Glossary of professional liability terms

Under the aggregate deductible option of a professional liability policy, deductibles are assessed on an annual aggregate, or cumulative basis, rather than on a per claim basis. The result is that, at a minimal additional cost, aggregate deductibles reduce out-of-pocket deductible expenses if a firm is faced with more than one claim in a policy period. 

For example, under the per claim deductible option, a firm with a $1,000 deductible that has two claims in a policy period would face a total deductible cost of $2,000. Under the aggregate deductible option, the same firm would pay only $1,000 in deductible costs for the entire policy period, regardless of the number of claims (up to the limit of liability).

Audit in accordance with Generally Accepted Auditing Standards (GAAS) issued by the AICPA designed to express an opinion regarding a client's financial statements taken as a whole. The client is an entity that is not registered or does not file audited financial statements with the SEC or any state securities regulator and whose stock is not available for sale to the general public through an organized exchange or any other method. This includes governmental entities and not-for-profit organizations.

• Bookkeeping Services - may include such activities as preparation of client's general ledger, preparation of periodic payroll records and checks, and reconciliation of bank account statements. 
• Compilation Services - presenting information that is the representation of the management/owners of a business in the form of financial statements, without expressing any assurance on the statements. 

The Professional Liability Insurance Program offers claim expenses both inside the limits of liability (known as CEIL) as well as claim expenses outside the limits (known as CEOL). When a valid claim is made, certain costs, referred to as claim expenses, begin to accrue. Claim expenses include attorneys' fees, court costs, and all other charges incurred by the insurer in defending a claim. 

If your professional liability policy has CEIL, all claim expenses are deducted first from the liability limit and the balance is available for settling a judgment. For example, if you have a $1 million liability limit and your claim expenses total $400,000, there is $600,000 available to pay damages. 

You can elect to have a CEOL endorsement on your policy.* For a small additional fee, you are provided with a separate but equal limit of liability for claim expenses. Using the same example as above, on a $1 million liability limit, the full $1 million is available for payment of damages, and there is an additional $1 million available for expenses related to the claim. Purchasing the CEOL option when you arrange for your insurance results in additional protection if a claim is filed against you. 

* Certain states require mandatory CEOL coverage.

All of the accountants professional liability insurance policies offered in the AICPA Program today are written on a claims-made basis. Claims-made means the incident that led to the claim must have happened on or after the effective date of a policy (which could include a period of time prior to the policy inception date -- see "Prior Acts Coverage") and the claim must be first made and reported while the policy is in force. It is this second requirement, the making of claims while the policy is in force, that differentiates claims-made policies from other types of policies you may purchase. 

The requirement that a claim be made and reported during a period that the policy is in force necessitates the maintenance of continuous coverage once established. If a claims-made policy is not in force when a claim is made, no coverage will be available. By maintaining continuous coverage, you ensure that services performed under previous policies' periods will be covered should a claim be made and reported. 

This section personalizes the policy for an insured. It consists of the necessary information to identify the insured, the risk(s) to be covered, the coverage limits provided, the premium cost, the policy number, and the inception/expiration dates. The declaration page states certain acts concerning the parties to the contract.

Business planning services are consulting services that can cover a wide range of topics, such as inventory control, sales incentive programs, expansion plans, accounts receivable collection, and more. While general business planning advice can cover a wide variety of subjects, it does not include performing management, sales, or administrative functions on behalf of business clients, but rather consists of providing advice, recommendations and plans for action by the client.

Any consulting service pertaining to a client's use of computer technologies to operate and manage an entity. This could include the client's use of computers, telecommunication equipment, and other technology.

A contract which covers only certain specified diseases or accidents. 

A consulting service designed to assist a client or their attorneys in matters involving pending or potential litigation or dispute resolution proceedings with a trier of fact. This includes expert consulting or witness services in connection with pending or planned litigation.

Any consulting service that has as its purpose the development of findings, recommendations and conclusions about an entity's existing or planned operations or business processes. Also referred to as Management Consulting Services, Consulting Services, Management Services or Business Planning Services. This is a general classification that encompasses all consulting services, and includes specialty consulting services such as personal financial planning/investment advisory services, information technology services and litigation consulting services.

Any service that is designed to examine, review or perform agreed-upon procedures on specific subject matter, or an assertion about subject matter, that is the responsibility of another party.

Developing strategies and making recommendations to assist clients in defining and achieving personal financial goals. This could include creating financial plans and assisting clients with plan implementation, or providing general or specific investment advice. Investment advisory services could include portfolio management services or recommendation/referral to investment managers, insurance agents or securities brokers.

Most professional liability claims-made policies offer optional coverage for services performed prior to the effective date of the policy. This is called prior acts coverage. Prior acts coverage is typically extended to the effective date of a firm's first claims-made policy (when claims-made coverage has been maintained continuously) or to some date that your firm and the insurance company agree upon for pricing or underwriting reasons. The date established is called the prior acts date or retroactive date. Generally, the date remains the same with each subsequent renewal. If an act, error or omission happened before the prior acts date, it will not be eligible for coverage. With prior acts coverage, you can move your coverage from one insurance company to another without losing protection for covered services you performed in the past.

The underwriter of the Professional Liability Insurance Program, Continental Casualty Company, considers a "professional" to be anyone who meets at least one of the following criteria: 

• Anyone who performs tax, bookkeeping, compilation, review, audit, attest, assurance, or consulting services for clients, including per diems and independent contractors; 
• Anyone who holds a professional accounting designation (CPA, PA, or enrolled agent); 
• Anyone who holds a college degree in accounting, a BA/BS with an accounting major or has equivalent practical experience/professional education. 

The number of professionals in a firm is used to determine a firm's Revenue to Professional ratio, which is a general indicator of professional workload. 

An organization in which practicing physicians assume responsibility for reviewing the propriety and quality of health care services provided under Medicare and Medicaid.

Providing limited (negative) assurance on a client's financial statements based on inquiries and analytical procedures in accordance with the Statements on Standards for Accounting and Review Services (SSARS) issued by the AICPA. The objective of a review is significantly different from that of a compilation or audit.

One who is engaged in rendering professional accounting services alone with no other partners, CPAs, consultants, bookkeepers, or other professionals working on client engagements.

Typically, professional liability claims are made a number of years after the act or omission that caused the claim. The amount of time between when services are rendered and when a claim arises varies, depends upon the type of services provided. Consequently, with each successive year of claims-made coverage, the likelihood of experiencing a covered claim increases.

To reflect this likelihood, insurance companies offer significantly lower policy premiums in the first year of coverage, and then gradually "step" the premium rate through yearly increases. The percentage of these increases and the number of years "stepped" varies among insurance carriers and policies. Once a claims made policy is considered "mature", that is, the premium no longer reflects a reduced risk because the incremental exposure resulting from additional years of coverage is assumed to be negligible (generally in the third through eighth years of continually maintained coverage), the insurance company will rate the policy at a steady level. It is important to note that step rating is not the only consideration in determining a firm's premium. Areas of practice, annual billings or revenues, the number of professionals, quality control procedures, claim history, as well as other factors are taken into consideration when assessing the risk and determining the appropriate premium.

Professional services that assist clients in complying with applicable tax laws and regulations, including tax return preparation services, consulting with clients for tax planning purposes, and representing clients before the IRS or other taxing authorities.