By Kenneth Wigboldy, CPCU
The movie “Bad Education,” released by HBO in April 2020, deals with one of the worst embezzlement cases in the history of public education, underscoring the importance of reporting claims and potential claims as soon as they become known. When the embezzlement was discovered, it was thought to amount to about $250,000. The theft was not reported until after the insurance policy periods in play had elapsed, and the policy requirements to report claims and potential claims on a timely basis had not been met.
A subsequent investigation discovered more than $11 million in thefts. Because the thefts had not been reported on a timely basis, coverage was denied, and those involved had to pay substantial amounts for their own legal defense.
This was just one high-profile example of a late-reported potential claim. More common situations for CPA firms generally involve tax-related claims, partly because such claims represent about 60 percent of all CPA professional liability claims, according to CAMICO statistics compiled over 34 years (1986 through 2019). Another reason for the high frequency of tax-related claims is simply the nature of tax seasons. CPAs sometimes are so busy they don’t properly acknowledge a potential claim as it develops. The potential claim is not reported until it becomes a claim made against the CPA, and if the policy and grace periods have expired, the damages may be denied due to the policy requirements for timely reporting not being met.
Estate tax returns are prone to late filings because of their irregular due date—nine months after the decedent’s date of death. With larger estates, tax penalties can run as high as $300,000 or more. When CPAs try to handle the penalty abatement request by themselves without reporting it to the insurer, the policy and grace periods may expire in the meantime, and the CPA may be denied coverage for the penalty because of late reporting.
The sooner claims and potential claims are reported, the more effective an insurer can be in achieving an early resolution. Early reporting will also help assure coverage for the potential claim. Some insurers encourage the early reporting of claims by reducing the deductible for any potential claim that is reported before a claim is made. Further, if it is determined that it is appropriate to retain legal counsel to assist with a pre-claim situation, some insurers will absorb the legal expenses, help policyholders achieve a resolution with the client, prepare a tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide subpoena and other services, if the needs arise. “Continuity of coverage for potential claims” is another feature that has been available to CPA firms. This provision helps eliminate coverage gaps for potential claims known to an insured and not timely reported by the insured, while coverage is consecutively renewed with the insurance company.
The key is to pay attention to potential issues and to report them to insurance carriers as soon as there might be a problem. Of course, the best way to avoid a claim is to manage the risks that lead to claims. Some of the basic risk-management tools, such as client screening, engagement letters and follow-up documentation, are crucial in managing potentially major problems. A good insurance program will also advise on how to utilize its resources to help CPA firms improve their practices. The company should do its best to help you minimize your losses and control your premiums. The CPA firm should always feel comfortable about contacting its liability carrier and asking questions about any matters, regardless of how small they may appear to be.
The information provided is a general overview and not intended to be a complete description of all applicable terms and conditions of coverage. Actual coverages and risk management services and resources may vary and are subject to policy provisions as issued. Coverage and risk management services may vary and are provided by CAMICO and/or through its partners and subsidiaries.
Kenneth Wigboldy, CPCU, is vice president of claims for CAMICO, responsible for CAMICO claims operations. He has more than 30 years of experience in property and liability insurance claims management.
CAMICO is a preferred provider of the VSCPA.