By AAT Comment Accountancy resourcesPII: avoiding non-compliance sanctions and penalties26 Nov 2024 Professional indemnity insurance (PII) is liability insurance that covers firms when a client or third party claims to have suffered a loss, usually due to professional negligence. Here, AAT’s Professional Standards team share their advice on AAT’s PII policy requirements, and why it matters.PII is a key part of managing risk and all our licensed members must have adequate cover in place. It is your responsibility to ensure that the amount of cover purchased is consistent with the nature of your practice and income, proportionate to the risks taken by the firm and consistent with AAT’s PII policy requirements (PDF).This year, a number of practice assurance reviews have found that a significant proportion of regulated firms are failing to comply with our basic requirements. We have identified licensed members trading with either no cover in place, or with coverage inadequate for the firm’s size.What are the risks of not having PII in place?If a claim is filed against you for professional negligence, you could be liable for significant damages, and you would not be insured for it.Not having appropriate insurance would undermine your professional reputation with clients or prospective clients.If you have a gap in cover, you are in breach of AAT’s PII policy and you will be subject to disciplinary action. Not only will this result in disciplinary sanctions being imposed, but it will also make any future attempts at getting PII extremely difficult.It is now mandatory for our members to confirm if they are compliant with all the requirements set out in AAT’s PII policy requirements in their annual licence return. So, if you haven’t got cover or you have had a gap in cover, please do not tell us you are compliant if you are not.We ask these questions so we can intervene and support your firm’s compliance. Submitting incorrect information to us is serious and misleading, and will be considered as part of any disciplinary action.Guidance on your terms of coverThe level of cover you need depends on how much you collect in fees on an annual basis. It is important you consider your gross fee income when re-renewing your policy every year to determine if you require more coverage to ensure it aligns with the following minimum requirements:for sole traders, must be the greater of: 2.5 times the firm’s gross fee income, or £50,000for partnerships, must be the greater of: 2.5 times the firm’s gross fee income, or £100,000for limited companies, must be the greater of: 2.5 times the firm’s gross fee income, or £100,000if the gross fee income of any firm is greater than £400,000 the maximum level of cover required by this policy is £1,000,000.Other important things to consider to ensure compliance with the policy requirements are:It should be fully retroactive and on an ‘any one claim’ basis.Your self-insured excess must be set at an amount which the licence holder is able to always meet.You must ensure your professional indemnity insurance specifically covers Limited Assurance Engagements and potential third-party claims if providing this service.Please check whether your existing policy automatically renews or not. This will prevent any gaps in coverage.You must secure run-off cover after you cease to provide services. This is to cover you for claims for work done while engaged in public practice but arising after your firm has ceased trading. We recommend a period of six years from the date of cessation, but check with your insurance provider for further advice.Case study 1Licensed member A started trading in 2018, providing general bookkeeping services to a small number of clients. As the firm’s gross income was relatively small for the first two years, £50,000 in PII cover was satisfactory to meet AAT’s PII policy requirements.However, the business grew faster than anticipated and as they were not required to provide details of their gross fee income to the insurer on annual renewal of the policy, they forgot to increase coverage. This meant the firm incorrectly maintained their level of PII cover at £50,000 each year until AAT identified the shortfall (see table below) during their practice assurance review.Accounting periodPractice incomeMinimum cover required per AAT PII policyAmount of coverageExtent of shortfall2020£22,669£100,000£50,000£50,0002021£50,345£125,863£50,000£75,8632022£54,233£135,582£50,000£85,5822023£94,213£235,532£50,000£185,532The member provided evidence that the firm has now increased their level of PII cover to £250,000 to meet the minimum requirements along with an undertaking that they will review the policy meets AAT’s requirements regularly, or when any changes need to take effect. Given the extent of the shortfall, the member was subject to disciplinary measures.Case study 2Licensed member B had PII coverage with an insurer for over ten years but decided to change insurers to obtain a cheaper premium. As his previous insurer renewed the firm’s policy on an annual basis, he assumed the policy he had taken out with the new insurer would also renew automatically.However, this was not the case and consequently the firm had no cover in place for 11 months – until AAT identified the shortfall when they requested to see a copy during a sampling activity. Given the gap in coverage the member was subject to disciplinary measures, and it was stressed to the member the importance of checking whether an existing policy automatically renews or not to prevent any gaps in coverage.You can find full details on AAT’s Professional Indemnity Insurance here (PDF). AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.