You’re great with numbers, right? So, how do you know if the price you’re paying for professional liability insurance actually adds up? It’s easy to focus on the final number at the bottom of your insurance quote, but when it comes to ensuring that your work is properly protected, it’s not just about paying the cheapest price.
What matters is what that policy will do for you if something goes wrong down the road. Errors and omissions insurance for accountants helps protect your business, your reputation, and the future of your business from costly claims. It’s a safety net that will help keep your business growing with confidence.
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Errors and omissions insurance, also called professional liability insurance, is designed to protect you when something goes wrong with your work, even if it wasn’t done on purpose. For accountants, that means it provides coverage for things like missing a filing deadline, a miscalculation, a misunderstood tax law, or even providing advice that ends up costing your client money.
This kind of insurance comes into play when a client claims that your mistake caused them a financial loss. It helps cover legal defense costs, settlements, or judgments that could come from a lawsuit.
Whether you’re a CPA, bookkeeper, or accounting consultant, professional liability insurance is customized to meet the unique risks of your profession. It gives you the confidence you need to do your job, knowing that if a costly incident occurs due to a human mistake, your business won’t suffer as a result.
Most policyholders pay an average of $61/month($732/year premium). That cost can vary based on what you do, where you work, and who your clients are. If your firm handles high-value accounts or provides complex services, your premium may be higher than average.
You’ll usually have the option to pay monthly or annually, depending on the insurer that you choose. Several factors can influence the amount you pay. Factors such as your business location, the size of your firm, the services you offer, and whether you’ve had past claims all play a role. Even if your business is on the lower-risk side, it’s still important to carry this insurance, because just one unhappy client could cost a lot more than a full year’s premium.
A low premium might grab your attention, but it’s worth digging deeper to see what you’re actually getting. Not all professional liability policies offer the same level of protection, even if they look similar on paper.
Most errors and omissions insurance for accountants includes coverage for legal defense, settlements and judgments tied to claims of professional mistakes. But here’s a critical detail to consider: Are your defense limits included inside or outside your policy’s liability limits?
Defense limits are often included inside a policy’s liability limits. Whether or not you buy them as part of a professional liability policy or as an add-on, your defense limit is the maximum amount you have available to cover defense costs.
If defense limits are inside your overall policy limits, the maximum amount you have to spend on defense costs is often less than it might be if you chose to buy your defense limits as an add-on to your professional liabilty policy.
What’s key when looking at the protection a potential policy could provide is whether it aligns with your risk exposure, not only from a profitability standpoint, but by considering the net worth of the clientele you serve.
It’s smart to think about who you work with when you’re choosing your professional liability insurance coverage. If your clients have a lot to lose, than you do too.
High net worth clients, like business owners or wealthy individuals, often have more complex financial needs than the average person, and if something goes wrong, the potential lawsuit could be very large. Even if you did everything right, defending yourself against a high-value claim can still cost thousands of dollars.
That’s why it’s important to choose policy limits that match the financial level of the clients you serve. A higher limit gives you more room to cover legal fees, settlements, or judgments if something goes wrong.
For example, if you manage taxes for a profitable small business or provide advice for a high-earning family, it’s worth looking into a policy that goes beyond the minimum coverage amounts. This will give your business better security, and it will give your clients the confidence that you’re fully covered.
When you’re buying a policy, it can be challenging to visualize how much coverage you’ll need. From the common beliefs that small accounting businesses like yours don’t get sued or that you don’t make mistakes, at least not ones worth going to court over, it can be tough to put your mind to the matter of buying a policy that truly fits. The good news is, you can always take your limits up or down as you business needs change.
However, as you consider the amount of wealth you manage and what your policy truly needs, it can be helpful to put yourself in a “worst-case scenario” and read some real-life instances of claims against financial advisors. So, we’re going to do just that.
Imagine this: three of your biggest clients claim your advice caused them financial harm. Maybe a tax strategy didn’t go as planned, or a filing error triggered an audit. Now you’re facing legal action from all three at once.
The cost to defend those claims could add up fast. You may be looking at tens of thousands of dollars in attorney fees, plus potential settlements or judgments. Even if you’re cleared from this claim, the stress, time, and money involved can take a real toll.
This is precisely why professional liability insurance is crucial. A well-built policy helps cover legal defense and any potential payouts that come from the claim, so that you’re not stuck trying to pay out of pocket.
When you consider it that way, the annual premium is small compared to the potential cost of being underinsured. If you’re running a business, it’s crucial to ensure your coverage reflects the real risks involved, not just the best-case scenario.
Consider this real-life case study, and imagine how you would feel in this situation knowing insurance had your back.
“An accountant prepared annual income tax returns for an individual. The client changed jobs and asked the accountant about the rules for rolling over an existing traditional Individual Retirement Account into her 401(k) plan with her new employer. The accountant advised her to seek a direct rollover from the IRA to the new plan.
The client instead received a check when she closed out the IRA account. The client did not deposit it to the 401(k) account in a timely manner. As a result, the entire distribution was treated as ordinary income tax and a 10% premature distribution penalty was incurred.
The client subsequently made a claim against the accountant, alleging that he failed to advise her of the rules regarding both direct and indirect rollovers of IRA distributions, and that she would not have chosen an indirect rollover had she been advised of these risks.
While the accountant alleged that their discussion revolved around completing a direct rollover and that the client was properly advised of these rules, he had no notes from the conversation and there were no letters or e-mails evidencing the advice provided to the client.
Settlement Amount:
A portion of the $20,000 in taxes and penalties incurred by the client”
verHound Tip: As you start to consider the reality of how much coverage you actually need, it’s always best to consult with a trusted insurance broker, especially if you’re doing this for the first time. Don’t hesitate to call one of our advisors at (866)278-7881 for a free consultationn.
Professional liability insurance is a very important part of protecting your work, but it’s not the only way insurance can help. Professional liability does not cover accidental bodily injury or property damage, customer data or client information, employment practices, or sick or injured workers. That’s where a few other types of insurance coverage can provide the extra protection you may need.
If you store or send client info online, cyber insurance can help if there’s a hack, data breach, or tech-related issue that puts that information at risk.
If clients visit your office, general liability insurance helps cover accidents, such as someone slipping on a wet floor or you breaking an item at their location.
And if you have employees, workers' compensation can be beneficial in the event of an on-the-job injury or illness.
These aren’t a part of errors and omissions insurance, but they can often be just as important. Together, they provide you with comprehensive protection and the peace of mind to stay focused on running and growing your business.
At the end of the day, professional liability insurance isn’t just another business expense; it’s protection for the work you’ve built and the clients who rely on you. The right policy should reflect how you operate, from the services you offer to the level of risk you’re willing to take on.
Understanding details like coverage limits, deductibles, and whether defense costs count against your policy limit can make all the difference. And with a trusted partner like CoverHound, it’s easy to compare quotes from over a dozen A-rated carriers and find coverage that fits, without the guesswork. Get your hassle-free quote in just five minutes today.
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