Professional liability insurance protects professionals against claims that errors, negligence or mistakes caused a client to suffer damages or injury. Over the past few years, several changes in the accounting sector have led to a surge in the frequency and severity of professional liability claims. As a result, recent research found that most accounting firms have encountered rising premiums, with some firms even experiencing double-digit rate increases.
It is crucial that accounting firms understand sector developments impacting the professional liability landscape and take steps to minimize their potential exposure, thereby reducing the likelihood of claims and associated costs. This article outlines key industry trends contributing to professional liability claims and provides related risk mitigation strategies.
Industry Trends
Multiple shifts in the accounting sector have affected the professional liability space.
Labor Shortages
The last few years have seen widespread worker shortages, and the accounting sector is not immune. The lasting effects of the COVID-19 pandemic have motivated many workers to reevaluate their employment priorities. As a result, a growing number of workers have been leaving their jobs in search of a more fulfilling career path. Those who stay in the same industry have changed jobs with greater frequency looking for better compensation and benefits. In addition, some employees have been exiting the workforce altogether. In the accounting sector, such shortages have made it increasingly difficult for firms to retain top talent. Many firms have responded by increasing employee workloads or hiring more entry-level staff. Yet, overworked, and inexperienced accountants may be more prone to making errors or mistakes in their services, resulting in additional professional liability claims.
Social Inflation
In general, social inflation refers to societal trends that cause the cost of insurance claims and lawsuits to rise above the overall inflation rate. Current drivers of social inflation include an anti-corporate culture that leads to nuclear verdicts (jury awards exceeding $10 million). In other words, stakeholders are adopting higher performance and transparency standards for businesses and holding them accountable for perceived shortcomings, with an increased willingness to demand large-scale payouts. Accounting firms are no exception to this trend. This means that clients are more likely to take legal action against accounting firms for errors, negligence, or mistakes in their services (whether actual or alleged), which leads to an increase in professional liability claims. If these claims lead to nuclear verdicts, accounting firms could experience major financial losses and possible underinsurance issues.
Artificial Intelligence (AI) Developments
AI technology encompasses machines, computer systems and other devices that can simulate human intelligence processes. In the last few years, this technology has increased in popularity. Although AI technology can help accounting firms automate certain tasks and establish more efficient workflows, it can also pose professional liability risks. AI technology operates on human inputs and algorithms, leaving the door open for possible errors. Because accountants have a professional responsibility to provide diligent and competent work for their clients, using certain AI tools (e.g., leveraging chatbots to talk to clients or utilizing automated systems to review data inputs and create spreadsheets) could under certain circumstances be considered negligent. In these instances, AI technology could expose accounting firms to various professional liability claims.
Regulatory Considerations
Regulatory requirements, industry standards and international sanctions evolve frequently in the accounting sector. The failure to maintain compliance with changing regulatory requirements can increase a firm’s exposure to professional liability. Recent regulatory developments include new data privacy laws across multiple states (e.g., California, Virginia, Connecticut, and Colorado), additional financial reporting standards from the U.S. Securities and Exchange Commission, updated anti-money laundering legislation and overseas entity registration requirements from the UK government, and enhanced coverage regulations from the globally recognized Association of Chartered Certified Accountants.
Risk Mitigation Strategies
Accounting firms should implement the following strategies to help mitigate their exposure to professional liability claims:
- Adopt effective retention and training initiatives. By retaining top talent, accounting firms can increase the likelihood of providing error-free services to clients, thereby reducing related professional liability concerns. Popular retention initiatives include increasing wages, giving bonuses and additional time off, allowing tuition and childcare reimbursement, implementing flexible scheduling, establishing remote or hybrid options, and offering well-being programs. If accounting firms need to hire more entry-level employees, they should provide in-depth training and maintain sufficient oversight of these workers and remedy any mistakes that these employees make before they affect clients and lead to professional liability claims.
- Ensure proper client selection processes and documentation. Accounting firms should exercise caution when selecting clients and avoid situations that could lead to possible conflicts of interest (e.g., working on transactions in which several different entities are represented). Accounting firms should have detailed engagement letters with clients that clearly outline the scope and boundaries of their services. These letters can help limit the risk of firms providing services outside of their area of expertise. Accounting firms should also document their meetings and conversations with clients to ensure both parties understand what was discussed and refute any allegations that mistakes were made during these services.
- Weigh the pros and cons of AI tools. Before utilizing AI technology within their operations, accounting firms should carefully assess the pros and cons of these tools. In some cases, the potential risks of this technology may not be worth the benefits. If they do opt to leverage AI technology, however, accounting firms should establish clear policies on proper use and continuously monitor AI-generated information and resources for errors, fixing these mistakes as quickly as possible to limit related professional liability claims.
- Prioritize compliance. As the regulatory space continues to shift, accounting firms should work with legal counsel to routinely review applicable laws and ensure their services remain compliant. If any legislation requires firms to make substantial operational adjustments, they should clearly communicate these changes to clients to mitigate associated professional liability disputes.
- Purchase sufficient coverage. Accounting firms should regularly review their professional liability risks and adjust their coverage when necessary to ensure adequate financial protection from potential claims. Firms should consult with trusted insurance professionals to discuss their coverage needs.
Conclusion
Amid emerging industry trends and today’s evolving professional liability landscape, it’s important for accounting firms to stay up-to-date on the latest developments and take appropriate measures to help prevent related claims. By keeping themselves informed and adjusting their risk management strategies as needed, accounting firms can effectively navigate this challenging environment.
Contact us today for further insurance solutions at 239-298-8210 or rmc@rmcgp.com.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2023 Zywave, Inc. All rights reserved.
