Do you own an accounting firm or work in one? Are you wondering if accountants have Errors and Omissions Insurance? Well, the answer is a big YES!
The Reality for Accounting Professionals:
- 73% of accounting firms face professional liability claims during their careers
- Average settlement: $43,000 per claim (AICPA, 2024)
- Most expensive claim type: Tax errors averaging $65,000
- Firms without E&O insurance: 40% close within 2 years of a major claim
You see, accounting professionals play an important role in maintaining the financial health and compliance of businesses. But even the most skilled accountants can make mistakes. In the world of finance, errors can have serious consequences for clients.
The good news is that E&O insurance costs just $50-250/month but can save your entire practice.
Therefore, if you are an accountant you should really consider purchasing Errors and Omissions (E&O) insurance to protect you and your clients against any financial liability. But how do you go about it?
In this article, I will go over what Errors and Omissions Insurance is, what it covers for accountants, how much it costs, and what key considerations accountants should make when choosing an appropriate E&O insurance plan to protect your practices from the risks of errors, omissions, and professional liability that come with your job.
Key Takeaways
- Accountants need E&O insurance to protect against claims of errors or negligence.
- E&O covers legal fees, settlements, and financial loss from mistakes like tax errors or missed deadlines.
- Customizable coverage can include cyber risks, fiduciary duties, and past work protection.
- Key features to consider when choosing E&O policy include coverage limits, deductibles, prior acts, and legal defense costs.
- Premiums vary by business size, risk, and history—but the protection is essential.
Understanding Errors and Omissions Insurance
E&O insurance, commonly known as professional liability insurance, protects accounting firms from claims that they made errors or failed to fulfil their professional duties to the standard expected of a reasonable professional. Professional liability insurance is essential for accountants as their profession involves providing financial advice and services to clients, and mistakes can result in losses or damages.
Common claims include omissions insurance, errors in tax filings or financial statements, missing filing deadlines, poor accounting practices, and negligent advice.
Without E&O insurance, an accounting firm would have to pay for its own legal defence expenses and fees, as well as any settlements or awards if it was found guilty. The insurance policy helps to cover these costs and protects the company and its partners or employees.
Why Accountants Need E&O Insurance
Operating in the financial world comes with numerous risks. Even the best in the business can make a mistake. Even if the accounting firm did not make an error, a frivolous lawsuit could harm its reputation and inflict significant financial damage that may be difficult to recover from.
E&O provides a means to protect both. As the name implies, it protects against errors such as auditing mistakes or omissions, such as failing to complete services within the agreed-upon time. Clients may sue for costly financial mistakes, just as they would in the medical arena. Situations where accounting professionals may face a lawsuit include the following:
- Significant expenses that some may overlook when preparing a financial statement
- Financial losses regarding taxes owing to a perceived error
- Budget overestimation results in inaccurate financial advice.
What E&O Insurance for Accountants Covers
E&O insurance gives accountants peace of mind when dealing with unexpected losses that could disrupt the business. They can tailor this coverage to the needs of specific fields. Whereas construction contractors may need a policy that focuses on contract violations and liability, accountants have unique needs.
Nowadays, most CPAs have embraced technologies that improve the efficiency of their operations while also expanding their consumer offerings. While advantageous, it also introduces potential risks, such as breach of information. When an accountant has E&O insurance, it often covers the following:
- Network security offenses
- Investment advisor
- Pre-claim assistance
- Personal Fiduciary
As long as the client maintains its insurance, even past claims may be covered. This means being able to pay for legal expenditures, judgments , court fees, and settlements without having to pay them out of pocket.
Factors to Consider When Choosing an E&O Policy
1. Standard Vs Enhanced Coverage
Most accountants’ E&O insurance policies will provide basic coverage, but firms should consider adding additional coverage. Standard policies often cover damages resulting from mistakes, slip-ups, or blunders at work, but only up to a certain amount that may not provide adequate protection for larger clients and more complex compliance services with its firm’s small business assets. Enhanced coverage raises these limitations, providing increased security.
It could also pay to broaden protection in order to pay for additional expert services such as business evaluations. Firms that interact with non-profit organisations and foreign clients, as well as those that handle outsourced work, may require additional coverage. When a practice’s work exceeds the scope of standard coverage, additional E&O insurance might be critical in covering major audits, SEC-registered corporations, and other professional services. Increasing coverage shows clients that the accounting firm takes risk management seriously.
2. E&O Limits And Deductibles
When considering E&O plans, accounting firms must consider expenses, liability limits, and deductibles. Higher limits are recommended for practices with significant assets and a wide clientele to ensure adequate protection. However, greater coverage amounts result in higher premium prices.
