$3M Professional Liability (E&O) Insurance for CPA Firms

For CPA firms asked by a lender, agency or large client for $3M, Professional Liability (E&O) is usually built as one $3M primary policy or a smaller primary plus follow-form excess.

What does a $3M requirement mean for CPA firms?

Professional Liability (E&O, short for Errors and Omissions) covers claims that your services caused a client a financial loss. CPA firms usually buy Professional Liability written for accountants (often called accountants professional liability). A $3M clause might read like this:

• Per claim and aggregate: the most paid for one claim, and for all claims in a year. See limits explained.
• Claims-made: the policy almost always covers claims made and reported while it is active, for work on or after the retroactive date (the earliest date of work covered). You would usually renew every layer for the years named. See retroactive dates.
• Primary plus excess: the last sentence allows stacked policies. If your clause is silent, confirm with the client that primary plus follow-form excess meets it.

Who asks CPA firms for $3M?

Many small firms carry $1M or $2M. $3M usually shows up when one engagement could cause a large loss:

• Lenders relying on your audited or reviewed financial statements (attest work, where you give assurance on a client's numbers) for larger loans.
• Government agencies and school districts, sometimes with a limit of $1M or more written into an audit request for proposal (RFP), and $3M in larger engagements.
• Larger nonprofits and health systems hiring an outside auditor.
• Larger companies outsourcing finance work under a master services agreement (MSA).

How is $3M built?

A primary policy pays first. An excess policy pays only after the primary limit is used up. "$1M xs $2M" means a $1M layer above the first $2M.

If your clause asks for only $2M, see $2M for CPA firms. $3M adds one more $1M of protection and usually brings in an excess layer or a broker.

Non-CPA bookkeepers and tax preparers usually buy Miscellaneous Professional Liability (a general form for services that do not have their own specialized policy) instead. The excess should follow form (adopt the primary policy's terms), with the same retroactive date and the same named insured (the business listed on the policy). Many policies pay defense costs inside the limit, so legal fees reduce what is left. A commercial umbrella almost never covers Professional Liability.

What will underwriters ask for?

• Revenue by service: audit and attest, tax, bookkeeping, payroll and advisory.
• Your audit clients by industry and size.
• Your quality control and peer review results (an outside review of your audit quality), and how you manage independence (staying free of conflicts with audit clients).
• Signed engagement letters, including any limitation of liability wording (a cap on what you owe a client).
• Loss runs (a report of past claims), known incidents, and your current policy.

What affects the cost?

• Service mix. Heavy audit work usually costs more to insure than tax or bookkeeping.
• Client types and size. Lenders and public entities can mean bigger losses.
• How the $3M is built. The first layer usually costs more per $1M than layers above it.
• Claims history. Prior claims can raise the price or shrink the limit offered.
• Retention. A retention works like a deductible. A higher one usually lowers premium.

Frequently asked questions

I carry $1M/$1M as a CPA firm. How do I get to $3M?

Request new quotes through Morrow, for a new $3M primary policy or for excess layers. Morrow can ask carriers to keep your retroactive date and prior acts coverage (cover for work done before the new policy starts) where the market allows. Report any known incident to your current carrier before switching.

Do I need $3M Professional Liability as a CPA firm that only does tax and bookkeeping?

Usually only when a contract or client asks for it. Check the insurance clause in each contract. If one asks for $3M, send it to Morrow to review and request quotes. If a contract asks for more, see $5M for CPA firms.

Can a client be added as an additional insured on CPA firm Professional Liability?

Usually not. Professional Liability protects you, not your client. Many clients accept a certificate of insurance (a one-page proof of coverage) that lists every layer, with each policy number, limit and policy period.

How long does it take to get $3M in place for a CPA firm?

It varies, because timing depends on how complete your submission is and how many layers you need. Having your service mix, peer review results, audit client list and loss runs ready usually helps. Send your contract requirement and current policy early so Morrow can review them and request quotes before your engagement or RFP deadline.

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.