The decisions made in selecting a professional liability policy are not on every accountant's popularity list. However, there are seemingly obscure issues that have far-reaching consequences for a practice. It's an area which, depending how it is handled, can save money or cause a huge loss for a firm, according to observers.
We are currently in a "hard market," according to Stephen Vono, senior vice president at McGowanPro. "When this happens, underwriting guidelines tighten up, and premiums tend to go up because, in general, companies saw an increase in costs in 2020 and 2021. There has been a higher frequency of claims, although not so much a higher severity. A primary issue has been the higher costs of litigation for 2020 and 2021 because courts were closed across the country."
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"Every time a lawyer had to pick up a file to review the claim, they would have billable hours," he said. "If a court date was set for June and the court was closed, they would head for September. When September came they would have to pick up the file, and the date might be pushed off again. The courts were overwhelmed with a backlog of cases."
That process is starting to lighten up, Vono believes, "but insurance companies are still looking at a hard market. In addition to litigation costs, the cost of reinsurance has gone up." Reinsurance kicks in when a claim goes beyond the policy limit and other insurance companies share in the risk, he explained. "Almost all companies have reinsurance. It's a way for insurance companies to spread the risk. "
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Hard markets tend to be cyclical, according to Vono. "They tend to occur every five to eight years, but COVID changed that. We don't know if we will come out of this one very soon."
One of the important things to examine in a policy is its definition of professional services, he cautioned: "It should be broad enough to cover all the services that the firm provides. Look for broad coverage as opposed to restrictive coverage. Some policies have endorsements that cover a number of exposures such as cyber, commercial criminal, and employment practices. For the most part, endorsements are just window dressing, and are inadequate for the risks they purport to cover. The practitioner should consider separate policies for cyber, commercial crime and employment practices liability."
Joanmarie Berry, director of marketing and sales at Herbert H. Landy Insurance, agreed. "We recommend a separate cyber policy, not just an endorsement," she said. "That's hard to communicate to the insured, because we want them to make the decision," she said. "Our endorsement is on the same liability policy, but has a separate aggregate limit. A lot of carriers are reducing their appetite, and are not offering as high limits as in previous years."
Tough economic times can drive firms into adding areas of practice that they may not be equipped to handle, noted Dave Sukert, senior vice president at Aon, the broker and administrator of the American Institute of CPAs' Professional Liability Program: "When the economy is good, claims go down because everyone is happy. When things are bad, we see more finger-pointing and litigation."
"One area that is attracting more accountants is client accounting services — payroll, paying bills and so on," he noted. "There are a lot of compliance issues, and if you're stepping into a client's shoes you had better have an understanding of the industry. More and more firms are doing this, but make sure you're doing it with your eyes open, and know the potential pitfalls. It's a lot different than doing someone's tax return."
Working with clients that have a lot of money can also be very demanding, he noted: "When things go right you can be very handsomely compensated, but when things go wrong you'll hear about it. They have the dollars that can fuel litigation. The biggest risk is to have your firm's reputation besmirched. It's a tough thing to come back from because you have to explain what happened to clients and future clients."
Shakeout in the market
There have been carriers that have left the market, observed John Raspante, director of risk management at McGowan- Pro. "That happens when claims go up, and they have been going up," he said. "It's not specific to the pandemic, but to programs that came up during the pandemic. The Paycheck Protection Program, Economic Injury Disaster Loans, Employee Retention Credit and the Restaurant Revitalization Credit did not exist prior to the pandemic. They came out fast and with a lot of uncertainty to quickly help struggling taxpayers and business owners. Accountants had to learn quickly and process them quickly for their clients, so they may not have studied as diligently as they should have. They may have missed some guidelines or misinterpreted some information, so we're seeing increased claims in those four areas."
"If a firm decides that it needs a stand-alone cyber policy, but only has the same amount to spend that it did a year ago, they have to decide where they will save the amount to purchase the stand-alone policy," Raspante remarked. "They will have to save on the professional liability policy by giving up something — either change the limits or change the deductible. Some of the newer carriers know this, so they come in with a lower premium. It can be challenging. "
"Underwriters are only as good as the information you give them," he said. "Make sure you give them the whole story. If you're a member of a state association committee, let them know. If two of your partners wrote an article for Accounting Today, tell them. And let them know that you have a client selection committee, and if you coach soccer on weekends. Describe the best practices that you follow. If you hire staff from local colleges, that's a factor because they tend to stay with firms and it's good to have continuity. If they know all the good things you do, that factors into a premium discretionary credit. Each carrier has different algorithms, but it will lower the premium."
One of newer programs in the market, PT Pro, has seen its client base expand immensely during COVID. "We focus on the microsegment of the market," said Jock Wols, chief executive of RiskDesk, which partners with Nationwide Insurance on the program. "Our clientele is made up of startups and part-timers, with an average revenue of $30,000. There seems to be an influx of those interested in rendering services on the side. The biggest impact COVID has had has been on people working from home."
