As an accountant, have you ever thought about what might happen if you miss a filing deadline, make a miscalculation or give a client advice that leads them astray? When accountants make errors or omissions in the course of their services, their clients could sue them for negligence. Professional liability insurance provides protection against this risk.
What is CPA professional liability insurance?
Professional liability insurance is also called errors and omissions (E&O) insurance. It’s a type of liability insurance that protects the insured against lawsuits alleging errors or omissions that occur during a professional service and lead to financial loss.
In the case of such a lawsuit, professional liability insurance can help cover the cost to defend the lawsuit as well as any settlements or jury awards, up to the limits of the policy.
Who needs a professional liability insurance policy?
Any type of professional who could face allegations of errors and omissions resulting in financial loss needs professional liability insurance. This applies whether you’re a sole practitioner or work at a large firm, and includes CPAs and other accountants, as well as many other professionals, such as real estate brokers, computer programmers and architects.
How CPA Professional Services May Trigger Lawsuits
Accountancy is a detail-oriented profession. Although Certified Public Accountants tend to be careful and precise, mistakes are possible, and they may lead to financial loss and lawsuits. Consider the following scenarios:
- Giving outdated advice. You advise a client on a financial strategy that you believe to be sound. However, new rules and regulations negatively impact this strategy. You fail to advise your client to adjust the strategy, which results in financial loss. The client sues you.
- Missing a deadline. You’re helping a client dig themself out of a hole they created by not filing taxes as required. Since it will take some time to figure everything out, you decide it would be best to file for an extension. However, you forget to actually file for the extension, which leads to late penalties and makes the client’s challenging tax situation even worse. Your client sues you.
- Encountering technological problems. You’re using a new program to manage records. You thought you understood how the program worked, but you misunderstood something, causing all of your records to become corrupted. This results in financial losses for some of your clients, leading one of them to file a lawsuit.
- Making a mistake. You are preparing financial statements for a new commercial client. Your workload is heavier than usual, leading you to make a mistake that results in complications when the client later tries to apply for business loans. The mistake is uncovered, leading the client to sue you.
Risk Management for Accountants
Errors or omissions could harm your clients, tarnish your firm’s reputation and result in costly litigation. Risk management strategies can help you avoid problems like these.
- Follow professional standards. Negligence often boils down to failing to adhere to professional standards. As an accountant, it is important to follow the standards set for your profession, such as those set by the Governmental Accounting Standards Board.
- Assess mistakes and near misses for corrective action. Not all mistakes lead to lawsuits. In some cases, you may catch a mistake in time to correct it, or the mistake might not lead to any financial losses. Nevertheless, you should not ignore these mistakes. If you’ve made a mistake, analyze the situation that led to it and take corrective steps to ensure you don’t repeat it in the future.
- Keep up with regulatory changes. Evolving regulations may require adjustments on your part. Stay abreast of regulations to alter your practices and advise your clients accordingly.
- Maintain documentation. Being hit with a professional liability lawsuit doesn’t necessarily mean you committed an error or omission – it means your client is claiming you did. Good documentation could help your defense.
- Secure professional liability insurance. Even if you win a case, the defense costs may be expensive. As an accountant, mistakes are always possible, but professional liability insurance can provide a critical layer of protection from human error.
Is your professional liability insurance adequate?
When reviewing your professional liability insurance coverage, consider the following questions:
- Are your limits sufficient? As your firm grows and you take on bigger clients, your risks may also increase, meaning you may need to raise your policy limits.
- Who does the policy cover? For example, if your accounting firm uses independent contractors, you should verify that your firm’s policy covers them or that they carry their own insurance.
- Do you need tail coverage? Professional liability insurance typically works on a claims-made basis. This means that you won’t have coverage for lawsuits that occur after the policy has lapsed, even if the event in question occurred during the policy period. Lawsuits do not always happen immediately; in fact, there may be a considerable gap between when an event occurs and when a plaintiff discovers the loss and files a lawsuit. This could pose a major problem for accountants who retire and terminate their professional liability insurance. Tail coverage can provide protection by extending the reporting period.
- What are the exclusions? Standard professional liability insurance excludes intentional or criminal acts. Understand these and other exclusions in your policy to determine whether you need additional coverage.
How Higginbotham Can Help
Need help reviewing your firm’s coverage and securing insurance? Higginbotham can help you protect your accounting firm with customized business insurance solutions. To learn more, connect with one of our industry specialists.
