Troubled economy, new standards may spark rise in liability risk

The current economic downturn and the uncertainty of the timing of a rebound will more than likely trigger an increase in the number of professional liability claims.

"We've seen an increase in frequency of potential claims and requests for subpoena assistance," revealed Jeff Day, assistant vice president of underwriting for CNA, the underwriter for the American Institute of CPAs' Professional Liability Insurance Program. "We do expect some carriers to make changes to their programs and possibly even leave the marketplace."

Clients are less tolerant of losing money and employees are more likely to steal money when times are tough, noted Michelle Duffett, chief executive at Geneva, Ill.-based Insight Insurance Services. "Our biggest concern is with defalcations," she said. "Invariably, a lawsuit says the accountant should have caught something before it happened, regardless of the level of service the accountant was engaged to perform. We've had lawsuits against accountants where all they did was prepare tax returns."

"As far as our advice goes, nothing has changed," explained Joe Wolfe, assistant vice president of risk control for CNA. "This isn't the first time the market has gone through a down cycle, and when it does, we expect to see an increase in claims activity. However, there are a couple of things that are different. The scale of the economic downturn is bigger, and from a professional perspective, there are a lot more standards that accountants have to deal with now than 10 to 15 years ago."

INSTITUTE EXPANDS COVERAGE

The AICPA program recently expanded its coverage to include claims alleging identity theft in rendering professional services, and client network damages alleging a security breach in rendering professional services, according to Alvin Fennell III, vice president of underwriting and sales for carrier Aon, the administrator of the program.

"We've noticed a trend of CPAs taking on clients and reaching out in areas that they may not have expertise in, or where two or three years ago they would not have accepted them," he said. "It's important to use and structure the engagement letter to mitigate risk, specifically in what services to render on a payment schedule and what happens on a failure to meet the payment schedule. Delinquency fees and the withdrawal provision need to be pretty specific."

In a discussion of fee-related suits on the program's Web site, CNA noted that suing for fees significantly sharpens the risk that a CPA firm will face a counterclaim for professional liability.

"Fee suits place the CPA firm at risk for professional liability claims and business losses in the form of litigation expenses and lost professional time that may outweigh any potential recovery in court," it stated. One of the most effective ways to avoid fee suits is to resign from a client engagement before the outstanding bill grows large, CNA warned.

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