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Professional Liability for CPAs – Understanding your coverage – Part IV – Exclusions

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AKA what’s not covered….

By Rickard Jorgensen, FCII, ARM, ACIArb

Whereas the coverage grant provides affirmative coverage, the exclusions take coverage away. If an activity is listed in the exclusions section of the policy, you do not have any coverage, no matter what the other sections of the policy state. It is the absolute prerogative of the insurance company whether a defense (with no obligation to pay the eventual settlement) will, or will not, be provided.

Each company’s insurance policy differs, so it is extremely important to examine exclusions carefully.

Listed below are the most important exclusions sometimes found in a professional liability insurance policy:

  • Dishonest acts, fraudulent acts, criminal acts, intentional or malicious acts are usually listed as uninsured in the first exclusion in most policies.  For the four categories of exclusion; however, defense coverage may be provided and coverage is often afforded to innocent parties).  Make sure you policy provides coverage until you are proved to be dishonest.
  • vicarious liability (liability acquired by law or by contract for the acts, errors or omissions of others).  This may be breach of contract or an indemnification.  Coverage for any claim which also arises from negligent acts should NOT be excluded.
  • claims made by or against a business enterprise owned or controlled by an insured (refers to claims by or against the business itself) OR claims arising out of or in connection with a business enterprise owned or controlled by an insured (refers to third-party claims).  There is no coverage if you are sued by a business you control or own.  There are limitations to this (like some policies limit this exclusion to Audit work or a percentage of ownership).
  • an accountant’s activities as an officer, director, etc., of a business not owned or controlled by the insured – similar to above but relates to management liability claims which is the subject of another type of insurance.
  • services as a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) – this does not exclude conventional accounting services.
  • personal profit – you cannot make a secret profit from the work for a client.
  • RICO (Racketeer Influenced and Corrupt Organization Act) claims arising from racketeering.
  • activities as a director or officer of another business – the policy cannot protect will not cover you for outside directorships.  This is the subject of a management liability policy.
  • worker’s compensation claims – this is a specific type of insurance which is usually regulated by your State’s department of insurance.
  • loss sustained as a beneficiary or distributee of a trust or estate – work as an independent trustee is usually covered, but not if you are a beneficiary.
  • bodily injury or property damage – this is usually covered by a Commercial General Liability policy or your Business Owners’ policy under the legal liability section.
  • claims involving an insured versus another insured – this can be restricted to non-professional services but in general, you can’t sue a fellow insured.
  • discrimination or sexual harassment – is usually covered by a Employment Practices Liability policy.
  • prior acts (acts committed before the policy period) where the insured had knowledge of or should have foreseen the claim.  There may be coverage for “innocent insured” or knowledge can be limited to a a management team.
  • activities as a broker-dealer in securities – this is a high risk activity.  Personal Financial Planning and activities as an RIA or Life can be added by endorsement.
  • securities work – the audit of Publicly traded companies is considered high risk and may require specific underwriting considerations and an endorsement.
  • punitive damages – often punishment damage awards are subject to State regulation as to whether these are insurable.  Certain policies excludes this absolutely.
  • fines, statutory penalties and sanctions – fines against the CPA firm are often excluded; fines and penalties awarded against a client which are part of a settlement, may not be covered.
  • contamination or pollution of the environment – this is the subject of  very specific type of insurance or government operated fun.
  • loss related to nuclear reaction, radiation or contamination – this is not usually insurable and is covered by a government operated fun.
  • fee disputes – this type of exclusion should be excluded at all costs as many claims against CPA’s arise from fee disputes.

Of course, policies can be modified with specific exclusionary endorsement which pertain to activities, entities, prior acts and area of practice.  You should check to see what specific endorsement attach to your policy.

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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.

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