Professional Liability Insurance is Not a Short-Term Proposition
by Ric Rosario, CPA, CFE
CAMICO Executive Vice President - Risk Management
One big misconception among CPAs is that professional liability coverage is more of a short-term proposition than a long-term. The problem with that point of view is that there is often a multi-year claims lag between the occurrence of an error and the claim. The claims lag in the tax area is generally two to three years, and in the financial statement area it’s generally four to five years. The work you do today is not likely become a claim against you for about three to five years from now. (See the following chart on “The Claims Lag.”)
CPA firms should keep the claims lag in mind when making their buying decisions, looking at the number of years a carrier has written CPA professional liability insurance, its commitment to the CPA market, and its financial viability. It’s important that your insurance company will still be there three to five years down the road.
It’s not unusual for a company to withdraw from a market as conditions deteriorate. Such withdrawals can be almost as bad as an insurer insolvency, especially if other companies are unwilling to provide coverage to firms previously covered by the withdrawing insurer. Also, an insurance company withdrawing from a market tends to reduce its commitment to the firms it was insuring before it withdrew. The company may still be liable for a claim made by an insured firm, but its commitment and interest in managing the claim and providing services may become extremely minimal.
Some companies may simply not have the expertise available that other companies provide, or their expertise is not specific to CPA firms. A lack of significant experience in dealing with accountants’ liability may cause an insurer to take actions that are detrimental to the appropriate resolution of a dispute or claim. Most companies make sound choices in selecting legal counsel and devising defense strategies, although some carriers may have more expertise in defending lawyers, doctors and design professionals than they do in defending CPAs—and the disciplines are very different from each other. The company should have skilled claims representatives on staff willing to work closely with the firm and legal counsel in defending the claim.
What kinds of resources does the company provide? Do you receive pre-claims services, or just post-claims services? Is there any loss prevention training and CPE? Loss prevention is critical because avoiding a claim can result in significant savings. Lost billable hours spent in legal proceedings as a result of a claim can be substantial, as can damage to a firm’s reputation.
What kinds of CPA services does the carrier’s policy cover? How many policy exclusions are there? A somewhat more expensive policy from an insurer taking a broad view of its coverage obligations may be less expensive in a claims situation than a lower cost policy issued by a carrier that is quick to disclaim liabilities perceived to be outside the scope of coverage.
What kind of financial security and stability does the carrier provide over the long term? If it becomes insolvent and unable to carry out its obligations under the policy, the insured CPA firm may find itself without effective coverage and unable to defend itself against a claim. Subsequent insurers may refuse to issue policies with full retroactive coverage because of the firm’s gap in coverage. Also, a carrier in a weak financial position may be prone to deny claims against the CPA firm.
It’s also important to review your policy periodically, about every three to five years, to make sure that you have the appropriate coverages and limits and that you are receiving the services you need at the appropriate prices. Contact your carrier early on in the process. “Test drive” their services by letting them know that your firm’s coverage is under review. Find out how well the company responds to you and your questions.
Ric Rosario, CPA, CFE, is executive vice president - risk management with CAMICO Mutual Insurance Company (www.camico.com). A Certified Fraud Examiner with experience in public accounting and private industry, he advises CAMICO’s member-owners and other CPAs on loss prevention principles and techniques. His duties at CAMICO also include executive oversight of underwriting, program development, and marketing and communication operations for the company’s 7,332 policyholders.
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