At a glance
- PI insurance may not cover advice given outside your formal engagement letter.
- Misunderstandings about subcontractor cover and past work create significant risks.
- Policy exclusions for fraud, late notification, and series of events can invalidate claims.
- Proactively review policy structure, limits, and exclusions with your broker regularly.
Imagine for a moment a meeting with a longstanding client. Imagine it drifting beyond your agreed scope of work: the client asks about a tax planning opportunity, and you share your professional view. Months later, that advice lands you in a professional negligence claim – and your insurer denies coverage because tax planning guidance wasn’t covered in your engagement letter.
This scenario plays out surprisingly often, according to experts consulted by Public Accountant. Professional indemnity (PI) is supposed to help protect your firm if and when a claim of negligence or breach of duty is made against you and your business. But professional indemnity insurance can come with expensive gaps in protection that many practices don’t discover until it’s too late. If Allianz is right in its 2022 global commercial claims review, professional indemnity-related claims now represent more than a quarter of all professional insurance claims. That suggests insurance blind spots may be exacting a heavy cost on professions like accounting.
Dangerous misconceptions
It’s easy to assume professional indemnity insurance creates a safety net for all professional work. That’s why you buy it, right? But some of the most common claims stem from misunderstandings about what PI covers. These include tax advice and compliance errors, audit and assurance failures, and breach of confidentiality.
“All my professional work is protected”
Gino Renzella, partner and manager for professional lines at AB Phillips, says too many professionals believe PI policy is a set-and-forget product, covering any advice given in a professional capacity. “We’ve seen claims denied due to activities falling outside the scope of declared services—particularly when practices expand into new advisory areas without notifying their insurer,” she says.
He recalls an IPA member whose claim was unsuccessful because they provided business structuring advice that extended into legal territory. This wasn’t listed in the original policy schedule.
“If I switch insurers I keep coverage”
Renzella warns against assuming you’ll retain protection for past services. “Unless retroactive cover is ‘unlimited’ or specifically backdated, earlier work may be excluded—especially if there’s a break in cover,” he says.
“Cyber incidents are automatically covered under my policy”
Cybercrime costs small Australian accounting practices an average of $46,000 every year, so it’s worth checking you’re covered. “PI policies typically exclude or limit cover for data breaches and cyber-attacks. A separate Cyber policy is usually necessary and recommended,” Renzella adds.
Policy terms that trip up practices
You’ve paid your premiums, you understand the complications set out above, and you assume you’re protected. But with new anti-money laundering (AML) regulations creating fresh exposure, understanding your policy exclusions is more essential than ever before.
Regulatory investigations
Debbie Youngs, client director for health and professions at Aon Affinity, explains that some policies exclude coverage for “regulatory investigations” unless specifically endorsed. “A firm could be left to fund its own defence in the event of an AML-related probe,” she says.
Fines and penalties
Australian PI policies also almost universally exclude coverage for fines and penalties imposed by regulators, Youngs adds – “including those from the ATO, ASIC, or AUSTRAC. This aligns with public policy, which prevents insurance from covering intentional or criminal acts,” she says.
Series of events clauses
It’s also worth checking if your policy allows insurers to treat multiple related mistakes as a single claim, even across different clients. If you have a small limit, the errors can quickly stack up to a value exceeding your coverage.
Building better protection
The reason most accountants discover coverage gaps too late is simple: they’re having the wrong conversation with their broker.
Start by assessing what level of cover you need. Don’t just consider the size of your practice, consider the type of advice you give and your client base. Renzella recommends the following:
- Check your highest-value client engagements and the potential cost of legal defence, settlements, and reputational damage.
- Look at lower sub-limits, particularly for high frequency/lower severity exposures such as fidelity/crime (employee fraud), defamation, loss of documents, investigation/legal defence costs, or public relations support which may be capped separately from the main policy limit.
- Ask whether you offer specialist advice (in areas such as SMSFs, tax planning, or business valuations) or have high-net-worth individuals.
- Examine whether the limit is “inclusive” or “exclusive” of legal costs.
When it’s time to renew your PI policy, treat it as a comprehensive health check rather than a price comparison exercise. Review your declared services. If they have evolved over time, Teh:
- check the retroactive date and your policy excess;
- disclose any potential claims before current policy expiry; and
- request a claims history review so you can avoid any repeat issues.
Many unsuccessful claims are preventable with the right conversations at the right time. Experts suggest you should not wait until renewal to discuss unusual work or policy gaps with your broker. The more you share throughout the year about new work or unusual instructions, the better placed they are to advise proactively.
Interested in bolstering your strategic skillset? The IPA Program is designed with that in mind. Learn more here.
