Does Your Firm Need Malpractice Insurance?

Source: The CPA Journal

Generally, CPA firms aren't legally required to buy malpractice insurance, and around half of all firms don't have malpractice coverage. In this article, the authors review commonly stated reasons for not buying, including:

• The firm has never had a claim
• The firm practices in low-risk areas
• The firm adheres to high quality control standards
• Malpractice insurance attracts claims
• Insurance increases costs
• Insurance creates conflicts of interest

Many of these are not good reasons for declining to buy insurance, and some, the authors say, are “wishful thinking.” On the other hand, malpractice coverage offers several benefits. For example, it:

• Provides peace of mind by establishing a known cost
• Pays for defense counsel
• Helps attract clients and young professionals
• Provides access to loss prevention services offered by many insurers

Firms that do not buy insurance should take steps to minimize their exposure, such as choosing a limited liability structure, setting up separate entities for high-risk practice areas, or establishing a defense fund.

The authors suggest that most firms with more than 12 professionals should have malpractice coverage because, among other things, “it will enable them to readily market their services and maintain a quality professional staff . . . .” Going without coverage might make sense for smaller firms that limit their practices to low-risk engagements.

As an alternative to going uninsured, firms may be able to reduce their costs by choosing a high-deductible policy or a small policy designed to cover their defense costs.

For the complete article, read “Rethinking the Purchase of Malpractice Self-Insurance.”

From The CPA Journal, A Publication of the New York State Society of CPAs, October 2011.