CPA E&O Pitfalls: Who do you know? What do you know?

In life, we learn that success is not necessarily based on “What you know” but also on “Who you know”.  For this article, we will include within the definition of success “the avoidance of or protection from unnecessary risk”.

When clients select an accountant, the “The Who v. The What” maxim is critical.  All accountants are not the same.  To the client, one accountant may seem appropriate, yet, in truth, may have very little or only cursory awareness of a client’s particular needs or objectives.  Understandably, there are many different types of personal and commercial clients with varying tax and accounting issues.

Shifting to the subject of Accountants Professional Liability Insurance (E&O), this truth and maxim– what we can call “The Who vs. The What” – holds as well; the “Who”, being the agent/broker selected, for the placement of the “What”, being the particular insurance company and policy contract form insuring the accounting operation.

Accounting owners may not recollect (or care to recollect!) the vast array of insurance terminology possibly shared by their incumbent broker, but there are three key points – “Three Little Known Truths” we call them – concerning Accountants Professional Liability (aka Errors & Omissions) that all should wish to understand:

1. There are No Standards to the “What” (Insurance Contract).
2. E&O Underwriters have Limited Knowledge of the accounting world.
3. Agents/Brokers have Limited Knowledge of the accounting world.

Accounting firms may feel they have adequate E&O insurance coverage placed by their respective “Who” (agent) with their respective “What” (insurance company/contract), yet that may not be the case. How crucial is this concern?  Breach of one’s duty, or, more commonly, someone alleging such against an accountant and/or accounting entity, may not be a frequent occurrence – but it is typically severe.  The Journal of Accountancy provides good information on claims by area of practice and related details (see Malpractice claims in 2021 and future predictions – Journal of Accountancy).

Understanding the importance of the “Who” and the “What”, let’s break down the “Three Little Known Truths” of CPA Professional Liability:

1. No Standards – Caution:  Most common forms of commercial insurance (property, auto, product liability, etc.) are issued under the control of the insurance industry’s “associated governing body”, the Insurance Services Office (ISO), with commoditized language.  Unfortunately, that is not the case for Accountants E&O.  ISO asserts that the exposures presented by the accounting world are ever-changing (tax laws – don’t we know it!) and too unique for them to address.  Therefore, all insurance companies participating in the Accounting E&O world are free to issue their own, independent, unique policy/contract with differing terms, conditions, definitions, limitations, exclusions, etc.  Additionally, some of the markets issue their “paper” on what is called a “Non-Admitted” basis; meaning, they are free to modify terms and conditions with little regulatory oversight.  Should they foresee or notice an accounting risk they wish to avoid – they adapt.  An underwriter’s contract form is fluid; changing and modifying continuously.
2. E&O Underwriter Limitations:  Underwriters speak insurance.  They have limited knowledge of the accounting profession and its many facets and vocabulary.  Accounting terminology can be a foreign language to an insurance underwriter or underwriting company who are “generalists” insuring a multitude of different commercial risks.  Therefore, it is critical for you to be represented by a knowledgeable and experienced broker “ambassador” who can effectively communicate your particular risk profile and calm the underwriter’s nerves.
3. Agent/Broker Limitations:  Ditto point 2!  Most insurance agencies are generalists insuring several different industries with limitations such as (1) knowledge of the accounting world, (2) how coverage must be structured to meet the respective risk profile of your firm, (3) how to effectively explain the that risk profile to the underwriter, and (4) insurance marketplace relationship depth and carrier placement authority.  Starting with an inexperienced agent who then submits your account to an equally inexperienced underwriter can only compound the issuance of a problematic and “swiss cheese” insurance contract.  Understand that an insurance policy is actually a legal contract between two parties (an insured and an insurer) with various terms, conditions, exclusions, limitations, definitions, etc.

With that knowledge, how should an Accounting firm approach securing solid and effective Professional Liability (E&O) Insurance?

Foremost, know your “Who” (agent/broker) by determining:

• How long has the agent and agency been insuring accountants?  How many do they insure?
• What is the depth of their underwriting market appointment authority?
• Do they have a process for analyzing your individual exposures and presenting how the insurance contract is structured to meet those exposures?
• To what degree have they asked you questions that demonstrate their knowledge of accounting exposures that confirms their abilities?

Through that important “Who” confirmation, a CPA should be able to then move confidently to the selection of the “What” (the insurance company).  Get the “Who” right, and the “What”, correctly administered by the “Who”, should follow.  Just as I would tell my three boys when they were young and learning how to cross the street, “Stop, Look and Listen” – so too is it wise for the CPA to do the same concerning their E&O.  One minor “i” not dotted or “t” not crossed can be the difference between a covered claim and a self-insured event.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in Accountants Errors & Omissions (E&O) insurance (aka professional liability insurance). As one of the largest Professional Liability brokers in the U.S., we have a dedicated staff that understands the risks of the accounting industry and delivers superior results.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our CPASURE process exists to serve that purpose.

Our CPASURE Review will analyze your unique exposures, provide rate details and comparisons, and provide a contract comparison. No application required.

To obtain your complimentary CPASURE Review, please provide the following information or contact us at (800)273-5883. Fields marked with * are required.