“Accountants shiver as cover slips away: A legal onslaught is scaring off insurers”
You might be forgiven for assuming that this headline was written during the dark days following the 2008 crash when claims were spiking against professionals. In fact it was taken from a national newspaper on 1 August 1993 as the country was recovering from a recession. The point is that claims against accountants over the last 20 years have often bucked the more extreme counter-cyclical claim trends suffered for example by law firms. The last recession has been no different with accountants largely escaping the flood of PII claims. But what might accountants and their insurers expect to face over the next three years?
Predicting claim trends in an uncertain future is frankly never easy and especially in respect of such a wide profession. This article is intended to provide some broad predictions by focussing on the following three indicators:
1. What types of claims are we seeing today?
The claims being handled by our national accountants’ team only provide a snapshot of current market trends but underwriters are telling us they are fairly typical of the market as a whole and we think provide a rough picture of the next six months.
As expected, current claims we are seeing arise out of a real mix of work which took place before, during and after the last recession. For example, there remains a tail end of pre-recessionary tax and transactional work (eg, film finance schemes, involvement in transactions resulting in losses during the 2008 crash). There has been a slow down in the spike of claims against insolvency practitioners (often against non-specialists brought into insolvency teams during the recession). However, claims arising from aggressive tax planning are on the increase as HMRC’s offensive on tax avoidance begins to bite.
2. “It’s the economy stupid”
The economic environment is a key player in influencing claim trends. Generally, insurers expect to see a rise of PII claims during a recession. Accountants seem to weather these storms better but they are not immune. Assuming that (and I am no economist) the UK’s economy will continue to grow over the next three years, I suspect there will be a more benign but wider claims environment as firms (especially the top 100) expand their practices across many growing sectors. I also suggest we will see a real decline in claims (both speculative and genuine) arising out of failed businesses. That assumes the rate of decline of “zombie” companies continues.
However, certain types of claims might buck the trend. Insurers are rightly concerned about claims arising out of tax avoidance schemes, which are the subject of a separate article. However, with government policy firmly focussed on recovering billions of pounds of tax and HMRC aggressively shutting down schemes, I expect certainly in the short term (before many firms pull out of aggressive tax planning) a spike in claims against aggressive tax planners/advisers.
Unless there is another downturn, I doubt we will see a repeat of the increase in claims after the early 90s recession. That was a turbulent time for insurers with a spike in audit and transactional related claims and lead insurer Merrett pulling out of the market. However, the world has moved on. For example, accountants are now much better at risk management – tighter retainer letters being an example. Also, recent authorities from Arrowsmith to Mehjoo have helped provide a legal brake on claims, especially by third parties against auditors.
3. Type of firm
The accountants’ market is incredibly wide from the 30,000 odd small high street practices handling general book keeping and personal tax advice to the giant multinational firms in the top 10 involved in a huge range of different practice areas. So, you wouldn’t expect to see the same types of claims across the market.
I would suggest that, at the smaller end of the market, we will see a continued benign environment with the typical types of standard tax and general accounting claims you would expect from smaller firms. In the top 100, claims will be drawn from wider sources. I would expect (in line with usual trends) to see around 30 per cent of claims coming from tax and then audit, transactional, insolvency and general accounting in that order. Claims from tax advice generally, I would suggest is not a concern in itself given that tax is the bread and butter work for all accountants. As above, the real danger will be claims against firms with specialist aggressive tax mitigation teams. Something also to watch out for are potential claims against firms which open probate departments with inexperienced legal teams.
Based on the indicators above, my view is that up to 2017, insurers can expect:
- A generally benign claims environment with about 30% of claims tax related followed by transactional/advisory, audit, insolvency and general accounting
- A short term spike in claims arising out of aggressive tax saving schemes
- A wider (and potentially larger) range of claims driven by the top 100 firms working in a variety of growth sectors with an increase international flavour