|What You Need to Know About Accounting Insurance|
Every accounting firm or CPA needs accounting insurance. But what does it do, and how much does it cost?
Accountants are important professionals in our economy. They create financial statements, check tax documents, and review the work of other accountants. They are known for their logical and straightforward approach.
What is Accounting Insurance?
Accounting insurance is a specialized type of coverage designed to protect accounting professionals and their firms from potential financial losses associated with errors, omissions, negligence, or other professional liabilities.
In recent years, the services offered by Certified Public Accountant (CPA) firms have expanded significantly. Regardless of your skill and experience, any rational accountant understands that mistakes can happen.
In most cases, when a deadline is not met, tax laws are applied incorrectly, or fraud remains undetected, the outcomes are unpleasant for accounting firms and clients. At the very least, these problems lead to distractions and often involve legal expenses.
Going a step further can lead to legal actions taken against you by clients or other parties who have suffered severe losses due to your mistake.
This is why intelligent CPAs and their accounting firms always have the appropriate accounting insurance policies in place to cover them in such scenarios. If you, a partner, or an employee in your accounting company makes an error while offering services, your insurance policy can ensure that your personal assets get adequate protection.
Accounting Insurance for CPAs and Accounting Firms
When developing their risk management plan, accounting firms should think about different potential risks. For example, nowadays, it's quite easier for a disgruntled client to file a lawsuit against an accountant or any accounting firm.
Professionals responsible for risk management in CPA firms can share several stories of firms delivering high-quality work, adhering to their letter of engagement, and yet facing expensive professional liability claims from clients.
Accounting firms, tax preparers, and even bookkeepers often face claims. Because tax laws are continuously evolving and the high fees they pay for accounting services, clients expect a high level of accuracy and don't easily accept errors.
In challenging financial times, when people experience investment losses, they often seek ways to recover their losses, and unfortunately, one of those methods is to blame the accountant for any errors. Given the high standards, it's quite clear why claims are frequently made against CPA firms.
No matter how complex the claim, these lawsuits involve legal costs, producing documents, lost hours, and valuable energy diverted from serving clients and expanding your business.
In recent years, as clients embrace technology and accountants become more involved, a heightened level of risk arises. Your responsibilities become more intricate as you provide guidance on the proper use of the latest accounting software.
Nowadays, most accounting entries are not made manually but involve multiple users contributing various inputs, especially with the use of cloud technology. Another inherent risk related to technology is the threat of hacks, theft of personal information, trade secrets, cybercrime and other technological vulnerabilities.
While this article primarily discusses professional risk, it's important to address cyber risk separately, ideally through a dedicated policy. In the end, regardless of the cause of the damage, accountants could be targeted in an attempt to recover losses for the client.
What Insurance Policies do Accounting Firms and CPAs Need?
Every firm has its insurance needs. These needs depend on the size of the firm and other reasons which we might not mention here. Some accounting insurance policies should be a must-have for the firm's business insurance coverage:
1. Professional Liability Insurance
Some people know this policy as accountants' professional liability or errors & omissions (E&O) insurance. It is unquestionably the most crucial and essential type of insurance that all accounting firms must have.
This insurance policy can cover a significant portion of the legal and discovery expenses, and damages related to claims made against you or your staff during the process of providing accounting services.
An experienced insurance broker can help you find comprehensive policies that effectively protect your accounting firm from any fee-based services or actions that benefit the firm.
As a bookkeeper, Certified Public Accountant (CPA), or a sizable accounting firm in Houston, Texas, professional liability insurance is a necessity because any error or dissatisfied client could potentially lead to a lawsuit.
2. General Liability Insurance and Property Insurance (Business Owners Policy (BOP))
General liability insurance is important coverage that can protect you from different types of lawsuits. It includes premises liability, which is crucial for covering injuries that may happen on your property.
Furthermore, general liability coverage is typically minimal for accounting companies because most business activities take place in the office, and client communication is primarily through email and phone.
Property insurance provides coverage for your personal assets, such as furniture, and computer hardware. It offers security in case of events like floods, fire, or other unforeseen situations that impact the building and work. Property and general liability insurance are frequently bundled into a Business Owners Policy (BOP).
