The professional liability insurance marketplace for accountants is continuing to soften, according to most of the nation’s providers.“It’s very similar to where we were last year,” explained Bill Thompson, chief executive of Alachua, Fla.-based CPA Mutual Insurance Co. of America. “We’re waiting to see how the subprime issues affect the market, but so far we haven’t experienced anything. We believe there will be an uptick in class-action suits that are subprime-related, but we haven’t seen any in our book.”
Last year, a number of liability insurance providers described a reduction in the number of malpractice claims against CPA firms over the past several years as a prime cause of a softer liability market.
Thompson noted that certain types of claims are affected by economic hardships. “The economy isn’t as good as it was, and we always see an increase in claims relating to theft and employee defalcations and fraud during these times,” he said. “You see this with employees at all levels, from bookkeepers writing checks for themselves all the way up to CEOs padding their statements to make their annual bonus. Historically, we’ve seen an increase in these when economic times have gone south.”
“From our perspective, the market is relatively soft,” agreed Michelle Duffett, executive vice president of Geneva, Ill.-based Insight Insurance Services. “Pricing definitely favors the accountant. Policy pricing is either down or not increasing.”
Likewise, the subprime situation and its effect on financial or mortgage clients is a concern for Duffett. “We haven’t seen any suits against accountants yet, but there is a concern that sooner or later we will,” she said.
Duffett also observed that a weakened economy tends to generate an increase in defalcation suits. “I can’t tell you how often we see suits against accountants in situations where someone within an organization stole money and the accountant didn’t find it,” she said. “Even when the accountant does find it, they will still sue. Clients are less forgiving with their own money in a tight economy.”
Valuation services relating to both businesses and personal assets are often at odds with client expectations, according to Duffett. “We see this often in divorces, and any kind of merger or acquisition, where the accountant is helping one side identify and value assets,” she said. “Someone gets unhappy that they got overvalued or undervalued. It’s like the subprime situation. A financial statement is based on your assets, and the real estate market tanks and you’re not worth that much anymore. It comes down to, ‘I don’t have as much money as I thought I had and I want someone to share the blame.’”
Ric Rosario, executive vice president of risk management at Redwood City, Calif.-based Camico has seen a slight increase both in the frequency and severity of defalcations. “It has some relationship to the souring economy, but it’s not at a fire alarm level yet,” he said.
Joe Wolfe, assistant vice president at CNA, the underwriter for the American Institute of CPAs’ Professional Liability Insurance Program administered by Aon Insurance Services, agreed. “Typically, when the economy goes into a downturn we expect to see an increase in the volume of claims against CPA firms,” he said. “What’s driving this is the position of their clients. They go bankrupt, or are trying to renegotiate their loan commitments. It starts out with real estate and construction, then automobile distributorships. We expect to see claims against CPA firms that work with those businesses. However, malpractice claims don’t appear immediately, but once you see business failures you see an uptick in claims 12 to 15 months later.”
Jeff Day, assistant vice president at CNA, noted an increase in claims against CPA firms for network risk and privacy claims. “Usually, the event that triggers it is stolen laptops or lost drives that contain confidential client information,” he said.
MOBILITY AND CONVERGENCE
Camico’s Rosario noted two areas that will have an impact on accountants’ liability in the near future: the mobility issue and international standards.
“The ability of accountants to work in different states will have a favorable impact, because without it they could inadvertently be practicing illegally in a state,” he said. “The push to resolve the mobility issue, in the long term, will be beneficial.”
“On the other hand, the convergence of U.S. GAAP to international standards will create all kinds of financial statement reporting issues,” he said. “It will be a huge change for small business and the accountants that service them. It will be necessary to educate everyone from the business organizations and accountants to the investors and bankers. The impact on small business will be a whole host of implementation problems and, ultimately, liability problems.”
The number and size of claims arising from personal financial planning is increasing, noted Rickard Jorgensen, president and chief underwriting officer for Ridgewood, N.J.-based CPAGold. “With the downturn in the economy, this will surely get worse,” he said. “The most sophisticated firms are recognizing that exposure from this relatively modest area of practice is causing stress to the firm as a whole. Claims from investment advisory services, asset management and financial planning can erode coverage limits for attest, tax or other more conventional activities.”
“Coverage provided by an endorsement to an accountants’ professional liability policy may not be adequate to protect a firm from all exposures,” he said. “Although insurance through broker/dealer relationships may cover individual registered representatives that are part of the firm, such policies are often restrictive and may not cover the firm or sales and services outside the broker/dealer relationship.” Jorgensen recommended that firms buy stand-alone coverage from specialist wealth advisor or investment professional errors and omission insurers. “This gives firms active in personal financial planning the peace of mind that a claim in this area won’t use up coverage for all other areas of practice.”
MORE CARRIERS
The softening has led to a number of new entrants, say observers. “It’s a soft market, and there are more players in the game,” agreed John Torvi, director of marketing and sales at Needham, Mass.-based Herbert H. Landy Insurance.
“A number of people came in to the market that really don’t have experience handling claims against accountants,” said Rosario. “Their commitment to the space is limited, so the second things don’t look good, they’ll be gone.”
“The claims lag in the tax area is two to three years, and in the financial statement area it’s four to five years, so the work you do today won’t be a claim against you for three to five years from now,” he said. “It’s important that your insurance company will still be there.”
Gary B. Sutherland, chief executive officer of Framingham, Mass.-based North American Professional Liability Insurance Agency, agreed. “I’m not convinced that the new ones will write enough premiums to be in the market for the long haul,” he said. “Admitted carriers are generally more stable and in the market for the long term. Excess-and-surplus carriers don’t have to file the same forms with the state. Usually they’re designed to write hard-to-place firms — for example, firms with claims that are high or have an unusual practice. Recently, we’re seeing E&S carriers going after companies that are in the admitted market, offering cheap premiums.”
CPA firms should take special care to manage their engagements, especially in an economic downturn, said Wolfe. “Historically, CPA firms are careful on initial client acceptance of attest clients, but once a company is on their books for a number of years, they’re not always objective,” he said. “When a client asks you to do something different, you need to consider the risks.”
