$1M Professional Liability (E&O) Insurance for Business Valuation Firms

For business valuation firms, a $1M requirement means your Professional Liability (E&O) policy must pay up to $1M per claim, and some clauses also ask for a $2M aggregate.

What does a $1M requirement mean for business valuation firms?

Professional Liability (E&O, short for Errors and Omissions) covers claims that your work caused a client a financial loss. For a valuation firm, that usually means a client says a value was wrong. 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 fall short of 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). See claims-made vs. occurrence.
• Years after the report: claims can come up long after delivery, so the clause asks you to keep coverage for three years after the final report.

Who asks business valuation firms for $1M?

A $1M requirement can come from:

• Banks and lenders that order valuations for business loans.
• CPA firms and wealth planners that bring you in for estate, gift or succession work.
• Some law firms that hire you as an expert in divorce or shareholder disputes, though many litigation engagements set no insurance requirement.
• Private companies that need valuations for stock options or financial reports.
• Buyers and sellers on smaller deals.

Larger deals, such as fairness opinions (a statement that a deal price is fair) and ESOP work (valuing a company for an employee stock ownership plan), often ask for $2M or more. If your largest engagements are of that kind, check whether the client's terms have moved from $1M to $2M before you renew. See $2M Professional Liability for business valuation firms.

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first) with nothing stacked above it. Valuation firms often buy a Miscellaneous Professional Liability form, which is made for service businesses. A CPA practice may have valuation work written on its accountants Professional Liability policy instead. Firms that also give investment advice usually buy a separate policy for that work.

A commercial umbrella (extra liability coverage above your general liability policy) almost never covers Professional Liability. See does a commercial umbrella cover Professional Liability? Clients also usually cannot be added as an additional insured (someone else who gets coverage under your policy). Many accept a certificate of insurance (a one-page proof of coverage) instead.

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 valuation firms about:

• Your revenue split by purpose: lending, deals, tax and estate, reporting, litigation, ESOP.
• Whether you issue fairness opinions or solvency opinions (a statement that a company can pay its debts).
• Who signs reports, their credentials and your review process.
• Engagement letters: scope, who may rely on the report, and how it may be used.
• Prior claims, disputes that could become claims, and your current policy and retroactive date.

What affects the cost?

• Type of valuation work. Transaction, ESOP and fairness opinion work often costs more than estate or lending work.
• Revenue and deal size. Larger deals mean larger possible losses, and your largest engagements matter.
• Claims history. Past claims can raise price.
• Aggregate and retention. A higher aggregate usually costs more. A higher retention (what you pay on each claim before the policy pays, like a deductible) usually lowers the premium.
• Defense and prior acts terms. Defense outside the limit usually adds cost. Full prior acts coverage can add cost when you move to a new carrier.

Frequently asked questions

Do I need $1M Professional Liability as a business valuation firm?

You need it if a lender, law firm or deal client puts a $1M requirement in your engagement terms. These examples are hypothetical. A buyer says your report overstated a company's value. A lender says a valuation missed a large customer loss. A family blames your estate valuation for extra tax. In each case, a policy may respond to a covered claim, which can include defense costs and any settlement or judgment. That depends on the policy wording.

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

No. A $1M/$1M policy falls short of a $1M/$2M clause. Ask Morrow to request quotes for a new $1M/$2M policy. Morrow can ask carriers to keep your retroactive date and prior acts coverage (coverage for work done before the policy starts) where the market allows. Keep your current policy in force until the new one starts. Before you switch, report anything that could become a claim to your current carrier.

Am I covered if I close my valuation firm?

Usually not for claims first made after a claims-made policy ends, unless you buy an extended reporting period (a "tail"), which gives you extra time to report claims about past reports. It usually must be bought soon after the policy ends. See tail coverage.

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.