Accountants Professional Liability Coverage

Posted on May 18, 2015 · Posted in Practice Management

Understanding What It Is and How and When to Report Claims

As an accounting and tax professional, and with your additional level of technical and professional expertise provided as an Enrolled Agent, client expectations and demands are high, which means lawsuits and claims alleging errors can occur. Defense costs alone can be financially devastating, so your business and financial security may depend on how well protected you are with an Accountants Professional Liability policy.

So what is in an Accountants Professional Liability policy (sometimes referred to as Errors & Omissions or E&O Cover-age), and what does a “claims made” policy mean?

A quality Accountants Professional Liability policy can help protect you and your firm against losses resulting from your client’s allegations of negligence, errors, and omissions in the performance of accounting and tax related professional services. In addition to this core errors and omissions coverage, better policies provide additional benefits that include assistance with responding to subpoenas, security breaches, disciplinary proceedings, and crisis events. And specifically for Enrolled Agents, some policies may offer a reduction in the policy deductible. A further reduction in the policy deductible may be available for early settlement of a claim through mediation.

Because most Professional Liability policies are written on what is called a “claims made” basis, coverage is triggered when the claim is made, not when the actual errors or omissions occur. There are two possible types of claims made policies. One is referred to as “claims made and reported” and the other is simply called “claims made.” “Claims made and reported” policies typically mean that the claim must be made against you during the policy period and you must report it to the insurance company within the same policy period, or a certain period of time thereafter. “Claims made” policies typically mean that after a claim is made against you, you must report it to the insurance company as soon as practicable. While we encourage you to seek counsel from your insurance agent on the policy language that best suits your needs, most insureds tend to favor the claims made “as soon as practicable” wording, as opposed to the definitive deadline associated with “claims made and reported” wording.

One policy feature that is important to understand in terms of how it addresses coverage for professional services you provided in the past is often referred to as Prior Acts Coverage. To illustrate this concept, consider the following example.

An accounting firm purchases an Accountants Professional Liability policy on June 1, 2010, and the insurance company establishes that date as the Prior Acts Date on the newly purchased policy (also called a “Retroactive Date” on some policies). Every year the firm renews the policy, the Prior Acts Date typically remains the same, so the Prior Acts Coverage period is essentially increasing. So, for example, in the policy term June 1, 2014 – June 1, 2015, coverage will apply to claims made against the insured firm in that policy period for any losses resulting from negligence, errors, or omissions that occurred any time after the Prior Acts Date of June 1, 2010.

Once a claim occurs, both how you report the claim and when you report the claim are very important. But what exactly is a claim? A claim can come in several different forms and is defined in the policy, so you should become familiar with how your policy defines a “Claim.” It could be a demand for money or services, a civil proceeding or similar proceeding, or a written request to toll or waive a statute of limitations for a wrongful act as defined by your policy. Consider that if you think or sense you have a claim, it probably is, and is therefore worthwhile to discuss with your insurance agent as soon as practicable.

How do you report a claim? Immediately notify your insurance agent or broker when a claim is made against you, as well as in the event that you have become aware of circumstances that you anticipate will become a claim in the future, which is often called a potential claim. Information on how to report a claim or potential claim directly to the insurance company is also usually provided in the policy itself. It is important that you comply with the specific claim reporting instructions set forth in your policy.

What typically happens after you report a claim?

1. Acknowledgement

Your insurance company will send a letter to you and your agent to acknowledge receipt of the claim notice. This acknowledges receipt of the matter and provides you with a claim number and contact information of the claim professional assigned to the matter.

2. Information Gathering and Investigation

A claim professional will begin the investigation into the matter. During this process, you may receive communications requesting additional information in order to assist in the investigation of the claim.

3. Coverage Determination

Your insurance company will send you a letter that out-lines the coverage available under the policy. This letter should be viewed as an informative document, setting forth the terms, conditions and exclusions contained within the policy that may apply to your claim. It may also explain why a matter does or does not fall within the coverage provided.

 4. Resolution

A claim professional, and, if applicable, defense counsel will work directly with you to respond and appropriately defend the claim, if applicable, with the goal of achieving a timely and efficient resolution to the claim.