ACCOUNTANTS PROFESSIONAL LIABILITY COVERAGE ANALYSIS

(March 2023)

WHO IS THE INSURED

A variety of parties may qualify as insureds under an Accountants Professional Liability Policy.

The named insured is the entity or individual named in the Declarations. It may be a partnership or a sole proprietorship or limited liability corporation.

Additional insured is a named insured's previous name or the name of a firm acquired in a merger.

Example: Pete had handled the professional liability insurance for Karl & Carl Accounting for years. When he visited the firm to discuss renewing their policy. Karl said that they wanted to change the name on the policy to Karl & Carl, LLC. Pete wrote up the change and also assured them that it wouldn’t be necessary to list "Karl & Carl Accounting" as an insured as coverage would still apply to eligible incidents involving the previous firm name.

Past officers, directors, partners, stockholders or employees of the named insured or an additional insured are insureds only with regard to professional services performed on behalf of the named insured or additional insured by such persons. They are granted insured status because lawsuits generally name individuals who performed services for the client, along with the firm.

An heir, executor, administrator and legal representative of an insured is an insured but only to allow the professional liability policy to continue to operate in the event of the insured's death, incapacity, or bankruptcy. This protection applies only to liability from professional services previously performed by or for the named insured or an additional insured. Though instances may arise where the professional liability policy would have to protect such a party, the likelihood of coverage is low. It is unlikely that a legal representative, especially an executor or administrator, would be involved with professional services. Chances are the exposure would be handled by a CGL.

INSURING AGREEMENTS

The basic agreement in Accountants Professional Liability policies generally obligates an insurer to respond to claims or suits against an eligible insured that involves professional accounting services (including omissions). Naturally, such services are part of the insured's accounting practice.

Covered damages are defined by a typical form. It limits protection to compensatory damages. Therefore, coverage does not apply to awards involving punitive damages, exemplary damages or treble damages.

Note: It is important to check a given form's definition of "damages" because differences may arise. Some definitions are broader, permitting the policy to respond to punitive damages when required under applicable state law.

Also be aware that Accountants Professional Liability forms may define claim/loss adjustment expenses as damages. In instances where such expenses are mentioned, they are generally defined as amounts that, when paid, reduce the policy’s applicable insurance limit.

CLAIMS-MADE PROVISION

Accountants Professional Liability Insurance is written on a claims-made basis. The following conditions must be met for coverage to apply:

· The negligent act, error or omission happened on or after the policy's listed retroactive date.

Note: Coverage applies even if none of the acts took place during the policy period.

· The insured had no prior knowledge (prior to the inception date of the policy) of such actual or alleged negligent act, error, omission or circumstance. Further, no insured must have had a basis to reasonably anticipate a claim that would be covered by the policy.

Example: Fairtown Bros. Accounting is covered by an Accountants Professional Liability Policy that was issued effective February 1, 2023, to February 1, 2024. A former client sues Fairtown. The firm gets the notice of the suit on May 4^th, 2023. The insurer later denies coverage. The company, during the claims investigation, interviewed the Fairtown receptionist who remembered that, during the firm's Christmas Party in December 2022, a tipsy partner said that he had made a huge mistake on an account and that they better find themselves some coverage.

· The claim is first made against the insured during the policy period.

· The claim is reported in writing to the company no later than 60 days after the end of the policy period. If the insured purchases an extended reporting period at the termination of the policy, claim may be made during that period.

Some carrier’s insuring agreement section includes specific instructions on who should be contacted regarding claims as well as incidents that the insured suspects may, eventually, result in a claim. If such instructions exist, an insured must be careful and prompt to follow them. Failing to do so could affect coverage.

LIABILITY LIMITS

Note: In some independent forms, this section includes the policy’s deductible provision, but it will be discussed separately in its own section.

Accountants Professional Liability Policies are subject to an aggregate limit of liability that appears in the Declarations. This is the total amount of claim expenses, or damages, that the company will pay for all covered claims made during the policy period. They must have been reported no later than 60 days after the policy period or, if applicable, during an extended claim reporting period or both combined.

Example: Accounting Firms A and B each suffer a complex, contentious lawsuit. Firm A’s policy handles legal defense costs separately while Firm B’s policy handles them as part of the policy limits. Both have to pay (after their deductible) $950,000 in damages. They both accumulated defense costs of $700,000. The results of the claim and their insurance coverage are as follows:
Firm	A	B
Limits	$1,000,000	$1,500,000
Deductible	$10,000	$10,000
Total Paid By Insurer	$1,650,000	$1,500,000
Total Paid By Firm	$10,000 (deductible)	$160,000 (deductible and $150,000 in excess of limit)

Defense costs

These are, in general, included within the specified insurance limits. They are a major factor in overall claim expense and a compelling reason for an accounting firm to carry high limits or, if there is an option, cover them as a separate item in order to preserve the policy’s applicable insurance limits.

