Coverage Denial for Accounting Firm Shows the Limits of Professional Liability

Coverage Denial for Accounting Firm Shows the Limits of Professional Liability

Tuesday, September 15, 2015/Categories: Errors and Omissions Insurance, Fiduciary Duty

A hard truth from insurance land: no matter how many bells and whistles your insurance policy has, there are simply some things it can't cover. A report from Business Insurance illustrates that point: if you operate in legally nebulous territory or encourage clients to participate in illegal activities, then no, your insurance policy probably won't cover the ensuing lawsuit expenses.

Surprised? We hope not.

According to the report, the Memphis-based Financial Strategy Group (FSG) was sued by two groups of clients who claimed the tax preparation firm…

  • Developed and sold sketchy investment strategies, which were later deemed illegal tax shelters by the IRS.
  • Advised them that claiming losses from the illegal tax shelters was above board.
  • Committed fraud and malpractice.

The report notes that once the firm was hit with the suit, it tried to rely on its Professional Liability Insurance policy to pay for the associated legal expenses. As you might have guessed, the insurance provider Continental Casualty Co. denied the claim, according to the report.Though the firm sued the insurance company over breach of contract, the report states the court ruled in the carrier's favor and dismissed the case because the policy explicitly excludes coverage for any incident connected to illegal tax shelters.

So what can you learn from FSG's misfortune?

1. Review your coverage carefully to know what is and isn't covered.

No one expects you to drop your financial services gig and take up as an insurance agent, but if you buy an insurance policy, there is the expectation that you know what it can and can't do. After all, a policy is a legally binding contract, so you want to know what terms you're agreeing to.

Aside from that, understanding your policy can also help you decide when it makes sense to spend your hard-earned dollars challenging an insurer's decision on a claim in court. (Worth noting: there's no small business insurance policy that can fund lawsuits you initiate.) If you need some help on that front…

  • Talk to an agent to get clarification. Think of your insurance agent as your travel guide to the wide world of insurance. If you work with an agent who specializes in insuring small accounting and tax prep firms (hey, like the agents at Insureon!), they are very familiar with how Professional Liability Insurance can and can't apply to common situations. Tap into their knowledge.
  • Read the policy. It may not be a page-turning thriller, but you can do it. Be sure to pay special attention to the policy's listed exclusions, and ask your agent to clarify exactly what the exclusions mean for your coverage.

To learn a little more about what triggers E&O lawsuits, read "4 Reasons Clients Sue Accountants (and What to Do if You're Sued)."

2. Walk the straight and narrow.

The report seems to indicate that FSG wasn't outright selling illegal investment strategies. Rather, it was operating in a gray zone that was later deemed illegal. Because they are tax professionals, it's safe to assume they probably knew they were just outside the law but took the risk anyway.

Here's the deal: breaking the law is not worth the risk. Engaging in shady or outright illegal business practices endangers your livelihood and demolishes your credibility. There's no coming back from that, especially if you run a small tax prep firm.

Think about it: why do people turn to tax professionals in the first place? Because they don't understand taxes but they want to follow the law and fulfill their obligations. If you inadvertently advise them to break the law, they could face steep penalties and possibly jail time. That's not something easily forgiven.

What's more, Errors & Omissions Insurance doesn't address claims over intentional wrongdoing. Most E&O policies for accountants and financial advisers exclude coverage for illegal practices in the field. So play it safe, and if in doubt about whether something is illegal or not, err on the side of caution. Your business and clients will thank you.

For more insight on avoiding lawsuits, read "6 Ways Accountants Can Prevent Malpractice Lawsuits."

Print

Number of views (952)

Tags: