Professional Indemnity Insurance for accountants and auditors

Understanding Retroactive Cover and Claims-Made Policies

Professional indemnity insurance can be complex, but two critical aspects that every professional should understand are retroactive cover and claims-made policies. These elements determine when an insurance policy will respond to claims and how past work is protected.

“Retroactive cover ensures that professionals remain protected for work done before the start of their current policy, while claims-made policies dictate that coverage applies only if both the claim and the incident occur within an active policy period. Misunderstanding these concepts can lead to gaps in protection, potentially exposing businesses to significant financial risk,” Samantha Varela, Senior Legal Risk Advisor at Aon South Africa explains.

Understanding the Retroactive Date

A retroactive date is a critical feature of any professional indemnity insurance policy. It determines the starting point from which insurers will cover claims. This means that if a claim arises from work done before the retroactive date, it will not be covered.

“The concept of retroactive cover emerged in response to claims involving long-term exposures, such as asbestos-related illnesses and severe pollution cases. These issues often took decades to surface, leading to uncertainties about when an insurance policy should respond. The introduction of claims-made policies helped establish clearer guidelines for insurers and policyholders alike,” Sam explains.

“Your retroactive date is essentially the birth of your insurance coverage. It is vital to ensure this date remains intact, even when switching insurers. If you allow your coverage to lapse, you could lose your original retroactive date, meaning past work would no longer be covered. Insurers will issue a new retroactive date when a policy is restarted, leading to potential gaps in protection,” says Sam.

To maintain continuous coverage:

• Always pay your premiums on time.
• Work with an expert broker to ensure your retroactive date is carried forward if you switch insurers.
• Avoid gaps in cover, as once a retroactive date is lost, it cannot be reinstated.

“Under a claims-made policy, the timing of claim notifications is crucial. If a policyholder becomes aware of a potential claim, they should notify their insurer immediately. Even if the claim materialises years later, it will still be covered under the policy active at the time of notification,” she adds.

Common Professional Risks for Accountants and Auditors

Risk management begins with understanding potential liabilities. According to UK-based law firm Hugh James[1], accountants can be found negligent in cases such as:

• Missing deadlines for filing accounts or annual returns.
• Providing incorrect tax or financial advice, leading to financial loss.
• Failing to detect fraud.
• Conducting negligent audits.
• Failing to prepare critical accounting documents.
• Negligently valuing company assets.

Trends in Professional Indemnity Claims

Locally, common claim trends in the financial sector mirror global patterns, including:

• Employee fraud – Cases where employees commit fraudulent activities.
• Regulatory complaints – Complaints lodged with the Independent Regulatory Board for Auditors (IRBA) regarding alleged professional misconduct.
• Incorrect advice – Errors in tax return advice leading to penalties imposed by tax authorities (though note that penalties and fines are typically excluded from coverage).
• Audit process disputes – Challenges to audit procedures by third parties.
• Financial loss claims – Clients suing for losses based on incorrect financial projections or advice.

The Value of Expert Advice

“Insurance can be complex, but working with an experienced broker and risk manager helps ensure your business is adequately protected. A knowledgeable professional will tailor risk management and insurance solutions to suit your specific needs, providing peace of mind that your assets and reputation are safeguarded,” says Sam. “Choosing the right broker is a critical decision. They should have a deep understanding of the risks professionals face and be skilled in handling claims effectively.”