It Could Never Happen to Me, or Could It?
[ILLUSTRATION OMITTED] An insurance broker engages a one-man CPA firm to prepare his tax returns. Unbeknown to the CPA, one of the insurance broker's employees has been making unauthorized transfers from the premium account to the operating account. In the insurance industry, "commingling" of policyholder premiums with business funds is deemed illegal. Months later, the broker discovers the unauthorized transfers but does not have the funds to return the money to the premium account. The department of insurance (DOI) investigates, revokes the broker's insurance licenses, and issues stiff fines. The broker is forced to sell his business at a distressed price to pay back the premium account. In the aftermath, the broker blames the CPA for not detecting his employee's fraudulent activity and, consequently, for the damage to his reputation, the DOI fines, and the short sale of the business. The CPA argues that he pointed out discrepancies in the books, but the broker failed to take action. The broker sues the CPA, claiming a loss of $3 million due to the short sale, $75,000 in legal fees fighting the DOI, and $3 million in lost income. During mediation, the broker lowers his demand to $2.5 million, but both sides are unable to reach an agreement. The case ends up going to trial, where the jury decides in the CPA's favor on all counts. Though the CPA won in court, it took several years to resolve the case, over which time his legal expenses amounted to $100,000. THE DANGERS OF "GOING BARE" Most people wouldn't go without automobile, homeowners, or health insurance, but an alarming number of small CPA firms go without professional liability insurance. In the insurance industry, it is called "going bare." In the case above, the CPA was insured by the AICPA Professional Liability Insurance Program in the CPA Value Plan, which is designed for small CPA firms. The policy paid the CPA's legal costs along with additional covered expenses such as his time away from work to appear in court. If the CPA hadn't had professional liability insurance, he would have been forced to manage the defense of the case himself, taking away from his billable hours and income. He also would have been forced to pay for his defense out of his own pocket, which could have been devastating to his finances, his practice, and his state of mind. "If you have professional liability insurance and have a claim, you call up your insurance representative, ask how to submit the claim, and hand it over to the carrier," said David Sukert, senior vice president of Aon Affinity, the administrators of the AICPA Professional Liability Insurance Program. "When the carrier gets involved, they have panel counsel that is assigned to help you with the claim." WHY DO SOME SMALL FIRMS "GO BARE"? "Many sole practitioners or small firms don't know a lot about professional liability insurance," Sukert said. "Some are new to the profession, and others may have set out on their own after practicing in large firms where the firms took care of their insurance." Others may be working out of their home and believe that their professional services are covered by homeowners insurance. However, homeowners policies are "personal" policies and exclude most claims that arise out of business pursuits. If the CPA has general liability insurance, it pays for bodily injury and property damage claims, but it likewise excludes claims that arise out of the performance of professional services. That's where professional liability insurance comes into play. It is also known as "errors and omissions" insurance, and in the health care field it's called "malpractice" insurance. Its primary purpose is to help protect professionals from human error that may cause a client financial harm. "Oftentimes, CPAs start their business off very close relationships," said Alvin Fennell, vice president of business development at Aon Affinity. …