You may have professional liability insurance to protect your bookkeeping job or business, but are you fully protected?
When you buy auto insurance, you wouldn't expect your insurance company to cover you when you ride a motorcycle, right? When you purchase professional liability insurance to protect your bookkeeping business or job, the same holds true. Your insurance will cover only those professional duties defined in your policy document.
The Case of Emily Brewster
Consider this hypothetical case. Emily Brewster, a recent community college graduate with an associate's degree in bookkeeping and accounting, returned to school after raising three children. After graduation, she got hired as an assistant bookkeeper for a manufacturing firm. After working in that job for five years, she decided to start her own bookkeeping firm. She soon purchased professional liability insurance to shield her assets against client litigation, following her accountant's advice. The policy covered her core bookkeeping services, including entering receivables and payables into her bookkeeping system. Other activities such as assisting with the development of tax returns, serving as a notary public and assisting with business planning and financial statements weren't included. At the time, this wasn't a problem since her company did none of those things.
Fast forward another five years. Emily's firm added a lot of clients, and her revenue soared. Her professional reputation also grew, with clients now asking her to do non-bookkeeping tasks such as developing tax returns and preparing financial statements.
Even though Emily's business grew, her insurance hadn't changed since she purchased it five years ago. It still assumed her company focused primarily on traditional bookkeeping activities. Why is this a problem? Because if she makes a mistake while performing a non-covered activity (for example: preparing a financial statement or developing tax returns), which causes an outside party to file a claim against her, the policy won't provide coverage for the incident. She might have to pay for a large settlement or judgment out of her own pocket.
What should you take away from Emily's story? If you want to be sure your professional liability insurance is fully protecting you, review how your policy defines your professional duties and make sure that description is consistent with your current job activities. If you need help reviewing your policy, reach out to your insurance agent.
Watch out for Restrictive Policy Exclusions
Bookkeeping entrepreneurs or employees should review their policy's exclusion list. These are claims your insurer will not pay for, meaning you'll be on the hook for any ensuing settlements or judgments. Most policies exclude several different claim triggers. So it's wise to familiarize yourself with them to determine whether you're at a high risk of experiencing one. If you are, shop for a policy that doesn't exclude those losses.
Some insurers will narrowly frame covered professional duties and exclude common losses from the policy. This allows them to charge a much lower price, giving them a competitive advantage in the marketplace. However, as a bookkeeper, paying a low premium might save you money in the short term but punish you later if you get sued without adequate insurance. For this reason, make sure your policy has a liberal definition of professional duties and that your bookkeeping tasks fall comfortably within that framework. Also, make sure it doesn't exclude work you may do in the future.
When shopping for professional liability insurance, look for insurers that offer broad definitions. For example, 360 Coverage Pros offers professional liability insurance for bookkeepers and tax preparers with the following covered areas of practice (note: protection isn't limited to only these areas):
- Bookkeeping, write-ups, payrolls
- Assisting with tax work/preparation
- Serving as a notary public
- Assisting with general business planning
- Doing data/financial record maintenance and audits
- Processing payables and receivables
- Performing account management and accounts payable duties
- Preparing business or financial statements
- Handling compliance
Make Sure Your Limits Are Sufficient
Finally, if it's been a few years since you purchased your policy, review your policy limits to ensure you're adequately protected. What are policy limits? They're the maximum amount of money your policy will pay for your legal defense and for settlements or judgments in the event you lose your case. For example, a policy limit of $1 million per claim and $3 million aggregate would pay up to $1 million for a single claim during the policy period. The $3 million refers to the maximum the insurance would pay for all claims filed against you per policy period.
Here's what's critical: make sure your policy limits are large enough to protect you against the typical malpractice claims filed against bookkeepers in your state, and make sure your policy covers the work you are doing.
360 Coverage Pros offers Professional Liability Insurance for Tax Preparers and Bookkeepers. It features a segment-leading online application that lets you click and bind your coverage to receive instant proof of insurance. To learn more, visit our website.
