An Uneven Playing Field for Smaller Practitioners: Professional Indemnity Insurance

By Kenneth Krys
Insol World, Second Quarter 2010

Professional indemnity insurance (“PII”) for insolvency practitioners is liability insurance that provides cover in the event that a third party claims to have suffered a loss as a result of professional negligence by the insolvency on the part of the practitioner.

PII cover is generally considered good business practice for insolvency practitioners and is usually required in any event either as a matter of regulation or to compete in markets where larger insolvency practices are also operating.

Larger insolvency practices may be able to leverage differences in the scope and economies of their business models in obtaining PII cover. However, for the smaller practitioner this can be an uphill struggle. Many insurers are simply not unwilling to insure the risk because they are unfamiliar with the specialized field of insolvency. Others have limited knowledge and consider the litigious environment of insolvency, particularly cross-border and US assignments, as high risk. This view however fails to consider the protections that many insolvency practitioners have, such as court sanction, consultation with creditors’ committees, or recognition by foreign courts in international matters.

In most jurisdictions it is extremely rare for a court supervised insolvency practitioner to be sued for professional negligence. In the Cayman Islands, for example, there are no reported cases of a court supervised liquidator having been successfully sued.

Unfortunately, the pool of insurers that do offer PII cover to smaller insolvency practitioners often charge high premiums compared to the amount of revenue generated from the engagements. This factor results in an unfair and uneven playing field which negatively impacts on smaller practitioners’ ability to compete.

Clearly the existence of independent smaller firms is good for the industry and promotes healthy competition. A key question therefore is how these smaller firms can level the competitive playing field. With respect to PII cover there may be options or steps that smaller practitioners can take to better compete. For example, depending on the jurisdiction there may be insurance available to insolvency practitioners through their local professional organizations. In the UK the Association of Chartered Certified Accountants offers its members options for professional indemnity insurance and bonding schemes which meet local insolvency regulatory requirements.

Alternatively, insolvency practitioners may consider passing on the PII premiums to the insolvent estates in the form of higher allocated costs. However, this will ultimately have a negative impact on the amount of assets available to creditors and allows larger players to operate at a cost/price advantage. On the other hand, the insolvency practitioner may consider offsetting the higher cost in the estate by lowering fee rates although this option may appear amateur and/or anti-competitive. Ultimately the smaller practitioner will need to consider the potential reputational impact in the market.

In considering a more competitive way forward there may be scope for exploring whether smaller practitioners from around the world can cooperate collectively to achieve a better result. INSOL International or other similar organizations may be uniquely placed to assist such an effort. Possible actions could include, perhaps, facilitating the creation of a pool to insure smaller practitioners or to provide limited cover such as for the first $1 million in claims. Clearly this strategy would face challenges in that the standards of practice and risks will be unique to each jurisdiction. However, these hurdles might be overcome if there were sufficient interest and demand.