A common misconception is that doctors and lawyers are the only professionals in need of Errors and Omissions (E&O) insurance. In fact, nearly every organization that provides a service to a client for a fee has E&O exposure, and because professional requirements are broadly defined in legal terms, Professional Liability insurance shields businesses from the unforeseen.
Errors and Omissions insurance, also known as Professional Liability Insurance, protects organizations or individuals against claims of professional negligence throughout a variety of professional services. This includes errors or omissions that the company actually made or that the client perceives were made. Errors and Omissions claims are not covered by General Liability insurance.
Insurance for Tax Preparers
Errors and Omissions insurance is particularly important for Certified Public Accountants, bookkeepers and tax preparers. Every year, in the U.S., thousands of suits are filed against tax preparers and bookkeepers, and, in the wake of nearly every corporate scandal, new lawsuits arise.
For bookkeepers, tax preparers and accountants, the tax and audit landscape is constantly changing. Clients rely on these professionals to be up-to-date and accurate, but no matter how polished a tax preparer or accountant is, and regardless of how seamless their risk management procedures are, mistakes will happen.
For instance, if a client is audited on their tax return, and there is in fact an error resulting from a simple miscalculation on the tax professional's part, the tax professional would be held responsible for any IRS-assessed penalties and interest the client was charged. Also, if the preparer overlooked or failed to include information provided by the client, they would also be at fault. Even if a client failed to provide a piece of information to the tax professional and then filed a frivolous suit, the tax preparer would still have to pay potentially exorbitant legal fees to defend themselves.
Even the most minor mistakes can cause substantial problems for clients, and without Errors and Omissions insurance for tax preparers, a firm or individual would likely not be able to survive even a single claim brought against it.
Bookkeepers Require Coverage Too!
Likewise, bookkeeper Errors and Omissions coverage would protect the bookkeeper in similar situations where figures might have been miscalculated or information was omitted, regardless of whether or not it was their fault or their client's fault.
History has shown that when a major corporate scandal is uncovered, racketeering lawsuits against accountants typically increase. According to an article published by the Manhattan Institute for Policy Research, during the late 1980s, in the midst of the Securities and Loan debacle, damage claims against accountants were estimated to be between one and four billion dollars - a figure that was purported to exceed the net capital of all accounting firms combined (Lawson & Olson). While some were involved in ill doings, others were reputable professionals. While a litigation onslaught of this magnitude may never be repeated, it is a risk that E&O insurance for accountants will safeguard against.
Most E&O policies will cover judgments, settlements and defense costs, even in cases in which the allegations are found to be frivolous. Without Errors and Omissions Insurance, the cost of paying settlements and court fees would leave many bookkeepers, accountants and tax preparers in extreme debt, or even bankruptcy.