3. Employment Practices Liability Insurance (EPLI)
As your company gets bigger and hires more people, you'll need Employment Practices Liability Insurance (EPLI). When an accounting firm has more employees, the problems get more complicated, and the people involved become harder to predict. This is why you need EPLI coverage.
EPLI insurance helps cover your accounting company from possible claims by employees, such as harassment, discrimination, not getting promotions, or being fired unfairly.
Furthermore, firms that offer professional services should consider getting third-party coverage to cover claims from external sources, like claims from clients over unsatisfactory services.
4. Workers Compensation Insurance
Because this commercial insurance is mandatory in nearly every state in the United States, there's not much to debate – your accounting company must have it.
Fortunately, workers' compensation is likely to be affordable for your accounting firm because offices are not a hazardous work environment.
However, accidents will always happen and workers’ compensation will cover your firm if your employees ever sustain any type of injury at work (whether it’s at your office or anywhere else they may be representing your firm in a professional capacity.
Nonetheless, accidents can occur, and workers' compensation will provide coverage if your employees get injured while working, whether it happens at your office or while representing your company professionally elsewhere.
5. Cyber Liability Insurance
Accounting firms handle sensitive information and frequently transfer funds, which makes them a common target for hackers. CPAs serve as advisors to companies and may also provide registered investment advisory services for their clients.
Modern hackers are highly skilled and patient; they monitor your email traffic and strike when the time is right. If they're not patient enough, many hackers are willing to launch a ransomware attack or a cyber extortion virus on your work computer. Both could severely disrupt your firm.
How Much Does Accounting Insurance Costs?
The cost of accounting insurance depends on the policy that your business needs. We listed five important accounting insurance for CPAs and accounting firms, let us analyze the costs for each of them:
- Professional Liability Insurance: The average premium is $61 per month, which adds up to $735 annually.
- General Liability Insurance: The premium cost varies, with a monthly range of $40 to $55, which equals an annual range of $480 to $660.
- Property Insurance: Small businesses typically pay around $67 per month as an average premium, which comes to about $800 annually.
- Business Owners Policy: Typically, a business owner's policy costs approximately $57 per month, which amounts to roughly $684 annually.
- Employment Practices Liability Insurance (EPLI): The average cost of employment practices liability insurance is $70 per month or $840 per year.
- Workers Compensation Insurance: Workers' compensation insurance usually averages around $45 per month, which comes to approximately $542 annually.
- Cyber Liability Insurance: The typical cost of cyber liability insurance is approximately $145 per month, which adds up to about $1,740 annually.
Factors That Determine the Price of Your Accounting Insurance Policy
When you apply for accounting insurance, insurers consider several factors to determine the price of your coverage. The main cost drivers include:
1. Size of the company
The size of your firm logically affects the premiums – if you have more accountants who need coverage, you'll have to pay more to insure all of them.
2. Over three years revenue records
Before determining the cost of your accounting insurance, insurers will examine your firm's three-year revenue. In simple terms, the more your firm's revenues, the more likely it is to attract lawsuits, which can raise its potential risk and cost.
3. Areas of specialization
The type of services provided by the accountant plays a crucial role in calculating premiums. Insurers consider certain practice areas as higher risk, and they adjust premiums accordingly. For example, CPAs usually pay higher accounting insurance costs compared to bookkeepers.
Furthermore, the clients your firm serves also have an impact. For instance, If your firm is providing auditing and tax services to large multinational companies, the insurance cost will be higher compared to someone who is responsible for bookkeeping for small businesses.
Firms based in major cities like Los Angeles will have to pay higher insurance premiums compared to those in less densely populated locations.
5. Insurance claims history
The claims history of your firm will largely determine your insurance premiums. A firm with history of severe and expensive claims will pay higher insurance coverage. Conversely, companies with a clean claims history can anticipate paying less for adequate protection.
6. Insurance limits
This is a relatively simple factor to understand – you will pay more money for higher insurance limits. It's good to work closely with your broker to carefully determine the right amount of accounting insurance that you need. This way, you can avoid overpaying while still ensuring you have adequate coverage.
Conclusion: Accounting Insurance for Accountants and CPAs
Accounting insurance is like a special safety shield for accountants and their firms. It is a must-have for both big and small firms due to the nature of their jobs. The insurance that CPAs and accounting firms need include professional liability, cyber security, workers compensation, and property insurance. Ensure you buy your policy from a reputable insurance company near you.