7 Essential Coverages for Accounting Firms

By John P. O'Connor, vice president, strategic product & platform development, Travelers Small Commercial, and Dan Reed, E&O product manager,Travelers Bond & Financial Products

Given the recent deadline for second-quarter 2012 estimated tax payments on June 15, your accounting firm clients have been busier than usual. With another rush of deadlines, they have probably not been thinking about the need to have adequate insurance in place to cover a major setback. But given current economic conditions and increasingly unpredictable weather, small businesses have too much at stake to risk being underinsured.

Whether you have existing accounting firm clients or want to expand into this market, it's important to remember that in a time-sensitive business like accounting, disruptions can be costly and damaging to client relationships. From a fire or natural disaster, to a disgruntled client or a physical injury that leads to a lawsuit, your clients need to be prepared. 

By talking to clients and prospects about these exposures and issues, agents and brokers strengthen their role as trusted advisors and ensure their clients have the right risk management and insurance products in place. If a loss occurs, clients will have the resources they need to get their firms up and running as quickly as possible.

Read related: “Large Professional Firms, Big EPL Risks.”

As they work day and night to meet filing deadlines, here are seven essential coverage areas to highlight for them:

 1. Commercial multi-peril: Any comprehensive insurance program has at its foundation a commercial multi-peril (CMP) policy. The policy and any endorsements should carry adequate limits for all essential coverage, such as property, business income replacement and liability. Be sure to advise your clients to seek out and choose a financially strong and stable insurer.

 2. Property: Any business can be affected by fire, natural disasters or other destructive events. One way to make sure your clients know what's at stake is to do an office inventory with them. Discuss the cost, for example, to replace desks, chairs, computers and other items that are used on a daily basis. Valuations need be up-to-date and the full replacement cost assessed. It's not uncommon to undervalue essential equipment as well as the cost to rebuild.

In a document-dependent business such as accounting, property insurance should also include valuable papers coverage. This will ensure that if client files, billing and other essential files are damaged or become inaccessible, the business won't suffer irreparable harm. Cloud or offsite electronic records storage can help mitigate losses.  

Also, if the business leases more office space or equipment during peak tax season, the insurance limits need to reflect that increase.  

3. Liability: No professional executes flawlessly every day and with every client. Professional errors or accusations of errors can have devastating effects on the reputation, focus and finances of an accounting operation.  Professional liability coverage is often the difference between the firms that clear the hurdle of a professional liability claim or lawsuit and those that do not. Changing tax laws can be one of the biggest threats to an accountant's practice. If their knowledge isn't current, the risk of filing incorrectly or advising clients improperly increases and the likelihood of litigation increases.

Liability also extends to the physical environment, where people slip, trip, fall and sometimes sue. Providing risk management advice, even if it seems rudimentary, can be helpful for clients. Assessing the physical condition of the office and surrounding areas, such as hallways and parking lots, is the first step. Are there potholes in the parking lot, dim lighting in the hallways or stairways, wet or uneven floors, or rugs that aren't securely attached to the floor? All of these are potential hazards that need to be corrected.

Make sure your client understands that with contract workers of any type, such as a freelance accountant hired for the peak season or vendors, such as snow-removal contractors, it's vital to insist proper contractual indemnity provisions as well as specific insurance requirements are in place. That way, the business will be protected from liability arising from the negligence of the contractor. 

4. Network and information security offense coverage: Many professionals, particularly those in small businesses, mistakenly believe that cyber-attacks are directed at large businesses and they won't be affected. In fact, small businesses are increasingly under attack by cybercriminals and they face serious and costly legal issues relating to privacy and data breaches. In accounting businesses in particular, the client information on hand is extremely valuable to a hacker.

If a lawsuit does result for any reason, it's critical to have liability insurance that will transfer to the insurer the burden of investigating and defending the suit and/or negotiating a settlement.

It's also important to have a plan to secure or move physical records if an office or building is damaged and no longer secure.

Read related: “An ROI Analysis of Document Management.”

5. Replacement income coverage: While most people would expect accounting firms to keep impeccable records for their own businesses, it's not always the case. Agents and brokers can help accountants understand that replacement income coverage is based on documented information. How much would it cost, for example, to keep the business running if income was disrupted? Many practice owners underestimate the cost to maintain their business or the amount of time it takes to reopen following a disruption. For accounting businesses with their ebbs and flows, a disruption at a busy time could be disastrous if there's no insurance in place. Replacement income also enables the practice to continue paying staff during the interim period.

Records documenting past income should be stored in more than one location so they can be immediately accessed, even if the main office is inaccessible. 

6. Business continuity plan: Many firms don't understand the need for a business continuity plan if a substantial loss or disruption occurs. But having a plan in place coupled with good insurance could mean the difference between surviving and shutting down. Accountants need to have a way to quickly access and restore client and other records. 

7. Workers' compensation: Most states require accounting firms with one or more employees to purchase workers compensation insurance. This insurance provides workers with wage and medical expense protection when injured on the job. Employees, including those with non-physical roles like a bookkeeper or accountant, sustain work-related injuries. Consider an employee who walks to the bank to deposit a firm's daily accounts receivable and falls or the impact long nights at a computer screen can have on carpel tunnel syndrome or eye-related issues. This is an area where good risk management can help to avoid or reduce problems.

Accounting practices need the kind of specialized help only experienced and knowledgeable agents and brokers can provide. Whether you have an established niche in this market or hope to expand your practice, providing great counsel and products can help win and retain clients.