It's no fun for most people being sued, even when the claim is for a trivial amount in small claims court. When the suit alleges mistakes made by a professional, with the possibility of damaging their reputation in addition to costing a significant amount, the anxiety factor is multiplied. Yet there's an entire industry centered on the reality that accountants make mistakes, and when they do (and sometimes even when they don't) they make good targets.

Since 2000, judges have been less likely to throw out cases against CPAs than they once were, according to Bill Thompson, president of CPA Mutual. "Fewer motions for summary judgment are granted, and judges seem to require additional discovery before rendering decisions on cases," he said. "In almost every case, CPAs are required to perform an extensive amount of discovery before they can reach a settlement."

Accountants face two different scenarios in which they may be sued, according to Ralph Picardi, a defense attorney with the Boston law firm of Lapping & Picardi, and a former practicing CPA. "In some instances, an accountant becomes aware that they made an error or omission, while on the other hand there are cases where they're suddenly hit with a claim. In cases where they become aware that they made an error or omission, they first need to make sure they understand their professional obligations regarding the issue. They have to meet their obligation to their client, and they have to notify their insurance carrier, and they have to do these things simultaneously."

The one thing to remember is to stick to the facts, according to Picardi. "Tell [your client] the situation they're in, but stop short of accepting blame," he said. "Make sure the client has the facts to mitigate the mistake, but don't volunteer to 'make things right.'"

When an accountant is not aware of any error or omission but receives a demand letter from a lawyer or a call from the client, or just gets blasted at a meeting with the client, Picardi said, "Get in touch with the insurance company as soon as possible and make a written report. If the client tries to put you on the spot, the best thing is to say, 'I'll look at my files and get back to you.'"

"Once it's in the hands of the insurance company, a claims adjuster will talk to you about the kind of risk there is and make the appropriate decision on how to handle it," he said. "Lots of times they will assign a local attorney to provide guidance and mitigate or defend the claim."



Responding immediately to the threat of a claim is not only important strategically, but may be required by the policy, said John Torvi, vice president of marketing and sales at Herbert H. Landy Insurance Agency Inc.

"It's really important that any insured respond as per the provisions of the policy," he said. "All policies have conditions in specific language on how a potential claim might need to be reported. It might be at the first notice of a claim or potential claim, or within a certain time frame. If the insured misses those requirements, the insurance company may have the right to deny coverage."

There are instances that the accountant may not see as a potential claim, Torvi noted. "For example, he might get a notice from the state governing board. He might see it as a disciplinary hearing from a licensing agency, but many of those may, in fact, turn into claims, so it's wise to notify the carrier."

All policies have an insuring agreement, covering the rights and obligations of the insurance company and the policy holder, explained Torvi. "It will show the time frame that the insured has to notify the carrier. Different companies have different requirements for this, so it's very important that the accountant understands what the conditions are for reporting to the company."



It is vital that the accountant not give in to the temptation to admit a mistake, cautioned CPA Mutual's Thompson. "As much as you might want to admit your error or omission, do not do so until you have contacted your insurance carrier, because it could put your insurance coverage at risk," he said.

Tom Henell, chief marketing officer at North American Professional Liability Insurance Agency, recommends reporting claims through the broker. "The broker represents your best interest and can help you through the process," he said. "Once a claim is reported to a carrier, it will provide a formal acknowledgement that they received it. That acknowledgement is often in the form of a 'reservation of rights' letter. The reservation of rights letter says the carrier has received your claim but it reserves the right to determine whether or not it is covered. Typically the accountant will work with a claims adjuster from the carrier that will work through the details with the accountant."

Many carriers have a risk management or mitigation service, and the sooner you notify them, the earlier they can come in and attempt to work things out before it becomes a claim, Henell said.

Whether or not a case will end up going to trial depends on a number of factors, according to Randy Werner, CPA, Esq., a loss-prevention specialist with Camico: "Each case is unique. Some CPAs are better suited for the long haul, to be in litigation and still run their practices. Some may want to settle faster because they're not suited to that. ... We have had CPAs with good cases who just don't do well with the distraction of litigation, whereas some feel strongly that they need to go forward to make a point."



The lawsuit formally begins with the service of a summons and complaint, observed Jennifer Mansfield, senior claims counsel at Travelers. "That starts the clock running for the accountant to respond," she said. "It's very important to turn everything over the carrier or to the agent. We begin our process by setting up the claim file, and we get back to the insured within 24 hours to answer any questions that might have arisen and get the insured's perspective on the suit."

If there's coverage, the next step is to assign defense counsel. "This is often done in collaboration with the insured," Mansfield said. "It may be that there are attorneys on our panel in a given location that the accountant has worked with."

The next steps follow the typical timeline of litigation, according to Mansfield. "There is an exchange of information between parties, and after all of the information has been disclosed, there might be depositions of the major players," she said. "After all documentation and the opportunity to review is complete, there will be a meeting between counsel, the carrier and the insured to determine the best strategy. If the case is not resolved in mediation or pretrial conference, it will go to trial. Throughout the process, the counsel, the carrier and the accountant work toward a strategy to conclude the litigation in a way that is beneficial to the insured."

Dan Reed, second vice president at Travelers, emphasized three steps to take to avoid going through litigation: "First, engagement letters should always be used and updated to reflect the current status of services," he said. "Second, when you get to a critical juncture in the engagement, document it."

"Third, recognize when it's necessary to get additional help," he concluded. "Where a case raises a new or a novel issue for an accountant, he has to decide whether to provide a response based on the best knowledge and skills he has, or go and do additional research, or in some cases get additional help. Making the right decision is crucial toward reducing liability exposure."

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