How Accounting Firms Can Secure Higher Professional Liability Limits with Excess Insurance

How Accounting Firms Can Secure Higher Professional Liability Limits with Excess Insurance

When your accounting firm needs more professional liability insurance coverage than your primary insurer provides an excess policy provides that protection. Common reasons are:

• • • A major client may require higher limits.
    • Your firm performs complex audits, high-value transactions, or large tax engagements.
    • Firm leaders may also want stronger protection against a severe claim.

Excess professional liability insurance for accounting firms adds another layer of protection above your primary accountants professional liability policy.

Why Do Insurers Restrict Professional Liability Limits?

Insurance companies control potential shock losses by restricting limits to individual accounting firms. Certain insurers place lower maximum limits on solo CPAs and small accounting practices because the premium generated by these accounts may not support the insurer’s exposure to a multimillion-dollar claim.

Underwriters typically consider key factors when determining maximum offered liability limits:

• • • The firm’s annual revenue and number of professionals
    • The accounting and consulting services the firm provides
    • The size and industries of its clients
    • The value and complexity of its engagements
    • The percentage of revenue generated by higher-risk services
    • The firm’s claims history
    • Its quality-control and risk-management procedures
    • The requested per-claim and aggregate limits

Will a Commercial Umbrella Policy Cover Accounting Errors?

No.

A commercial umbrella policy increases the limits available under certain underlying policies, such as commercial general liability and business automobile insurance. However, umbrella policies commonly exclude claims arising from professional accounting services.

Certain accounting firms need both commercial umbrella and excess professional liability insurance, but the policies address different exposures:

• • • A commercial umbrella policy provides additional limits for covered general liability, automobile, and other scheduled exposures.
    • An excess professional liability policy provides additional limits for covered errors, omissions, and other claims arising from professional accounting services.

Never assume an umbrella policy increases the limits of every policy your firm carries. Review the policy language and underlying insurance schedule when determining what coverages the umbrella provides.

Why Not Buy a Second Primary Professional Liability Policy?

Purchasing another primary policy may appear to increase your firm’s total limits, but this approach can create complications.

Primary professional liability policies usually contain an “other insurance” provision that explains how the policy responds when another policy covers the same claim. If two primary policies contain competing provisions, each insurer may argue that the other company must respond first.

Overlapping primary policies can cause:

• • • Disputes over which insurer has the primary obligation
    • Delays in appointing defense counsel or responding to a claim
    • Conflicts between policy terms
    • Multiple deductibles or self-insured retentions
    • Unanticipated coverage gaps

Expect an underwriter declination trying to obtain additional primary policies covering the same firm and professional exposure. A properly structured excess policy offers a cleaner solution because it specifically sits above the designated primary policy.

What Is Excess Professional Liability Insurance for Accounting Firms?

Excess professional liability insurance for accounting firms provides an additional layer of coverage above the firm’s primary accountants professional liability policy.

For example, an accounting firm could purchase:

• • • A primary professional liability policy with a $2 million limit
    • An excess policy with an additional $3 million limit

Subject to both policies’ terms, conditions, and exclusions, this structure could provide a combined limit of $5 million for a covered claim. Firms needing even more protection purchase multiple excess layers from one or more insurers.

The excess policy normally responds after a covered claim exhausts the applicable underlying limit. The underlying policy limit effectively serves as the excess policy’s retention (deductible).

What Is a Following-Form Excess Policy?

A following-form excess policy follows the terms and conditions in the primary policy. This structure can help the primary and excess policies work together.

However, the phrase “following form” does not guarantee identical coverage. Excess policies usually fall into one of three categories:

1. 1. 1. Stand-alone excess coverage: The excess policy uses its own definitions, conditions, and exclusions.
      2. Modified following-form coverage: The policy follows portions of the primary policy but adds endorsements, exclusions, or limitations.
      3. True following-form coverage: The excess policy adopts the primary policy’s terms without adding material restrictions that create coverage gaps.

Your firm should review the complete excess policy instead of relying solely on the “following form” description.

What Should Your Firm Review Before Buying Excess Coverage?

Review exclusions and endorsements for differences involving audits, tax services, investment advice, financial planning, fiduciary services, technology consulting, and other activities your firm performs.A well-designed excess insurance program requires coordination between the primary and excess policies. Review the following details carefully.

Policy periods – Whenever possible, align the effective and expiration dates of the primary and excess policies. Misaligned policy periods complicate claims and potentially create gaps.

Retroactive or prior-acts dates – Align the excess policy’s retroactive date with the primary policy’s prior-acts date. If the excess policy uses a more recent date, it excludes certain claims arising before the excess insurance policy prior-acts.

Required underlying limits – The excess insurer requires your firm maintain a specific primary coverage limit. Failing to maintain the primary insurance policy limits results in coverage holes.

Defense expenses – Determine whether defense costs reduce the primary policy’s available limit. If legal expenses erode the limit, a costly defense may reach the excess layer sooner while leaving less primary coverage available for a settlement or judgment.

Compare each policy’s definitions of:

• • • Insured
    • Claim
    • Professional services
    • Damages
    • Related claims
    • Wrongful act

Reporting requirements – Understand how and when your firm must report claims, potential claims, and circumstances that could lead to a claim. Follow the reporting requirements under both the primary and excess policies.

What Determines the Cost of Excess Coverage?

The cost of excess professional liability insurance varies by accounting firm. Insurers may consider:

• • • The limits and premium of the primary policy
    • The amount of excess coverage requested
    • The excess insurer’s attachment point
    • The firm’s annual revenue
    • The number of owners and accounting professionals
    • The services the firm provides
    • Its client industries and engagement sizes
    • Its claims history
    • Its geographic reach
    • The excess policy’s terms, exclusions, and endorsements

A firm that provides higher-risk services or has a significant claims history may pay more than a firm with a lower-risk profile.

Secure the Right Protection for Your Accounting Firm

Your primary insurer’s refusal to provide higher limits does not mean your accounting firm must remain underinsured. Properly structured excess professional liability insurance can provide the additional protection your firm needs without the complications associated with overlapping primary policies.

The details matter. Policy periods, prior-acts dates, required underlying limits, defense costs, definitions, exclusions, and reporting provisions can all affect coverage when a serious claim occurs.

L Squared Insurance Agency can help accounting firms evaluate primary and excess professional liability insurance options. Even if L Squared does not place your primary policy, its team may be able to help your firm obtain the additional limits it requires.

Contact L Squared Insurance Agency to discuss excess professional liability insurance for your accounting firm.

This article provides general insurance information only. Coverage depends on the specific policy language, endorsements, applicable law, and facts surrounding each claim.

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