$1M Professional Liability (E&O) Insurance for Bookkeepers

If a client contract asks your bookkeeping firm for $1M in Professional Liability (E&O), the policy may pay when a bookkeeping mistake causes a client a financial loss, up to $1M per claim.

What does a $1M requirement mean for bookkeepers?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your work caused a client a financial loss. A typical clause looks like this:

• Per claim: the most the policy pays for any one claim. Here, $1M.
• Aggregate: the most the policy pays for all claims in one policy year. Here, $2M. A $1M/$1M policy would not meet this clause. A $1M/$2M policy would meet the limit amounts in this clause. Check the other terms too, such as the post-contract coverage period.
• Claims-made: the policy covers claims made and reported while it is active, for work done on or after the retroactive date (the earliest date of work the policy covers). See claims-made vs occurrence.
• The listed services: your policy should describe every service the clause names. If the contract lists payroll and your application only says bookkeeping, that is a gap.

Who asks bookkeepers for $1M?

A $1M request often comes in a written agreement from larger or more risk-aware clients, such as:

• Growing companies handing off month-end close, payables and receivables to an outside firm.
• CPA firms subcontracting client write-up or cleanup work.
• Franchise groups, property managers and medical practices outsourcing reconciliations across several locations.
• Nonprofits outsourcing bookkeeping and grant tracking.

Larger or multi-entity engagements may ask for more (see $2M Professional Liability for bookkeepers).

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first). Excess layers (extra policies stacked above it) are rarely needed at this level. A commercial umbrella almost never covers Professional Liability. Bookkeepers who are not CPA firms often buy Miscellaneous Professional Liability (a form built for service businesses) or a bookkeeper-specific Professional Liability form, depending on the carrier and services. CPA firms usually buy Accountants Professional Liability.

Clients usually cannot be added as an additional insured (a party named on your policy who gets its protection). Many clients accept a certificate of insurance (a one-page proof of coverage). Morrow can review the contract against your policy. A review may catch a service left off the policy, a low aggregate, or wording that limits coverage for penalties and interest. Theft of client funds is often excluded and handled by a separate crime policy or bond.

What will underwriters ask for?

An underwriter is the insurer's decision maker on coverage and terms. For a bookkeeping firm, they often ask for:

• Your revenue split by service: bookkeeping, cleanup work, payroll processing, bill pay, sales tax filings and any tax preparation.
• Whether you have access to client bank accounts, approve or send payments, or remit payroll taxes for clients.
• Client count, your largest client's share of revenue, and the industries you serve.
• Whether you use signed engagement letters that define your services.
• How work is reviewed and how you track payroll and filing deadlines.
• Prior claims, fee disputes, possible claims, and your current policy and retroactive date.

What affects the cost?

• Service mix. Payroll, bill pay and tax filings usually cost more to cover than basic bookkeeping, because one error can be larger.
• Revenue and client size. Larger clients and bigger engagements mean bigger possible losses.
• Controls. Engagement letters, a second review and limited payment authority may help.
• Claims history. Prior claims can raise the price or narrow your options.
• Aggregate, retention and defense terms. $1M/$2M usually costs more than $1M/$1M. A higher retention (the amount you pay on each claim before the policy pays, similar to a deductible) usually lowers the premium.

Frequently asked questions

Do I need $1M Professional Liability as a bookkeeper?

It depends on your contract: some clients and CPA firms ask for it in the engagement agreement, so check yours. Hypothetical claims: a payroll tax deposit is posted to the wrong period and the client is charged penalties, or a lender relies on monthly statements that overstate income. A policy may pay for your defense on a covered claim, subject to the retention and limit.

Is $1M/$1M enough if my contract says $1M/$2M?

No, a $1M/$1M policy would not meet a $1M/$2M clause. Request new quotes for a $1M/$2M policy. Morrow can request them for you and ask insurers to keep your retroactive date and prior acts coverage (coverage for past work done before the new policy starts) where the market allows. Start the new policy by the contract's required date, and keep your current one in force until then. Report anything that could become a claim to your current insurer before that policy ends.

Am I covered for past work if I close my bookkeeping practice?

Usually not, unless you buy tail coverage. A claim first made after a claims-made policy ends is generally not covered. An extended reporting period (a "tail") gives you extra time to report claims about past work. It usually must be bought soon after the policy ends. See tail coverage for Professional Liability.

This article is general information, not legal advice or a coverage determination. Coverage depends on the actual policy wording, carrier underwriting and your contract terms.