One of the most critical errors in managing a tax preparation firm is failure to properly insure the business against losses and lawsuits.
There are a number of reasons why tax preparers might under-insure their businesses. They may believe that having policies for general liability and errors & omissions is all they require. They may work out of a home office and believe that their homeowner’s policy covers them. Or they may simply believe that their company is too small for anyone to bother suing it.
All of these and many other insurance myths may be the fastest path to financial ruin.
Insureon, a leading online insurance platform for small businesses and the fastest-growing insurance company in Inc.'s annual "Inc. 500" report for 2014, suggests that there are six types of insurance policy that every tax preparation firm should have. These are:
· General Liability Insurance for Accountants, Tax Preparers, and Finance Professionals. In the unlikely event that a third party should claim that you or one of your employees caused them physical injury or damaged their property, you could be facing an expensive litigation process. General Liability Insurance can help you manage these claims by paying for your legal defense, including reimbursement fees and lost income compensation. Many companies and client contracts require that accountants carry General Liability Insurance to reduce their own amount of financial risk.
· Professional Liability Insurance/ Errors & Omissions Coverage. An accounting mistake can cause significant and costly complications for your clients, which may lead to a lawsuit. If this happens, legal costs can increase rapidly. Bookkeeping or accounting malpractice risk is a very important reason why every tax preparer, accountant, and finance professional needs professional liability coverage. Errors and Omissions Insurance covers you and your tax preparation business if one of your clients claims that your work caused them a financial detriment. Examples may include failing to file a return on time or making technical errors. If a lawsuit begins, you will be spending a good deal of time and money on your legal defense. Professional Liability Insurance pays for your legal defense, any income lost due to your inability to work, and other specified costs. If you are legally required to compensate for losses, your Professional Liability Insurance will cover that award as well.
· Errors and Omissions Insurance policies. These are generally doled out in allotments of $1 million with deductibles starting at $1,000. Coverage must be in force when any alleged incident occurs and also at the time the claim is filed in order for a covered party to collect benefits. As a result, we advise our clients to keep their policy in force even after an engagement is finished.
· Workers’ Compensation Insurance. You may need Workers’ Compensation Insurance to cover any employees in the event of an injury on the job or suffer a work-related illness. Workers’ Compensation Insurance pays for employees’ medical expenses and accounts for some of their lost wages. As the business owner, you can also cover yourself for any injuries or illnesses sustained on the job. Even though the risks of on-the-job injuries are typically low for tax preparers, most states mandate some level of Workers’ Comp coverage for your business. Be sure to check your state’s requirements. Some state directives may depend on the number of employees in the business, and in some instances you may even need to include independent contractors in your Workers’ Compensation package.
· Property Insurance / Business Owner’s Policy (BOP). As a finance professional, you have a low probability of facing a dangerous work situation. BOP is a cost-saving, comprehensive policy that consists of a General Liability policy and Property Insurance.
· Umbrella Insurance / Excess Liability Coverage. An Umbrella Insurance policy is an easy way to boost coverage levels to meet client contract demands. Umbrella Insurance adds coverage to your existing General Liability Insurance policy. For example, if your contract requires $500,000 in General Liability coverage, but your policy limit is $250,000, purchasing Excess Liability or Umbrella coverage will cover the additional amount.
· Cyber Insurance against data loss and theft. As tax preparers and their clients increasingly become the targets of identity thieves and hackers, this insurance is either included as part of the Property Insurance policy. However, the tax preparer should evaluate whether this is sufficient to protect the firm.
There’s another advantage to having adequate insurance coverage – fraudulent preparers won’t bother because they have no intention of being around long enough to be sued. Having a strong array of insurance policies, and letting your clients know the depth of your coverage, is another hallmark of a professional.