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7 Questions on your Application that are Important to your Professional Liability Insurance Coverage
Sue Hillegass, NAPLIASelect Manager
In my 25 years' experience in underwriting professional liability insurance for accountants, one thing has not changed: The number one complaint consistently made at renewal involves completion of the renewal application. To most accounting firms, completing the annual renewal application is a cumbersome process that is perceived as more time consuming than valuable. Not a week goes by that I do not hear;:
"Why do I need to fill this out every year?"
"Nothing has changed from last year."
"I have been insured for years with the same carrier; don't they know who we are?"
I'm certainly empathetic to these comments, and as your insurance agent, we make specific efforts to assist where we can. All NAPLIASelect clients have their renewal applications personally pre-filled by our NAPLIA staff.
Beyond assisting where we can, I want to take the time to explain why your renewal application is actually an important tool in assuring the appropriate coverage for your firm. Updating your firm's information is critical to matching your insurance coverage to your attributes and risk exposure.
7 application areas that are important to your insurance coverage
1. Firm name
Although potentially considered an administrative - or insignificant - detail, the firm name directly corresponds to one of the most important policy elements: the "Named Insured." The policy declarations page should always match the firm's name(s).
As your insurance agent, we are sometimes surprised by name changes, mergers or acquisitions with other firms, or newly established entities and D/B/As. We cannot stress enough that your insurance agent should be contacted early in the discussion process of a merger or acquisition. Certain steps can be taken to minimize liability and maintain prior acts coverage. However, these options are usually limited after the merger or acquisition has occurred.
In addition, "additional insureds" should be addressed prior to delivery of services to avoid potential gaps in coverage.
2. Professional staffing
Accurate listing of your professional staff is important for several reasons. First, some carriers use your professional staff in the rating process to determine your premium. Therefore, correctly classifying your staff is important. Carriers generally define professional as "an individual who has a four-year degree in accounting or related services and/or whose time is billable to clients." If in doubt, simply contact us to discuss.
In addition, the number of years a professional has been with your firm can impact the premium rating. A newly hired professional, regardless of years of experience, is potentially rated lower than a professional who has been with the firm for five or more years.
Almost all insurance carriers use revenue as a significant factor to determine your premium. Revenue is typically noted as gross revenue as listed on your last tax returns.
A significant increase or decrease in revenue and/or professional staff are items that an underwriter looks for on your renewal application. Proactively addressing significant firm changes is beneficial to you in the underwriting process. (i.e. An increase in revenue as the result of a one-time project may be weighed differently in the premium calculations; or a partner leaving with a large portion of firm revenue may lead to further discussion on prior acts coverage and liability.)
4. Areas of practice
The services provided by your firm are typically reviewed by an underwriter to determine potential exposure. You have probably heard that Audit engagements have a higher severity of claims, but Tax engagements have a higher frequency. If you list an area of practice as "other," or in a category that requests additional details, please provide enough details for the underwriter to clearly understand the services you are providing.
In addition, if you have added a new service (i.e. personal financial planning) discuss with your agent the additional exposure and coverage for these services. Often endorsements are available for Registered Representatives, RIAs, and Life Insurance Sales agents, but must be added manually as the policy itself may not extend coverage to these services.
5. Trustee and non-Trustee type services
Many accountants' professional liability policies have exclusions or restrictions regarding trusts services. Having a clear understanding of the services you are engaged in assists us in properly evaluating the exposure. Consider - even if billed by the firm - some trustee services are legally provided by you personally, and not on behalf of your firm. In order to have appropriate coverage, we usually request to name the individual as an "additional insured" in such cases.
Non-trustee services, like bill paying, have unique issues and exposures. In particular, some services should or may require employee dishonesty coverage which is not covered under your professional liability policy. Your agent can assist you in exploring stand-alone employee dishonesty coverage for these exposures.
6. Directors and Officers
Insurance applications will ask questions regarding any employees who serve as a board member for either profit or non-profit entities. Accountants' polices differ on coverage intent, and it is important to understand that, because you list a provided service on your application, it does not automatically mean that your policy provides related coverage.
Coverage for the services as a Director or Officer is not covered under your professional liability policy. There are some exceptions in the case of non-profit entities. Always ask the client if they have a Director & Officer Liability policy in place prior to accepting these positions.
In addition, almost all policies have exclusions that impact the accounting services provided to those clients for whom you may serve as a Director or Officer. Several insurance policies exclude any services to a client where an employee acts as a director or officer (or has an equity interest). Others allow for claims, provided that you are not providing audit or review services for these entities while also serving on the board. Underwriters have to know the details to make sure they can match your insurance coverage with your risk exposure.
7. Claims and Potential Claims
If you have had any claims, potential claims, or issues that you reasonably believe could lead to a claim, you must notify your professional liability insurance carrier prior to the expiration of your policy. Including this information on your renewal application is required; however, your renewal application does not constitute notification to the carrier of a claim. Each policy contains several reporting conditions that must be met for the insurance company to accept the claim notification. Understanding the nature of the claim or potential claim is essential for the underwriter in determining renewal terms.
We concur with you that renewal applications can be time-consuming and cumbersome to complete. However, they are an important aspect of your renewal process and calibrating your insurance coverage. Understanding the above factors may help you with the process of completing your applications. In addition, follow these simple tips:
1. Be honest and accurate with all questions.
2. When additional details are requested, provide enough information that an underwriter, who may not be familiar with your firm, will be able to quickly decipher and evaluate.
3. With the assistance of your agent, anticipate questions that an underwriter may have and proactively address these items.
4. Contact your agent prior to any formal discussions regarding mergers or acquisitions.
5. Contact your agent with any questions. Our role is to be your liaison and adviser in the process.
Sue Hillegass is the Manager for NAPLIASelect, representing North American Professional Liability Insurance Agency, LLC's top tier clients. She has been underwriting Accountants Professional Liability Insurance nationally for 25 years.