Why Liability Insurance Is Non-Negotiable for CPA Firms

Running an accounting practice is rewarding but risky. One error, a missed deadline, a misfiled return—can lead to hefty penalties, lawsuits, and reputational harm. Professional liability insurance is the essential safety net your firm needs to navigate these challenges, ensuring financial security and peace of mind. Let’s explore how liability insurance can shield your practice in 2025, with real-life examples that highlight its critical importance.

Protecting Your Practice

Professional liability insurance is like a financial firewall for your firm. For instance, a micro-CPA firm faced a $75,000 negligence claim after a tax preparer’s oversight caused penalties for a client. The legal defense alone cost $15,000. Liability insurance covered both the legal fees and the settlement, saving the firm from a significant financial hit. Without insurance, the firm would have had to deplete its reserves or risk closure. For CPA firms, especially micro and mid-sized ones, having this coverage is indispensable in today’s environment of increased regulatory scrutiny.

Candace Coach, small firms' sales manager at Aon, emphasizes: “As the CPA profession evolves and new services are offered, risks increase. Without proper coverage, firms may not only face financial losses but also reputational damage.”

Real-Life Risks CPA Firms Face

The risks accountants face is constantly evolving. Here are some key challenges and how liability insurance helps:

• Tax Errors: Tax-related claims, such as missed deductions or late filings, remain common. A mid-sized firm faced a $200,000 lawsuit for poor tax advice but avoided disruption thanks to liability insurance, which covered $25,000 in legal fees and a $100,000 settlement.
• Sales Tax Assumptions: Clients often assume accountants handle sales tax filings. Gary Sutherland of McGowanPro stresses the importance of clear engagement letters to avoid claims stemming from misunderstandings.
• Trustee Services: Without indemnification in trust documents or engagement letters, firms risk liability. Anthony Carolei of Hanover Insurance highlights that proper clauses and coverage are crucial for trustee services.
• Cybersecurity Threats: Digital risks are growing. One firm faced $150,000 in lawsuits after a data breach but was saved by cyber liability coverage included in their policy.
• IRS Appeals: Claims involving IRS appeal denials are rising. Ralph Picardi advises accountants to notify insurers early to avoid claim rejections due to prior knowledge exclusions.

Expert-Backed Advice on Liability Coverage

When selecting a policy, consider the following insights from industry experts:

• Broad Coverage: Ensure the professional services definition is expansive to avoid gaps.
• Adequate Limits: John Raspante, CPA and senior risk manager at McGowanPro, suggests: “Legal fees can quickly erode coverage limits. Adding outside-the-limit options for defense costs is worth considering.”
• Risk Management Support: Policies offering resources like engagement letter templates and workshops provide extra value.
• Standalone Policies for Specialized Risks: Separate coverage for cyber liability, employment practices, and fiduciary liability is essential for full protection.

Why Acting Now Is Crucial

• Rising Complexity in Accounting: Candace Coach predicts an increase in claims related to new services like BOI filings. She cautions: “These claims could result in exorbitant fines. Firms must ensure their policies cover such emerging risks.”
• Digital Transformation Risks: Technology boosts efficiency but also introduces cyber vulnerabilities. Comprehensive policies with cyber liability coverage are critical for mitigating these threats.
• Client Confidence: Holding liability insurance reassures clients that you’re prepared for unexpected issues, building trust and credibility for your practice.

Top Providers Tailored for CPAs

When it comes to liability insurance, choosing the right provider is key. Industry leaders include:

• CNA Insurance: Offers tailored coverage for CPA firms, backed by decades of expertise.
• AICPA Professional Liability Insurance Program: Provides CPA-specific resources like risk management workshops and templates.
• The Hartford: Known for flexible, budget-friendly policies for micro and mid-sized firms.
• Travelers Insurance: Customizes plans for firms of all sizes and specialties.

Each of these providers brings unique strengths to the table, ensuring your practice is secure and future ready.

The High Cost of No Coverage

Neglecting liability insurance is a gamble that few firms can afford. Legal fees for a single negligence claim can easily exceed $20,000, while settlements often range between $50,000 and $500,000. As Raspante puts it: “Skipping insurance is like walking a financial tightrope without a safety net. The cost of no coverage far outweighs the policy premium.” Can your firm survive such a blow? If not, liability insurance isn’t just a wise choice—it’s essential for your practice’s survival.

Secure Your Firm’s Future

In 2025, professional liability insurance is more than a safeguard, it’s an investment in your firm’s growth and resilience. By covering legal fees, settlements, and unforeseen risks, it allows you to focus on what truly matters: serving your clients and expanding your practice. Don’t wait for a costly mistake to take action. Protect your practice today with professional liability insurance and ensure your firm’s stability, reputation, and success for years to come. Stay ahead in accounting, tax, and finance—subscribe to MYCPE ONE Insights for the latest updates and industry news delivered straight to your inbox.