A tricky market for professional liability insurance means that accounting firms must be even more careful than usual
A number of factors have contributed to the current "soft market" in the industry for accountants' professional liability, including the economy, new players, rating downgrades by AM Best, and "surplus lines" carriers trying to increase premium share by competing in the standard marketplace.
"As a result, pricing is aggressive right now and not always backed by quality," said Tom Henell, chief marketing officer for the North American Professional Liability Insurance Agency. "Professional liability is one product that should never be purchased on price alone, and too many times we see accounting firms getting what appears to be premium pricing that is too good to be true."
Significant coverage that is absent from some discounted policies includes no coverage for personal financial planning, including services as an RIA or registered representative; limited coverage as a fiduciary or trustee for others; cancellation clauses that can void the policy in 30 days for any reason; limited scope of professional services; limited definition of the named insured (subsidiaries not covered, predecessor firms not covered); and no coverage for subpoenas.
"Firms should fully understand the financial stability and direction of the carrier," said Henell. "Common sense says that those carriers slashing premiums in an attempt to increase volume do not have a sustainable business model."
"Industry expertise, comprehensive coverage and financial stability are still the main elements on which to base the value of your insurance premium," he said. "If coverage is replaced with a significantly limited policy form, the premium savings become moot in relation to the coverage limitations."
AREAS OF CONCERN
The economic slide has significantly impacted the personal financial planning area of practice, according to Rickard Jorgensen, president and chief underwriting officer for Ridgewood, N.J.-based CPAGold.
"We have seen a number of claims arise from fraud - Madoff- or mini-Madoff-related - and bad real estate ventures," he said. "Despite the professionalism of the firm, proximity attracts claims. And these claims can be in the multi-millions of dollars, even though the area of practice may contribute less than a few percentage points of the firm's income."
Jorgensen recommended protecting the firm's coverage for its core areas of practice by establishing a separate PFP entity, drafting tight engagement letters and purchasing specific wealth advisor's professional liability insurance for the subsidiary. He added that attestation continues to generate the largest claims in terms of dollar value. "The economic environment has yielded claims arising from business bankruptcies, and thefts by client employees of client funds is on the rise," he said. "Failure to detect fraud is still the most significant source of claims. Firms should check that their clients have adequate employee dishonesty coverage. It's relatively inexpensive and should be the first line of defense in the case of theft or embezzlement."
Identity theft coverage is being offered by a number of programs, and offers some valuable protections, said Jorgensen. "However, accountants should read the fine print carefully and understand what exactly is being covered. Claims from this area are relatively modest, requiring credit monitoring or notification services. So far, we have seen few claims arising from access to networks or theft of client identity."
FALLING PRICES
Pricing in the professional liability marketplace has been aggressive, with the bigger insurers scrambling to garner market share by undercutting pricing on high-risk firms or offering cheap additional limits, said Jorgensen: "This is often a characteristic of the end of a soft market cycle, where premiums are more competitive."
"However, in this instance the aggressive pricing has not been subsidized by lucrative investment returns, so it is unsupportable," he said. "This manifests itself in poor operating results leading to rating downgrades, which in turn can lead to desperate underwriting practice and ultimately spiral into business failure. Although soft-market pricing benefits accounting firms in the near term, it is in their long-term interest that an insurer stays in business and continues to pay claims."
Jorgensen predicted that it is unlikely that rates will change over the next few months.
"However, the impact of the economic slump, large claims for personal financial planning, minimal investment returns and poor underwriting decisions will adversely effect the market for accountants' professional liability insurance, and it is likely that rates will start to increase during the third quarter of 2010," he said.
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