Professional indemnity (PI) insurers risk becoming caught up in Parmalat style negligence claims as they rush to expand practices in the fast-growing economies of Brazil, Russia, India and China, warned Reynolds Porter Chamberlain (RPC), the insurance law firm.
RPC warned that the risk will be high unless PI insurers ensure accountancy firms follow strict risk management procedures.
RPC partner Jane Howard said: "There are concerns that in order to win business in these new and lucrative markets, overseas offices are promoting themselves as fully integrated members of one international partnership rather than as independent legal entities forming part of a network.
"Depending on the facts, the UK member of such networks could be drawn into litigation triggered by activities of other network firms on the other side of the globe.
"Past experience has shown that if a local firm has limited professional indemnity cover, claimants and their class action lawyers will invariably target the international umbrella organisation and other network firms for any shortfall.
"While we may not see any new negligence claims for a few years, it is the way that firms have gone out and won business in this early battle for market share that will be crucial in determining the potential liability involved.
"Insurers need to formulate their own ‘best practice' for risk management procedures which they expect UK accountancy firms (via the network) to ensure their overseas associates adhere to."
Howard says: “Clarifying the separate nature of the different organisations within the network in marketing materials and engagement terms may go someway to reducing the risks of being drawn into litigation, rarely however, will it be determinative. The most important thing is to ensure that what is said on paper actually reflects the way the network actually functions. That, of course, is much harder to monitor and assess.”
