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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Harlow & Co, an audit firm, is reviewing how to protect itself against claims from clients and third parties arising from negligent work. The managing partner proposes buying professional indemnity insurance (PII) and states it is the firm's main defence. Which statement about PII is most accurate?

Professional indemnity insurance shifts part of the financial burden of negligence claims to an insurer, but it does not remove the firm's responsibility to perform engagements with due care. It also does not replace quality management, and it typically does not cover dishonest acts, so the firm must still manage risk actively.

  1. APII transfers some of the financial consequences of a negligence claim to the insurer but does not remove the firm's duty to perform its work with due skill and careCorrect
  2. BPII removes the firm's legal liability to third parties so that quality control procedures become unnecessary
  3. CPII guarantees that the insurer will meet every claim in full whatever the firm's conduct, including dishonesty by partners
  4. DPII is a substitute for a limitation of liability agreement and cannot be held together with one

Explanation

Insurance is a risk transfer mechanism covering financial loss from claims. It does not remove liability, replace quality management, or normally cover dishonest or fraudulent acts. It can also be held together with other protections such as limitation agreements.

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