CPP, PI and liability issues on retirement

Key Points

  • Members must decide whether their circumstances allow them to cancel their CPP or downgrade to a concessional rate.
  • If you retain your CPP at a full or concessional rate you will still need to hold PI cover. A concessional PI policy is available for concessional CPP holders.
  • As long as run-off PI cover is held, members should have liability capped provided they were participating members of the Institute scheme when the service was provided.

Retirement and your CPP

Some members decide to wind down from practice, retaining their statutory registration(s) and providing some services as a consultant through the practice or retaining a few clients independently. Others decide to resign their statutory registration(s) and stop providing services.

The decision you make will determine whether you retain your CPP or cancel it altogether.

Still providing services?

If you intend to retain your statutory registration(s) and provide services you must continue to hold your CPP. If you are unsure whether you need to continue to hold a CPP, work through this interactive tool: Do I need a CPP?

The level of income derived from these services will determine your CPP subscription rate. If you are earning less than $7,500 p.a. you will be entitled to a concessional nil rate CPP and incur no fees to retain your CPP.

If you are permanently retired, with an income between $7,500 and $56,000, you will be entitled to a CPP at the concessional one third rate. You will pay one third of the full CPP subscription rate.

No longer providing services?

If you resign your statutory registration(s) and stop providing services, you can cancel your CPP.

You can adjust your CPP rate or cancel your CPP altogether by completing the CPP cancellation/downgrade form and submitting it to service@charteredaccountants.com.au.

Professional indemnity insurance

Regulation 4A (available in the Members Handbook) requires all CPP holders to be covered by a professional indemnity (PI) insurance policy which meets the standards set out in the Regulation.

The key PI insurance policy requirements are:

  • A minimum of $1 million in cover
  • Provided by an authorised insurer
  • Providing cover for all services provided
  • An excess which is no greater than $10,000 per principal or 3% of gross fees
  • Costs-in-addition cover which provides for the payment of defence costs over and above the policy limit of indemnity is recommended.

If you decide to downgrade from a full rate CPP, you must continue to meet the PI insurance obligations. However, you can access a concessional PI policy arranged through Marsh PI brokers. This policy provides the full level of PI insurance cover required in Regulation 4A at a concessional premium.

Run off cover

If you decide to cancel your CPP you are required under Regulation 4A to ensure that you have adequate run-off cover for a period of not less than seven years. This provides cover for any claims which might arise up to the statutory limitation period and is an important asset protection measure.

If you have retired from a practice which continues to provide services, you should ensure that the practice’s ongoing PI insurance covers the services which you provided up until your retirement.

If you are a sole practitioner who has ceased practice you must make your own PI insurance arrangements for run-off cover. Run-off cover is most easily negotiated with a current insurer and we recommend that you discuss run-off cover with your broker prior to retirement.

Institute scheme limiting liability

The Institute limitation of liability scheme provides for the capping of liability for participating members who meet the requirements of the Professional Standards Legislation and the Institute Scheme.

CPP holders are participating members of the Institute scheme. On cancellation of your CPP you cease to be a current participating member of the Institute scheme.

However, your liability can still be capped for those services you provided as a CPP holder when the Institute scheme was operating. For your liability to be capped for such a service you must still have adequate PI insurance in place at the time the claim is made.

Let's consider an example:

David Jones was a CPP holder and partner in a practice in Victoria up until 31 December 2009 when he retired, cancelling his CPP. The Institute’s Victorian limitation of liability scheme commenced on 3 March 2008 and was prescribed by the Commonwealth on 12 June 2008. The PI insurance policy of the practice continues to name David as an insured in relation to the services he provided up until his retirement date. In 2011 a client makes a claim in relation to a service David provided in June 2008.

Q. Was there a scheme in Victoria at the time the service was provided?
A. Yes

Q. Was David a participating member of that scheme at the time the services was provided?
A. Yes

Q. At the time of the claim does David have the benefit of PI insurance which meets the limitation amount in the scheme (either the $1million minimum or 10 times the engagement fee (or reasonable charge for services relating to the claim) where the fee was greater than $100k)?
A. Yes, as long as either:

  1.  the PI insurance policy of the practice continues to cover services provided by David up until his retirement and meets the level of cover required under the limitation of liability scheme;
    or
  2. David has effected and continues to hold run off PI cover.

Conclusion:
Under Professional Standards Legislation, David’s liability should be capped as long as the claim relates to occupational liability.

Further information is available regarding the operation of the Institute limitation of liability scheme.

Article last updated 18 January 2012