Accountants and other professionals should carry a professional liability insurance policy, otherwise known as Errors and Omission or E&O policy. This policy will protect them in the event of a claim for professional negligence or breach of contract. All CPA firms no matter the size should carry E&O coverage because the consequences of a claim can be disastrous. Common reasons CPAs don’t carry E&O insurance coverage
Reasons CPAs don’t carry E&O insurance coverage
Many CPAs choose not to purchase professional liability insurance coverage because they think they don’t need it or think they won’t be sued.
Common reasons why about E&O coverage isn’t purchased include:
- CPAs or accounting professionals who only do tax work. Tax claims are the most common reason CPAs are sued. Claim costs can be high, and the cost of paying a lawyer to defend you and your firm can almost double the value of the claim.
- Lack of insurance means you won’t get sued. Some accountants mistakenly believe that they won’t get sued if they don’t have malpractice coverage because there won’t be enough assets to collect on. However, an attorney may not know you don’t have insurance until after a claim has been filed. And if there is an adverse judgment, you risk losing your assets, including money in your bank account, vehicles, and even your home.
- CPAs or accounting professionals consider their clients as friends. If mistakes happen and money is involved, friendships can and often will fall apart, and lawsuits will be filed. Without insurance coverage, your practice is at risk
- The CPA or accounting professional never makes mistakes. It’s inevitable at some point an error will be made, or a rule or regulation will be missed. Even if a claim is groundless or the CPA firms or professional is found not at fault, defense expenses can add up.
General liability insurance vs. E&O policies
General liability insurance and professional liability insurance both protect accountants against liability, but they cover different types of claims.
General Liability Insurance
Covers essential claims for bodily injury made by a non-employee, damage caused to someone else’s property while performing work, or advertising injuries like libel, slander, or copyright infringement. General liability insurance policies cover expenses in the event someone files a claim against the CPA or firm, including attorney’s fees, court costs, as well as the cost of paying the judgment or settlement if there is one.
Protects the business against claims if a mistake occurs in a professional capacity. E&O coverage protects if there is a claim when negligence occurs during professional services, or when obligations are not met under a contract.
Even if a client’s claims are ultimately found to be without merit, CPAs and accounting professionals could still end up owing a significant amount in legal fees. An E&O policy will cover these costs, as well as the cost of any settlement or judgment.
General liability insurance policies do not cover claims of professional negligence. Because the above policies cover different types of claims, accounting firms should carry both kinds of insurance.
Understanding an E&O policy
Most E&O insurance policies are “claims made” policies, which means that they cover the insured against claims made during the term of the policy. Other policies have a retroactive date, meaning that they only cover claims arising from errors or omissions made after the date specified. If your policy has a retroactive date, it should be the date your first claims-made policy began and should remain the same every time you renew the policy.
When you purchase an insurance policy, review the insuring agreement, which provides a summary of the coverage provided, including the types of claims covered, dates of coverage, and coverage amounts.
Be sure that the policy covers the costs of defense. These are the expenses you will incur in hiring an attorney to defend you or your firm. Some costs of defense are included within the limits of coverage, meaning that the total amount of coverage will decrease by the costs of defense. In contrast, others cover costs of defense outside of the overall limit of coverage.
Most insurance policies contain exclusions or things that are not covered by the insurance policy. Standard exclusions in an E&O policy include:
- Punitive damages
- Fraudulent or criminal acts
- Acts you were aware of before the start of the policy
- Claims reported under a prior policy
- Fee disputes
- Discrimination claims
- Bodily injury or property damage claims
Insurance policies have a coverage limit, which is the maximum amount that the insurance company will pay out under the policy. Policy limits are usually expressed in terms of “single limit” and “aggregate limit.” The single limit is the most the policy will payout on an individual claim. The aggregate limit is the most the policy will payout in the event there are multiple claims during the same policy period.
Most E&O policies include a deductible, which is the amount you must pay out of pocket before the insurance coverage applies.
Any professional, including accountants, should carry E&O insurance. At McGowan, we have more than 50 years in the insurance industry. Learn more about our Errors and Omissions (E&O) Insurance Policies for Accountants and contact us today for answers to your insurance questions.