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

For CPA firms asked by a client to carry $1M, Professional Liability (E&O) must pay up to $1M per claim, and the contract may also ask for a $2M aggregate.

What does a $1M requirement mean for CPA firms?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your professional 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 meets either wording.
• Claims-made: Professional Liability almost always covers claims made and reported while the policy is active, for work done on or after the retroactive date (the earliest date of work the policy covers). Tax errors can surface years later.
• "Covering the services": the policy should include every service you provide that client, such as tax, payroll, outsourced accounting or attest work (audits and reviews, where you give an opinion or assurance on financial statements).

Who asks CPA firms for $1M?

You will often see $1M from:

• Mid-sized and larger companies outsourcing bookkeeping or CFO work to your firm.
• Cities, towns, school districts and agencies hiring a firm for audit or accounting work (see Professional Liability for government contracts).
• Nonprofits and their boards engaging a firm for audits, reviews or tax filings.
• Larger CPA firms subcontracting overflow work to smaller firms.

Bigger audit and outsourcing deals may ask for $2M instead, which is a higher per-claim limit, not just a higher aggregate (see $2M Professional Liability for CPA firms).

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first). Extra layers above it are often not needed. CPA firms usually buy Accountants Professional Liability. Bookkeepers and tax preparers who are not CPAs usually buy Miscellaneous Professional Liability instead (see $1M Professional Liability for financial service firms).

A commercial umbrella (an extra liability policy that sits above your general liability coverage) almost never covers Professional Liability. Clients usually cannot be added as an additional insured (a person or business given its own right to coverage under your policy). Your contract says whether a certificate of insurance (a summary showing you carry the coverage) is enough.

What will underwriters ask CPA firms for?

An underwriter is the person at the insurer who decides whether to offer coverage and on what terms. For a CPA firm, they usually ask for:

• Your revenue split by service: tax, bookkeeping, payroll, attest work, consulting and compilations (financial statements you prepare without giving assurance).
• The number of CPAs and other staff.
• Your attest clients, noting any public companies, financial institutions, nonprofits or government entities.
• Whether you use signed engagement letters and track filing deadlines.
• Whether you hold client funds or give investment advice.
• Prior claims, fee disputes, possible claims, and your current policy and retroactive date.

What affects the cost?

• Service mix. Audit and attest work usually costs more to insure than tax or bookkeeping work.
• Firm size. More revenue and staff usually mean a higher premium.
• Client types. Larger, regulated or public clients may mean bigger possible losses.
• Claims history. Prior claims can raise the price.
• Aggregate and retention. $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 CPA firm?

Only if a client, lender, agency or contract requires it, though a single missed deadline or audit error can lead to a costly claim. Hypothetical examples include these. A preparer misses an extension during tax season, and the client pays penalties and interest. An audit fails to spot a bookkeeper's theft, and the lender sues.

A policy may pay to defend a covered claim, even if you did nothing wrong. Many policies limit or exclude fines and penalties imposed on the firm itself, so Morrow can review that wording with you.

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

No, a $1M/$1M policy does not meet a $1M/$2M clause, so request new quotes for a $1M/$2M policy. Morrow can request them and ask carriers to keep your retroactive date and prior acts coverage (coverage for past work done before the new policy starts) where the market allows. Keep your current policy in force until the new one starts, to help avoid a gap in coverage. Report anything that could become a claim to your current carrier before that policy ends.

Do I need tail coverage if I retire or sell my CPA firm?

Often yes, because a claim first made after your 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.