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Using Indemnification Clauses to protect your firm

signby Rickard Jorgensen, FCII, ARM, ACIArb

All CPAs know that a signed engagement letter is a crucial tool in the defense of a professional negligence lawsuit. The engagement letter memorializes the terms of the engagement, details what services you are performing and more importantly, the services you are NOT offering (i.e. you will not detect fraud). Engagement Letters often provide a basis to resolve any disputes (e.g. a mediation clause).

But what about an indemnification provision? We have talked about such clause in the past (go here) and there is a debate over enforceability; however, an indemnification provision can actually be used in settlement negotiations or can act as a shield to litigation if a plaintiff (client) is faced with the possibility of reimbursing you for the cost of defending a malpractice lawsuit. Of course, legal jurisdictions differ so local counsel must be engaged to give a local perspective, and engagement letters for certain services (e.g. attest work for public companies) cannot contain an indemnification provision.

There are certain instances where it is appropriate to use an indemnification clause in an engagement letter and there are various versions of the clause you should consider.

A basic indemnification provision can be worded as follows:

“[Name of Client] agrees to indemnify [CPA Firm] for any monetary losses, including attorney’s fees, caused in whole or part, by [Name of Client] negligence, dishonest intentional act, or failure to meet or fulfill the obligations outlined in this engagement letter.”

Of course, certain clients may baulk at the prospect of signing an engagement letter which contains this clause so there are a number of variations on a theme.

Lesser of Actual Damages for Fees Paid

“By accepting and signing this Engagement Letter [Name of Client] agrees that the liability of [CPA Firm] arising from the services performed shall be limited to the lesser of any actual damages which may have been caused by our acts or omissions, or the amount of the fees which you pay for our services.”

Liquidated Damages Only

“By accepting and signing this Engagement Letter [Name of Client] agrees that the liability of [CPA Firm] arising from the services performed shall be limited to no more than __% of the fees which you pay us for the performance of this engagement.”

“Prevailing Party”

“If [Name of Client] bring an action against [CPA Firm] concerning the outcome, quality or timeliness of our performance of services described in this engagement, Name of Client] agree that the party who prevails shall be entitled to recover [CPA Firm]’s or professional liability insurer’s attorney fees incurred in defending such suit. If plaintiff is awarded judgment greater than the largest offer of settlement made within _ days after the service of suit, plaintiff shall be deemed to have prevailed. Otherwise, defendant shall be deemed to have prevailed.”

Payment of Defense Costs – Breach of Covenant Not To Sue

“By signing and returning a copy of this Engagement Letter, the [Name of Client] agrees that any dispute concerning the outcome, quality or timeliness of the service performed in this engagement shall not form the basis for legal action, and agrees not to bring suit against [CPA firm]. Should a lawsuit be brought in violation of this clause, the undersigned client agrees to pay attorney fees incurred by the [CPA Firm]’s or professional liability insurer’s attorney fees in the defense of such action.”

Payment of Defense Legal Costs – No Prevention Against Suit

“In addition to the fees and costs for professional services defined in this Engagement Letter, [Name of Client] agrees to pay an amount equal to all attorney fees incurred by [CPA firm]. in connection with this engagement, including but not limited to, attorney fees incurred for legal advice on any issues arising from this engagement; incurred in connection with any suit to recover the fees due from [Name of Client] for this engagement; incurred by [CPA firm] in responding to any subpoenas, interrogatory or other legal process arising from this engagement; and incurred in the defense of any action brought against [CPA firm].”

However, a client’s agreement to any of the forgoing indemnification clauses depends upon the nature of the engagement, the cost of the engagement and the firm’s relationship with the client. As stated above, indemnification clauses are best looked upon as a shield, and not a sword, but if included in an engagement letters can contribute to the speedy resolution of a malpractice claim.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com