What is Professional Liability Insurance
Professional liability insurance offers accountants peace of mind by economically managing professional liability risk. With a professional liability policy, accounting firms are protected from bearing the full cost of potential claims made against them while performing professional services.
Specifically, professional liability insurance will contribute to the payment of defense costs from frivolous lawsuits, disgruntled clients or charges of professional negligence. If an accountant gets sued, attorneys’ fees and expenses could cost thousands of dollars. However, those financial losses can be mitigated by purchasing a professional liability policy for a relatively low premium. A professional liability policy can protect a small business from losing assets, paying high legal fees, and potential business failure.
Although similar to other types of insurance, professional liability insurance works a bit differently. Professional liability policies operate on a “claims made and reported,” basis. A claims made policy provides coverage when a claim is reported, regardless of when the claim actually occurred. Coverage is determined by the policy that is in force at the time the claim is reported, which may not be the same policy that was in force at the time the alleged error occurred.
Who Needs Professional Liability Insurance
Anyone performing a professional service or giving a professional opinion should obtain professional liability insurance. Whether the professional service in question is consulting, providing legal services, or filing taxes returns, comprehensive professional liability manages risk by helping to offset potential monetary losses associated with errors or omissions that could occur while providing services to clients.
For accountants, general business insurance is simply not enough. Although general business liability coverage protects small businesses from a large variety of claims, such as property damage or personal injury, it does not cover professional negligence. If a client feels that the standard of care has not been met, a professional liability policy will offset the potential monetary losses associated with a claim.
There is a common misconception that small accounting firms who prepare business and personal tax returns, bookkeeping, and compile financial statements simply have no need for professional liability insurance. We estimate that: 50% of claims against CPAs are tax-related, 10% of claims against CPAs come from performing bookkeeping functions for clients, and 10% of claims against CPAs come from compilation and review. No matter what your firm does, it is important to realize that claims can arise from any client or situation, and they often come suddenly and unexpectedly.
Aside from protecting accountants from the unknown, professional liability insurance also provides several benefits to professional service providers. First, obtaining professional liability insurance demonstrate a high degree of professionalism to clients. Professional liability insurance demonstrates an accountants confidence in their work and accountability for all of their actions.
Despite paying a premium every year to maintain a policy, professional liability insurance actually saves an accounting firm money in the long run. Unfortunately, mistakes do happen. If a claim is made against you by a client, your professional liability insurance comes to the defense and protects against devastating legal bills. Without the proper coverage a firm could incur far greater financial losses than the relatively low cost of professional liability premium.
Not only do lawsuits cost money, but they also require time. And, what a lot of people find is that the time element is the most expensive part of the whole dispute. If a dispute escalates and cannot be fixed promptly, professional liability insurance can help resolve the dispute quickly and with the least harm to all parties involved.
Additionally, insurance carriers typically provide resources for firms to effectively assess and manage professional liability risk. It is in the best interest of both the carrier and the insured to mitigate possible risks. Carriers will often educate their insureds on claim trends and provide best practices to circumvent those risks.
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What Does Accountants Professional Liability Insurance Cover
Professional liability policies pay on behalf of insureds damages and defense expenses that the insured becomes legally obligated to pay as a result of a claim made against an insured resulting from professional services provided.
Some of the most common errors covered by a Accountants Professional Liability policy are as follows:
- ERRORS IN FINANCIAL STATEMENTS
- ERRORS IN AUDITING ACTIVITIES
- NEGLIGENT TAX FILINGS OR TAX PREPARATION
- FAILURE TO DETECT EMBEZZLEMENT
- POOR MANAGEMENT ADVISORY SERVICES
Policies can be customized to meet the specific needs of CPA practitioners, no matter what the size of the firm or areas of expertise.
What Isn’t Covered
While it is important to note what is covered by professional liability insurance, special attention must also be paid to the exclusion section of a policy. Some examples of common exclusions are: criminal, dishonest, or fraudulent acts committed by an insured.
Additionally, in the event an insured had knowledge of a claim prior to the effective date of the policy, the claim will not be covered. It is important to report knowledge of any circumstance that could potentially become the basis of a claim before the current policy expires.