$2M Professional Liability (E&O) Insurance for CPA Firms

A $2M requirement means your CPA firm's Professional Liability policy must pay up to $2M per claim. This guide is for CPA firms asked for it by a client, lender or RFP (request for proposal).

What does a $2M requirement mean for CPA firms?

Professional Liability (E&O, short for Errors and Omissions) covers claims that your professional services caused a client a financial loss. For CPA firms, this coverage is usually called accountants professional liability. A $2M clause might read like this:

• Per claim: the most the policy pays for any one claim.
• Aggregate: the most the policy pays for all claims in one policy year. See Professional Liability limits explained.
• Claims-made: Professional Liability almost always covers claims made and reported while the policy is active, for work on or after the retroactive date (the earliest date of work covered).
• Defense costs: many Professional Liability policies pay defense costs inside the limit, so legal fees reduce what is left to pay a claim.

Who asks CPA firms for $2M?

Smaller firms that focus on individual tax returns and bookkeeping often carry $1M. $2M usually appears when the client, or the work, is larger:

• Larger companies outsourcing controller, CFO or monthly close work.
• Banks and other lenders that hire outside accountants for review work.
• Nonprofits, school districts and government agencies hiring an auditor, where the RFP often sets a limit that can be lower or higher than $2M.
• Buyers and investors hiring a firm for financial due diligence.

How is $2M built?

At $2M, the limit is usually one primary policy (the policy that pays first) written at $2M/$2M. A $1M/$2M policy has a $1M per claim limit, so it usually does not meet a $2M per claim clause. See $1M Professional Liability for CPA firms.

CPA firms usually buy accountants professional liability. Non-CPA bookkeepers and tax preparers often buy a tax preparer or bookkeeper E&O policy, or Miscellaneous Professional Liability, depending on the carrier and the services.

A $1M primary plus a $1M excess layer (extra limit that sits on top of the primary) can also work. The excess should follow form, meaning it uses the same terms as the primary. Confirm with the client that primary plus follow-form excess meets the clause.

A commercial umbrella almost never covers Professional Liability, so it usually cannot fill the gap (see Does a commercial umbrella cover Professional Liability?). Clients usually cannot be added as an additional insured. Many clients accept a certificate of insurance (a one-page summary of your policy) instead, but check your contract.

What will underwriters ask for?

An underwriter is the person at the insurer who decides whether to offer coverage. For a CPA firm at $2M, expect questions like these:

• Your revenue split by service: individual tax, business tax, bookkeeping, payroll, audit and attest, and advisory work. Audit and attest work usually carries more risk than tax or bookkeeping.
• Number of CPAs and staff.
• Your client mix, including any lenders, nonprofits, government entities or larger companies.
• Whether you use signed engagement letters for every client, and your quality control process, including any outside review of your work.
• Whether you handle client funds, run payroll tax deposits or give investment advice.
• Prior claims, fee disputes, anything that could become a claim, and your current retroactive date.

What affects the cost?

• Service mix. A firm with heavy audit and attest work usually pays more than one focused on individual tax returns.
• Revenue and staff size. More engagements mean more chances for error.
• Client types. Lenders, public entities and larger companies can mean bigger possible losses.
• Claims history. Prior claims can raise the price or limit your options.
• Retention and defense terms. A retention is the amount you pay on each claim before the policy pays, similar to a deductible. A higher retention usually lowers premium, and defense outside the limit usually costs more.

Frequently asked questions

I carry $1M as a CPA. How do I get to $2M Professional Liability?

Request new quotes for a $2M policy through Morrow. Morrow can ask carriers to keep your retroactive date where the market allows, so past work may stay covered. Keep your current policy in force until the new one starts. Report anything that could become a claim to your current carrier before that policy ends.

What claims can a CPA firm's Professional Liability cover?

It can cover claims such as a missed filing deadline, a payroll tax mistake or advice a client says cost them money. Claims can arrive years after the work.

Is $2M Professional Liability enough for audit work?

It is enough only if it meets the number in your contract. Requirements vary widely: they can be lower on smaller nonprofit or government audits and higher for larger or public clients. See $3M Professional Liability for CPA firms.

What happens to my coverage if I retire or close my CPA firm?

Claims about past work can still arrive after you close. An extended reporting period, often called tail coverage, gives you extra time to report claims after the 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.