘cost exclusive’ excess will not require you to pay legal fees unless a claim is successful. In this example the underwriter will pay the legal fees of $7,000.
What’s the risk? Taking out a ‘costs inclusive’ limit and excess policy could mean you are left out of pocket whether or not a claim is successful.
TIP: Seek a cost exclusive limit and excess in your policy.
Need to know more about the right Professional Indemnity insurance cover for your business?
Call IPA’s Insurance team on 03 8665 3139 or email info@publicaccountant.com.au
This information is general in nature and does not take into account your specific circumstances.
David Martin, Founding Director of Quattro Insurance Solutions, has over 25 years’ industry experience. Prior to establishing Quattro Insurance Solutions in 2009 he spent six years in the Tax and Government Audit Insurance industry, and over 15 years providing insurance and IT services to the accounting profession.
