Professional Liability Insurance for Accountants – What CPAs Need to Know
Financial services professionals such as CPAs, tax preparers and financial advisors can be exposed to the risk of a lawsuit if they make a mistake (even if it’s an “honest” one), especially if that mistake costs their clients money.
These lawsuits and settlements can be incredibly costly, easily bankrupting a company or an individual if they don’t have insurance coverage. Claims and awarded settlements can range from a few thousand dollars well into the millions.
The most common types of claims involve failure to provide an agreed upon service, negligence, and incorrect or incomplete work.
What does Professional Liability insurance for accountants cover?
Professional Liability insurance is also commonly referred to as Errors and Omissions (E&O) coverage. While specific policies differ in terms of their coverage limits and deductibles, most policies include the following basic framework:
- Coverage includes the cost of legal fees whether you’re found liable or not.
- Coverage includes the cost of the settlement against you if you are found liable.
- Coverage is on a “claims made” basis, meaning the policy must be in place when the claim is filed as opposed to only when the incident took place.
- Coverage limits are based on a per-incident and per-year amount.
- Deductibles usually start around $1,000 though they can be much higher than that depending on your company’s specific needs.
Note that Professional Liability insurance does not cover costs related to criminal lawsuits.
Am I required to have Liability insurance?
In some industries, a professional liability insurance minimum coverage may be required by law, for example, doctors, attorneys, and contractors.
Accountants, CPAs and other financial services professionals should refer to their local insurance agent, attorney or state’s department of commerce to find out what legal requirement may be in place.
It’s important to note that some clients may require you or your firm to carry professional liability or E&O insurance before they will bring you their business. So even if carrying the coverage isn’t a legal requirement, it is a good faith business practice that helps protect not only you but your clients.
4 Things Accountants can do to Mitigate Risk
In addition to having adequate professional liability coverage, there are a few things you can do to protect yourself from being sued, or to help mount an effective defense in the event you are facing a lawsuit.
- Have written contracts or engagement letters that spell out exactly what services you will and will not be providing, when services will be rendered, what the client is responsible for, and if necessary what the service parameters are (i.e., what is the service designed to accomplish).
- Implement a rigorous client screening process. Higher risk clients increase your exposure no matter how accurate and careful you are.
- Implement a document retention policy and communicate it to your clients to ensure you do not face legal consequences in the event you destroy or discard client files.
- Identify and implement quality control procedures and regularly audit (both internally and externally) to verify their veracity.
Where can I get Liability insurance?
Most insurance providers, as well as independent insurance agents that write business insurance, will be able to provide Professional Liability or E&O coverage.
Contact us to determine the right type and amount of coverage based on your specific needs.
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