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Understanding the professional liability claim process

By Sarah Beckett Ference, CPA

Facing a professional liability claim can generate strong emotions. If a CPA discovers an error on a previously filed tax return, emotions may include guilt about having made an error, as well as anxiety about how to tell the client. If a CPA is served with a seemingly frivolous lawsuit, anger and frustration often follow. Irrespective of the situation or emotion, when a claim arises, the first call a CPA should make is to its professional liability insurer.
Contacting the insurer may produce feelings of worry or dread. Some may hesitate, especially if the issue appears minor. What will happen to me? Will this affect my premium? My coverage? How will this affect my reputation and my life? To help overcome these feelings of unease, we pull back the curtain on the claim process and highlight what to expect if this unfortunate situation happens to you.


Professional liability policies are typically issued on a claims-made basis, meaning the policy provides coverage when a claim is made against the insured, not when the error or omission occurred subject to its terms and conditions. A claim often must be reported to the insurer in the same policy period in which the CPA becomes aware of the claim. Consequently, timely reporting is crucial. Policy language dictates the policyholder’s specific responsibilities regarding when and how claims should be reported.

Professional liability policies can require reporting of both actual claims and potential claims. Actual claims are fairly straightforward and include service of a suit, institution of arbitration proceedings and other demands for money or services. Potential claims are less obvious and may include acts or omissions that are reasonably expected to become the basis of a claim. For example, a tax practitioner realizes an error was made in a prior year return, resulting in an underpayment of tax or an auditor learns that the client’s bookkeeper has been processing fictitious invoices and embezzling money from the client.

CPAs may question whether something should be reported, especially when it may appear minor or immaterial. However, claim outcomes generally do not get better with time, and what may appear trivial to the CPA may not be perceived the same by others. Do not attempt to address the matter yourself. Remember, your insurer probably has more experience handling claims and also possesses the desire and resources to help keep a potential claim from evolving into an actual one.

Building the defense team

Resolution of a claim can take anywhere from a few months for a straight forward matter to several years. At CNA, the average accountants matter can take 18 months to resolve and close. Thankfully, there are guideposts to help support and steer CPAs through this stressful time. The reported matter will first be assigned to a claim professional with experience handling accountants professional liability claims; they may even have prior experience in law or other professions relevant to the matter. Similar to a CPA firm, many claim professionals work in teams, enlisting others with specific expertise depending on the circumstance presented. For example, complex claims such as class action lawsuits, those made by celebrity plaintiffs, or that assert damages well in excess of the policy limit may be assigned to claim professionals with specific skillsets necessary to address the intricate and complex nuances of the matter.

The claim professional may assign defense counsel. Before counsel is assigned to defend a claim, they are extensively vetted. Criteria evaluated typically include experience and track record handling accountants professional liability matters, trial experience, licensing in and knowledge of the applicable jurisdiction, and written and oral communication skills. A CPA may be apprehensive to trust an attorney with whom they have had no prior dealings. Perhaps the CPA would prefer to use their counsel or a friend or a neighbor who is an attorney. However, attorneys, similar to CPAs, develop specific expertise, and not every attorney has the requisite professional skills to defend accountants professional liability matters.

Development of resolution plan

One of the first documents requested by the defense team will be the CPA’s engagement letter. This helps the defense team understand the specific scope of services and what was mutually agreed to between the client and the CPA. The engagement letter also identifies the professional standards applicable to the service and, thus, defines the appropriate standard of care. An expert may be assigned to help the defense team assess the strength of the case and evaluate the CPA’s adherence to the applicable standard of care. The expert will review engagement workpapers, documentation, and communications. Members of the engagement team may also be interviewed to gather additional insights.

The complexity and venue of the matter and the litigiousness of the plaintiff are just some of the considerations that influence the resolution plan. If the engagement letter does not already address it, mediation may be suggested as a more expeditious path towards resolution. Mediation represents a facilitated negotiating process in which the parties to a dispute meet with a neutral third party whose sole function is to work with the parties to create an acceptable outcome. When successful, mediation is generally quicker, and less costly, than litigation or even arbitration.

What should CPAs expect?

Professional liability insurers, defense counsel, and experts understand that a claim can be unsettling and disruptive. Thankfully, they are there to support the CPA and help them get through what may be viewed as a nerve-wracking process.

CPAs should expect regular and clear communication with their defense team. They also should expect that their input will be heard and appreciated. Professional liability insurers should seek the CPA’s written consent before settling any claim. If you are unhappy with the service received, there should be an avenue to provide your feedback.

What can CPAs do to help?

  • Take advantage of resources provided by the insurer. Many professional liability insurers offer risk control resources to help a firm manage its risk. Resources may include sample engagement letters, articles with risk management tips, training and educational resources, and experienced professionals to provide direct, consultative advice to CPAs. Use of these resources may help prevent a claim or, at a minimum, help defend the claim should one arise.
  • Report early and often. Professional liability insurers want to know and help if there is a problem on the horizon. Early reporting is advantageous for both the CPA and the insurer, and consultation and communication with your insurer is strongly encouraged. When in doubt, report the matter, and seek assistance from your insurer.
  • Understand and utilize policy benefits beyond claim defense. Not all claims start as a claim. Some may arise following a subpoena, deposition, or regulatory inquiry of the CPA. For this reason, many professional liability policies offer supplemental benefits to assist CPAs when responding to these items, and such benefits may be at no cost to the CPA.
  • Keep an open mind. According to most defense experts, few engagements are perfect and any set of workpapers has room for improvement. The defense team will provide an objective view of the strength of your defense based upon their experience and their view of how a judge or jury might perceive the matter. Equipped with this information and supported by an experienced defense team, you can then select the best path forward.



