Minimum terms - potential pitfalls for insurers and insureds

In May 2017, the Institute of Chartered Accountants in England and Wales (ICAEW) revised their minimum wording to include an obligation on insurers to provide two years of run-off cover if their member’s practice ceases during the period of insurance. We consider the amendments and the potential pitfalls for insurers and insureds.

As a result of a review carried out in 2016, the ICAEW have revised their PII Regulations and minimum wording, both of which came into effect on 1 May 2017.

A total of 34 amendments have been made to the minimum terms and the difference in conditions clause, the majority of which are clarifying amendments or technical updates.

There are, however, a number of significant changes, the most important of which is the requirement that members must use their best endeavours to put in place run-off cover for a minimum of two years following a cessation of practice. In its accompanying guidance, ICAEW has stressed that it recommends:

  • Run-off cover is maintained for six years.
  • The terms and extent of any run-off cover is equivalent to the member firm’s previous qualifying insurance.

Insurers on cover at the date the firm ceased to practice are obliged as a consequence of the revisions to the minimum terms to offer run-off cover for a minimum of two years. Insurers have flexibility in determining the level of premium, the date the premium is payable and the terms (provided they are compliant with the minimum terms). Insurers may make the run-off cover conditional upon payment of an additional premium by a specified date.

If the member is unable to pay the specified premium quoted by their current insurer, or is unable to obtain cover from any of the ICAEW’s alternative participating insurers, the member must make an application to the assigned risks pool.

Further amendments of note to the terms are:

  • A new definition of “authorised work” to specifically incorporate probate work authorised by ICAEW.
  • An amended definition of “defence costs” – the requirement for the insured to have “written consent of Insurers (such consent not to be unreasonably withheld)” has been removed.
  • A new definition of Insurance Mediation Work has been incorporated.
  • The non-compliance special provision has been clarified to ensure that where there has been non-compliance with a condition of the policy, insurers will pay the claim in full and seek reimbursement of an amount reflecting the prejudice suffered by insurers.
  • The exclusion relating to prior claims has been amended so that it is clear that both claims and circumstances previously notified will not be covered.
  • A new retroactive date exclusion, provided that such a date is specified in the schedule of insurance.

All ICAEW participating insurers must provide members with cover which complies with the ICAEW’s PII Regulations and minimum terms. If insurers choose to use their own wording they must include the Institute’s Difference in Conditions (DIC) clause, the effect of which provides the insured with at least the level of cover offered by the minimum terms. The DIC clause has been updated to ensure that where lengthy insurance contracts are in place, the policy is deemed to incorporate any amendments to the minimum terms which come into force during the life of the policy of insurance.

Regardless of whether policies incepted post 1 May 2017 contain the revised minimum terms, as a consequence of the DIC clause, insurers will be obliged to provide the two year run-off cover to any insured who ceases to practice during or at the end of the policy term. While insurers will have some flexibility in setting the premium, the obligation to offer the extension may come as a shock. These minimum change provisions have appeared without any real warning, and many insurance professionals are unaware of the changes.

If you would like to discuss the revisions to the minimum terms, or if you have any questions concerning claims against accountants, please contact Virginia Hickley or Lesley-Ann Hamlyn.

Click here to read our briefing about the Insurance Act 2015 changes to ICAEW’s minimum terms. Click here to read our briefing about key policy points to be aware of when adjusting accountants' claims.

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