Example: Knumbers Akkounting Group specialized in small business accounts and it was covered by an Accountants Professional Liability policy with a limit of $300,000. Jamie, one of Knumbers' veteran CPAs, had visited Harshtone Events several times to discuss some business accounting issues for their jointly owned catering firm. Several months later, Mrs. Harshtone sues Jamie and Knumbers. She alleges that Jamie assisted Mr. Harshtone in moving funds from several accounts and hiding the funds prior to filing for divorce. Knumbers' insurer defends the claim and, rather than continuing the trial, they settle for $250,000. The trial and related expenses exceed $70,000 and, since such expenses are handled under the policy limits, the insurer only pays $50,000 of the associated costs. Knumbers has to come up with the remaining $20,000.

Some insurers incorporate a separate limit of liability in their policies for each covered claim in addition to an aggregate limit. Whether or not an "each claim" limit is included, two or more covered claims arising out of a single negligent act, error, or omission, or any series of related negligent acts, errors, or omissions are treated as a single claim.

The insurance limits specified in the Declarations (aggregate and, if included, each claim) are the maximum the insurer will pay regardless of the number of insureds, individuals or organizations that make a claim, or the number of claims that are made.

DEDUCTIBLE

A deductible is stated in the Declarations for each claim, regardless of whether a policy is written with a per claim limit of liability or if it only shows an aggregate limit. It must be paid by the named insured and is applied to the payment of damages and/or claim expenses.

Subject to the deductible provision for each claim, an aggregate deductible provision functions to limit the deductible paid by the named insured during the policy period, to an amount stated in the Declarations.

Mitigation Consideration

Some insurers, as a way to minimize litigation costs, provide an incentive. Specifically, the insurer may substantially reduce or even waive the stated deductible if a loss is handled via alternative dispute resolution instead of a trial.

SUPPLEMENTAL PAYMENTS

Some carriers provide additional coverages as part of their basic policy such as:

Defense Expenses

Under forms that provide a legal defense separately from the policy’s liability limit, the coverage may appear under a supplemental section in order to clearly present the insurer’s obligation.

Disciplinary Activity

This coverage defends the insured against a disciplinary inquiry. Such an incident must be incurred and reported within the applicable policy period (or extended reporting period) and must involve acts or errors that qualify for coverage. The limit provided is usually both a per incident and policy period aggregate.

Reimbursement Expenses

This provision reimburses an insured for expenses incurred with cooperating with the insurer with regard to a claim or lawsuit, including loss of income. Such expenses commonly occur due to having to appear at trials, depositions, hearings or mediation proceedings. Both a daily and aggregate limit usually apply.

Subpoena Expenses

This provision provides a stated limit that handles requests made of an insured to submit documents or testimony related to a lawsuit or claim for damages. This coverage, naturally, includes a responsibility to notify the insured of such a request. Further, the insurer will provide separate, legal counsel to assist with subpoena requests.

EXCLUSIONS

Familiarity with the exclusions in a professional liability policy for an accounting firm is essential for the agent or broker who arranges the protection and for the individual who purchases it. Most exclusions are essential and may not be removed. Some may be modified or additional coverage may be arranged in light of information developed in the application for the policy. Because different carriers have different philosophies, it may be worthwhile to discuss how accounts with some undesired exposures might be acceptably underwritten.

In general, the company will not pay damages or claim expenses for any claim arising out of:

· Any incident that may create a claim, that an insured knew existed before the inception of the policy.

· Actual (or alleged) acts/omissions that an insured knows were wrongful. The exclusion applies whether the act involved an insured or is done at the direction of any insured.

Note: Some policies make an exception and provide for defense of innocent insureds.

· Bodily injury, sickness, disease or death of any person; or injury or destruction of any tangible property, including loss of its use.

Note: Damage to clients’ records is an exception in some policies when such records are in the insured's care, custody, and control in the course of performing professional services for the clients.

· Actual or alleged wrongful hiring or employment practice, humiliation, harassment, misconduct, or discrimination of any kind by any insured, based on but not limited to race, color, creed, national origin, physical or other disability, marital status, age, sex, or sexual orientation.

Note: If there is no provision for deleting this exclusion by endorsement, employment-related practices liability insurance is available.

· Acts related to performing professional services for banks, savings and loans, credit unions and similar financial institutions.

· Any insured's involvement in providing professional services to any entity not named in the Declarations that is owned (wholly or partially) by an insured. Ineligible entities may include a trust or estate. Ineligibility occurs when an insured:

- is an heir, beneficiary, or distributee

-is an officer, partner or employee, or

-to any extent controls, operates or manages the trust or estate.

Note: This exclusion does not apply to professional services in an insured's capacity as a trustee when no insured is a beneficiary of the trust. However, the terminology is governing.

