What New CPAs Need to Understand About Professional Liability Insurance

What New CPAs Need to Understand About Professional Liability Insurance
March 3, 2016 Pearl Insurance

What New CPAs Need to Understand About Professional Liability Insurance

As a CPA, your career will revolve around your clients’ financial losses and gains. If you make any mistakes that cost your clients money, their response may cost you, too. In fact, clients may file claims even if you aren’t responsible for any wrongdoing. Professional liability insurance is your best defense against the financial and professional consequences of legal claims.

Reasons to Get Professional Liability Insurance

If you don’t understand why you need professional liability insurance, you won’t be able to make an informed decision about your policy. As you advance in your accounting career, make sure you know exactly what kind of coverage you need.

Legal Requirements

Some states require CPAs to secure professional liability insurance. If you work in a state with ethical or professional standards that require insurance, you must secure coverage that meets these specific standards.

Common Causes of Legal Liability

Every accounting firm faces a variety of risks. However, some services and circumstances increase these risks. Common areas of concern include:

  • Merging with another firm—When you acquire another firm, you take on their risks.
  • Data protection—You’re responsible for securing your clients’ confidential data by preventing criminal and accidental breaches.
  • Engagement documentation—Protect yourself against future claims with a signed engagement letter that outlines your services, then update it and have your client sign the new version every year.
  • Fraudulent activity—You may be sued if your firm, your client’s company, or a criminal is responsible for theft.
  • Wealth transfer—When a client’s estate is transferred to a beneficiary, this third party may sue you if they’re unhappy with the amount they receive.

Details of Your Insurance Coverage

What does professional liability insurance cover? Your policy’s details will heavily depend on the type and amount of coverage that you choose to purchase, but you can expect some basic benefits and exceptions from any policy.


Some services and clients increase your risk of receiving a claim. Professional liability insurance may protect you from the following risks:

  • Tax mistakes—Tax claims are the most common and devastating claims for CPAs.
  • Clients who become friends—Claims can destroy any longtime client-CPA relationship, even if your client is a personal friend or has been loyal for years.
  • Unfounded claims—Even if you manage to make zero mistakes, disappointed and litigious clients may file unfounded claims that take time and money to disprove.
  • Losing personal assets—If you don’t have coverage, you may lose personal assets as a result of high defense expenses and damages.


Intentional criminal acts are not protected by professional liability insurance. Your policy period also affects your eligibility, so make sure you know when your coverage takes effect and ends.

How to Handle Claims

Your liability insurance will protect you from most claims of negligence. However, even if the wrongful act is covered, the claim itself must meet certain requirements in order to qualify.

Reporting New Claims

Report all claims immediately to ensure that your coverage will apply to any damages incurred because of them. You must also report any mistakes or errors that may prompt your clients to make claims in the future.

Revisiting Past Services

Work you completed in the past may result in future claims. Your policy may or may not cover prior acts, but even if it does, you must have continuous coverage to qualify. Don’t allow your policy period to expire unless a new period will begin immediately.

Securing Representation

Your professional liability policy will detail your insurance provider’s obligations to you. In many cases, they secure your legal defense and assign experts to handle your claims and provide expert consultations.

Obtaining Your Policy

How much coverage do you need? How should you apply for coverage? Your insurance provider or broker can help you understand the risks and costs associated with each policy.

Determining Your Premium & Deductible

The lower your premium, the higher your deductible. If you provide services that carry a low risk of claims, it doesn’t necessarily mean that a lower premium is the best idea. You should also consider the average amount of money that possible settlements could require. Similarly, if claims are likely, but the monetary requirements are relatively low, you may not need a policy that covers huge expenses.

Applying for Coverage

As a new CPA, don’t expect to understand every detail of the application process. Consult your broker or insurance provider, ask plenty of questions, and never submit an application unless you’re completely confident that you made the right financial decision. Do exactly what you’d tell your clients to do: minimize your risks by making an informed decision that reflects your specific job responsibilities and budget.

Protect Your Accounting Firm & Career With Professional Liability Insurance

Because your services allow your clients to meet their financial goals and accurately assess their next steps, you may be held responsible for any financial losses that you caused or failed to prevent. Pay careful attention to the decisions you make on your clients’ behalf, the advice you give, and the type of liability coverage you obtain to soften the blow of significant errors.