Be Cautious: Professional Indemnity Insurance is Must after Companies Act 2013

Professional Indemnity Insurance provides essential financial protection for a wide range of professional adviser’s. In the event any one suffers financial loss as a result of alleged neglect, error or oversight, professional indemnity insurance will meet the cost of defending claims and any damage payable. Any Chartered Accountant, who gives advice, designs or offers a similar service in a professional capability, is seen as an expert. In these times of high end user attentiveness, none will shilly-shally to pursue a claim if it is felt that they have received sub-standard service. The companies act 2013 has introduced a number of financial penalties ,Refund of Remuneration & Liable for damages to company, statutory bodies , tax  authorities or to any other persons .We are exposing to more complicacies and claims like they have never before. The need for professional indemnity insurance has never been greater. This tax authority and any other persons cover the entire world in its definition. While some professional people see professional indemnity insurance as an expensive and avoidable overhead, we have to foreseen that any professional can produce considerable claims and without insurance, the financial security of our profession is threatened.

Penalties , prosecutions & suits  against Auditors under COMPANIES ACT 2013

Further Section 140(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

Further For proven misconduct, NFRA will have power to levy penalty amounting to not less than Rs. 1 lakh but which may extend to five times the fees received in a case of an individual and not less than Rs. 10 lakh but which may extend to ten times in case of a firm.

The accounting professionals have been able to organize their work and get social and statutory appreciation for their competence, objectivity and integrity in a big way. We are  one of those who are providing high caliber services to the society, in general, and in business community, in particular Any accounting professional  whom acts in a professional capacity is bound to exercise the care and skill required by a competent practitioner in that profession. If he fails, then he is open to an action being brought against him. The role of professional accounting which started with compulsory statutory audit under the company law is now require some shield from the liability  raised in the act against the auditors. So far the questions of liability for negligence and incompetence were normally settled through the self-regulatory mechanism and disciplinary framework of our institution itself.  Now, suits are to be imposing on professionals which may ruin their professional practice, reputation and goodwill and may tarnish the image of peers of the accounting profession.

Shield through Professional Indemnity Policy of New India Insurance co ltd.

The policy is meant for professionals. Only New India Insurance Co. Ltd issue ‘Professional Indemnity’ policies to the group of professionals. Chartered accountants are among them who can take such policies. These policies indemnify errors and/or omissions while rendering services by accountants as well as their firm and partners named in the policy. The other professional’s financial accountants, management consultants, advocates, solicitors or counsels, insurance brokers and agents are also there for insurance cover.

“Every person who enters into a learned profession undertakes to exercise a reasonable degree of care and skill.” If he is an attorney, he does not undertake that in all events he shall win your case; nor does a surgeon undertake that he will perform a cure; nor does he undertake to use the highest degree of skill. There may be persons who have higher education and greater advantages than he has. But he undertakes to bring a fair, reasonable and competent degree of skill.

It follows that there are two counts upon which an action may be based for damages for negligence. First, that the defendant did not have the necessary degree of skill, and secondly, that, having the required skills, he did not exercise them in a particular case.

The risk to the professional man of an action being brought against him for negligence is very real and the consequences of such an action can be serious. The policy will not pay for claims arising out of contractual liability, intentional non-compliance of any statutory provision, loss of goodwill, slander, fines , penalties , libel , false arrest , defamation , mental injury etc.

How does the Policy Work?

This policy is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service. This policy is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service.

The policy offers a benefit of Retroactive period on continuous renewal of policy whereby claims reported in subsequent renewal but pertaining to earlier period after first inception of the policy, also become payable.

Group policies can also be issued covering members of one profession. Group discount in premium is available depending upon the number of members covered.

How Civil Liability By virtue of Law of contract may arise?

Professional indemnity insurance provides cover for claims brought against the policyholder due to their professional negligence. Liabilities may arise in the discharge of professional duties due to negligence. This indemnifies the policyholder against loss/circumstances incurred only as a result of their negligent act, error or omission in carrying out the policyholders business. This is the narrowest form of cover

Negligent act, error or omission

The policy covers all sums which the insured professional becomes legally liable to pay as damages to third party in respect of any error and/or omission on his/her part committed whilst rendering professional service. Legal cost and expenses incurred in defence of the case, with the prior consent of the insurance company, are also payable, subject to the overall limit of indemnity selected.

Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation of any law or ordinance is not covered.

Some Professional indemnity policies go further than the standard cover and provide indemnity ‘for any civil liability’. This covers such areas as breach of contract, libel and slander. Some standard cover policies may also include libel and slander as extensions to the policy wordings if required.

How to select the sum insured?

In Professional Indemnity Policy, the sum insured is referred to as Limit of Indemnity. This limit is fixed per accident and per policy period which is called Any One Accident (AOA) limit and Any One Year (AOY) limit respectively. The ratio of AOA limit to AOY limit can be chosen from the following:

a. 1:1

b. 1:2

c. 1:3

d. 1:4

The AOA limit, which is the maximum amount payable for each accident, should be fixed taking into account the nature of activity of the insured and the maximum number of people who could be affected and maximum property damage that could occur, in the worst possible accident.

In the case of Professional Indemnity policy issued to engineers, architects, interior decorators, lawyers, advocates, solicitors, counsels, chartered accountants, financial accountants and management consultants, the Any One Accident (AOA) limit is restricted to 25% of the Any One Year (AOY) limit.

Only the professional by his own judgment can assess the amount of cover appropriate to the profession. In determining how much cover to effect, it is important that a realistic view is taken of the potential damages and legal costs for which the profession could become libel. Being under-insured can be almost as financially disastrous as being without insurance at all.

How to claim?

The term “liability” means responsibility and “legal liability” means responsibilities which can be enforced by law. Legal Liability may be classified into Criminal Liability and Civil Liability. Only Civil Liability claims are payable.

Civil Liability claims will arise if there is prima facie evidence of negligence by the insured resulting in injury or death to any third party or resulting in damage to property belonging to a person other than insured.

Negligence will be proved only when following conditions are satisfied:

1. Existence of duty of care
2. Breach of this duty
3. Injury suffered by a person or property damaged as a result of that breach.

In case of any event likely to give rise to a liability claim as described above, insurance company should be informed immediately. In case any legal notice or summons is received, it should be sent to the insurance company. The company has the option of arranging the defence of the case.

The event giving rise to the claim should have occurred during the period of insurance or retroactive period and the claim first made in writing against the insured during the policy period. The maximum amount payable including defence cost will be the AOA limit selected. The Any One Year limit will get reduced by the amount of claim or indemnity paid for any one accident. Any number of such claims made during the policy period will be covered subject to the total indemnity not exceeding the Any One Year limit.