4 Trends to Watch in Professional Liability for Accountants

November 3, 2014

There’s no shortage of accountants in the United States today, and the growth of this industry is not expected to slow anytime soon.

In 2013, there were 1.17 million accountants and auditors and 1.59 million bookkeeping, accounting and auditing clerks employed in the United States, according to the U.S. Bureau of Labor Statistics. The number of accountants/auditors and their staff is forecasted to rise to 3.44 million by 2022. The revenue of the accounting, tax preparation and payroll services industry in the United States reached approximately $137 billion in 2013. By 2018, this industry is expected to generate around $160 billion.

That’s one reason why Greg Leffard, president of professional E&O at The Hanover Insurance Group, sees this segment as an area of opportunity for agents and brokers.

Leffard spoke with Insurance Journal’s Andrea Wells in mid-October to outline a few key trends in the errors and omissions (E&O) liability market for accountants today.

Accountants tend to be a good source of referrals for agents.

While the accountant E&O market has been a relatively stable marketplace, Leffard says a few more competitors have entered the segment in the past couple of years. For agents considering targeting this niche, there’s plenty of potential for growth.

One bonus – accounting firm clients often generate referral business for their insurance agent partners, Leffard said.

“One of the things that is interesting about the agent’s relationship with their accounting clients is that accountants tend to be a good source of referrals for agents,” he said. “If an agent writes an accounting firm and does a good job for that firm, they establish a good relationship and that repeats itself over and over.” That’s because like agencies, accounting firms do business with many other people. “If they’re satisfied with the agent’s service, the accountant will generate a good referral flow.”

Here are four trends Leffard outlines as issues to watch in the professional liability market for accountants.

Affordable Care Act

Greg Leffard: One of the things that we see in the marketplace right now that our accounting clients are facing includes issues concerning fines and penalties under the Affordable Care Act. There are penalties for those who do not have health coverage. Those fines are actually levied through tax returns. That’s a new development and something that a lot of people are talking about. Individuals and businesses that are not represented by an accountant may have difficulty in this area.

It’s an issue that we obviously expect accountants to be up to speed on as they prepare tax returns for their clients. If a tax return is filed incorrectly, and their client has to pay a fine or a penalty due to an incorrect filing, that client would obviously seek some recovery from their accountant. It wouldn’t be a direct action against the accounting firm by the government. However, the accounting firm client would be adversely impacted by the filing mistake and would therefore be seeking some reimbursement or compensation because of that. It’s been a pretty big topic of conversation so far.

Baby Boomers and Wealth Transfer

Leffard: The second trend that we see happening right now has to do with retirement planning for the baby boomers generation. As baby boomers plan for retirement, there’s a lot of discussion and work being done with accounting firms around the idea of wealth-transfer. Many baby boomers have family businesses to transfer, or have needs for other wealth transfer mechanisms such as estate plans. They really are relying on their accountants to steer them in the right direction and make sure that their wishes are complied with, while at the same time they’re also minimizing their cost or their tax liability. We think that that’s a big area that will continue to grow over the next several years as those of us who are in that baby boomer generation continue to age. … One of the things that we ask in our underwriting process is: What areas of practice does the accounting firm get involved in? There are accounting firms that have some specialization in the area of wealth transfer, and then there are also general accounting firms that do not have that specialization. As a general rule, we think that those who are specialists and have some background and experience in a specialty area are probably a better risk for us.


Leffard: Another trend that we are seeing from a claim perspective is an uptick in some partnership issues. This uptick in claims has to do with partnerships that are dissolving, or perhaps seeking some additional financing, or doing something out of the normal course of business. It really has to do with an accounting firm that is providing services to the partnership (the client). In some of these claims scenarios, there might be an allegation that the accountant is favorably treating one partner over another. It doesn’t happen all the time, but the idea of favoritism is very difficult to defend. It ends up being a “he said, she said” situation. We think that the use of an engagement letter that specifically spells out who the firm is representing and lays out the ground rules for that representation is a great risk management technique. That’s one way to overcome this issue.

Information Security

Leffard: The last issue is just the whole area of information security. That is a huge topic, not only with accounting firms, but also for every individual and buisness right now. Obviously, accountants, by the very nature of their business, have a lot of personally identifiable information or business sensitive information – information that is not known by the general public. If they have that information on a laptop and it gets stolen or if they misplace some work-related documents and that information makes its way into the wrong hands, that’s an exposure that they need to have coverage for. This is an area that accounting firms need to be cognizant of and make sure from a risk management perspective that they’re addressing those issues.

We do see a lot of accounting firms that will purchase a separate cyber liability coverage. However, even in our own accountants professional liability policy we offer some information security coverage in the policy form. We’re going to beef-up the coverage even more next year. That’s one of our priorities for 2015 – is to make sure that we have a product that adequately addresses this exposure.

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