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.
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 Financial 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.
Three risky 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”
Many believe PI policy covers any advice given in a professional capacity. The reality is more restrictive. Your policy protects the specific services outlined in your engagement letters. Step outside those boundaries, even with the best intentions, and you’re on your own. This includes informal guidance without adequate documentation showing authorisation.
“Sub-contractors are automatically covered under my policy”
Scott Williams, joint managing director at insurance broker Clarke Williams, explains that sub-contractor cover is also often misunderstood.
“Sub-contractors can be covered under your policy for work they carry out on your behalf, but most wordings require that they also maintain their own PI insurance. The insurer has the right to sue this person if they are found negligent. And we’ve seen examples where a contractor thought they were covered under the practice’s PI, so had no cover,” he says.
“Switching insurers means losing coverage for past work”
This misconception could keep practices locked into poor insurance relationships. “Many still believe that changing insurers will mean losing cover for historic work,” says Williams, “whereas in reality, as long as the retroactive date is maintained, you retain protection for past services.”
Policy terms that trip up practices
You’ve paid your premiums, you understand the complications set out above, and you assume you’re protected. Then a claim hits and the protection you counted on evaporates because of clauses buried deep in policy documents that you never fully examined. These are the exclusions that often catch firms out.
Late notification
Failing to notify your insurer of a potential claim or lodge a “circumstance” that might lead to one can void your coverage entirely. Williams recalls he once had a client call on the way to court to see if he could inform their insurer.
Series of events clauses
Many policies allow insurers to treat multiple related mistakes as a single claim, even across different clients. “If you have a small limit, this can create exposure if those errors add up to more than your cover,” Williams explains.
Janthana Kaenprakhamroy, CEO of business insurer Tapoly, highlights three other clauses that frequently catch practices off guard. “Key exclusions often overlooked include dishonesty or fraud by partners or staff, prior known circumstances, and work performed outside declared jurisdictions,” she says.
Building better protection
Many accountants discover coverage gaps too late because they’re having the wrong conversation with their broker.
Start with the policy structure. Williams recommends policies based on a civil liability basis, with cover written as “any one claim” and legal defence costs paid in addition to the limit. This means your policy limit applies to each claim separately and any legal bills won’t eat into the compensation available.
“If you have a small limit, this can create exposure if those errors add up to more than your cover.”
– Scott Williams
Kaenprakhamroy warns larger practices should take extra care. “Certain risks – like loss of documents or fidelity – often have lower sub-limits, which can be inadequate for high-volume practices handling sensitive client information,” she says.
Experts suggest that when it’s time to renew your PI policy, you should treat it as a broader insurance health check, rather than just a price comparison exercise. You can review how your services have evolved, whether your client profile has shifted, and whether your turnover now implies new risk levels. Maintain those crucial retroactive dates when switching insurers, and pay close attention to any changes in the exclusions or sub-limits.
Many coverage issues are preventable with the right conversations at the right time. Experts advise not waiting 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.
