The increased exposure to risk from the deteriorating economy is one of the factors that accountants need to consider when deciding what professional liability policy and which limits to purchase.
"Accountants tend to extend their practices into areas in which they have less competence," noted Dan Reed, second vice president for professional liability at Travelers. "As smaller firms engage in new services, their risk exposures change. Some smaller firms are extending their services to do financial planning or offer investment advice, or sell insurance products. That exposure can be covered separately or as an endorsement."
Meanwhile, cyber-security is becoming critical, according to Tom Henell, chief marketing officer of North American Professional Liability Insurance Agency, an independent broker. "Information security and data privacy are the growing issues affecting the market," he said. "Nearly every state has data security laws. The distinction is whether a breach is part of 'performing professional services.' For example, if a CPA did 800 tax returns, and someone breaks in and accesses the data, or he leaves his laptop on the train, there's a question as to whether his mistake is covered under the definition of performing professional services. But he would have to notify all 800 clients that there was a breach."
Most firms cover third-party liability, which means that if you lose client data and as a result the client or third party sues you, you're covered, Henell said. "And some programs offer first-party coverage, which covers the cost of notifying clients when the data breach occurs and offering credit-monitoring services. Stand-alone policies are also now available for information security. It's a relatively new exposure."
POLICY LIMITS, SUBPOENAS
More firms are also buying separate coverage for their financial planning practices, said Rickard Jorgensen, chief executive of liability and risk management provider CPAGold: "The reasons for this are many - lower deductible, separate limits, cost of corrections coverage - but the biggest reason of all is to insulate the practice from claims arising from investor suits and fraud claims."
When choosing liability insurance, the evaluation of limits is all-important, according to Ron Parisi, executive vice president of risk management at Camico. "Accountants should be talking to their carrier about appropriate limits for the services they provide and who their clients are," he said. The size of the policy's deductible is also worth evaluating: "We've seen policyholders that had a large deductible and end up having trouble paying it when there's a claim."
From a risk standpoint, CPAs should remember their duty of confidentiality, Parisi advised: "Particularly in the tax realm, we see CPAs giving out way too much information in response to subpoenas."
Reed agreed: "We're seeing accountants being asked to produce documents in litigation that they're not involved in. For example, a CPA may do tax work for a small business, and the owner gets involved in a divorce. The attorney will send a subpoena asking for all the records. It's important for them to have coverage that helps in the legal response to a subpoena."
"In most jurisdictions, the service of a subpoena is sufficient to override the need for client consent," said NAPLIA's Henell. "But there are some states that do not recognize such an exception ... and the Internal Revenue Code imposes its own limitations on the process."
And just because you are served with a subpoena, rather than a complaint, doesn't mean that all is well, Henell said. "Sometimes, the information you reveal to others in response to a subpoena will cause them to set their sights on you," he said. "More often, they already had you in their sights."
RUSH TO MARKET
The current landscape looks like "the beginning of the end of the cheap market for professional liability insurance," opined Jorgensen. "Some insurers with little or no past experience are making a last-ditch attempt to establish a market presence, while long-standing carriers are trying to grab a bigger share of a smaller pool of premiums."
Bill Thompson, president of CPA Mutual Insurance Co. of America, noted some upward movement in prices in the past year, but said that for the most part premiums have been flat. "A lot of companies may enter this kind of market with fairly low premiums," he said. "Buyers should consider how well-established a potential carrier is. The last thing they want to get involved with is a company that is no longer writing accountants professional liability."
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