Accounting insurance is a must-have for any accounting firm or CPA. But, what exactly does it do and how much does it cost?
Accountants are a logical, straightforward set of professionals critical to our economy who produce financial reports, review tax documents, and audit other accountants’ work. The scope of services provided by Certified Public Accountant (CPA) firms has grown immensely over the last few years.
But no matter how good you are at your job and how much experience you have, any logical accountant knows mistakes are bound to occur.
When a deadline is missed, tax law is misapplied, or fraud goes uncovered. The result is not pleasant. At best, these issues result in a distraction and are likely to involve legal fees.
One step further can easily result in legal actions against you coming from the clients, investors, or other third parties that have been negatively affected by your error.
That’s why smart CPA’s and their accounting firms are always covered by the right accounting insurance policies that protect them from these types of situations. Whether you or someone in your firm makes a mistake in the course of providing professional services, insurance can help make sure that your personal assets are properly protected.
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Insurance for Accountants
When creating their risk management program, accounting firms need to consider a variety of potential exposures.
For instance, in today’s litigious environment, it’s incredibly easy for an agitated client, investor, or other outsiders to file suit against an accountant or any other advisor.
Any professional associated with watching risk for CPA firms can tell you countless stories of firms providing good work, sticking to the scope of their engagement letter, and still getting hit with a costly professional liability claim.
CPA firms, tax advisors, and even bookkeepers get hit frequently with claims. The tax laws are constantly changing, and the client’s expectation is such that errors are not readily acceptable.
During difficult financial times when people lose money on investments, they are quick to look for ways to recoup their losses, and blaming the accountant for mistakes is sadly one of those methods. With the bar being set so high, it’s pretty easy to see why claims are alleged against CPA firms so frequently.
Regardless of the complexity of the claim, these suits require legal fees, document production, lost billable hours, and precious energy consumed instead of serving your clients and growing your business.
In recent years clients adding technology and the accountants’ involvement adds a new level of exposure. Your scope of work becomes more complex as you look to advise on the proper usage of the latest accounting software.
Most accounting entries are not manual entries anymore but are the subject of multiple users from varying inputs, as the case is with cloud technology.
The other natural exposure to risk via technology is the risk hacks, cybercrime, theft of personal information, theft of trade secrets, and other technology exposures. This article spends a majority of time talking about professional risk, but cyber risk must be addressed as well, preferably via a stand-alone policy.
And in the end, no matter what the reason for the damages is, accountants and professional advisors could easily be blamed in an effort to recover damages to the client or other third parties.
What Insurance Policies Do Accounting Firms Need?
While every firm potentially has a specific set of accounting insurance needs, depending on its size and a variety of other factors, there are certain accounting insurance policies that most should consider mandatory parts of their business insurance program:
Professional Liability Insurance:
Know by some as accountants professional liability malpractice or errors & omissions (E&O) insurance, this is easily the most important and vital type of insurance that all accounting firms will need to have.
This insurance policy will be able to cover most of the legal costs, discovery costs, and damages associated with claims against you or your employees in the course of providing accounting services. A good broker can guide you towards broader policies that effectively cover the accounting firm for anything you do for a fee or that enures to the benefit of the firm.
No matter whether you are a bookkeeper, CPA, or large accounting firm, you need professional liability insurance, because any mistake or aggravated client can potentially turn into a lawsuit.
General Liability Insurance & Property / Business Owners Policy (BOP):
A staple coverage that will be able to protect you from most types of lawsuits, general liability insurance includes the very important premises liability, which covers injuries that could possibly occur on your property.
General liability is often minimal for accounting firms since almost all business is conducted in the office and most communication with clients is handled via telephone and email. Property insurance covers your personal property including computer hardware and furniture.
This policy provides protection in the event of a fire, flood, or other unexpected circumstances that affect the building, your property, and your ability to work. General liability and property are often combined into a Business Owners Policy (BOP).
Employment Practices Liability Insurance (EPLI):
The need for this coverage grows in concert with the size of your firm. As the accounting firm adds employees, the issues become more complex and the personalities involved are less predictable, giving the need for EPLI coverage.
EPLI insurance will protect your accounting firm from potential employee-related claims, including discrimination, harassment, failure to promote, and wrongful termination. Professional services firms are also strongly encouraged to get third-party coverage to protect against claims coming from outside the firm, such as claims made by clients.
Workers Compensation Insurance:
Since this type of commercial insurance is required in just about every state, there’s not much to think about – your accounting firm needs to have it. Thankfully, workers’ compensation probably won’t cost your accounting firm a lot, since an office is not a high-risk workplace.
However, accidents will always happen and workers’ compensation will cover your firm if your employees ever sustain any type of injury at work (whether it’s at your office or anywhere else they may be representing your firm in a professional capacity.
Cyber Liability Insurance:
Accounting firms deal with a lot of sensitive information and often transfer funds, so it’s no surprise that they are constantly being targeted by hackers. CPAs act as the trusted advisors to some firms, adding on registered investment advisory arms for their clients’ funds.
Hackers today are well-trained and are patient enough to watch over your email traffic and attack at just the right time. Or if they are impatient, many have no problem launching a ransomware attack or cyber extortion virus onto your system, both of which could paralyze your firm.
What Does It Cost?
When applying for accounting insurance, there are many things that carriers will be taking into consideration when trying to arrive at a price for the coverage you need. The leading drivers of cost are:
Size of the company
Size logically correlates with premiums – the more accountants you have that need to be covered, the more you’ll have to pay to insure them all.
Revenue over three years
Insurers will want to see your three-year revenue before calculating the cost of your accounting insurance. Simply put, the more money your firm makes, the more lawsuits it will attract, increasing its potential exposure.
Areas of practice
The service that the accountant provides is crucial for calculating premiums. Certain areas of practice are considered as higher risk by insurers and will be treated accordingly. For instance, CPAs can typically expect to pay more for accounting insurance than bookkeepers.
Additionally, the clients you’re servicing will also play a role. If your firm is auditing and handling taxes for large multinational corporations, it will have to pay more than someone keeping books for private citizens or small businesses.
Firms located in large cities, such as Los Angeles or New York City, will pay more for insurance than those in less populated areas.
Your claims history is a crucial factor for determining premiums. If a company has a history of claims, especially if they are severe and costly, it will have to pay considerably more for coverage. On the other hand, companies that don’t have claims in their past can expect to pay much less to be adequately protected.
This is also a reasonably straightforward factor – the higher your insurance limits, the more you’ll have to pay. It’s a good idea to carefully consider exactly how much insurance you need with your broker to not overpay but also have sufficient coverage.
Protect your business with accounting insurance and tailor policies to your needs by choosing your own limit and deductible.
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