I was originally going to call the article: "Risk and Insurance", but then I realized how absolutely terrible of a title that is so I came up with the next best title I could think of that just might peak some interest among our audience. I have 2 disclaimers: 1. This article, like most, is not a recommendation of providers nor can you consider it as insurance advice. My goal is to make you think about your current situation and to provide you with enough information to start shopping for, or reevaluating your current insurance needs. 2. This article is long, but I think this is an example of quality and quantity together at last. I hope you agree.
To write the articled I leaned on two insurance professionals and friends who are embedded into the accounting profession; John Torvi, VP of Marketing and Sales for Herbert H. Landy Insurance Agency, Inc. and Bill Thompson, President of CPA Mutual Insurance Company.
What follows is what we'll call a virtual roundtable Q&A with these two professionals.
IA: What are the key areas of risk accounting professionals need to be thinking about when they sit down with an insurance company?
Torvi: A Professional Liability insurance underwriter will be looking for several key risk management factors or procedures in assessing a company’s suitability for insurance and the cost thereof.
Those factors can include:
- Internal Controls. Who maintains the corporate calendar(s) and client files to ensure that all deadlines are met; the necessary forms and procedures are completed; that there is back up support in the case of employee absence, vacations, etc; do employees receive regular and standardized training or professional development? A significant number of claims arise as a result of sloppy administrative procedures and poor internal quality controls.
- Industry Standardized and Government Mandated Forms. Professional Liability insurance claims arise from poorly written documents and contracts as well as poor execution of required forms and contracts. These errors can range from simple things like the wrong date or the wrong or missing signature; to the use of the wrong form or omission of the right form; to tardy filings all the way to the unauthorized practice of law (providing information that is meant to be helpful or persuasive to a client that oversteps the boundaries of typical CPA services, for example).
- Engagement and Non-engagement letters. Many professionals use Engagement letters thought not all do. An engagement letter needs to clearly indicate the scope of work to be provided, any time limit on the professional services to be provided and any limitations of or services not part of the contract. Non-Engagement letters are seldom used but can be valuable to clearly state that the contracted services have been provided and the client should have no further expectations of professional service beyond the original contract. Engagement letters are not just for accountants or attorneys, and should be a standard part of any professional relationship. (read IA's recent article on engagement letters here)
Thompson: I’d consider the length of time the company has been in the accounting arena. Also inquire with local CPA defense counsel as to the company’s claim handling rep. Some companies love taking in premium but resist paying claims when its needed.
IA: How do they know if they truly need what the insurance company is offering?
Torvi: Anyone providing professional services can be said to have a moral and professional obligation – and in some cases a legal or licensing obligation – to protect their client from a possible professional error or omission. Who would use a medical provider that did not carry medical malpractice insurance? The bigger question has to do with what policy the professional is buying. Professional liability insurance policies can be complicated and contain provisions substantively different than one’s home or auto insurance. It is not just about how much coverage or what deductible, or even price. What is the financial strength of the carrier? Are claims expenses inside or outside of the limits? Are independent contractors covered? What about Prior Acts or Predecessor Firm coverage? Do you have choice of counsel in the event of a claim? These and the many other policy features need to be fully understood and reviewed before purchasing coverage.
Thompson: There is no question that CPAs need malpractice coverage. Especially in today’s economic climate and complexities in our tax code etc… Since 2000 – on the heels of the financial reporting fiascos associated with Waste Management, Anderson/Enron, WorldCom, et al. – judges have been less likely to throw out cases against CPAs than they once were. Fewer motions for summary judgment are granted, and judges seem to require additional discovery before rendering decisions on cases. We serve CPA's across the country and we have seen claims with expenses rise from an average of 32.45% prior to 1998 to over 48.54 (a 41% increase) since 1999.
IA: Based on these stats, professionals clearly need coverage. How do they know they are getting the right amount of coverage for their business?
Thompson: To be honest you never know if you have enough. But generally speaking, One Times (1x) fees or $150,000 for each licensed professional should be enough. Also some states require CPAs to have a minimum amount of coverage so they need to check their state licensing requirements.
