A little over a month ago, a decision was handed down by the 3rd Circuit Court of Appeals on a particular coverage dispute in an accountant’s professional liability insurance policy. The matter arose while CAMICO – a California based insurer of accounting firms – defended Heffler, Radetich & Saitta, LLP (Heffler) in a professional malpractice claim.
In the underlying case against Heffler, the accounting firm was acting as an administrator of class action funds for a number of class action settlements. It was discovered that one of the firm’s employees in charge of disbursing the funds to appropriate parties was working to embezzle funds to their own friends. He worked with others to create fake businesses that would later apply for thesesettlement funds. The employee would then approve the disbursement and receive a kick-back. Heffler was sued as soon as this was discovered.
The insurance company – CAMICO – defended the firm but said that they would only defend up to the $100,000 sublimit because of the fact that the claim revolved around misappropriating funds. The lawsuit defense costs exceeded this $100,000 limit and CAMICO sued for the return of money that they spent about this limit.
The court agreed that the insurance company could ask and receive these funds back since the insurance policy was enforceable in this area. While Heffler argued that the rogue employee was not engaged in professional services on behalf of the firm when they acted in this manner, the court disagreed.
There are two take-aways from this case.
- First, it is important to note that this happened on multiple class action settlements. There was trust placed in the employee and a lack of oversight that allowed this happen on more than one occasion. It is important for accounting firms to be aware of the areas that are ripe for fraud or theft and place safeguards over these areas. Rotating personnel, or having a partner oversee and audit the work are simple steps that can be taken to prevent wrongdoing.
- The second aspect this case raises is the importance of knowing your insurance policy. Few firms carefully read the policy and all its components, but this is important since no professional liability insurance policy is written exactly the same. There is no standardized policy form as there is in auto insurance or even general liability insurance. Each insurance company drafts their own E&O policy for their clients.
Engaging a generalist insurance broker who does not understand this aspect of risk transfer can be costly for firms. Often a less expensive product may lack an important coverage grant or perhaps exclude some work done by a firm. It is important to have a broker who is able to compare the policy forms and offer feedback on each one. Contact us to discuss whether your accountant’s professional liability form is proper for your firm.