It’s a good time to buy liability insurance
In a litigious society, even the most trusted advisors in the public realm face a chance of being sued by their clients.
“There’s always that misunderstanding between the CPA and the client as to the level of service being provided,” observed David McKay, audit partner and assurance practice leader at Edelstein & Co. LLP, and formerly an audit partner at Big Four firm EY.
“And we’re all human,” he said. “There are going to be errors and omissions, and a firm needs to protect itself against legal costs and disruptions to the firm. Given the increased complexity in accounting standards and tax rules, those are the primary reasons that make professional liability insurance an operational imperative.”
The current marketplace for accountants’ professional liability insurance continues to be extremely competitive, according to Rickard Jorgensen, president and chief underwriting officer at Jorgensen & Co., a professional liability and risk management consulting firm. “The insurance marketplace is experiencing a ‘soft’ underwriting cycle,” he explained. ”New entrants to the marketplace and newly established programs are much more aggressive — even where firms have claims — which means that firms can secure pricing and coverage concessions. The downside to this is that these new entrants and programs often have a short lifespan, which means that firms will be forced to find alternative coverage once the insurer has inevitably exited the marketplace.”
“Conversely, the more established programs are trying to deal with these short-term participants by incorporating new coverage features like full-limits cyber-liability or expanded coverage for personal financial planning, and, where possible, offer premium discounts for a firm’s excellent risk profile,” he said. “Firms should be wary of new insurers. However, this current soft environment can assist negotiations with the established programs that will be more likely to offer a pricing or coverage concession to maintain a long-term relationship with a well-run CPA firm.”
“Accountants, like lawyers, are licensed professionals,” observed Morris Robinson, CPA, Esq., managing director of M. Robinson & Co. PC. “The public needs to know that if there’s a screw-up, not only will the professional make good but there’s an insurance company behind the professional that will make good. It’s like auto insurance — no matter how hard they try, most people will end up with a few fenderbenders in their life.”
Simple errors can lead to heavy claims, according to Larry Campagna, shareholder at Chamberlain Hrdlicka and former chair of its tax controversy section. “In my largest case, the plaintiff sued a Big Four firm for $120 million, claiming that the firm had incorrectly prepared its Form 990 [‘Return of Organization Exempt from Income Tax’]. We went through a three-week trial and were successful — the plaintiff got nothing. But it’s not a fun experience for an accountant in the docks. Having insurance and having the insurance company providing experienced counsel to handle matters is very comforting at a time when allegations are being made, whether they’re true or false.”
In fact, more accountants are having claims made against them based, not on incorrect interpretations of a law or regulation, but a simple mistake, according to John Raspante, CPA, director of risk management for CPA Protector Plan, a division of Brown & Brown. “In the last six months, I’ve seen more claims than I’ve ever seen before based on simple errors, not the accountant just blowing it,” he said. “It may be the growing complexity of the rules they deal with, or increased pressure, but it’s definitely a growing trend.”
There are fewer claims in the areas of audit, compilation and review, he noted: “These are less profitable to all but the very large firms, so the firms we insure are doing less of these services. For the most part, when you do less of a service, you will have fewer claims in that sector.”
A MAJOR NEW RISK
Cyber-liability is on the rise, Raspante warned. Ten years ago, cyber-liability was a hypothetical concept, and five years ago accountants were beginning to be cautioned about it. Today, full cyber-coverage is a must for accountants wishing to protect themselves from the expanding area of liability.
“We’re seeing more claims in this area,” he said. “It was always thought that cyber-attacks were unique to large retailers, hospitals and banks, but that’s not true anymore. CPAs are more vulnerable, and cyber-related attacks are affecting firms of all sizes.”
”It is imperative that an accounting firm look to their malpractice insurer to provide robust coverage for the new wave of attacks by cyber-criminals,” said Jorgensen. “Many do not, or they provide sub-limited coverage. Or worse, they add an exclusion for cyber-perils.”
In such situations, the rule of “Let the buyer beware” applies, he noted. “It may be tedious to read the fine print in your professional liability policy, but it’s a good idea to know exactly what is covered and what is not,” he suggested. “Some new programs add cyber-coverage for ‘non-professional’ claims, although in our experience all important cyber-claims arise from professional services. Another program offers cyber-coverage, but an exclusion to the policy virtually eliminates any claims.”
“An accountant should request from their insurer — not their agent — affirmative confirmation that full-limits coverage is provided,” Jorgensen said. “Firms should consider either an expansion to the malpractice coverage which provides meaningful enhanced cyber-coverage beyond the routine endorsements, or look at one of the new standalone policies available — no two are alike and some are very complicated. “
Jorgensen advises accountants to ensure that their policy:
- Provides cyber-extortion coverage;
- Does not exclude or sub-limit social engineering (wire fraud) claims; and,
- Does not contain sub-limits for privacy and network claims.
“And confirm that your insurer has the resources to assist you to fight back in the war against cyber-criminals,” he said.
Not all policies are the same, and the level of involvement of the insurer or program manager can sometimes make a difference between a claim going forward or not.
In the end, though, forethought and a proactive approach to limiting exposure to liability may be best. “We spend more time helping CPA firms successfully avoid claims than on defending them,” observed Ken Mackunis, executive vice president of Aon Affinity, program manager for the AICPA Professional Liability Insurance Program.