$1M Professional Liability (E&O) Insurance for Business Tax Preparers

For business tax preparers whose client asks for $1M, Professional Liability (E&O) at $1M means a policy that pays up to $1M per claim, and the contract may also set the yearly aggregate.

What does a $1M requirement mean for business tax preparers?

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.
• 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). Returns you filed in past seasons may be covered only if the retroactive date goes back far enough. See claims-made vs occurrence.
• The listed services: your policy should describe every service the clause names. If the contract lists payroll tax work and your application says only tax preparation, that is a gap.

See also Professional Liability limits explained.

Who asks business tax preparers for $1M?

The $1M request usually comes from:

• CPA and accounting firms that send business returns to outside preparers.
• Mid-sized companies outsourcing their income tax, payroll tax or sales tax filings.
• Multi-location groups, such as franchise owners, with several entities to file for.
• Outsourced finance and fractional CFO firms that bring you in for tax work.
• Larger clients with many entities or states. Some ask for $2M per claim instead of $1M, a higher limit with its own underwriting (see $2M vs $1M Professional Liability for business tax preparers).

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first). Excess layers (extra policies above it) are rarely needed. CPA firms, non-CPA preparers and enrolled agents (tax pros licensed by the IRS) usually buy a tax preparer or accountants' Professional Liability form. A Miscellaneous Professional Liability form is sometimes used for work such as bookkeeping or consulting.

A commercial umbrella almost never covers Professional Liability. Clients usually cannot be added as an additional insured (an extra party named on your policy). Many clients accept a certificate of insurance (a one-page proof of coverage). It is proof only and does not change the policy.

What will underwriters ask for?

An underwriter is the person at the insurer who decides whether to offer coverage and on what terms. They usually ask for:

• Your revenue split by service: business returns, payroll tax, sales tax, bookkeeping and advisory work.
• The business returns you file, how many, and how many cross state lines.
• Staff credentials, such as CPA or enrolled agent, and how you train seasonal help.
• How you track deadlines and extensions, and whether a second person reviews each return.
• Whether you access client bank accounts or make tax payments for clients.
• Engagement letters, prior and possible claims, and your retroactive date.

Some insurers restrict or exclude payroll tax and client fund-handling work. Morrow can check this when it requests quotes.

What affects the cost?

• Service mix. Payroll tax work, planning advice and multi-state filings usually cost more to cover than basic business returns.
• Revenue and client size. More entities mean bigger possible losses.
• Controls. Engagement letters, deadline tracking and second reviews 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 first, like a deductible) usually lowers the premium (the price of the policy).

Frequently asked questions

Do I need $1M Professional Liability as a business tax preparer?

Only if your contract or client asks for it, but many business clients do. Hypothetical examples of claims: a preparer misses an extension deadline for a partnership client, and the client pays penalties and interest. A payroll tax deposit is filed for the wrong quarter. A client says your advice on a large purchase cost it money. The policy may pay your defense on a covered claim, and those costs may reduce the limit.

Does Professional Liability pay the penalties themselves?

Sometimes, depending on the policy wording. Many policies cover a client's claim against you for penalties and interest caused by your error. Some limit or exclude it. Fines charged directly to you may not be covered, so check the policy wording.

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

No, a $1M/$1M policy does 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 work you did before the new policy starts) where the market allows. Keep your current policy in force until the new one starts. Report anything that could become a claim to your current insurer before that policy ends.

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.