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Insuring changes for accountants - new ICAEW PII Regulations and minimum approved policy wording

By Simon Mason and Philippa Lane (DWF).
09 June 2017

Following an extensive review, various important changes have been made to ICAEW's PII Regulations and the minimum approved wording affecting policies that incept or renew on or after 1 May 2017. These changes will apply to any insureds who are members of the ICAEW/ICAS/ICAI (where we refer below to ICAEW this includes ICAS and ICAI), or who otherwise have the benefit of the minimum wording.

We address here three key changes, and outline some important considerations moving forward.

1. Automatic right to two years of run-off cover

ICAEW members who cease practicing are now expected to use their best endeavours to arrange run-off cover that meets the requirements of the PII Regulations for at least two years. The PII Regulations suggest that a member should continue to assess their need for such cover each year thereafter until satisfied there is no possibility of a claim being made. The ICAEW recommends (but it is not compulsory) that members consider maintaining such cover for at least six years after ceasing practice (it should be noted that, contrary to a common misconception, there are circumstances where claims can be brought against accountants and other professionals more than six years after work is done).

As run-off cover can be difficult to obtain, a new clause has been added to the minimum wording (at D4.1) which requires that where a firm ceases during or on expiration of the period of insurance, insurers shall provide run-off cover in accordance with the PII Regulations for a minimum of two years from the date of cessation. In effect, the insurer on risk when a firm ceases practicing must then provide that firm with run-off cover for at least two years.

This is arguably the most onerous change that has been made, and particularly in the current soft market it may be met with some trepidation as run-off arrangements are not always particularly attractive to insurers. Not only is it difficult to assess the potential risks, but it can be harder to deal with any claims as the insured and/or its employees may be less co-operative or able to help following cessation of the business. The change is nevertheless in keeping with the ICAEW's view of the general purpose of professional indemnity insurance, to protect the consumer.

One saving grace is that clause D4.1 specifically states that insurers are able to make run-off cover conditional on payment of an additional premium. Also, PII Regulations 2.7 and 2.8 have been amended to remove the requirement that run-off cover be equivalent to the previous insurance; that is now a recommendation in the guidance to those regulations.

It will be interesting to see how run off cover will be provided in practice where it seems there is no bar to a high additional premium being charged and where the terms can be different. Market convention may arise as to the maximum level of the additional premium, and/or run-off cover may be offered on minimum terms as a USP of the cover.

2. Non-avoidance prejudice

Clause D2.1 has been changed in a way that also appears intended to improve the consumer's position when bringing a claim against their accountant.

Previously, where the insured's non-compliance with, or breach of, any condition of the policy caused insurers prejudiuce, clause D2.1 provided that insurers could reduce the indemnity to such sum as in their reasonable opinion would have been payable in the absence of such prejudice.

The minimum wording now expressly requires that insurers pay any indemnity that is required to meet a claim, and then seek reimbursement from the insured to that extent that insurers have suffered prejudice. This is a less attractive position for insurers, as it is easier not to pay the full indemnity than to seek to recover some of it from the insured afterwards (who might be unwilling, or unable, to pay insurers). However, insurers still have a fairly wide discretion to decide how much prejudice the insured has caused, and thus what they can recover from it.

3. Dishonesty and fraud will not be imputed to a body corporate unless committed by all directors / all members

Clause C4, which relates to dishonesty and fraud, has been amended to expressly provide that: no dishonest or fraudulent act or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company, or in the case of an LLP, all members of that LLP.

In accordance with the ICAEW minimum wording, insurers are able to exclude cover for dishonesty and fraud only against insureds who have effectively committed or condoned the fraud themselves. Every innocent insured is still entitled to cover.

This has previously caused some difficulty where a claim is brought against a corporate entity following the fraudulent actions of one director, whilst the other director(s) is entirely innocent of that behaviour. It must then be considered whether the company itself was fraudulent, and therefore whether cover is excluded for the claim, by looking at who the controlling mind(s) of the company is or are.

It is already generally thought to be the position that an innocent director might effectively 'save' the corporate entity, in light of cases such as Arab Bank PLC v Zurich Insurance [1999] 1 Lloyd's Rep 262 (in which it was considered that where each director is a separate insured under a policy, then one director cannot be treated as the controlling mind of the company, unless there is something more to suggest this is the case).

Whilst this change therefore assists in creating further certainty and clarity to this area, it is not a significant departure from that which was already in place, as the ICAEW's own notes on the change explain. The change has perhaps been made to ensure cover cannot be declined against a company for the actions of one 'bad apple' in protection of the other insured(s) and of consumers (including the victims of any dishonesty and fraud).

Overall thoughts

The above changes have clearly been implemented to provide further protection for applicable insured accountants as well as the consumers that they serve. The most important change is perhaps that it is now compulsory for insurers of applicable insureds to provide run-off cover for a minimum of two years (albeit insurers now appear to have some flexibility as to the premium they charge and the level of cover they provide). Particularly given the current soft market, it is to be hoped that the ICAEW does its best to balance the needs of insurers, insureds and consumers going forward, as consumers will ultimately suffer if it becomes harder to obtain insurance for accoutants.

It is also a reminder of the importance of the Difference in Conditions clause. To be able to participate in ICAEW's professional indemnity insurance arrangements, insurers must provide ICAEW members with policy coverage that meets the PII Regulations and minimum approved wording. Where using their own policy wording, insurers must include the Difference in Conditions clause, which provides that, where there is a difference between policies, the provision more favourable to the insured will apply.

Whilst this is unavoidable in circumstances where the insured is an ICAEW member, we have seen some accountancy policies which include a Difference in Conditions clause which seem to operate irrespective of the insured's membership of the ICAEW. Subject of course to market demands, insurers may wish to consider their position in this regard in light of these changes.