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What accounting firms should look for in a professional liability insurance carrier

4 min read

Modern Money

Certified public accounting firms should ask several questions and consider many crucial factors when selecting a professional liability insurance carrier, says Alvin Fennell, vice president at Aon Insurance Services. He explores the steps that firms can take to help find the proper level of coverage.

What key factors should an accounting firm consider to be certain that the level of coverage and the premium are appropriate for that particular business?

The key factors will vary based on the firm. In regard to limits, the firm must review its areas of practice. A firm that provides individual tax services may be less of a severity risk than a firm that provides audits of a company’s employee benefit plan. It is important for a firm to consult with an insurance professional who can help in regard to assessing its risk. Also, a firm’s industry focus could influence the limit a firm should carry. Some industries require a minimum limit in order to perform services.

Ask your insurance carrier questions regarding claims activity and trends for a particular service. Asking how a firm’s premium is rated is important. Ask what components make up the premium. What influences the premium positively and negatively? A firm must also not just look at the premium as purely a dollar amount. Also, ask what is included in the premium payment. Are there benefits that come with working with the carrier? How does that carrier make me a better firm? Are there risk-control services? What are the carrier’s pre-claim-assistance resources? What is my responsibility and my input in regard to the claims process? And finally, what does my policy cover? You often get what you pay for.

What does an accounting firm need to understand with regard to a professional liability insurance carrier’s A.M. Best rating?

A.M. Best is an independent rating organization that provides current and historical information pertaining to the financial strength and history of an insurance carrier. A.M. Best is regularly used to rate insurance companies and is highly regarded by most industries. For example, when a CPA firm is bidding for a new client, it is often required within the bid process that one of the qualifications is the bidding firm be insured by a carrier with an A rating. A. M. Best is the accepted source of that information. Most potential clients will not accept a firm with insurance provided by a carrier with a rating below A-.

What considerations are important in weighing a carrier that is admitted to do business in a certain state versus a nonadmitted carrier?

An admitted carrier has met and adheres to that specific state’s insurance department’s regulations. The carrier has also filed its rates with the state, which the state must accept and approve. Once the carrier has been approved as admitted, the state has the responsibility to pay insurance companies’ claims up to a specified limit if that carrier becomes insolvent. A nonadmitted carrier does not operate under a state’s insurance regulations, so it has more flexibility as it relates to pricing, because it does not have to submit its rates to the specific state for review. Another item specific to being nonadmitted is that the state does not have to step in and resolve claims if that carrier becomes insolvent.

How might that status affect the ability to collect on a claim?

Admitted or nonadmitted, it is still important to review the financial stability of the carrier. How long has that carrier provided coverage to the CPA profession? Has the carrier provided that coverage and support of the profession continuously over time? Has that carrier gone in and out of the market based on claims results? The financial rating of the carrier and the details provided by the A.M. Best reporting are very strong indicators of a carrier’s actions related to its ability to pay a claim.

What questions should a firm ask with regard to a carrier’s reinsurance coverage?

A good question is, “What portion of the limit is retained by the carrier before reinsurance steps in?” The higher the portion that the carrier retains, the less influence the reinsurance market plays on the carrier’s rates. A carrier may push to settle within its retention in order to not impact what it pays the reinsurer.