Bought an Accounting Firm? First Insurance Checks

Professional liability is usually the first policy to check, and the detail to look at before anything else is its retroactive date: the earliest work the policy covers. It answers a claim that a return, financial statement or filing was wrong or late. Cyber, crime, property with business income sized for tax season, general liability and workers' compensation round out the core set. This guide is for someone who just bought a certified public accountant (CPA), tax preparation, bookkeeping or payroll practice and inherited the seller's policies.

The short answer

The core stack is professional liability (also called errors and omissions), cyber, crime, property with business income, general liability, workers' compensation and, where staff is large enough to matter, employment practices coverage.
Professional liability usually covers only claims made while the policy is active, and only for work done after its retroactive date (the earliest work it covers). A new policy that starts the day you close may not cover returns the seller prepared. A tail (extra time to report claims on the old policy) or a new policy that keeps the old date can close that gap, depending on who is insured and what carriers offer.
A general liability or businessowners policy is not the policy that answers a "you got my return wrong" claim. A businessowners policy is generally written to exclude professional services, so that claim belongs under professional liability.
In the first weeks, confirm the named insured, the retroactive date, any claim or circumstance notices, the workers' compensation ownership change report and what the lease and your lender require.
Insurance does not replace clients who leave when the selling owner does. That is a business risk, not an insured one.

Which policies does an accounting or tax firm need?

An accounting practice has no fleet, no chemicals and no product. Its real exposures are professional errors, client data, money and the lease. The table maps each exposure to the policy that normally answers it. Forms vary by carrier, so use it as a checklist, not as a statement of what yours covers.

Coverage by exposure for an accounting and tax firm
What goes wrong	Policy that usually answers	What to confirm
A client says a return, statement or filing was wrong or late	Professional liability, also called errors and omissions (E&O)	Claims-made trigger, retroactive date, and exclusions for fraud, intentional or criminal acts, bodily injury and property damage
Thieves reach client files, or ransomware locks them	Cyber liability	Whether it exists at all, and what it pays for breach response and lost income
A staff member or a fraudster moves money	Commercial crime	Employee theft of clients' property, and any social engineering option, if the firm handles client funds
A pipe bursts and the office is closed in March	Property and business income, often in a businessowners policy (BOP)	Waiting period, any electronic data limit, records coverage, and how income is measured and for how long (the form decides)
A visitor trips in the lobby	General liability	Premises and operations only. Professional services are a different policy, so check the wording
An employee is hurt on the job	Workers' compensation	State rules, class code and the ownership change report
Staff say they were not paid overtime or were treated unfairly	Employment practices liability (EPLI)	Claims-made terms and how wage and hour claims are treated
A preparer drives a personal car to a client	Hired and non-owned auto	Usually an endorsement, not automatic

Pages on professional liability and cyber liability explain each line in more detail, and the accountants and bookkeepers insurance page gives the general overview.

Does the seller's professional liability policy cover work done before I closed?

Not automatically. The seller's policy insures the entity named on it, so the answer depends on the deal.

Stock or membership interest purchase: that entity is now yours, so its policy and any tail still matter. Many claims-made policies have a change in control clause that can limit coverage to work done before the transaction, put the policy into run-off or end it.
Asset purchase: the seller's entity usually keeps the policy, and a tail bought for it protects that entity and the people it names.

Whether you are protected for the seller's past returns depends on the wording and on what the purchase agreement says.

Professional liability is usually claims-made, which means it responds to a claim made while the policy is in force, for work done on or after its retroactive date (the earliest date of work the policy covers). Many forms also require that the claim be reported, not only made, in the policy period or an extended reporting period. If your replacement policy sets its retroactive date at your closing date, a claim about a return the seller prepared last year is not covered by it. Two common fixes are a tail (an extended reporting period) on the old policy and a new policy that keeps the old retroactive date, often called full prior acts. Which one is available depends on who is insured, the deal structure and what carriers will offer.

Timing makes this a long-running question. The Internal Revenue Service (IRS) can generally assess more tax within 3 years after a return is filed, within 6 years if a large amount of income was left out, and at any time if no return was filed or the return was fraudulent. A client who gets an exam notice years later may look to whoever prepared the return. Whether that can reach the firm that now holds the practice depends on the deal structure and the facts, so ask deal counsel.

A hypothetical example. Four months after closing, a small business client says the prior owner missed a deadline on an S corporation election, leading to penalties and higher tax. The client asks the firm to reimburse the cost. The buyer's new professional liability policy shows a retroactive date equal to the closing date. Whether anything responds turns on prior acts terms, any tail the seller bought and the exact wording. The lesson is to ask about the retroactive date before closing, not after the letter arrives.

Read prior acts and tail coverage after an acquisition for the mechanics, and occurrence vs claims-made for the basic difference.

What should I confirm in the first weeks, and what has a longer deadline?

Work through this list in order. It takes documents, not guesswork.

