For sales tax consultants asked for $3M by a large client, the requirement usually means one $3M primary policy, or a smaller primary plus a follow-form excess layer.
The short answer
- A $3M requirement means your Professional Liability (E&O) must pay up to $3M for one claim. It is on the high end for sales tax consultants.
- It is built as one $3M primary policy, or a $1M or $2M primary plus a follow-form excess layer (an extra policy that uses the same terms).
- $3M is rarely available online and is usually placed by a broker. Morrow can help you find it.
What does a $3M requirement mean for sales tax consultants?
Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your work cost a client money. For a sales tax practice, think of a missed filing, a wrong taxability call (deciding whether an item is taxed) or a missed state registration. A $3M clause may read like this (nexus means a tax connection to a state):
Illustrative contract wording
Consultant shall maintain Professional Liability (Errors and Omissions) insurance covering sales and use tax compliance, nexus, taxability and audit support, with limits of not less than $3,000,000 per claim and $3,000,000 aggregate. Limits may be met through primary and excess policies. If written on a claims-made basis, coverage shall be maintained for three (3) years after services end.
Illustrative example only. Your contract's wording controls.
- Per claim and aggregate: the most paid for one claim, and for all claims in a policy year.
- Layers: this clause allows them. If yours is silent, confirm with the client that primary plus follow-form excess meets the clause.
- Claims-made: the policy covers claims made while it is active, for work done on or after the retroactive date (the earliest work date covered). Tax problems can surface years after the work, so keep your retroactive date.
- After the work ends: renew every layer for three years, or buy tail coverage (extra time to report claims).
Who asks sales tax consultants for $3M?
$3M shows up when one error could spread across many states, years or a large deal:
- Large online and marketplace sellers filing in most states.
- Private equity buyers and lenders relying on your sales tax review before closing.
- Large companies outsourcing all indirect tax work under a master services agreement.
How is $3M built?
A primary policy pays first. An excess policy pays only after the limit below it is used up. "$2M xs $1M" means a $2M layer above the first $1M.
Example A: single policy
Example B: two layers
Example C: two layers
The excess should follow form, adopting the primary policy's terms, with the same retroactive date and policy period. CPA firms usually buy accountants Professional Liability, often from dedicated programs. Non-CPA consultants usually buy Miscellaneous Professional Liability, a form for service businesses. A commercial umbrella almost never covers Professional Liability. Building $3M usually takes a broker. Morrow can help you find it.
Good to know
Defense costs can shrink the limit. Many Professional Liability policies pay defense costs inside the limit, which leaves less for a settlement. Penalties and interest caused by your error may be covered, often with a lower cap, or excluded, depending on the wording. The tax itself is generally not covered.
What will underwriters ask for?
An underwriter decides whether to offer coverage, and each excess carrier may review your firm too. Expect:
- Revenue by service: nexus studies, taxability research, return filing, voluntary disclosures (settling past-due tax with a state), audit defense and deal reviews.
- The client asking for $3M: its sales, states and your scope of work.
- Returns filed, states covered and who checks them before filing.
- Whether you send tax payments or log into client accounts.
- Whether you set up tax software or map product tax codes, and whether buyers or lenders rely on your reports.
- The contract, your engagement letter, loss runs (a report of past claims) and your current policy.
What affects the cost?
- Client size and spread. More states and higher sales let one error grow larger.
- Service mix. Deal reviews and tax software setup may cost more to insure than registrations.
- How the $3M is built. The primary layer usually costs the most per $1M.
- Controls and claims history. A second review before filing and a clean record often help.
- Retention and defense terms. Retention is what you pay on each claim, like a deductible. A higher one usually lowers premium.
Frequently asked questions
What kind of claim could reach $3M for a sales tax consultant?
A claim reaches $3M when one error repeats across many states or years, or feeds a large deal. Two hypothetical examples: a product code you mapped in a seller's tax software under-collects tax for two years, and the client seeks its cost to fix the error and defend state audits; or a buyer closes a deal relying on your review, finds exposure in states you missed, and seeks the cost from you.
I carry $1M or $2M today. How do I get to $3M?
Request new quotes through Morrow, either a new $3M primary or excess layers above a primary. We can 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. Report anything that could become a claim to your current carrier before you switch.
Is $2M enough if my contract says $3M?
Usually not. A $3M clause needs $3M in total limits, as one primary or a primary plus follow-form excess. Compare the $2M and $1M limits. Morrow can help you find $3M.
Can my client be added as an additional insured (listed on your policy for protection)?
Usually not. Professional Liability covers your own liability, so clients are not normally listed on it. A few carriers may allow it in limited cases. Some clients accept a certificate of insurance (a one-page summary of coverage) listing every layer. Check your contract.
Looking for $3M in Professional Liability? Morrow can help.
Send us the insurance requirement from your contract and your current policy. Morrow can review both and request quotes for a $3M primary policy or a primary and excess structure.
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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.