By John F. Raspante

In recent years, CPA firms have been able to choose from about 15 professional liability insurance programs. That number appears to be dwindling as the insurance market goes through a general constriction due to lower insurance company investment income and surplus. Some CPA firms also are seeing significant premium increases. If liability insurance continues to become more difficult and expensive to obtain, firms will need to be even more careful about the stability and quality of their insurance program.

Selecting insurance that is right for your firm involves two basic questions:

• Is the company right for your firm?
• Is the policy right for your firm?

Answering those questions requires the firm to know what kind of program it is seeking. The best way to know that is to talk with other CPAs and knowledgeable insurance brokers who have dealt with professional liability insurers. CPAs who have been claimants in a tough case are especially good sources.

The criterion that first comes to mind for most people is price. While price is important, several other equally important criteria need to be considered as well, including:

• Financial viability of the insurer
• Insurer commitment to the market
• Admitted insurer status
• Policy considerations
• Insurer coverage attitude
• Level of expertise
• Selecting defense counsel
• Loss prevention services.

Financial Viability

If the insurance company 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, insurance companies in a weak financial position may be prone to deny claims against the CPA firm.

Accordingly, CPA firms should carefully ascertain the economic viability of the company before purchasing its policies. All insurance companies are rated by rating agencies, such as A.M. Best & Co., which evaluates insurance companies from “A++” down to “C,” based on the quality of reserves and the operational integrity of the insurance company. CPA firms should try to avoid purchasing insurance from a company with less than an A.M. Best “A-” rating.

Commitment to the Market

What degree of commitment does the company have to providing professional liability insurance to CPAs? Many companies provide several lines of insurance to consumers and nonaccounting professionals, and CPA liability insurance represents a small percentage of their business. Some companies move from market to market, depending upon the conditions of each market, and 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 retroactively to firms previously covered by the withdrawing insurer. A company’s commitment to the CPA professional liability insurance market might be determined by:

• The number of years that the insurer has written this type of insurance
• Its claims expertise
• Its financial viability
• The level of value-added services that it offers to insureds
• The breadth of its lines of insurance
• CPA society endorsements.

Admitted Status

Companies doing business within a state generally must register with the state’s insurance department and comply with that state’s regulations. Registering involves filing the policy form and rate plan with the state insurance commissioner and obtaining approval before selling policies, also referred to as being “admitted.” The approval process often includes a review of various policy provisions, such as extended reporting, cancellation notice, and the inclusion or exclusion of expenses within the policy limits of liability. If the insurance department believes that a particular provision substantially alters the insurance coverage, it will require the company to conspicuously note such provisions.

Admitted status provides some assurance that the insurer is reputable and has the requisite capital to carry on its business. Also, each admitted insurer is backed by the state insurance guarantee fund, established to honor policies if the insurer becomes insolvent.

Not all insurers are required to be admitted to be able to sell their policies within a given state. For example, there are offshore insurers that do not solicit sales within the U.S., but will sell insurance to U.S. businesses that seek them out. Also, federal legislation enacted in the late 1980s, when liability insurance was difficult to obtain, permits persons and entities with similar insurance needs to form risk retention groups for the purchase of insurance coverage. Because the groups are supposed to control the insurer, they are not deemed to need the protection of state regulation and are not always required to comply with state insurance laws.

Policy Considerations

CPAs should carefully review policies offered at renewal to determine that no gaps in coverage will be created. The avoidance of coverage gaps is greatly influenced by the type of policy, especially whether it contains occurrence or claims-made coverage.

An occurrence policy covers errors or omissions occurring during the period in which the policy was in force. If a claim is made after the occurrence policy lapses, any resulting liability would be considered as long as the error or omission occurred during the policy term.

A claims-made policy covers claims filed during the term of the policy, without regard to the date of the error or omission. The date of the claim determines whether coverage will be considered, not the date of the error or omission. If a claims-made policy is allowed to lapse, coverage for claims made after the lapse date will not be provided even if the error or omission occurred during the policy term.

Coverage gaps resulting from changing policies can be avoided by purchasing prior acts coverage from the new carrier (for claims that occurred before the purchase of the new policy), or by purchasing extended reporting (tail) coverage from the former carrier. Tail coverage is designed to cover errors or omissions made during a period in which claims-made coverage was in force, but a claim was not made until after the policy expired.

Coverage should not be allowed to lapse until all potential claims are barred by the applicable statute of limitations, which means that policies generally should be maintained for a period beyond retirement, or sale of the firm, equal to the applicable statute of limitations period.

There are many other important policy considerations, such as limits of liability, deductibles, endorsements, definitions, exclusions, and so on. Adequate treatment of those considerations is not possible in this space, but a good resource is the Guide to Accountants’ Legal Liability and Risk Management, published by Practitioners Publishing Company, Fort Worth, Texas, at www.ppcnet.com.

Coverage Attitude

Insurance companies tend to vary widely in their attitudes toward coverage. Some companies tend to offer their policies to “all comers” but utilize a large number of policy exclusions to limit their exposure. They tend to be quick to disclaim liability for claims that are outside the scope of their policy or are otherwise excluded from coverage.

Other insurers are more careful in their underwriting process and use that process as the primary means of limiting exposure. Such companies tend to utilize more general language in their coverage provisions and will accept responsibility for a much broader class of claims against the CPA firm.

The coverage attitude of the insurer can affect long-term cost to the policyholder in the event of a claim. A somewhat more expensive policy issued by 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.

Level of Expertise

Not every insurance company has the ability to handle technical CPA liability claims. A lack of substantial experience in dealing with accountants’ liability may cause an insurer to take actions that are detrimental to the appropriate resolution of a claim.

For example, an appropriate settlement offer might be refused, thereby subjecting the CPA firm to a jury verdict in excess of the firm’s policy limit. Conversely, an insurer might insist upon a settlement in a case where the CPA firm has meritorious defenses. Accordingly, an insurer’s expertise in dealing with accountants’ liability claims is a major factor.

Selecting Defense Counsel

The insurance company should know how to select appropriate defense counsel and how to control the defense of claims. Most companies make sound choices in selecting counsel and devising defense strategies. Occasionally, though, a company will tend to select law firms willing to charge the lowest hourly billing rates, causing the insured to receive a poorly handled defense, which can be terribly costly. The company should have experienced claims representatives on staff willing to work closely with the firm and legal counsel in defending the claim.

Loss Prevention Services

Companies should provide their insureds with free advisory hotlines staffed by experts on CPA liability. Many insurers also extend their loss prevention services through newsletters, handbooks and website resources. Some companies provide conferences to help CPA firms avoid claim situations. Such conferences sometimes qualify for continuing professional education (CPE) credit, saving firms hundreds, if not thousands, of dollars in CPE costs. Companies providing loss prevention services may also offer credits or discounts to CPA firms using those services to avoid liability claims and save substantial costs.

Firms also should consider that only a portion of the whole cost of a claim is covered by insurance. For instance, lost billable hours spent in legal proceedings are not reimbursed. Consequently, an effective loss prevention program should be a major factor in selecting a company.

Bottom Line

The best results in buying liability insurance usually are obtained by seeking the counsel of those who have experience in the market and have carefully studied it. Even after a CPA firm has decided which insurance coverage it wishes to purchase, the actual negotiation in obtaining that coverage still requires effort and expertise.

A firm may want to seek the guidance of an experienced independent insurance broker who is familiar with the CPA professional liability insurance market. Again, CPAs who have experience in the liability field, especially those who have been claimants in a tough case, can also be excellent sources of information.