Every Certified Public Accountant (CPA) can benefit from professional liability insurance, which can be a critical component to both managing risk and protecting the business from a costly lawsuit. Many smaller accounting firms nix buying CPA professional liability insurance, opting out due to a belief that because their firm mainly does only tax work that there is no real risk and therefore this type of insurance is not absolutely necessary.
Unfortunately, this is a mistake on their end since tax preparation represents half of the claims that are generally brought against accountants. For example, CPAs can come under fire by clients citing errors in judgment, or claims of late and improper filings, or even tax advice provided to clients that may be taken out of context. Cost certainly shouldn’t be a factor since professional liability insurance premiums average below one percent of a small firm’s annual revenues.
Defending a claim is often a costly matter
Whenever a claim is made against an accountant, it’s usually in the form of a demand to correct a perceived error, or it may actually be a suit filed against the firm. The fact is that when claims are made, legal expenses can quickly add up. Even a case where a judge deems there is no merit for a claim, this can still result in significant legal expenses.
Most professional liability policies include a feature called duty to defend. When proper notice of a claim is given to the insurance company, they have a n obligation to step in and provide a defense for the insured. The company will often appoint an attorney to represent the policyholder, and the policy will pay the legal fees for this representation above the deductible. Regardless of the validity of a claim or its final disposition, having experts available to help when a claim is made is a very valuable asset.
Prior acts coverage
CPA professional liability insurance policies are written on a “claims made and reported basis,” meaning that coverage must be in place at the time a valid claim is made. Unlike occurrence policies that are triggered by the date of a loss (i.e., the day the office caught fire and burned to the ground), professional liability policies are triggered by the date the claim is made against and reported to the insurance company. A policy in force now could cover an allegation evolving out of a tax return that was completed a year ago or longer.