Is Your Company Cash-Strapped?
How CPA firms can secure insurance coverage to which they are entitled and receive much-needed funds.
February 9, 2009
Insurance policies are a valuable asset to any CPA company, large or small, including professional-service firms and their clients. For those CPA firms that are faced with liquidity issues, insurance proceeds can be a welcome source of funds when a company suffers a first-party loss (e.g., lost profits due to business interruption) or a third-party loss (e.g., a malpractice or defamation lawsuit). Insurance law often involves a tangled web of policy provisions and regulations. But there are several steps every policyholder can take to maximize its likelihood of receiving the insurance coverage for which it paid.
Know Your Coverage
While this may sound redundant and obvious, it is worth reminding. Policyholders should keep copies and a list of all insurance policies held. These may include commercial general-liability policies, professional-liability policies, employment-practices coverage and business-interruption insurance. In the event of a loss, you will easily be able to access the potential sources of coverage if you have both copies and a list of all your policies. You will also need to pay attention to what time period, and thus which policy, is implicated. This may depend on whether the coverage is claims-made or occurrence-based. With claims-made coverage, the policy that responds to the loss is the policy in place in which an actual claim is made. Good examples of this are when a company receives a written demand for money or a lawsuit is filed. With occurrence-based coverage, the policy that responds is the policy in place when the event that caused the loss took place.
CPA policyholders also need to be aware of the dollar amount of coverage provided. Policies can have varying limits for different risks. And to add to the confusion, there are often limits for single claims (usually referred to as per-occurrence or per-claim limits), and for the total number of claims that the insurer will pay during the policy period (the aggregate limit). Deductibles and self-insured retentions are also often part of the equation, which the policyholders must pay themselves.
Follow the Rules
Are there any conditions you need to be aware of? For example, most policies require the policyholder to promptly notify the insurance company in the event of a loss. Failure to do so may give the insurer grounds to deny coverage. Notice to the insurance broker may not suffice (if notice is typically provided through the broker, make sure that the broker notifies the insurer). Additionally, check the policy to determine what information needs to be provided to the insurance company. If you are providing notice of a lawsuit, it will often suffice to include a copy of the complaint, along with a cover letter stating that you are filing a claim.
Policies often require a policyholder to cooperate in any investigation. They also prohibit the insured from making a voluntary payment to a third-party (e.g., a payment absent a court judgment or good-faith settlement). A careful review of the policy is necessary to make sure all other requirements are fulfilled.
Know Your Rights
Two primary duties are typically imposed on insurance companies issuing third-party liability policies:
The insurance company’s options for responding to a claim vary from state to state, particularly with respect to third-party claims. For example, the insurer may acknowledge coverage and agree to defend the policyholder. In other cases, the insurer may file a lawsuit seeking a court declaration that no coverage exists.
The insurer may also conditionally accept coverage, but reserve its rights to deny coverage on various grounds. When the insurance company’s reservation of rights creates a conflict of interest, as the policyholder you will usually have a right to independent counsel of your choice. In other words, rather than accepting an insurer-appointed lawyer to represent your firm, you can choose your own counsel and demand that the insurer reimburse you.
Moreover, while the policyholder often requires the insurer’s consent to settle a case for which the policyholder expects to be reimbursed, such consent may not be required if a conflict exists.
Ask for Help
Policyholders should also be aware that coverage is often found in unexpected places. Insurance companies offer different policies to insure against myriad risks of any business. Oftentimes, coverage is found where one might least expect it. For example, discrimination coverage usually applies to employment-related claims. But at least one court applied the coverage to claims for price discrimination. Similarly, general-commercial liability coverage for “trespass” has been found to apply to certain environmental contamination. Thus, reading a policy alone, without the knowledge of how courts have interpreted the language, may result in overlooking potential coverage.
Finally, keep in mind that insurance law varies from state to state. And insurance policies, which often contain definitions that refer to multiple other definitions and endorsements that modify the coverage, can sometimes require a map and compass to navigate. Be sure to consult an appropriate professional when such assistance is required.
Insurance is an important business tool for any CPA business. These steps are a start to make sure you and your clients realize its full value.
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Jason M. Rosenthal, Esq., is a partner with Schopf & Weiss LLP, a national business litigation firm based in Chicago. He regularly represents and counsels policyholders seeking insurance coverage. For more information, please contact Rosenthal at 312-701-9300 or visit www.sw.com.