$1M Professional Liability (E&O) Insurance for Enrolled Agents

A $1M Professional Liability (E&O) requirement means your policy pays up to $1M if a client claims your tax work cost them money. For enrolled agents asked for proof by business clients.

What does a $1M requirement mean for enrolled agents?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your professional work cost a client money. A clause from a client or partner firm might read:

• Per claim: the most the policy pays for any one claim. Here, $1M.
• Aggregate: the most it pays for all claims in one policy year. Here, $2M. A $1M/$1M policy does not meet this clause. A $1M/$2M policy does.
• Covered services: the clause names tax work. Your policy should describe the services you actually provide, including payroll or bookkeeping if you do them.
• Proof: clients usually accept a certificate of insurance (a one-page summary of your coverage).

Who asks enrolled agents for $1M?

Enrolled agents who serve mostly individuals may never be asked for a set limit. The request usually shows up when you take on business or partner work:

• Small and mid-sized businesses outsourcing tax, payroll tax or bookkeeping work.
• CPA firms and accounting practices sending you overflow returns during tax season.
• Payroll companies and fractional finance firms that subcontract tax work.
• Franchise systems or larger companies hiring outside tax help under a master services agreement (a standing contract that sets the terms for all the work).
• Larger clients and master services agreements often ask for $2M instead. A $2M limit pays more for one claim, while $1M/$2M only raises the yearly total. See $2M Professional Liability for enrolled agents.

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first). Enrolled agents who are not CPAs often buy Miscellaneous Professional Liability, a form made for service businesses, or a tax preparer program. CPA firms usually buy accountants Professional Liability.

Professional Liability is almost always claims-made: it covers claims first made and reported during the policy period, for work on or after the retroactive date (the earliest work date the policy covers). A commercial umbrella almost never covers it. Professional Liability policies usually do not offer additional insured status (extra parties named on your policy). Where one does, it is usually limited to the client's liability arising from your work, so check the wording before agreeing. Compare the contract and policy for gaps, such as payroll work missing from covered services or a retroactive date that skips past returns.

What will underwriters ask for?

An underwriter decides whether to offer coverage. For enrolled agents, they often ask about:

• Your service mix: individual returns, business returns, payroll tax, bookkeeping and representation work, with a rough share of revenue from each.
• Return volume, staffing during tax season, and how you track filing deadlines and extensions.
• Whether you hold client funds, sign client checks or make tax payments for clients.
• Any financial planning, investment or insurance advice, which may be excluded or need separate coverage.
• Your engagement letters and largest clients.
• Prior claims, any client complaints that could turn into a claim, and your current retroactive date.

What affects the cost?

See Professional Liability cost factors for more.

• Service mix. Payroll tax and business work often cost more than simple individual returns.
• Revenue and volume. More returns and larger clients mean more chances for an error.
• Claims history. Past claims can raise the price or narrow options.
• Aggregate and retention. $1M/$2M usually costs more than $1M/$1M. A higher retention (what you pay on each claim before the policy pays) usually lowers the premium.
• Prior acts and defense terms. A retroactive date set further back (more prior acts), or defense paid outside the limit, can add cost, especially when you change carriers or have a gap or claims history.

Frequently asked questions

Do I need $1M Professional Liability as an enrolled agent?

Only if a client or contract asks for it, though many business clients do. Here are hypothetical examples. A missed extension leads to late-filing penalties for a business client. A payroll tax deposit error builds up interest over several quarters.

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

No. A $1M/$1M policy does not meet a $1M/$2M clause. Request new quotes for a $1M/$2M policy. Morrow can request quotes for it and ask carriers to keep your retroactive date and prior acts coverage where the market allows. Usually, keep your current policy in force until the new one starts, and report anything that could become a claim to your current carrier before you switch.

Will my policy pay a client's penalties and interest?

It depends on the wording. Some policies cover a client's claim for penalties and interest caused by your error. Others limit or exclude them. Taxes the client owed anyway are usually not covered. Ask how a policy handles this before you buy.

What happens when I retire or sell my practice?

A claim about past returns can arrive years later. A claims-made policy that has ended will generally not cover it. An extended reporting period (a "tail") gives you extra time to report claims about past work.

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.