How Professional Liability Insurance Helps Protect CPA Firms

What is professional liability insurance?

Professional liability insurance is a form of liability insurance that helps protect professionals and their businesses from negligence exposure claims related to their professional services. It is also called professional indemnity or, more commonly, errors & omissions insurance.

Professional liability insurance includes special forms for medical professionals, known as medical malpractice insurance, and for legal professionals, also called legal malpractice or lawyers’ professional liability insurance. It is an important coverage for many types of professionals, especially accounting professionals like CPAs.
 

Who should have professional liability insurance?

Individuals who work in occupations that provide professional advice should carry professional liability insurance. This includes accountants, consultants, insurance agents and brokers, engineers, financial service providers, and general contractors. Other occupations like bookkeepers, tax preparers, and underwriters may also benefit from this type of cover depending on the products or services they provide.

Some employers may require their professional employees to carry this insurance to protect the employer and the individual. Additionally, some states require professionals to meet minimal capitalization requirements to obtain and maintain their licenses, which can be satisfied by purchasing professional liability coverage.
 

Why is professional liability insurance important for CPA firms?

Professional liability insurance is designed to cover negligence claims, misrepresentations, financial loss, or erroneous advice arising out of a professional’s services or advice. Professional liability insurance policies for CPAs can help protect against legal costs to defend lawsuits that have merit and those that are frivolous. Even frivolous lawsuits can be expensive and time-consuming to defend, so maintaining coverage to assist with the defense and related expenses is important.

Mistakes happen and having professional liability insurance helps provide protection. Liability risks like missing a tax filing deadline or accounting errors can cost your clients money, leading to a claim against you. While you likely have other business insurance policies such as commercial general liability or cyber liability, those policies do not extend coverage to professional liability claims.
 

What types of professional liability plans are available?

While no one likes to think about the possibility of being sued, the truth is that it's always a possibility - no matter how careful you are. Professional liability insurance can help give you peace of mind in the event of a lawsuit.
 

Professional liability insurance for small firms

As a small firm, you may be especially vulnerable to lawsuits. You may not have the same resources as a larger company to defend yourself, and a lawsuit can easily put you out of business. Professional liability insurance can help cover damages resulting from professional accounting services that may include tax preparation and planning, accounting services, business counseling, audit, and more. Having insurance in place can help firms manage their bottom line and protect their business.

Features

  • Protects against claims subject to a policy’s terms and conditions

  • Cover damages subject to a policy’s terms and conditions

 

Professional liability for mid-sized CPA firms

Mid-sized CPA firms have different risks than small or solo practices such as increased client expectations, more sophisticated financial transactions, and greater regulatory scrutiny. As such, mid-sized firms need to be especially diligent in managing their risks. Professional liability insurance can help mid-sized firms by offering coverage for damages resulting from professional accounting services and by providing adaptable and creative solutions to meet a firm’s evolving insurance needs.

Features

  • For businesses that need specialized coverage.

  • Coverage that is designed to address the changing risks in the accounting profession.

 

Professional liability for national and regional firms

Larger national and regional firms have a higher risk exposure than smaller and mid-sized firms. They have a wider variety of clients, more complex work, and more employees. As a result, their professional liability exposure is usually greater. Although larger firms may face greater risks, they also usually have more resources to defend themselves. Professional liability insurance can help national and regional firms by offering them protection against the financial ruin that a lawsuit can cause.

Features

  • Allows a firm to analyze its enterprise risk

  • Built around a firm’s particular business and risk management practices

  • Includes personalized underwriting

 

What are the important things to consider in a professional liability policy?

When shopping for a professional liability policy, it is important to understand the nuances of the insurance quote or policy. Knowing the policy terms including coverage limits, terms, and deductibles, and how they apply is vital. You will also want to consider the exclusions and conditions of coverage, so you know what is covered and what you need to do for coverage to apply.

Finally, consider the premium cost of the policy, which may vary depending on the endorsements you choose for your policy type.
 

How the policy type affects claims filed under a professional liability insurance policy?

Professional liability insurance is most commonly written on a claims-made basis, meaning coverage will only be available if a claim is made – or filed – during the policy period (when you first purchase insurance, your premium will experience step increases with this type of policy due to the buildup of loss exposures over a period of time and a natural progression of reported and made claims under the policy, meaning that your first year's premium will be much lower than any subsequent year's). Retroactive dates can be included, which is a date in the policy after which alleged errors or omissions will be covered, subject to the policy’s terms and conditions. Extended reporting periods are common in professional liability policies, which extends the timeframe after the policy period when claims may be reported. The automatic extended reporting period is generally 60 days.
 

What is typically covered under a professional liability insurance policy?

Although each policy differs and coverage is dependent on a policy’s terms and conditions, a policyholder can find help with defense costs arising from a lawsuit as well as payments of damages, up to the policy limit. Any deductible on a policy generally applies first before the carrier makes payment. When deciding on coverage limits and deductibles you should consider your firm’s specific needs.
 

Common Questions About Professional Liability Insurance

Do I really need professional liability insurance?

Professional liability insurance is not required by law, but it is highly recommended. Professional liability insurance can help give you peace of mind in the event of a lawsuit.
 

What is the difference between public and professional liability insurance?

Professional liability insurance is insurance that helps protect businesses and professionals from claims arising from their professional services. Public liability insurance, on the other hand, protects businesses from claims arising from their interaction with the public.

 

Does an umbrella policy cover professional liability?

No, an umbrella policy does not cover professional liability.
 

Why is it important to have professional liability insurance?

Professional liability insurance is important because it can help protect you financially if you are sued for negligence, even if the suit is groundless, subject to the policy’s terms and conditions.
Professional Liability Plans with AICPA Member Insurance Programs

To learn more about professional liability insurance for CPA firms, contact our highly skilled risk advisors at AICPA Member Insurance Programs or visit our education and resource center.
 

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This information is provided for general informational purposes only and is not intended to provide individualized guidance or advice. You should discuss your individual circumstances thoroughly with your professional advisors before taking any action. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.
 
Aon Insurance Services is the brand name for the brokerage and program administration operations of Affinity Insurance Services, Inc., a licensed producer in all states (TX 13695); (AR 100106022); in CA & MN, AIS Affinity Insurance Agency, Inc. (CA 0795465); in OK, AIS Affinity Insurance Services Inc.; in CA, Aon Affinity Insurance Services, Inc., (CA 0G94493), Aon Direct Insurance Administrators and Berkely Insurance Agency and in NY, AIS Affinity Insurance Agency.