Why would a company insure its auditors?

Auditors are currently prohibited from limiting their liability to a company, or obtaining an indemnity, for negligence, default, breach of duty or breach of trust.  This restriction, in s.310 of the Companies Act 1985, aims to prevent auditors from agreeing provisions that protect themselves from their own misfeasance. 

          Yet s.310(3) allows companies to insure auditors against any such liability, or be indemnified against the costs of incurred when successfully defending proceedings (where the court grants relief from liability under s.727 of the Companies Act 1985).  Since auditors are contracted in to the company, and have a duty of care to the company and the shareholders (as a body) and third parties, why should the company wish to purchase insurance on behalf of its auditors?   Why take on this risk?

          Auditors have long campaigned for a change to s.310, especially in light of recent corporate failures.  Auditors are concerned of their exposure to unlimited liability and the high costs of obtaining appropriate professional indemnity insurance.  Plucking thoughts from thin air, Corporate Blawg UK conjectures that a company may wish to obtain insurance for its auditors if:

1. the overall insurance costs are reduced as a result of being tied in to the company's directors' and officers' liability insurance; and/or
2. auditors' contract costs are further reduced as a result of the administrative process undertaken by the company to obtain insurance on behalf of the auditor; and/or
3. the company will brings its claims directly against the insurer rather than the auditor, who would then have to claim against its insurer.  This would only reduce costs for the auditor, but the apportionment of risk may have some commercial value to the company.

Are there any other circumstances under which a company would want to obtain insurance on behalf of its auditors?  Corporate Blawg UK has suffocated its idea-cloud.

          Due to the assumed lack of use in the market place of this insurance provision, the Company Bill (as of 20 July 2006) dispenses with it.  As a result of wide consultation, the Company Bill retains the voidance of indemnities, but incorporates provisions for new liability limitation agreements (in s.548-552) in regard to the audit of accounts. 

          A liability limitation agreement between a company and its auditor may be authorized by the company passing an ordinary resolution, subject to any provision of the company’s articles requiring a higher percentage for approval.  The limitation of liability must be fair and reasonable, baring in mind the auditor's responsibilities, the nature and purpose of the auditor's contractual obligations and the required professional standards of the auditor.  Flexibility of form and structure in these new agreements is wide, although the Secretary of State may (by regulations) require or prohibit specified provisions or types of provisions in such agreements.  Also the Secretary of State may require disclosure of liability limitation agreements in annual accounts or directors reports.

          The removal of the provision for company's ability to obtain auditors' liability insurance demonstrates how the role of auditors and directors are being pushed out to a more commercial and independent relationship over a collaborative one.  In the same way as the role of auditors and lawyers are clearly distinguished, increasing such "separation of powers" in the regulatory compliance of a company leads to greater transparency, accountability and greater overall comfort for investors.

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