Another group of activities that fail to qualify for coverage under an Accountants Professional Liability Program includes the following:

· Performance of investments, or variations in the market value of any investment

· Personal profit or advantage gained by any insured to which the insured is not legally entitled

· Liability of others assumed by any insured under contract or agreement

Note: This exclusion does not apply to a contractual obligation that would have existed regardless of any agreement.

· Fiduciary activities of the insured under the Employee Retirement Income Security Act of 1974 (including subsequent amendments and related regulations)

Note: Applicable policy wording must be reviewed under this exclusion as some forms make a distinction between fiduciary activities and professional services. The applicability of the exclusion then depends upon how activities and services are defined.

· Notarization of a signature when the signatory has not appeared in person before the insured

· Formation, syndication, operation, sale, or recommendation of private placements, limited partnerships, syndications of any kind, or real estate investment trusts.

· Development, manufacture, sale, or lease of computer hardware or software by the insured

· Discharge, dispersal, release, seepage, migration, or escape of pollutants and compliance with regulatory agency clean up directives

· Nuclear projects, nuclear reaction, radiation or radioactive contamination

· Any claims filed by one insured against any other insured

Note: This exclusion includes claims for wrongful termination of employment and those arising from insider feuds or differences. Such claims are typically covered by Employment Practices Liability Insurance.

Other exclusions in general use apply to:

· Return of or reimbursement for fees for professional services

· Libel or slander

· Claim by any enterprise that wholly or partially controls, manages, operates or holds ownership in any insured at the time professional services are performed

· Insolvency or bankruptcy of an insured

· Claims arising out of professional services relating to or involving any security that must be registered, qualified or reported under any specified federal laws or state laws governing securities transactions

Note: When this type of claim is not excluded, the exposure might be avoided (or at least minimized) by placing a statement in the application that the accounting firm does not perform such work.

· Arising out of allegations of infringement of intellectual property

· Arising out of incidents typically considered to be related to advertising, broadcasting or telecasting that is done for the benefit of any insured

· Arising out of allegations of violations of privacy rights

There may be substantial differences in exclusions found in different Accountants Professional Liability Policies. It is important that the parties involved be familiar with a particular form's provisions. For instance, some forms have additional exclusions regarding an insured making warranties/guaranties, or involvement in peer review, auditing, counseling, professional boards, use of inside information and other activities. Potential disputes can be avoided by making sure the named insured reviews and understands the exclusions. Special attention should be given to any new limitations that take affect in a renewal policy.

DEFINITIONS

Certain terms with special meaning are used repeatedly in accountants professional liability policies. Because of their particular meaning, they may appear in bold face type or quotation marks and then defined in a separate section. They include:

Affiliated Firm─refers to entities that, via written agreement, perform professional services on behalf of the insured.

Alternative Dispute Resolution─refers to mediation or arbitration (non-binding) activities in which an insured participates (with the insurer’s permission).

Claim─meaning a demand for money or services, including service of suit or institution of arbitration proceedings against the insured for damages.

Claim Expenses─meaning fees and other charges by attorneys (designated by the insurer); expenses related to investigation, adjustment, defense, settlement or appeals; and premiums for appeal bonds required with respect to covered claims. Related prejudgment interest and taxes also qualify as claim expenses.

Note: The term does not include salaries of insurance company employees or officials that, conceivably, could have an impact on the insured's limit of liability.

Covered Act─meaning an action, allegation, error or omission involving the professional services provided by the named insured.

Crises (or Crises Event) ─meaning any wrongful act committed or allegedly committed by the named insured which creates adverse public reaction that harm the insured’s business reputation.

Damages─meaning any amount an insured is legally obligated to pay as a result of a covered claim, including judgments and settlements. It does not include punitive damages, exemplary damages, or treble damages (unless coverage is required under applicable state law), sanctions, fines, or penalties (except for assessments against clients of the insured by the IRS or any state or municipal tax authority), payment for professional services (including the return, withdrawal or reduction of fees paid to the insured).

Insured─meaning the named insured and any additional insured named in the Declarations. It also includes past or present officer, director, partner, stockholder or employee but only for professional services performed within the scope of duties on behalf of the named insured or an additional insured. If a named or additional insured dies, becomes bankrupt or incapacitated, its heirs, executors, administrators and legal representatives are insureds but only with respect to liability arising out of professional services performed by or on behalf of the named insured or an additional insured prior to such death, incapacity or bankruptcy.

Named Insured─meaning the entity or individual named in the declarations.

Personal Injury─meaning incidents such as detention/imprisonment, false arrest, wrongful eviction or entry, invasion of privacy, libel, slander, distribution of material alleged to hurt another entity’s reputation.

