How professional indemnity insurance protects bookkeepers

Professional indemnity insurance is growing in popularity and offers important protections for bookkeepers.

When choosing a policy, there are a number important factors to consider to ensure the appropriate level of cover.

Professional indemnity (PI) insurance offers an important form of protection for bookkeepers. Anyone who offers knowledge or services as part of their business could be subject to a legal claim if their advice causes financial loss to a client or employer. As in accountancy, it’s ultimately a business owner’s responsibility to review and sign off on bookkeeping activities, but those involved in preparing the books also bear legal liability should a problem arise.

Like in any other profession, bookkeepers sometimes make mistakes. PI insurance helps ensure that a bookkeeper can afford to settle any claim resulting from an error in their work. Mike Hallam is head of technical services at industry body the British Insurance Brokers’ Association. With more than 30 years of experience in the industry, he is keen to highlight the importance of PI insurance for bookkeepers.”Since a bookkeeper is dealing with the financial records of clients or employers, there’s the possibility that errors, omissions or mistakes could occur in their work,” he explains. “If this does happen and they don’t have professional indemnity cover, it could potentially have a big impact on their job or freelance career.”

According to a report by business data company Timetric, the demand for PI insurance cover in the UK has grown considerably in recent years. During 2014, PI premiums in the UK amounted to £1.17 billion – an annual growth rate of 7.15 per cent – and they’re expected to reach a value of £1.58 billion by the end of 2019. “More and more people are purchasing PI insurance these days. One reason for this is that so many companies now require you to have certain kinds of insurance when you enter into a contract with them,” Hallam says.

This rising demand comes partly from UK insurers recognising an opportunity to support the country’s thriving small and medium-sized enterprise market.The Federation of Small Businesses recorded that 99.3 percent of all private sector businesses at the beginning of 2015 were SMEs. PI insurance is just as helpful for sole traders and SMEs as it is for large companies, and it’s especially significant for bookkeepers working with clients and employers in high-claim industries like construction and entertainment.

“If you’re a builder, your client will ask to see your public liability insurance, and it’s a similar situation with financial services,” Hallam explains. “When you’re tendering for a contract, often the prospective client will need you to demonstrate you have professional indemnity insurance up to a particular limit.”

Provided a bookkeeper has the correct level of insurance, PI will cover the legal expenses in the event a claim is made against them. For example, if a bookkeeper accidentally introduces an error in their calculations and causes damage to their client, PI cover will help pay for their defence and offer client or employer compensation for the losses incurred. Cover extends to other scenarios too – from the loss of sensitive documents or data, to equipment failures and breaches of confidentiality.

Determining the correct level of cover for a bookkeeping business is crucial to ensuring all professional activities are fully covered. The options depend on the type of clients a bookkeeper works with, the size and value of the client’s company and the specific nature of the work a bookkeeper is involved with. Insurance brokers should be a bookkeeper’s first port of call in navigating the available options.

“Brokers can advise bookkeepers on the exact needs and insurance requirements in relation to what they do,” he says. “For example, if you’re just working for a local newsagent, your requirements will be very different than if you were working for a multinational supermarket chain. So the limits you choose must relate specifically to the activities you’re involved with.”

All licensed AAT members, whether accountants or bookkeepers, must have professional indemnity insurance to cover the services they provide. AAT also has its own PII offer for members and provides guidance as to the minimum level of cover you need as a licensed member.

Hallam recommends keeping communications open and working closely with brokers to mitigate oversights during a period of insurance cover. “Insurance policies are generally for a period of 12 months, and you will have to provide a business description and a list of the activities you’re involved in,” he says. “If that changes throughout the period of the policy, then you are obliged to advise the insurer. So it’s absolutely essential that any change in business activities and the like are made known as soon as possible.”

Many claims on PI insurance can be avoided through carefully worded letters of engagement that state a bookkeeper’s specific responsibilities in their role. Where an insurance policy mandates that a letter of engagement is in place, it’s important to ensure that a formal letter is sent, otherwise a bookkeeper might find themselves without sufficient cover.
PI insurance is one of a business’s best defences against a costly claim, which is why choosing the right policy should be a priority for professional bookkeepers. No matter how diligently record-keeping is dealt with, mistakes can occur, which is why this form of insurance is so important. Ultimately, PI insurance cover could be the difference between a business in jeopardy and business-as-usual – so explore your options carefully.

Johanna Hart is a freelance writer whose work has been published by Google, Facebook and Natwest.