Considerations for professional liability insurance

Sponsored by 3000 Insurance Group

Professional liability insurance covers liability for damages arising from the rendering of or failure to render professional services. Accounting professionals need professional liability insurance to protect themselves and their business for claims made by their clients or third parties that aren’t covered by commercial general liability coverage.

Professional Liability Considerations

The need for professional liability coverage developed due to typical general liability insurance policies only responding to bodily injury, property damage, personal injury or an advertising injury claim. Because professionals such as accountants can cause claims without triggering one of these GL coverages, additional coverage is needed to fill the gap.

Common Professional Liability Exposures

Common claims made on a professional liability (PL) policy include negligence, misrepresentation, bad faith, accounting errors and inaccurate advice.  While the firm’s clients are the first line of potential claimants, PL claims are also often brought by third parties, such as banks, creditors, contractors and business purchasers and sellers. PL claims can occur in any size practice, no matter the type of client or type of work performed.

• Tax claims generally represent the highest frequency but lowest severity and can typically be settled by correcting the accounting and tax work and covering the penalties assessed. Tax claims tend to be a result of improper tax treatment, calculation errors and improper advice.
• The number of audit claims are far fewer than tax but can be the highest severity as dollars paid out. Many audit claims are caused by failure to detect fraud, overstatement of assets or revenue, report errors and engagement disputes.
• Technical errors, improper advice, failure to detect fraud and engagement scope disputes can also occur in other practice areas, such as general accounting, bookkeeping, investment advice, litigation services, business valuations and consulting.

What Exactly Does Your Business Need?

When buying PL coverage, there are considerations that will help you determine exactly what you need:

• Is the insuring agreement broad enough to capture the current and future work of your firm? Determine if the policy covers the scope of your firm’s services by reading the definition of the covered services in the policy.
• What else is included? Many carriers provide more than just an insurance policy. Policyholders may also have access to a risk management hotline, risk management education, assistance responding to subpoenas and sample engagement letters.
• How will your claim be handled and who will handle it? Whether or not your firm has made a damaging act, error or omission has little or nothing to do with whether a claim might be brought against you. No matter the circumstances, you will need a defense. Be sure you know the process for notifying the carrier of incidents, claims and potential claims, what to expect and whether claim expenses are included in the limit of liability or separately.
• What if there is a sale, merger or change in position at your organization? Discuss what these possible changes in services mean for your coverage.
• What are the exclusions and limitations? Review the list of exclusions and limitations that restrict coverage to make sure it does not preclude coverage for any professional services that you need covered.
• Is an extended reporting period an option under the policy? These provisions offer extensions of time to report claims that would otherwise fall outside the policy period—as long as the act, error or omission occurred during the policy period.

Risk Management Techniques

Other ways to protect your business, in addition to professional liability insurance include the following:

• Establish a high standard for quality control at your organization.
• Keep all company records up to date and accurate.
• Train employees thoroughly and properly and maintain proper oversight.
• Beware of overstating your expertise and results in your marketing materials.
• Have a consistent and strategic client intake screening process, including a process for identifying conflicts of interest. You should also have a process for terminating client relationships.
• The No. 1 risk management tool recommended by Accountants Professional Liability carriers is use of engagement letters that are annually updated and signed off by the client.

Contact 3000 Insurance Group, the OSCPA’s endorsed provider of Accountants Professional Liability Insurance, at (405) 521-1600 or info@3000ig.com to learn how professional liability insurance can be utilized as part of your total risk management program.