Torvi: In today’s world, a business owner may need to consider coverage beyond the typical professional liability policy. As we read in the news every day, privacy and data protection are increasingly bigger concerns. A data breach can cost a business tens or hundreds of thousands of dollars in third party claims, legally mandated notifications of breach and civil penalties. Privacy Protection insurance is becoming more readily available and affordable and should be considered by any firm. Another example might be Employer Practices Liability which protects a business owner against claims for Sexual harassment, discrimination, wrongful termination and similar problems.
What is the typical process you take your clients and prospects through when reviewing their business to see if it is a right fit for your firm?
Torvi: It is always helpful to start where the client is. Are they an experienced, sophisticated buyer or a first time purchaser? We will look at the current circumstances of the client to see if the legal entity or named insured has changed; any substantial growth or reduction in the number of professionals and why. We also consider how that might impact the limits of liability. We look at whether the areas of practice or the type of clientele changed; are they comfortable, or even aware of, the defense costs options, retirement provisions and a number of other factors. It is not necessarily about the client being a right fit for our firm, but is the policy and its’ coverage the right fit for the client.
What are the factors that are taken into account that determine their premium?
Thompson: Fees, claims history, staff size, type of engagements ie…if they do SEC type of work, that's "bad"- high risk; if they do bookkeeping work,that's "good"- low risk; Not surprisingly - High Risk = Higher Premiums
Do you recommend “shopping around”?
Torvi: Everyone appreciates loyalty and there are some excellent providers for professional liability. With that being said, it never hurts to shop around, though too often the focus is on price rather than coverage and service, including claims service. The caveat to the shopping around idea is that while there are many excellent general business insurance firms out there, the complexity and the uniqueness of the professional liability policy requires an insurance representative that is well versed in the coverage issues as well as the profession being served. For example, the Landy Agency has been writing professional liability for accountants continuously since 1962 so we like to think we have a degree of experience and knowledge that is quite valuable to the accounting profession. On the other hand, we do no medical malpractice and would not venture to provide the kind of assistance and knowledge a doctor’s office needed for their insurance.
Thompson: On occasion, but I do not recommend buying on price alone for the reasons we've already discussed. It may also be a good idea to consider the history of your current carrier. As these claims statistics worsen, companies that recently entered the accountants market only to grab market share will be heading for the exits. It happened in the mid-1980s and then again the early 2000s, so it should not come as a surprise to receive a non-renewal letter in the mail, informing the firm that the company it paid premiums all these years won’t be around to service claims. And, of course, the last thing a firm wants deal with is claim litigation being serviced by an insurance company that no longer serves its market!
How often should someone plan to review their insurance coverage and needs?
Thompson: Every year or when there is a material change their practice. New SEC client, additional staff, mergers and acquisitions additional partners all give rise to a review of coverage.
Torvi: Annually or upon any changes in the business operation.
Lastly, do you offer coverage to their clients? If so, is there any type of residual they can earn from it? (I would think not, but worth asking).
Torvi: The Landy Agency writes professional liability for accountants, tax preparers, bookkeepers, enrolled agents, real estate brokers, appraisers, attorneys and a few other professions. If those are clients of the accountant, we can certainly assist. We do accept business from licensed property & casualty insurance agents and pay a commission: we do have several accountants who also hold P&C licenses that send us not only their own business but that of their clients as well.
Thompson: We really focus on the CPA's practice as a general rule. However, we do on occasion have some fiduciary coverage available as well as a market for D&O (directors and officers) coverage.
There you have it! I hope you learned something. I hope I made you think about your current situation as is related to insurance and liability for your firm/business. As always, we'd love to hear your feedback, especially if you made it all of the way through the article.
Thanks for being an Intuitive Accountant!
John Torvi is VP of Marketing and Sales for Herbert H. Landy Insurance Agency, Inc.. Established in 1949, The Herbert H. Landy Insurance Agency has been protecting professionals for more than six decades. We provide Professional Liability and Errors & Omissions Insurance for thousands of Accountant's, Real Estate Professionals, Real Estate Appraisers, Tax Preparers, Bookkeeper, Attorneys and other professionals throughout the United States.
Bill Thompson is President of CPA Mutual Insurance Company. CPA Mutual was formed in 1986 to help alleviate a hard market for accountants' professional liability. The company began servicing clients in 1987 with the goal of "exceeding client expectations".