The insurance company’s deductible is the amount of money the company must pay out of pocket before insurance coverage kicks in. Larger deductibles result in lower premiums but require the insured to pay more upfront. Companies must weigh these trade-offs against their budget and their risk level.
A high deductible may put the practice at risk if numerous serious small business side claims occur in a single year. Accountants can work with their broker to determine the appropriate liability limits and deductibles for their small business insurance and finances.
3. Prior Acts Or Retroactive Date Coverage
Most policies only cover claims filed during the same company’s policy period, thereby leaving prior work vulnerable to cyber liability. Accounting practices, on the other hand, can benefit greatly from either prior acts or retroactive date coverage.
This feature extends the policy backward, typically 5-10 years, to cover any claims relating to work completed before the current policy company’s term began. While the extra premium has an up cost, it helps protect accountants from liability for previous work that may result in claims years later.
Tax returns, audits, and financial statements may be contested in the future, thus extended coverage offers adequate security. It is especially beneficial for new business owners or organisations taking over an existing practice because it ensures that earlier work is covered under the new policy company’s terms and limits.
4. Innocent Insured Protection
When multiple business partners or employees are insured under the same company or E&O policy, the question arises as to how coverage responds if one insured acts negligently or fraudulently without the knowledge of the others. “Innocent insured protection” addresses this issue. It states that even if one business partner or practitioner intentionally or fraudulently creates a loss, the other “innocent” insureds will still be covered under the insurance company, policy, and terms for that claim.
This ensures that the actions of one bad actor do not jeopardise the entire firm’s insurance coverage. Such coverage provides accounting and tax experts, as well as firms using a partnership structure, with additional security that one person’s actions will not result in the cancellation of insurance for everyone. It encourages practices to maintain professional standards and multiple levels of review and control, while also covering other employees and practitioners in the event that one insured is accused of intentional wrongdoing.
5. Punitive Damages
When choosing an E&O policy, accounting firms should check to see if punitive damages are covered. These are monetary awards intended to penalise or discourage really bad behaviour, rather than simply compensating the victim. Some policies do not protect punitive damages on the grounds that covering intentional or criminal conduct may encourage bad behaviour.
However, if not protected, allegations resulting in punitive damages lawsuits might ruin accounting firms and small businesses. Not all property damage claims are actually intentional, either; some states allow punitive damages for acts that are regarded highly irresponsible rather than deliberately malicious.
Comprehensive E&O coverage will include punitive coverage to protect public accountants from the most severe allegations. Accountants face significant financial risk if clients sue for even questionable punitive damages.
6. Defense Legal Costs In Addition To Limits
Some policies may state that defense spending will reduce the stated general liability coverage limits, leaving less available to cover settlements or judgements. However, it is better to obtain a policy that includes legal costs and fees in addition to the general liability amount limits. This ensures that the full general liability limitation amount remains intact to cover alleged damages rather than being partially used up to pay lawyers.
Defense costs can quickly build up in complex litigation, potentially exhausting the policy limits before a verdict is reached. Choosing an insurance policy with supplementary defense coverage eliminates this risk and ensures that the full protection provided is still valid. This non-eroding limit structure should be prioritised, especially for businesses with considerable assets that require top-tier security.
How Much Does E&O Insurance Cost?
The cost of E&O insurance varies with industry. A building design company is likely to pay more than a hair salon or massage therapist. Other factors influencing your premium include the size of your business, your claim history, and the limits you select.
What Are the Errors and Omissions in Accounting?
In accounting, errors and omissions are mistakes or oversights that occur during the recording and processing of financial transactions. Errors of omission include forgetting or forgetting to record a transaction, either totally or partially, resulting in incomplete or inaccurate financial records.
What Does Errors and Omissions Insurance Cover?
Professional liability insurance, often known as errors and omissions (E&O) coverage, is designed to protect your company from claims that the professional advice or services you provided caused a customer financial damage as a result of actual or alleged mistakes or failure to deliver a service.
What Is an Example of Errors and Omissions Insurance?
Medical malpractice insurance is a type of E&O coverage that protects doctors and other medical practitioners from patient claims for professional negligence. It covers claims made against healthcare practitioners for negligence, medical errors, or unintentional oversights.
Conclusion
Proper E&O insurance planning necessitates ongoing review and attention. You should collaborate closely with brokers on a regular basis to assess risk exposures against policy terms and make necessary adjustments. Maintaining good carrier relationships ensures seamless coverage. While premium costs must be considered, the primary goal must still be to effectively handle professional liability and responsibility risks to clients. As an accounting firm, you can strengthen your ability to provide specialised client service without jeopardising their profitability by carefully selecting E&O insurance and implementing claims prevention measures.
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