A Certified Public Accountant (CPA) can certainly benefit from accountant professional liability insurance as a means of managing risk as well as protecting the business from costly lawsuits. Many small accounting firms opt to dismiss the notion of needing professional liability insurance, due to their belief that the type of services their firm provides doesn’t pose any real risks, and therefore this policy is not an absolute necessity.
This is clearly a mistake on their part, since tax preparation represents about half of the claims generally brought against accountants. For example, clients often cite errors in judgment, or present claims of late or improper filings, or may even claim that tax advice given by their CPA caused them financial harm.
Defending a claim is often a costly matter
When a claim is made against you, it’s usually in the form of a demand to correct a perceived error, or in some cases a suit may actually be filed against your firm. The fact is, when claims are made expenses can quickly mount. Even in the case where a judge deems there is no merit for the claim, you can still end up paying significant legal expenses.
Most professional liability policies include a feature called duty to defend. When proper notice of a claim is given to the insurance company, they have an obligation to provide defense for the insured. The company will then appoint an attorney to represent the policyholder, and the policy will pay the legal fees for this representation, above any deductible amount. Regardless of the validity of a claim, or its final disposition, it helps to have an expert available to help you when a claim is made.
Prior acts coverage
CPA professional liability insurance policies are written on a “claims made and reported basis” meaning that coverage must be in place at the time a valid claim is made. Unlike occurrence policies, which are triggered by the date of a loss, accountant professional liability insurance policies are triggered by the date the claim is made. Once reported to the insurer, any policy in force will help cover expenses for any allegation for a tax return that was completed, even if a year or longer has passed.