Policy Period─meaning the period from the effective date of the policy to the time the policy either expires or is terminated, whichever is earliest.

Predecessor Firm─meaning an accounting-related business that is no longer in operation but from which over half of the current named insured’s revenue was derived or over half of the current named insured’s employees were employed.

Professional Services─meaning services performed for others in the insured's capacity as an accountant or notary public. The term generally applies to the notary public function because the certification of signatures on financial reports and other accounting documents is crucial to an accounting firm's operation.

Subsidiary─refers to an entity that an insured holds an ownership percentage exceeding 50% when that entity provides eligible professional services.

Suit─meaning a civil proceeding that occurs in a court of law.

CLAIMS REPORTING CONDITIONS

An insured must quickly report any claim to the insurance company. The notice must include every demand, notice, summons, or other pertinent information received by the insured or its representative.

Accountants Professional Liability Policies (in general) provide exceptional protection for possible claims that could arise from conditions of which the insured becomes aware. If the insured gives notice (of such concerns) during the policy period, within 60 days after expiration, or during an extended claims reporting period, any subsequent claim arising out of the identified act, error or omission is considered to have already been reported. The insured must have first become aware of a possible claim during the policy period or extended claims reporting period, if any. The insured's notice to the company must include key information such as:

· The potential claimant’s name and address

· A description of the professional services provided or that allegedly should have been provided

· An explanation of the belief that claim may be made and the date when the insured first became aware of the possibility of claim

· Explanation of the type of claim anticipated

GENERAL CONDITIONS

Accountants Professional Policies typically include the following provisions that, for the most part, are similar to those found in a standard CGL: However, there are some provisions that differ from a CGL, so it is always important to review a given policy’s specific conditions to be certain what applies.

Assignment – Policy assignments may only be made with the carrier’s prior, written permission.

Example: Fairtown Bros. Accounting is covered by an Accountants Professional Liability Policy. Both of the Brothers decide to retire, so they sell the firm to a group of their employees who rename the firm “New Crew Accounting.” The Brothers also give the new owners a signed statement declaring that they have officially turned over ownership of their professional liability policy to the new owners. However, their insurer is never notified of the change. The policy is no longer valid because it does not show the correct insured.

Bankruptcy – An insured’s bankruptcy does not affect the insurance company’s policy obligations.

Cooperation – This provision requires an insured to notify insurer regarding situations that may create a claim/loss and to send any and all relevant paperwork to the insurer (such as notice of claim, suit, summons, etc.). Notification must be timely and in writing. Further, insured must be willing to help with all areas requested by the insurer, including providing testimony, attending dispositions and hearings and participate in other areas to handle a claim or resolve a dispute.

Declarations and Application – This provision explains that, since the insurer relies heavily upon the information supplied by the insured, that all insureds under the policy are bound by the information provided in the application and declarations.

Deductible – The amount that appears as the applicable claim deductible is the maximum amount the insured is obligated to pay except when a loss exceeds what is available under the policy.

Endorsements (Changes) – The policy’s general conditions are not affected unless a written change is accepted and applied to the terms.

Liberalization – The applicable policy will automatically receive the benefit anytime the insurer adopts program-wide changes that broaden coverage but only when such changes do not involve additional premiums.

Legal Action – An insured may not take legal action against the carrier until the insured fulfills any and all required policy conditions regarding disputes.

Note: It is common in professional liability policies to require that, before legal action takes place, a judgment or settlement that determines the insured’s obligation to pay a loss must occur.

Premium – Determined according to carrier’s applicable rules, rates, plans, discounts, surcharges. The insured is responsible, when necessary, for premium audit purposes to keep relevant records and to share such information when requested by the insurer.

Conformity to Statute – This provision allows the policy to automatically comply with the requirements of any given jurisdiction.

Other Insurance – This condition explains that, when other sources of coverage apply to a given occurrence, this policy acts as excess coverage. However, when other coverage exists and the other coverage also has an excess provision, then each policy will respond to an eligible loss on a pro-rated basis. When this policy is allowed to act as excess protection, the carrier does not have to provide any assistance with a legal defense, unless it chooses to do so.

Subrogation – This condition allows the insurer to assume an insured’s legal right to secure recovery from any party that may bear total or partial (financial) responsibility for any payment made by the insurer. The insured is obligated to make sure nothing is done to harm the insurer’s rights.

Termination – This provision explains the circumstances under which either the insured or the carrier may terminate coverage, either via cancellation or allowing a policy to expire without renewing coverage. Typically, state termination laws supercede the stated policy provision. A given number or days and process of mailing apply to various, specified conditions, particularly nonpayment.

Voluntary Payments – This provision bars coverage or reimbursement of payments that an insured makes without the knowledge and consent of the insurer. It also prohibits an insured from making unauthorized agreements regarding damage claims related to either lawsuits or alternate dispute resolution.