Advice on Fee Insurance

PROFESSIONAL FEE PROTECTION insurance has now been around for more than fifteen years and the number of insurance providers insuring this type of risk has increased, although the market is controlled by three or four of the larger companies.
This type of insurance, of course, concerns insuring against the possibility of an individual, partnership or company being investigated either by the Inland Revenue in connection with direct tax or National Insurance matters or by Customs and Excise in respect of VAT irregularities. Self assessment has brought the potential cover into even higher profile because a 'random' audit is a possibility for any business now, and the Inland Revenue is targeting larger business and companies.
From time to time the writer has written articles for Taxation on this subject, detailing the type of cover available and the companies in the market, and a parallel chapter exists in Volume 3 of Butterworths Investigation Service. I have commented on the various types of scheme available, which essentially include group insurance, client decide or self insurance, and in particular outlining the dangers of the third possibility.
It has been expected for some time that one of the professional institutes would advise its members on this subject and it is therefore no surprise that CAASE (Chartered Accountants Advisory Service on Ethics), has published its helpsheet number 15. The Institute of Chartered Accountants in England and Wales has received a large number of enquiries from members concerning professional fee insurance schemes and the CAASE committee has therefore taken counsel's advice. It is not possible to reproduce the notes on the helpsheet in full in this publication, but it is helpful to summarise one or two points for the benefit of readers.
No obligation
First of all the Institute states that there is no obligation on its members to provide professional fee insurance for its clients. However, counsel has advised that, with the increase in random investigations, it would be advisable for members to make their clients aware of the availability of such schemes.
The notes then go on to consider the three types of scheme.
Group insurance
Under group insurance schemes the practice takes out the policy which may include all clients or a selection of clients. The cost is then passed on to the client as an increase in the hourly charge-out rate or as a specified sum. Alternatively the practice may bear the cost of the insurance.
Counsel has advised that in his opinion there is no obligation to disclose any profits which arise where the costs of the premium are passed on to clients. However, they should be kept fully informed of the level and method of charge made to them for the insurance cover provided. Clients should also understand that they are not obliged to become part of the group insurance scheme and that there are other schemes available.
Such policies stipulate circumstances in which payment of a claim will not be made. To avoid possible complaints, practising members are advised to make sure that clients know for what period the cover has been provided and in what circumstances they may not be covered. They are advised not to undertake work without ensuring that the client is fully aware that the resulting costs may not be recoverable under the policy.
Clients decide
Under this type of policy, which may be one for which the practice has secured a special deal on premiums for its clients, the client decides whether or not to take out the policy. The client is the insured and has the relationship with the policy provider and will probably pay the premium direct.
If the chartered accountancy practice collects the premium, resulting in a profit, or the insurance policy provider pays a commission, counsel has advised that there is no legal obligation to disclose. However, members need to consider whether they have a fiduciary relationship with the client and as a minimum follow guidance at Statement 1.204 in the Members Handbook (conflicts of interest).
CAASE recommends that
(1) the member discloses to the client in writing (a) the fact that commission or benefit is likely to result; (b) when received the fact that the commission or benefit has been received; and (c) as early as possible the amount and the terms;
(2) that the association with the policy provider is disclosed;
(3) that the client's written consent to act in this particular area is obtained in writing.
Self insurance
Readers may recollect that the writer warned of the dangers of this particular course of action where a practice sets up its scheme and provides the 'insurance' direct to its clients. The advice obtained by counsel to the Institute sets out the following considerations if such a course of action is complicated:
Members should seek legal advice.
The company will need to be authorised by the Secretary of State to carry on insurance under the Insurance Companies Act 1982.
The insurance field is heavily regulated and numerous requirements will need to be met in order to be authorised.
Members must establish a separate company specifically for the purpose.
Subsidiary points
The helpsheet also emphasises that any money for the purposes of professional fee insurance premium payments is handled in accordance with the client's money regulations.
Finally, if the practice chooses to avoid insurance schemes, it should still be aware of their availability and mention the possible benefits to clients.
Members of the Institute of Chartered Accountants in England and Wales can obtain copies of the actual advice given by counsel on request by calling 01908 248258. The helpsheet is available from CAASE, Institute of Chartered Accountants in England and Wales, Gloucester House, 399 Silbury Boulevard, Central Milton Keynes, MK9 2HL and it was published in June 2000.

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