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To err is human — but to do so without an adequate professional liability policy is a recipe for a ruined business and reputation

There’s not much call in Hollywood for films about professional liability. But accounting errors and omissions did provide a key plot twist in a movie that went on to win the Best Actor, Best Director and Best Picture Oscars in 1947. It’s a Wonderful Life has been a holiday tradition for many people ever since. But today’s accountants can’t depend on local townsfolk to rally around them when they face E&O claims. It’s professional liability coverage that’s needed to save the day — and in the most serious cases, perhaps even to save their businesses and licenses.

Like members of any other profession, accountants face a variety of claims risks that liability insurance can help to address or mitigate. For accountants, E&O involves dual concerns: the claims themselves and the administrative proceedings related to them or to the accountant’s claims history: instances in which a stakeholder lodges a complaint or inquiry with a regulatory board to register concern about issues with a particular CPA.

Common reasons for submitting claims include missed filing deadlines, failure to communicate and disputes over fees and billing. But myriad other issues can lead to a claim, and E&O coverage offers protection against those that pose a potential threat to the CPA’s business and license.


Contractual obligations and business continuity

This safeguard is an essential tool when individual practitioners or accounting firms face lawsuits and allegations — whether valid or not — of errors or misconduct. Absent an E&O policy, these accountants must hire lawyers to manage their defense. But with a policy, they report the claim under the terms of their policies and the insurance company hires panel counsel — experts in the pertinent field — at negotiated rates. Counsel oversees adjudication of the case while the accountants continue to run their businesses.

It’s important to remember that although accountants are not legally required to carry E&O coverage in most U.S. states, they may be required to obtain a policy as a condition of doing business with certain corporate clients. Banking and other financial services corporations are known for specifying not only that accountants have policies, but that their coverage is at or above a certain baseline level.

That coverage extends not just to what CPAs do, but what they fail to do. And omissions are not the lesser component of E&O.

Consider this example: A local business hired a CPA to complete an audit. The CPA fails to uncover that one of the employees had embezzled over $300,000. When this information comes to light later, the small business seeks damages in a suit against the CPA, who now needs money to cover legal defense of the claim, lost billable hours for attendance at hearings/mediations and damages awarded. Follow-on costs could include legal defense in the event that the incident sparks grievance filings that threaten the CPA’s license.

The total cost of the claim could exceed $500,000. That excludes the further financial impact of reputational harm and loss of future business stemming from having been named in a lawsuit involving embezzlement or defalcation. And that’s in the example of a small business audit. Large corporate audits pose the twin risks of higher exposure for claims and higher value claims.

It’s important to remember that although accountants are not legally required to carry E&O coverage in most U.S. states, they may be required to obtain a policy as a condition of doing business with certain corporate clients.

Keeping tabs on a changing landscape

Changes in tax laws or regulatory requirements can correspond to an increase in risk exposure for accountants, as can unforeseen developments with economic impact. The COVID pandemic and the emergence of PPP loans is a prime recent example: as federal, state and local government agencies rolled out business incentives, accountants faced a hike in demand for their services. This was great news for accountants’ revenue but, as billable hours mounted, less optimal news with regard to their levels of pressure and fatigue. Even the uptick in revenue had impact that accountants may not have anticipated: it’s a rating factor in the insurance sector.

To date, we have not seen claims emerge from the most recent tax reforms or from COVID, but issues like these should remain on both accountants’ and insurers’ radar as possible sources of E&O complications.

Prominent among those complications is the question of cybersecurity in home offices. As remote work has shifted from a necessity of emergency response to a reality of the “new normal” in business, cybersecurity risk protection must be of paramount importance as a component of full-spectrum E&O coverage. From ensuring the integrity of financial or tax records and other data to guarding against vulnerability to spear phishing or other kinds of cyber fraud, work from a home office requires highly sophisticated network protection. And E&O policies must keep pace with the constant evolution of insidious cyber threats.


A business protection checklist

Internal changes can also spark the need for a review of existing coverage. For example, a firm that is considering opening an office in another state must get up to speed on its tax laws and on how E&O policy requirements may vary there. Expanding service to a new industry or new business sector may also create the need to gain knowledge of how contractual obligations may affect the extent of an accountant’s E&O coverage.

Any shift in business that involves something that is new to professionals, or that they are not expert in, requires a thorough review to ensure that they’re fully prepared to take on the new business they’re targeting. The review should involve a fairly in-depth process. And again, increases in revenue correlate to increases in exposure, so that must be factored into consideration of any plans for new business development or expansion, as must a calculation of increases in liability limits.

Each of these points has an impact on determining accountants’ optimal level of E&O coverage and should be a topic of conversation annually at the time of policy renewal. By conferring with client relations representatives and discussing recent and upcoming changes, accountants can receive the best recommendations for coverage that protects them in the event of actual errors, omissions or allegations of inadequate performance that threaten their businesses, licenses and reputations.

 

Frank Palermo is Head of Professional Programs at AXA XL
Robin Smith is Practice Group Leader of the Accountants Professional Liability Program at Pearl Insurance

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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

US- and Canada-Issued Insurance Policies

In the US, the AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of AXA XL.
US domiciled insurance policies can be written by the following AXA XL surplus lines insurers: XL Catlin Insurance Company UK Limited, Syndicates managed by Catlin Underwriting Agencies Limited and Indian Harbor Insurance Company. Enquires from US residents should be directed to a local insurance agent or broker permitted to write business in the relevant state.