Fall 2024

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.

As careers evolve, accountants often adjust their liability coverage. In doing so, CPAs will let their existing policy expire. However, a CPA could face a negligence, malpractice, or errors and omissions (E&O) claim several years after an actual engagement has ended. If a CPA does not have a policy or switched to a new insurer that doesn’t offer prior acts coverage, protection gets complicated.

A common solution to these complexities is the purchase of an extended claims reporting period (ECRP), or tail coverage.

Tail coverage prolongs the amount of time for which an accountant can notify a past insurer and get coverage for a claim incident that happened during the old policy period. But it can only be purchased as an add-on to a current claims-made policy. Often without prior acts coverage, a new insurance policy will not cover an event that occurred during the old plan.¹

Tail Coverage Scenarios

There are a few circumstances where an accounting professional with an expiring policy will want to consider tail coverage:

• Retirement – Even if a CPA is no longer working, a claim from when he or she was still practicing could arise a few years later.
• Switching to a new policy – If an accountant is starting a new insurance program, the new policy will not cover mistakes made under the prior plan without purchase of prior acts coverage.
• Acquisition by another firm – Acquiring firms do not assume the acquired firm’s liabilities. Selling owners can still be found liable.
• Succession planning and departure agreements – Departing partners are usually required to purchase tail coverage to diminish the new owners’ risk of successor liability.

The Length of Tail Coverage

If a CPA decides to get tail coverage, they should work closely with their insurance adviser to purchase an appropriate length. There are many details that go into determining the length of an ECRP, and each situation should be examined carefully.

An accountant can purchase many different intervals, with most periods ranging from one year to unlimited, depending on the insurance carrier and state. However, a CPA shouldn’t have to purchase a policy longer than five years, as the risk of a lawsuit arising diminishes significantly after that time frame.²

The Cost of Tail Coverage

Insurers often offer a free ECRP for 60 days after a CPA’s or firm’s policy expires. To secure a more extended period, the accountant or firm must purchase supplemental tail coverage, which is normally one to five years from the date the previous plan ends.

According to Forbes, purchasing an additional ECRP typically costs at least 100% of the policy’s premium, with some rates going as high as 300%.³

Your cost for tail coverage also depends on factors such as the coverage limits you choose, your claims history, the length of the extended reporting period, and the size of your business, among other factors.

The Importance of Tail Coverage

It can take a long time to uncover a mistake that causes a client to face damages for which they hold their firm liable. Accountants may not face a liability claim for up to five years after the incident occurs.⁴

If you have a claims-made policy and are considering switching policies, consult your insurance provider if you decide you are not going to renew. Ask about tail coverage options. Without tail coverage, months- or years-old claims of negligence, malpractice, or E&O are difficult to protect against.

An important aspect of tail coverage is knowing the state statute of limitations regarding professional liability. In Pennsylvania, a plaintiff has two years to file a claim after they realize an incident’s effects, such as when they receive a prepared tax return.⁵ In other states, such as Missouri, professional negligence limitations can be up to 10 years.⁶ 

¹ “How Prior Acts Coverage Protects Accountants,” Huntersure.com (Oct. 26, 2023).

² William Thompson, “How ‘Tail Coverage’ Can Protect a Retiring Firm Partner,” CPA Practice Advisor (Oct. 2, 2019).

³ John Egan, “What Is Tail Coverage In Business Insurance?” Forbes (Dec. 22, 2023).

⁴ Ibid, Thompson.

⁵ “Pennsylvania Civil Statute of Limitations,” FindLaw (Jan. 17, 2023).

⁶ “Professional Negligence Claims,” Holder Susan Slusher LLC.

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.

As careers evolve, accountants often adjust their liability coverage. In doing so, CPAs will let their existing policy expire. However, a CPA could face a negligence, malpractice, or errors and omissions (E&O) claim several years after an actual engagement has ended. If a CPA does not have a policy or switched to a new insurer that doesn’t offer prior acts coverage, protection gets complicated.

A common solution to these complexities is the purchase of an extended claims reporting period (ECRP), or tail coverage.

Tail coverage prolongs the amount of time for which an accountant can notify a past insurer and get coverage for a claim incident that happened during the old policy period. But it can only be purchased as an add-on to a current claims-made policy. Often without prior acts coverage, a new insurance policy will not cover an event that occurred during the old plan.¹

Tail Coverage Scenarios

There are a few circumstances where an accounting professional with an expiring policy will want to consider tail coverage:

• Retirement – Even if a CPA is no longer working, a claim from when he or she was still practicing could arise a few years later.
• Switching to a new policy – If an accountant is starting a new insurance program, the new policy will not cover mistakes made under the prior plan without purchase of prior acts coverage.
• Acquisition by another firm – Acquiring firms do not assume the acquired firm’s liabilities. Selling owners can still be found liable.
• Succession planning and departure agreements – Departing partners are usually required to purchase tail coverage to diminish the new owners’ risk of successor liability.

The Length of Tail Coverage

If a CPA decides to get tail coverage, they should work closely with their insurance adviser to purchase an appropriate length. There are many details that go into determining the length of an ECRP, and each situation should be examined carefully.

An accountant can purchase many different intervals, with most periods ranging from one year to unlimited, depending on the insurance carrier and state. However, a CPA shouldn’t have to purchase a policy longer than five years, as the risk of a lawsuit arising diminishes significantly after that time frame.²

The Cost of Tail Coverage

Insurers often offer a free ECRP for 60 days after a CPA’s or firm’s policy expires. To secure a more extended period, the accountant or firm must purchase supplemental tail coverage, which is normally one to five years from the date the previous plan ends.

According to Forbes, purchasing an additional ECRP typically costs at least 100% of the policy’s premium, with some rates going as high as 300%.³

Your cost for tail coverage also depends on factors such as the coverage limits you choose, your claims history, the length of the extended reporting period, and the size of your business, among other factors.

The Importance of Tail Coverage

It can take a long time to uncover a mistake that causes a client to face damages for which they hold their firm liable. Accountants may not face a liability claim for up to five years after the incident occurs.⁴

If you have a claims-made policy and are considering switching policies, consult your insurance provider if you decide you are not going to renew. Ask about tail coverage options. Without tail coverage, months- or years-old claims of negligence, malpractice, or E&O are difficult to protect against.

An important aspect of tail coverage is knowing the state statute of limitations regarding professional liability. In Pennsylvania, a plaintiff has two years to file a claim after they realize an incident’s effects, such as when they receive a prepared tax return.⁵ In other states, such as Missouri, professional negligence limitations can be up to 10 years.⁶ 

¹ “How Prior Acts Coverage Protects Accountants,” Huntersure.com (Oct. 26, 2023).

² William Thompson, “How ‘Tail Coverage’ Can Protect a Retiring Firm Partner,” CPA Practice Advisor (Oct. 2, 2019).

³ John Egan, “What Is Tail Coverage In Business Insurance?” Forbes (Dec. 22, 2023).

⁴ Ibid, Thompson.

⁵ “Pennsylvania Civil Statute of Limitations,” FindLaw (Jan. 17, 2023).

⁶ “Professional Negligence Claims,” Holder Susan Slusher LLC.