Being on the defensive in a professional liability lawsuit can have devastating effects on an individual CPA or a firm. Not only does it open them up to economic loss, but it calls into question the competence and integrity of the CPA, things they have taken years to build.
And it doesn’t go away overnight, often taking years to settle a large suit. “The amount of time getting ready for depositions, or to attend a mediation or arbitration can take a large chunk out of your life,” said Bill Thompson, president of CPA Mutual. “It can take a mental toll on defendants.”
But doing it on your own, without the involvement of a knowledgeable insurer that routinely handles such matters, would be even more unpleasant.
“Occasionally I run across a firm that has elected not to have coverage,” said John Raspante, director of risk management at McGowan Pro. “I point out to them that if they want to sell the firm, a buyer won’t be interested if they can’t get tail coverage, and you can’t get tail coverage unless there’s an existing policy in force.”
Tail coverage, also known as an extended reporting period provision, allows the insured to report claims made after a policy has expired or been canceled, if the act giving rise to the claim occurred during the policy period.
“We’re still at a high level of accounting firm sales, and by all accounts this pattern will continue, due to an aging profession and succession issues,” said Raspante. “So it’s important to have tail coverage. Consultants in the mergers and acquisitions field say the whole question of a tail can be a deal killer.”
“A tail is an extension to an existing coverage,” he explained. “It takes the current policy and adds an endorsement that upon the sale of the practice the policy will continue to cover claims made as far back as the retroactive date [the inception of the policy]. If the practice is sold and the purchaser gets a five-year tail, any and all claims as far back as the retroactive date will be covered for the period of the tail — three or five years after the sale of the practice. It gives the buyer a lot of comfort knowing that if something comes up, there’s a policy that will react and cover that peril. With more accountants retiring and mergers occurring, the question of a tail needs to be looked at closely.”
New risks
“We’re seeing more and more accounting firms jumping into servicing the cannabis industry,” Raspante observed. “Obviously, the profit potential is enormous, but accountants should not make false assumptions that their policy will provide them coverage. They need to have their agent explain any limitations.”
“The federal government still considers this an illegal drug, and some policies have an exclusion for illegal activities,” he said, “The policy might put in an endorsement to cover cannabis services, but accountants need to take a close look at the policy to see if it will cover third parties, not just a client. If a cannabis grower raises money through an initial public offering, it’s not just potential clients that can sue the CPA — the public that bought shares in the IPO can also sue. If that happens, you want to make sure that the policy will respond, so check to see if there is an exclusion that would apply to cannabis services, and if there’s an endorsement to cover it.”
A cyber policy might have sublimits, which lowers the recovery from the full policy coverage, Raspante noted. “The recovery would be limited to a smaller amount than the full policy limit in the event of a claim. A full stand-alone policy might be preferable, but the additional premium could be excessive depending on the size of the firm. It starts out low, but when you get to higher limits with a firm of, say, 100 employees, it could be a very material amount. Of course, that’s why a lot of firms don’t buy a stand-alone policy,” he said. “There’s a trade-off between the risks you think you might have versus the size of the premiums you’re willing to pay.’
While some policies cover only claims brought in the U.S., others provide coverage for claims anywhere in the world. “There’s not that much difference in premiums,” said Raspante. “Buyers should only purchase policies with worldwide coverage. With the convergence of international standards, you want to have coverage for claims brought anywhere in the world.”
There are multiple issues that CPAs need to be aware of to avoid situations that might create risk. Insurers stay abreast of these issues and communicate them to their insured.
“On July 1, 2019, an AICPA Professional Ethics Executive Committee ethics interpretation went into effect that says CPA firms shouldn’t be the sole source of an attest client’s records, as this impairs the firm’s independence,” noted Dave Sukert, senior vice president at Aon Affinity Insurance Services Inc. “Firms with the tech infrastructure to provide these services need to be aware of and understand this interpretation, and how it might apply to them.”
“The insurance marketplace is seeing an increase in pricing across the board for errors and omissions insurance,” said Ricard Jorgensen, president and chief underwriting officer of CPAGold. “Losses in other classes of professional liability insurance, for example, directors & officers liability, are driving rate increases of some 20 to 30 percent for some professionals. This has yet to materialize in the accountants’ professional liability marketplace, but there will likely be some pressure in the next 12 to 18 months. Firms should look to the promotion of positive risk management features like loss control education, client screening, maximizing of engagement letter usage, use of mediation clauses in engagement letters, and avoidance of certain high risk areas of practice to keep costs down. A clear, concise and well-presented application is crucial to a successful renewal negotiation.”
“Over the past decade, policyholders and specialty insurance brokers have won hard-fought coverage concessions from insurers which have enhanced the quality of professional liability protection available to CPAs,” said Jorgensen. “This includes full tort coverage (not limited to negligence), a broad definition of covered services (not a list of services), and additional section like theft of client records or cyber liability.”
To offset any price increases, certain insurers offer stripped-down coverage that takes away many of these benefits, according to Jorgensen. “Check the policy that is being proposed to you,” he advised. “Review the policy carefully, and look out for words like ‘negligence’ or ‘false pretense.’ Check the exclusions to see how they might impact your practice. Saving money is fine, unless you buy an inferior policy. The uninsured costs could be substantial — the most expensive insurance policy just might be the cheapest one.”
