What Is Professional Liability Insurance?

Professional liability insurance, also known as errors and omissions insurance, protects you if one of your clients files a claim or a lawsuit against you. Professional liability insurance provides coverage for the damages that could result from a claim, not only from the work you performed, but also for the expenses and attorney’s fees necessary to resolve the claim or lawsuit.

How Does the Insurance Company Determine My Premium?

When determining professional liability premiums, insurance companies consider several different factors: the size of your firm, your practice areas, your management procedures – and your firm’s previous claim history.

Firm Size

Most of the insurance companies that provide accountants’ professional liability insurance use revenue as the basis for calculating your premium. Typically, you are asked to provide your firm’s revenue over the most recent three years, which the insurer then averages to calculate your premium. When determining the base rate, the company also may factor your firm’s headcount into their final calculation.

Areas of Practice

Also considered in the calculation of your premium are the services you provide and your areas of practice. Tax and bookkeeping services are viewed as low-risk practice areas, but audit is considered a higher risk type of work. When calculating your premium, companies typically consider the percentage of your revenue by area of practice to determine any modifications (“mod”) in price. Revenues from tax carry a low-price mod, while audit revenues have a higher mod to reflect the higher risk of that type of work.

Practice Management

A review of your firm’s practice management procedures also can impact your premium. Procedures considered may include your use of engagement and disengagement letters, CPE by staff, and peer review and outcome of the review. Insurance companies also consider the types of clients you serve and your concentration on one specific type of client, if any. If auditing is one of your firm’s services, you should know that insurance companies view your concentration in a specific type of business more favorably than when you provide auditing services for a wide variety of different industries.

Claim History

Companies will review your firm’s claims history in determining a premium. Typically, you’re asked to provide information on historical claims over the previous five years as well as any present-day circumstances that could lead to a future claim. You must report all known claims and their circumstances on your application. When determining acceptance of your application, companies assess the magnitude, the cause and the frequency of claims reported; then, they use this information to establish your premium.

How Can I Save Money on Professional Liability Insurance?

Companies will provide a variety of limit and deductible options that differ in significant ways. You should consider all these options carefully since they can have a critical impact on your premium.

The standard limit provides a fixed dollar amount to respond to all claims that includes any damages and claim expenses reported during the policy period. If you purchase a standard limit of $1,000,000, for example, that amount represents the maximum the company will pay during the policy period – regardless of the number of claims reported.

In addition to the standard limit, companies may provide split limits, which provide a per-claim and aggregate limit for claims reported during the policy period. For instance, a split limit of $1,000,000 per claim and $2,000,000 in the aggregate provides coverage up to $1,000,000 per claim, and it also makes available an additional limit of $1,000,000 for other reported claims. The extra cost for the split limit option can range between 5 to 10 percent.

Another limit option provides for claim expenses covered outside the limits of liability, commonly referred to as CEOL. Unlike the previous examples, claim expenses under CEOL policies do not deplete the limit, which allows you to reserve the limit for payment of damages. Depending on the limit amount you purchase, the cost for CEOL also ranges between 5 to 20 percent.

The standard deductible for professional liability policies is the per-claim deductible, and it applies to both your claim expenses and the damages, up to a selected amount. Companies may offer an aggregate deductible that places a cap on your deductible cost during the policy period to the selected amount – regardless of the number of claims you report. In addition, you also may be offered a first dollar defense deductible that limits your responsibility to pay the deductible for claims only when damages are paid to resolve it. The cost for both of these options can run between 5 to 10 percent of additional premium.