Named insured. Check that every policy names the entity that now owns the practice, not only the seller. See wrong named insured after an acquisition.
Professional liability. Get the declarations page, the endorsements, the retroactive date, any tail terms and every claim or circumstance notice the firm has ever filed.
Loss runs. Ask each carrier for them, and look for open matters tied to prior-year returns.
Cyber and written security plan. The Federal Trade Commission (FTC) Safeguards Rule lists tax preparation firms among the businesses it covers. Ask whether a written information security plan exists and whether the cyber policy matches it.
Workers' compensation (within 90 days). Under National Council on Compensation Insurance (NCCI) rules and many state versions, the ownership change must be reported to the insurer within 90 days. See the workers' comp and payroll guide for accounting and tax firms.
Lease and contracts. Compare the lease's insurance clause with the certificates on file. The contracts, licenses and bonds guide covers what must be reissued at a sale.
Who signs returns. Confirm that each preparer who will sign holds a current Preparer Tax Identification Number (PTIN) and the credential the work needs, and start the IRS e-file application or update. The IRS e-file number cannot be sold, and the contracts guide explains which one applies.
Lender terms. Under Small Business Administration (SBA) Standard Operating Procedure (SOP) 50 10 8.1, lenders must write insurance requirements into the loan terms, and for a change of ownership loan the credit memo has to address life insurance and business hazard and liability insurance. A practice has few hard assets, and SBA hazard insurance is not required where the business's assets have a full replacement value of $50,000 or less on a loan of $500,000 or less. Ask the lender in writing what it will require.
Renewal dates (any time, but before the next busy season). Note which policies renew near the filing deadlines, so a renewal does not land in the middle of the busiest weeks.

What would a one-owner program miss once I take over?

The seller's broker may have built a sensible program for a solo owner. A buyer with a lender, investors or a larger staff has different needs, so the question is fit, not fault. Three differences to check first:

Limits. A limit that suited one owner and a few preparers may be thin once seasonal staff prepare many more returns under the firm's name.
Cyber and client money. Some small programs have no cyber coverage, or sublimit it well below the main limit. A firm that does payroll or bookkeeping and touches client bank accounts may need crime coverage written to include clients' property, not only the firm's own money. Ask the broker whether the form offers it.
Seasonal staff. Temporary preparers can change workers' compensation payroll and employment practices exposure.

The coverage gaps guide for accounting and tax firms owns the detail on how to spot each gap and fix it.

How does the deal structure change which policies I need?

In a stock or membership interest purchase the legal entity stays the same, so its policies, claims history and unknown liabilities stay with it. Check each claims-made policy for a change in control clause before you assume it carries on. In an asset purchase, rights under a policy generally cannot be transferred to you without the insurer's written consent (rules for older occurrence policies vary by state), so your own professional liability, cyber and crime policies need to be in force at closing. Either way, you keep the same clients, staff and office and file next year's return for people the seller served, which is why counsel looks at "mere continuation" (courts look at whether the buyer keeps the seller's name, location, staff, services and management, and some also require the same owners). Your deal counsel decides how that applies to you.

For an accounting practice, this makes professional liability the first policy to place and the last to leave unresolved. Read asset purchase vs stock purchase and who covers old claims in a stock or asset deal before you settle on what to buy. The pre-closing list in the insurance checklist for buying a business also applies.

What will insurance not do for my practice?

Two risks that worry buyers of a practice sit outside property and casualty insurance. First, client retention: if the selling owner retires and clients do not return, no policy pays for that. Practices are often owner dependent, so losing one or two relationships can move revenue faster than any insured event. Second, key person risk: life or disability coverage on the owner or a key staff member is a different product, and a life insurance specialist or benefits advisor is the right person to ask. Morrow focuses on business property and casualty insurance, so it can flag where a lender asks for life coverage but not place it.

One step that does help: send the declarations pages, loss runs and lease to a broker for a gap review before the next busy season. Morrow can review inherited policies, flag gaps and request quotes, and any new terms depend on carrier underwriting. A quote is not coverage until a carrier binds it.

Keep reading

Frequently asked questions

Do I need professional liability insurance if I bought a small tax preparation practice?

Many buyers choose to, because it is the policy that answers a claim that a return or filing was wrong or late. The amount is a judgment call that lenders, landlords, client contracts and your own risk tolerance can shape, so check your loan documents and any engagement terms.

Does general liability cover a mistake on a client's return?

It is not the right policy for that claim. General liability responds to injury or damage from premises and operations, such as a visitor who falls. A businessowners policy that packages it is generally written to exclude professional services, so a wrong-return claim belongs under professional liability. Check your own wording.

What is a retroactive date and why does it matter after I buy?

It is the earliest date of work a claims-made policy covers. If your new policy starts its retroactive date on the closing date, claims about returns the seller prepared earlier are not covered by that policy. A tail on the old policy or a new policy that keeps the old date can close the gap, depending on who is insured and what carriers offer.

Does cyber insurance come with professional liability?

Often not. Professional liability policies commonly exclude data breaches and cyber incidents, though some forms add limited extensions. The IRS tells preparers to ask their carrier about data theft coverage, so read the policy wording rather than assuming.

Can I keep using the seller's insurance policies after closing?

Not safely without checking. A policy insures the entity named on it, and in an asset purchase its rights generally cannot be transferred without the insurer's written consent. Ask the carrier and your broker what happens at closing, and keep a policy in force until its replacement is confirmed in writing.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

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