$5M Professional Liability (E&O) Insurance for CPA Firms

Some CPA firms are asked for $5M in Professional Liability when a lender, buyer or large client relies on their audit or deal work, often as a primary policy plus excess.

What does a $5M 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. CPA firms usually buy an accountants Professional Liability policy. A $5M clause might read like this:

• Per claim and aggregate: the most paid for one claim, and for all claims in a year.
• Claims-made: Professional Liability almost always pays only for claims made while the policy is active. The work must also be after the retroactive date (the earliest work date covered).
• Primary plus excess: the last sentence lets you combine policies. If yours does not say so, confirm with the client that a primary plus follow-form excess (excess that uses the primary's terms) meets the clause.

Who asks CPA firms for $5M?

Tax and bookkeeping firms rarely see $5M requirements. They show up when outsiders rely on your numbers.

• Large companies outsourcing controller, CFO or monthly close work.
• Buyers and private equity firms hiring you for due diligence (a deep check of a company's books before a deal).
• State agencies and public bodies hiring an outside auditor. The RFP (request for proposal) states the limit. It varies by agency and by the complexity of the audit.
• Larger CPA firms passing a client's $5M requirement to subcontractors.
• Banks and lenders only sometimes set an insurance requirement for your firm, usually when they hire you directly, such as for lender-side diligence, or when a reliance letter (which lets the lender rely on your report) names a limit.

How is $5M in Professional Liability built?

A primary policy pays first. An excess policy pays after the layer below is used up. "$3M xs $2M" means $3M above the first $2M.

Many CPA firms carry $1M or $2M. For them, a primary plus one excess layer, like Example B, is a common way to reach $5M. Three-layer towers like Example C are less common and depend on each carrier's minimum primary limit. Moving up from $3M to $5M usually follows a larger audit, lender or deal engagement, while $10M is rarer still. Morrow can help you find it.

Every layer should have the same retroactive date, policy period and named insured (the firm that is covered). Many policies pay defense costs inside the limit, so check that each layer treats defense alike. See defense costs inside or outside limits.

What will underwriters ask for?

• Revenue split by service, such as tax, bookkeeping, payroll, audit and attest, and due diligence.
• Attest clients by type and size, such as banks and credit unions, nonprofits, public bodies and benefit plans.
• Peer review results (an outside check of your firm's work quality) and quality control steps.
• How you track filing deadlines, make payroll tax deposits or hold client funds.
• Sample engagement letters and the contract requiring $5M.
• Three to five years of loss runs (a report listing past claims), fee disputes, any incident that could become a claim, and your current policy.

What affects the cost?

• Service mix. Heavy audit, attest or deal work usually costs more than tax work.
• Who relies on your work. Lenders, investors and buyers can mean larger losses.
• How the $5M is built. The primary layer usually costs the most per $1M of limit. Excess layers often cost less per $1M, but each layer is underwritten on its own.
• Claims history and firm size. More revenue usually raises cost.
• Retention. A retention is what you pay per claim before the policy pays. A higher one often lowers cost.

Frequently asked questions

I run a CPA firm with $2M today. How do I get to $5M?

Request new quotes through Morrow, either a new $5M primary or excess layers. Quotes can ask to keep your retroactive date and prior acts coverage (coverage for work done before the new policy starts) where the market allows. Keep your current policy until the new one starts, and report anything that could become a claim to your current carrier first.

Can my commercial umbrella cover $5M of Professional Liability for my CPA firm?

Almost never. A commercial umbrella usually excludes professional services, so you usually need a higher primary limit or excess.

Can a lender be added as an additional insured on my CPA firm's Professional Liability?

Usually not. Professional Liability covers your liability to others, not the lender or client. Some requesters accept a certificate of insurance (a one-page proof of coverage) listing every layer, with policy numbers, limits and dates, but check what your contract requires.

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.