McGowanPRO Professional Liability Blog / Resources / Articles

As the New Year approaches so does Tax Season for our CPA clients.  One of the consistent issues that arise for CPA’s at this time of the year is the question of utilizing engagement letters for tax clients.  Some CPA’s feel that requesting their tax clients to sign engagement letters is burdensome and may appear ominous to some clients. 

The professional liability (errors & omissions) insurance market has always been cyclical.  In other words, the market will go for a few years with excess capital which means low premiums and an abundance of carriers offering coverage to accounting firms.  However, the capital eventually dries up and those carriers who were looking for a quick profit drop out of the market, leaving fewer carriers, tighter underwriting restrictions and increasing premiums.

2010 was an “extended” soft market for the accountants (and other) professional liability market.  The tightening of capital and low investment returns for insurance companies was over shadowed by the recovering recession.  The market continued to be soft despite economic indicators that would typically reflect a hardening market.

For 2011, we are starting to see some signs that the hard market may eventually come.  Keep in mind, we’ve inaccurately predicted this before.

However, here are 3 specific signs that lend us to believe the hard market is coming:

1. Economy is improving.

According to the Commerce Department, the economy grew at an annual rate of 2.6 percent in the third quarter of 2010, a touch above its earlier 2.5 percent estimate.  Many forecasters expect gross domestic product to continue to expand at a 3 percent to 3.5 percent pace in the fourth quarter.  A separate report from the National Association of Realtors showed existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace, the highest since June but a still-depressed level that was slightly weaker than expected.  Surprisingly, an improvement in the economy allows insurance carriers to improve their investment income and demand more underwriting profit.

1. Carriers look to get off sub-standard accounts and take premium.

We have seen an increasing trend of professional liability carriers electing to non-renew accounts that just a year ago they were willing to take a chance on.  In addition, subsequent to those carriers that have filed formal rate increases, underwriters are being stingier with applying available premium credits.

1. The New York Attorney General sues Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud”

In the property & casualty business they have hurricanes and other natural disasters to harden the market.  Ernst & Young might just be the hurricane of the accounting professional liability market that pushes carriers to finally tighten up their pens.  You can read more about this story here, http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?scp=2&sq=lehman%20brothers&st=cse

In general, no one can predict exactly if the insurance market will harden, or to what extent.  But, there are definitely some signs on the horizon.  In our next blog, we’ll discuss ways your firm can prepare.

Social media can be a valuable tool for investment advisors to reach new client audiences and network with colleagues, but only if you know how to use it right. NAPLIA will be a featured speaker in fi360’s upcoming Webinar on building an effective social media program, understanding the liability and exposure associated with social media and complying with the latest regulatory guidance.

Date and time: Thursday, December 2, 2010 from 4:00-5:00 p.m.

Presenters: Jessica Weiner, Founder of Value Quotient, Tom Henell Chief Marketing Officer of NAPLIA and Kristina Fausti, Director of Legal and Regulatory Affairs of fi360

REGISTER HERE  (https://www2.gotomeeting.com/register/537072218)

Personal information (social security numbers, credit card numbers, bank account numbers, even name and address) has become a leading target of cyber criminals.  With your client's personal information in your possession, understanding your state privacy laws and having a timely response plan is essential.

So, what do you do if you have a Data Breach and some of your client’s personal information is compromised?

First, review your State Security Breach Notification Laws.  At this time, all but four states (Alabama, Kentucky, New Mexico, and South Dakota) have enacted Data Breach Notification Laws. 

See State Security Breach Notification Laws (http://www.naplia.com/resources/state_security_breach_laws.shtml)

Second, determine who should be notified:

• Law Enforcement
  • When the compromise could cause harm to a person or business, you should first contact your local police department.
• Your Insurance Carrier
  • Your insurance policies likely state that if you are aware of circumstances that could potentially lead to a claim you must notify them at your earliest convenience.  When in doubt, contact NAPLIA for assistance.
• Affected Businesses
  • The compromise may impact businesses other than yours including banks or credit issuers
• Individuals
  • early notification to individuals whose personal information has been compromised allows them to take steps to mitigate the misuse of their information.

The FTC has excellent resources to assist you in making these determinations and “Dealing with a Data Breach”,  http://www.ftc.gov/bcp/edu/microsites/idtheft/business/data-breach.html

For more information including a sample client notification letter visit our website, http://www.naplia.com/resources/identity_breach.shtml

Social Media has changed the rules

Social Media has become prevalent in our society and has the tendency to blur the lines between personal and professional exposure.  What your employees do on their personal time, or on personal website platforms while in your office, can impact you.  NAPLIA has developed specific guidelines for amendments to your Employee Handbook (www.naplia.com/social_media) and recommends every firm consider Employment Practices Liability Insurance (EPLI).

You are more likely to be sued by an employee than have a property loss

It’s a fact, you are more likely to be sued by an employee than have a property loss.  Yet, few firms would consider going without property insurance, while the percentage of firms that forego EPLI is significant.

Health or Benefit Reductions increase risk

Any reductions to employee benefits, including the reduction of 401k matching benefits, can increase the risk of EPLI claims. 

Economic slow down

Economic changes are rarely in our control, and unfortunately changes in the economy can directly impact your business.  It is a smart move to consider EPLI prior to having to consider any lay-offs, cut-backs, or changes to staffing.

Can you afford not to?

Over 60% of the employee liability claims filed annually are against small employers, and it is estimated that one EPL suit could bankrupt 50% of  small businesses without Employment Practices Liability Insurance.  Nobody likes to think it could happen to them, but with these statistics can you afford not to investigate insurance that could protect your business.

Breakdown of Cyber Claims*:

• System Glitch 36%
• Negligence  40%
• Malicious/criminal  24%

Interesting that 76% of the time, claims are not the result of hackers, or other criminal activity.

The following claims samples are actual stories from our experience.  No names or personal information is included.

1. Daylight robbery!

A CPA client had a laptop taken by a stranger who walked into the accountant’s office, grabbed the laptop and took off. The stranger was captured on security cameras and was well known to the local police. The laptop contained personal and confidential information on three banking clients. Police reports were filed and the client even attempted a sting operation trying to lure the criminal to sell the laptop through Craigslist.

Finally, a “no questions asked” reward was posted, but the laptop was gone.

The police do not believe that the CPA firm was targeted and most likely the laptop was pawned shortly afterwards. The CPA firm did not believe any sensitive information was compromised but did have to notify three banking clients of the potential security breach.

The banks were also forced to send letters to their clients warning them of the potential identity theft dangers.

The banks advised the CPA firm that any costs associated with the mailing of letters should be reimbursed by our firm. A claim’s file was established with the carrier and attorney appointed to represent our CPA client.

The cost to the CPA firm was $101,000. The firm absorded a $25,000 deductible as well a significant amount of non-billable time to bring this to a closure.

What steps could have been used to possibly prevent this claim.

• Laptops should be locked to a desk or other larger object to avoid the random quick theft. Locks are available resembling a bicycle lock that can secure the laptop to a desk. This will not stop a thieve from cutting the lock; however, it will make it less likely that it can be stolen in a grab and run theft.
• Laptops should be both encrypted for logging in and access to the harddrives.
• Consider purchasing a stolen laptop tracking device, like LOJACK, that installs an external program designed to erase all data in the event it is stolen.
• Only use laptops to access a server never store personal or confidential information, instead use the laptop as a portal to see but not store information.