Audit · tax · advisory · CA firms
Professional Indemnity Insurance for Chartered Accountants
A chartered accountant's work is relied on by people who are not the client: lenders, shareholders, depositors and the tax authorities. When it is wrong, the claim can come from any of them. Professional indemnity insurance defends those claims and pays what is owed if one succeeds.
Key takeaways
- The Companies Act, 2013 lets members and depositors bring a class action that can claim damages from a company's auditor, including the audit firm, under section 245.
- An auditor convicted under section 147 is liable to refund the fee and pay damages to anyone who lost money through a misleading statement in the audit report.
- Most claims against smaller firms come from tax and compliance work: a missed deadline, a wrong position on a return, or advice a client acted on and was then penalised for.
- PI is written on a claims-made basis, so the retroactive date must be preserved when partners change, firms merge or the policy moves insurer.
Where the exposure comes from
Audit is the obvious one. Under the Companies Act, 2013, members and depositors can bring a class action under section 245 and seek damages from the company's auditor, including the audit firm, for an improper or misleading statement in the audit report or for wrongful conduct. Section 147 makes an auditor convicted of contravening the audit provisions liable to refund the remuneration and pay damages to those who suffered loss from incorrect or misleading statements in the report.
For most small and mid-sized firms the more frequent claims come from everyday work. A GST or income tax return filed late or on a wrong position leaves the client with interest and penalty, and the client looks to the firm that filed it. Advice on structuring, valuation or a certification relied on by a bank produces the same kind of claim, sometimes years later.
What the policy has to cover
Defence costs, which are incurred whether or not the claim succeeds, and the damages or settlement if it does. Check whether defence costs sit inside the limit or in addition to it: on a long dispute the difference is material.
Check the definition of professional services matches what the firm actually does. A policy that describes audit and taxation may not respond to valuation, insolvency or management consulting work the firm has added since. Check cover for loss of documents, for breach of confidentiality, and for acts of employees and articled assistants.
Fraud by a partner is normally excluded for that partner, but innocent partners should still be protected. That wording is worth reading in a partnership.
Partnerships, mergers and retiring partners
PI responds to claims made while the policy is in force for work done after the retroactive date. When partners join from other firms, when firms merge, or when a partner retires, the question is which policy answers for whose past work. Settle it in the wording at the time, not after a claim arrives.
A retiring partner or a firm that closes should arrange run-off cover, because claims about audits and returns arrive long after the work.
Setting the limit
The limit should reflect the largest engagement the firm takes on and what a realistic claim on it would cost, including several years of defence. A firm auditing a company with public depositors or listed shares carries a different exposure from one handling individual returns, and the limit should show it.
Frequently asked questions
Is professional indemnity insurance mandatory for chartered accountants?
There is no general statutory requirement, but many engagements, empanelments and client contracts ask for it, and it is the practical way to fund the defence of a claim.
Can shareholders sue a company's auditor in India?
Yes. Under section 245 of the Companies Act, 2013, members and depositors can bring a class action that may claim damages from the auditor, including the audit firm, for misleading statements in the audit report or wrongful conduct.
Does PI insurance cover tax filing errors?
It covers claims arising from negligent professional services, which include tax filings, if the policy's definition of professional services includes taxation. It pays the client's resulting loss and the defence costs, not the firm's own fines.
What happens to cover when a partner retires?
Claims about their past work can still arrive. The firm's continuing policy may answer for them, or the retiring partner may need run-off cover; the wording should say which.
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