Do Accountants Have Malpractice Insurance?

Providing financial services, such as tax preparation, auditing, or consulting, inherently carries the risk of errors or omissions. Professional liability insurance offers a safeguard for accounting professionals and their firms against claims arising from their services.

Understanding Professional Liability Insurance for Accountants

Professional liability insurance (PLI), often called errors and omissions (E&O) insurance, is a specialized coverage designed to protect accountants and accounting firms. It provides financial protection against claims of negligence, errors, or omissions that occur while providing professional services. This insurance is distinct from general business liability insurance, which covers physical injury or property damage, such as a client slipping in an office.

PLI addresses financial damages that may result from professional mistakes or alleged failures in duty. For instance, if a client experiences a financial loss due to a miscalculation in tax preparation or incorrect financial advice, PLI can help cover the resulting legal costs and potential settlements. This coverage protects against significant financial repercussions that can arise from even an unintentional professional oversight.

Why Accountants Carry Professional Liability Insurance

Accountants work with sensitive financial data and provide advice with substantial financial implications for their clients. The complexity of financial services, including tax law and auditing regulations, creates a constant potential for human error. Even competent professionals can make mistakes, such as a missed filing deadline or a miscalculation, which could lead to a client incurring penalties or financial losses.

This insurance serves as a financial safeguard, protecting the accountant’s assets and business from costly lawsuits. For example, a client might allege negligence if an error in their financial statements leads to complications when seeking business loans. Even if a claim is without merit, the legal costs to defend against it can be substantial, potentially reaching tens of thousands of dollars. Professional liability insurance helps absorb these defense costs, allowing accountants to continue their practice.

Common Coverage and Exclusions

Professional liability insurance for accountants covers legal defense costs and any settlement or judgment amounts for covered claims. These claims stem from alleged negligence, errors, or omissions in the professional services rendered. Examples of covered scenarios include errors in financial reporting, incorrect tax advice leading to penalties, or failures in audit procedures. The policy may also cover claims related to misleading information or breach of duty.

However, this insurance has specific exclusions. It does not cover intentional wrongdoing, fraudulent acts, or criminal activities. Claims involving personal injury or property damage, which fall under general liability insurance, are also excluded. Professional liability policies do not cover employment-related claims, such as wrongful termination or discrimination, nor do they cover data breaches or cyberattacks, which require separate cyber liability insurance.

Considerations for Clients

For clients engaging an accountant, understanding professional liability insurance is an important aspect of due diligence. While not universally mandated by law, an accountant carrying this insurance provides an additional layer of protection and peace of mind. It signifies that the accountant is prepared for unforeseen professional errors and has a mechanism to address potential financial harm to clients.

Clients can inquire about an accountant’s professional liability insurance as part of their initial vetting process. This inquiry helps ensure financial recourse is available in the rare event of a professional mistake leading to a loss. Knowing an accountant is insured can foster greater trust and confidence in the professional relationship.