Determining the Right Policy Limit for Your Firm

by Ric Rosario, CPA, CGMA | Dec 04, 2018

Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.

Regardless of your level of expertise in CPA professional liability, risk management, and insurance, the answer to “What should our policy limit be?” requires the careful consideration of a variety of factors.

Some factors are easy to understand, such as the dangers of being underinsured and overexposed to liability. Others are not so easy, such as being overinsured and creating a target for unwarranted litigation.

When considering the areas described here, remember your policy limit serves two purposes: to cover damages from an error committed by the firm in providing professional services, and to protect the assets of the firm and its owners from the financial consequences of a claim.

Annual firm revenue – Annual firm revenue is a good starting point when considering how much protection your firm should have. CAMICO’s data on the limits chosen by about 8,000 policyholder firms is presented in the accompanying table for comparison purposes. The table shows the distribution of per-claim policy limits selected by insured firms according to their annual revenue range.
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Regulatory requirements – If you are practicing as an accountancy corporation, limited liability corporation, or limited liability partnership, you may be required to carry certain limits of liability insurance to qualify for limited liability legal protections. The regulations for such entities vary by state, so firms will need to ascertain which regulations apply to their entity form.

Risk exposures from services  – The types of services offered can affect the size and types of limits you should have, especially when it comes to the question of single versus split limits.

Risk exposures from clients – The severity of a claim is closely related to the size of the client. Look closely at the kinds of clients you have. If you have one or more high-net-worth clients, consider the amount of damages that may be claimed by such a client. Another example would be an audit client that has significant lines of credit or loans to the business.

Also, certain types of industries pose a higher risk. Real estate, construction, financial industries, buy-sell transactions, and investment activities have more severe claims.

Firm and partner assets – In CAMICO’s experience there have only been a handful of claims where payments to the plaintiffs exceeded policy limits. Generally, as long as the policy limit is sufficient, relative to the net worth that can legally be reached, plaintiffs will accept the amount available under the policy.

No provider should advocate “buy as much as you can afford.” The size of the policy, unfortunately, may motivate some plaintiffs to exaggerate damages and make it harder to negotiate a reasonable settlement. The best size is neither too big nor too small.

The “sleep well at night” factor – Each firm needs to decide how to best manage risks to be within its risk appetite. This involves a combination of loss prevention and risk management programs as well as insurance coverage.

Some firms and their partners are comfortable with the adequacy of their risk management abilities and procedures, which may lead them toward lower policy limits. Others are less comfortable about their ability to manage their own risks, which may lead them to choose higher policy limits.  

Ric Rosario, CPA, CGMA, is CEO and president of CAMICO in San Mateo, Calif. He can be reached at rrosario@camico.com.
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