When your firm ceases to be engaged in public practice, you must have appropriate run-off insurance cover to meet the requirements of the PII Regulations for at least two years. And then you have to take “all reasonable steps” to maintain cover for a further four years, effectively making six years in total of run-off cover that firms need to have in place after ceasing to practise.

This requirement is laid down in Regulation 2.8 of the ICAEW Professional Indemnity Insurance Regulations, effective from 1 September 2024. Run-off insurance is necessary so that any claims relating to work done in the past, but that come in after the firm has ceased in practice, are adequately covered. It is mandatory for all firms, regardless of the type of work they have done, previous claims history or predicted future exposure.

“Just because your firm has never had a claim in the past, it doesn’t mean it won’t have one in future,” explains Sarah-Jane. “So, the run-off cover is essential to ensure that, if a claim does come in, everyone involved is properly protected.”

The detailed terms and extent of the run-off cover depend on each firm’s circumstances. But it must at least comply with the minimum limits of indemnity required in the PII Regulations, and it would usually be equivalent to that provided by the firm’s previous qualifying insurance.

Why is it important?

Some people question the need for run-off cover, mainly on the basis that they don’t think they are at risk of a claim once they are no longer practising. “There is a misconception that the risk goes away, and people think that because they’re only doing simple bookkeeping or not trading anymore with no fees coming in, they don’t need to pay for this insurance,” says Sarah-Jane.

Another question firms may have is why they should be paying for the same cover in run-off as a firm still practising. They argue, for example, that as they have been winding down, they’ve only been working for a few clients doing low-risk work, and there is no indication that anyone has been dissatisfied.

“When you're dealing with a professional’s lifetime experience in practice, these questions are understandable,” says David, a partner in the insurance team and head of the accountants professional liability practice at Mills & Reeve LLP. “But sadly, I have lost count of the times an accountant has said to me ‘this is the first claim I’ve had in 30 or 40 years of practice’. And a lot of those clients will be in run-off or approaching retirement, so it isn't unusual for this to happen.”

He also points out that the winding up process itself can potentially bring claims to light. “Often, if a firm is winding down and their clients are moving, the firm taking on their work will be looking anew at the files and potentially finding things that might not have been done properly,” he explains. “We do see quite a lot of claims being triggered when clients’ files are passed to different firms.”

A further misconception, which applies not only to run-off cover but also to PII more broadly, is that if a firm’s fee income is small, claims would only ever be of low value. “This is not the case,” says Sarah-Jane. “You could have been doing quite low fee-generating work, but it could lead to significant claims.”

“We see quite a few cases of claims against a firm of accountants for failing to advise on the dangers of entering into a tax mitigation scheme, for example,” adds David. “As far as the accountant is concerned, all they've done is introduce the client to a tax adviser; they haven't been involved in the scheme and they haven't received any fees for it. But it's not unusual in today’s market for a firm that hasn't received fees or hasn't done any work yet to be sued for failing to give certain advice.”

All reasonable steps

Revised PII Regulations came into effect in September 2024. These included a change to the wording on run-off cover. Previously, the requirement was for firms to use “best endeavours” to arrange cover for a further four years. The requirement is now to take “all reasonable steps” instead.

“We changed this wording to underline the importance of getting appropriate run-off cover,” explains Sarah-Jane. “And the reason for six years of cover is because usually – although there are exceptions – a claimant has six years to bring a claim resulting from professional work that may have been performed negligently.”

Under the minimum wording, your existing insurer is obliged to offer run-off cover for at least two years when your firm ceases to practise. “This means your firm will always have an offer of run-off cover,” says Sarah-Jane. In the first couple of years, the cost of this cover is likely to be similar to the premium paid in the last year before cessation. In line with the minimum wording, participating insurers are also required to notify ICAEW if a firm does not take out its offer of run-off cover.

When calculating the cost, insurers will generally consider what they perceive to be the risk and price it accordingly. In some cases, you will be able to buy a six-year block. But more commonly the insurer will offer run-off cover on an annual basis; it tends to be more expensive in the first couple of years but may decrease over time if there are no claims.

“Current market conditions for PII are quite favourable for firms, compared with a few years ago,” says Sarah-Jane. “Overall, we're generally seeing that insurance is readily available for ICAEW firms, and it should be quite competitive.”

Talk to a broker

There is no prescribed list of the steps you are required to take to ensure you are covered by arrangements which satisfy the regulations. “We're not giving you a specific road map to follow,” says Sarah-Jane. “The broad spectrum of circumstances firms face means it would not be feasible to specify exactly what each firm needs to do. But what we are quite clear about is that we expect you to seek the advice of an insurance broker to source appropriate cover from participating insurers.”

If you have a detailed conversation with a broker, they will be able to understand your firm, its circumstances and work with you to consider both ICAEW’s regulatory requirements and what level of cover you need to address your firm’s insurance needs. “A broker will be able to say whether the minimum amount required by our PII Regulations is sufficient or whether you should think about getting more,” says Sarah-Jane. “And they’ll also be able to advise on other types of insurance that you might need to get beyond the usual PII policies.”

Another source of advice in terms of meeting the regulatory requirements is ICAEW’s technical advice line. “This is available on a confidential basis to discuss the winding down process and PII requirements,” says Sarah-Jane.

When you’re going through the process of securing appropriate run-off cover, something else to consider is retaining files and documentation for work carried out that could give rise to a claim. “From my perspective, it can be much harder to defend a claim in run-off,” explains David. “So, it’s helpful if firms retain their paper and electronic files somewhere accessible. It’s one of those things firms don't often think about because they’re focused on where their clients are going and dealing with the practical arrangements. But ensuring files are properly retained, in particular, if a circumstance has been notified to an insurer and there was no claim at the time, can make a big difference to handling a run-off claim.”

Act now

“Firms (and principals running them) face potentially serious consequences for failing to obtain appropriate run-off cover,” says David. “First, there are regulatory implications. And second, potential exposure for civil liability for any claims.”

ICAEW’s PII Committee considers failure to take out run-off cover a serious matter, so such a breach may result in a referral to the Conduct Department. “Obtaining compliant run-off cover is an obligation under the PII Regulations so, if you fail to do this, it would be breach,” explains Sarah-Jane. “And there could be potential for disciplinary action to follow.”

“If you're thinking about winding down your practice or selling your business, get in touch with your broker and start having conversations about run-off requirements, and making provision to pay for run-off policies while you’re still generating income,” she advises. “A broker is going to be best placed to advise you, and we recommend you have those conversations as early as possible as part of your retirement plan or sale of the business.

“We’re also reminding all firms that the revised PII Regulations came into force from 1 September 2024,” she adds. The new arrangements apply to all policies taken out or renewed from that date, so firms need to be looking generally at their cover and ensuring it remains compliant. If you haven’t already done so, check with your broker whether any of the changes affect your policy.

Resources

• Visit the ICAEW PII hub for a list of participating insurers and general guidance
• Read the revised PII Regulations, effective 1 September 2024
• Watch our webinar outlining the changes to the regulations, which includes questions about run-off cover
• Contact ICAEW’s technical advice line on +44 (0)1908 248 250