How does fee income affect your limit of indemnity?

IPA Insolvency Practitioner newsletter, May 2024

Article by Chris McLaughlin, Account Manager, Lockton.

Following recent changes to the Insolvency Practitioners Association’s (IPA) regulations, members may wonder how their fee income impacts the limit of indemnity they are required to hold under their professional indemnity insurance (PII) policies. To avoid confusion, we’ve put together this simple explainer.

Limit of indemnity requirements

The IPA brought about new changes to their PII regulations with effect from 1^st January 2024, applying to policies commenced or renewed after this date.

For members, one area of particular focus concerns the limit of indemnity that they are required to have, and how this relates to their fee income. As shown in the table below, the larger a firm’s fee income, the higher the limit of indemnity they are expected to hold:

Under the regulations, any member achieving income of less than £600,000 in their last complete financial year will need to hold the greater of i) or ii) above. Those with income of more than £600,000 must hold a base limit of £1,500,000. It’s down to individual members to decide if they wish to have a higher limit than £1,500,000.

Examples

To give an example, should business ‘A’ achieve a fee income of £500,000, they will need to hold a limit of either i) two and a half times £500,000, or ii) £250,000, depending on whichever is the greater. On this occasion, business A would require a limit of indemnity of £1,250,000 (two and a half times £500,000).

If company ‘B’ achieves a fee income of £850,000, the minimum limit the IPA will require company ‘B’ to have would be £1,500,000.

How is fee income calculated?

For members to know whether they have the right limit of indemnity in place, it’s essential to first understand how fee income is calculated.

To do this, we use the ‘Gross Fee Income’ as defined on page 1 of the IPA’s Professional Indemnity Insurance Regulations : “The aggregate of all fees and income from insolvency or insolvency-related work (including formal and informal appointments and advisory work where insolvency considerations apply) attributable to the Member and/or their staff, agents or locums (whether working under a contract of service or for services) and fees received in respect of work subcontracted to others (unless it is clearly demonstrated to the Individual Member’s satisfaction that the subcontractor is taking professional responsibility for their work and has appropriate PII cover) in each case net of VAT and disbursements and excluding interest, dividends and rents received by the Firm or Professional Practice, income and capital profits from investments made by the Firm or Professional Practice and bad debts written off.“

Why it’s important to monitor fee income

For businesses generating a fee income in addition of £600,000, it’s prudent to note that the required limit of £1,500,000 is a minimum only. Any business should monitor their fee income closely to ensure that their limit of indemnity is increasing with their fee income, to reduce the likelihood of under insurance in the event of a claim.

Further information

As a specialist broker operating in the IP market, Lockton can offer advice and assistance with any queries. Members can contact our Bristol office on 0117 906 5032, or reach out to us by email at chris.mclaughlin@lockton.com.

Please note that guest content does not necessarily represent the views of the IPA.