Professional indemnity (PI) insurance cover

Before the court will cap the damages awarded, it must be satisfied that the member has the benefit of enough PI cover and/or business assets to meet capped damages for the service on which the claim is based.

Because of the risks associated with relying on business assets the Institute requires that all CPP holders, affiliate and practice entity members must hold adequate PI cover.

What does this mean for me?

You will only get the benefit of the cap on liability if you hold adequate PI cover.

Minimum PI Calculator

This Minimum PI calculator will assist you to determine the minimum level of PI cover required under the PSL and Scheme.

The scheme limits liability in relation to services provided after the commencement of the scheme. When deciding on the level of PI cover required, members should consider:

  • The risks associated with uncapped services provided prior to this date (Check the commencement date in your state or territory) and
  • The statutory limitation period which applies to those uncapped services.

Minimum cap

The PSL provides that the court will only limit damages where the amount claimed would exceed the minimum cap of $1 million specified in the Institute scheme.

Example 1
A claim is made for $400k against a member relating to taxation advice provided.

If the claim is upheld, the court would award damages without any reference to the PSL or Institute scheme as the claim is less than the minimum cap on liability.

Example 2
A claim is made for $2.5m against a member in relation to the audit of a client which has now gone into liquidation. The audit fee was $50k.

If the claim is upheld and the auditor satisfied the court that she carries PI insurance of at least $1million, the damages should be limited to $1million.

Limitation amount

For a large engagement, with a fee of greater than $100,000, where the amount claimed is over $1million, damages will be capped based on a multiple of ten times the engagement fee (referred to as the limitation amount) up to a monetary ceiling which varies by category of service. View the Limitation Amount.

Engagement fee

Both the limitation amount and the level of PI cover required are based on a multiple of the engagement fee. However, PSL provides that the court will decide whether the fee charged is based on a ‘reasonable charge for the services provided’. In making this decision, the court must consider:

  • any amount actually charged and
  • the amount that a competent person of the same qualifications and experience as the participant would be likely to charge in the same circumstances.

Key points regarding ‘fees’ over $100k

  • The amount of PI should not be based on any written down or discounted fee
  • The terms of a members’ engagement letter may reflect the acceptance by the client of the fee. However, the court will ultimately decide whether that fee is reasonable.

FAQs - PI requirements.

 

Article last updated 26 August 2011