The following Q&A has been updated to reflect new findings and recent claims experience involving CPA fees, billings, collections, suits for fees, and arbitration. CAMICO’s Claims and Loss Prevention experts have several years of experience in managing the risks stemming from these issues and offer their advice.
Q: How can I avoid having a collection problem in the first place?
A: The best way is to communicate your billing and collection policies in your engagement letter, including stop-work and disengagement provisions (that can be enforced if a client doesn’t pay you in accordance with the engagement letter). Bill on a timely basis, and do not allow fees to build up to the point where you can no longer walk away from them. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA has sued to collect fees.
Q: Is there a better option than suing to collect fees?
A: CAMICO’s claims experience shows that simple fee disputes are better resolved through mediation and arbitration than through litigation. That is why CAMICO recommends mediation for all disputes as a first step and binding arbitration for fee disputes only as a second step. CAMICO also provides as much as 5% premium credit to policyholders who agree to an alternative endorsement to their policy (to exclude coverage for claims arising after suits for fees).
Q: How do I get clients to agree to mediation for all disputes and binding arbitration for fees disputes only?
A: The best way is to have clients sign engagement letters with a mediation clause for all disputes and a binding arbitration clause for fee disputes only. Note that some states do not permit arbitration clauses.
Q: What are the first steps to take when a client is not paying?
A: Good communication with a non-paying client will either spur payment or establish circumstances that will make a potential demand for arbitration more effective. This involves sending a series of three letters requesting payment and communication from the client:
- The first letter politely notes the nonpayment of fees owed, requests payment, and asks whether there is a reason for the delay in payment.
- The second letter reiterates the first.
- The final letter notes the continued nonpayment and requests a call to discuss payment arrangements by a specified deadline date, stipulating that if no call is received by the specified date, a demand for arbitration concerning the fee dispute will result.
The letters serve to evidence that the clients lack any basis to claim the fees were not owed. Had there been any dissatisfaction with the work, the clients would have communicated it when given multiple opportunities.
Q: Why does CAMICO believe that mediation and arbitration are better than suing to collect fees?
A: CAMICO’s claims experience clearly shows that suing to collect fees creates a high probability of a countersuit by the CPA’s client, usually alleging malpractice. This escalates the situation from a simple fee dispute to a malpractice lawsuit.
Q: Does CAMICO cover claims arising subsequent to suits for fees?
A: CAMICO policyholders have the option of suing to collect fees, but the policyholder must first consult with CAMICO before suing for fees. After consultation and agreement, CAMICO will cover claims arising after suits to collect fees, but this will not qualify for the premium credit described above.
Q: Why do I have to first consult with CAMICO before suing to collect fees?
A: The consultation enables a CAMICO specialist to assist the policyholder in weighing the risks and consequences of suing for fees. The cost in dollars and reputational risk of lawsuits, countersuits, and lost billable time nearly always outweighs the fees owed to the CPA. CAMICO believes it is important for policyholders to be aware of all potential costs and consequences before suing to collect their fees. Without consultation and approval, you will be responsible for 50% of the first $50,000 in expenses or damages paid on a claim arising after the suit to collect fees.
Q: Does CAMICO recommend binding arbitration for any other disputes?
A: CAMICO does not recommend binding arbitration for disputes other than simple fee disputes.
Q: Can I just use a general arbitration clause in my engagement letters?
A: We advise CPAs not to use a general arbitration clause in their engagement letters. Most engagements, when in dispute, tend to produce complex, high-risk, high-dollar disputes that are better managed through litigation than arbitration. An effective legal defense can be restricted and impaired by arbitration.
Q: Can I still use a collection agency?
A: Yes, but the same guidelines apply to the agency. If you are using CAMICO’s basic policy form without the alternative endorsement, you must first consult with CAMICO before the agency sues to collect your fees. If you have the alternative endorsement that excludes coverage for countersuits after suing for fees, countersuits are still not covered if the collection agency sues to collect your fees.