Protecting You, Your Firm and Your Clients

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Protecting You, Your

Firm and Your Clients

Professional Liability Insurance

& Risk Management Practices

March 5, 2009

Presented by: Derrick Leue

Toronto, ON

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Putting the pieces together for you

Agenda

Who We Are

Understanding Business Insurance

Overview on Professional Liability

Risk Management Practices

Review of the CMA E&O Policy

Claims Overview

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Who We Are

LMS PROLINK is a diversified insurance and

financial services brokerage

Broker managing the Society’s E&O program

LMS PROLINK is the founding member of the

PROLINK Insurance Group

PROLINK Group is the 5

th

_{largest private}

insurance brokerage in Canada

Specializing in Professional Association

insurance programs since 1986

Currently manage >40 professional liability

insurance programs

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Understanding Business

Insurance

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Putting the pieces together

for you

Overview on Business Insurance

General Policy Types:

1. Commercial General Liability;

2. Property Insurance;

3. Crime Insurance

Specific Policy Types:

1. Professional Liability (“E&O”)

2. Directors & Officers Liability (“D&O”)

3. Employment Practices Liability

4. Credit Insurance

5. Environmental Liability

6. Identity Protection

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Overview of Liability Insurance

Liability Policy Types

1. Personal Liability – included under your

homeowners’ policy;

2. Commercial General Liability;

3. Directors & Officers Liability (‘D&O’)

4. Professional Liability – known as Errors &

Omissions insurance (‘E&O’), excluded

from #1 & #2.

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What is D&O Insurance

D&O Liability insurance offered to:

Non-Profit organizations

For-Profit organizations

Financial loss represents a common claim

Covers allegations, whether factual or not.

Covers your defense costs and damages

awarded to the claimant.

Board members can be held personally

liable.

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What is D&O Insurance

Primary exposures for Non-Profits:

Employment Practices Liability

Defamation

Misrepresentation/non-disclosure

Breach of duty of care (e.g., pension committee)

Fiduciary mismanagement

Bankruptcy related claims (unpaid wages, GST and PST etc.)

All non-profits should purchase D&O to

protect their board members

Premiums are often less than $1,000 per year

for small non-profits

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What is E&O Insurance

E&O covers mistakes, negligent and wrongful

acts committed while performing professional

activities within the scope profession covered.

Covers allegations, whether factual or not.

Covers your defense costs and damages

awarded to the claimant.

E&O policies are offered on a “Claims-Made”

basis:

The policy must be in place when the claim is reported.

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What is E&O Insurance

Key Policy Features:

Retroactive date:

Often inception date of the first E&O policy you purchase through the insurer;

The first date the policy will respond to claims;

Services rendered prior to this date are excluded;

CMA policy covers prior acts that you were not aware would lead to a claim.

Extended Reporting Period (‘Tail coverage’):

Extends an E&O policy with an insurer after the policy is cancelled or non-renewed;

Covers claims reported after the policy is

cancelled/terminated for “wrongful acts” committed while the policy was in effect;

CMAs should maintain ERP coverage for at least 6 years after you cease practicing.

AXA Advantage – free ERP if you stop practicing

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E&O Insurance Policy

Claim Scenario 1:

CMA Insured under AXA policy since entering public practice on March 1st_{, 2003}

Notice of claims received from client’s lawyer E) Mar. 22, 2007

AXA settles claim

File closed F) Apr 2, 2008

Policy will be renewed by AXA

Claim notification will not exclude insured from program D) Jan. 1, 2007

Insured becomes aware that claim may arise

Insured notifies broker C) Nov. 20, 2006

Act / service giving rise to claim occurs B) October, 2006

Enter public practice

Purchased AXA E&O policy A) Mar 1, 2003

Policy Milestones Timeline

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E&O Insurance Policy

Claim Scenario 2:

CMA switched E&O insurance from AXA to ABC Insurance policy.

Notice of claim received from client’s lawyer

ABC policy excludes claim because it relates to services provided prior to the inception of this policy (see retroactive date).

AXA policy will respond if ERP is purchased because act causing claim occurred when policy was in effect and the claim is reported during the ERP period

AXA policy will respond if CMA retired or sold practice b/c ERP is provided for 6 years at not cost.

AXA policy will NOT respond without ERP because the policy is not in effect when the claim is made

E) Feb. 12, 2009

Switch to ABC E&O policy

Should purchase ERP coverage from AXA D) Jan. 1, 2009

Wrongful act is committed which may give rise to future claim (i.e., error in tax filing)

Insured is not aware they made an error B) May 25, 2008

Enter public practice and purchase AXA E&O policy A) May 1, 2004

Policy Milestones Timeline

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The Proper Policy

Miscellaneous E&O policies may not meet your needs:

Standard E&O policy covering many different professions

No customization provided

Coverage may only be provided for those services disclosed on your insurance application

No retroactive coverage provided

The CMA E&O policy is customized to specifically address your broad professional activities.

Benefits of purchasing E&O through the CMA program:

Lower premiums (group insurance principle);

Better coverage;

Stable insurer – “A” rating from A.M. Best Rating Agency

Experienced claims servicing;

Society endorsement and leverage.

Purchasing E&O and CGL from one insurer:

Reduces chances for gap in coverage;

Simple to manage one common renewal date;

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Impact of Claims

Direct Costs Financial burden

Immediate legal defense costs (must respond to the claim)

Damages that must be paid if found liable

Lost time:

Selecting legal counsel with proper experience;

Time commitment to work with your lawyer (compiling documentation);

Court proceedings.

Indirect Costs

Emotional stress;

Loss of referral, future business;

Reputation potentially tarnished.

Risk Management Solutions:

Maintain E&O insurance;

Use appropriate contracts;

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Risk Management

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Risk Management

What is it?

Policies and procedures implemented to reduce your exposure to serious financial loss.

Key Elements:

1. Risk identification:

Exposures and sources of claims;

Professional responsibility;

2. Evaluation: Loss prevention techniques;

3. Implementation: Procedures based on exposures for a practice;

4. Monitoring/Adjustment: Ongoing audit and re-evaluation of procedures.

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Risk Identification

Exposures / Sources of claims for CMAs :

Poor client communication;

Poorly documented client files;

No engagement letter in place;

Lack of technical knowledge (staff);

Lack of standard practices and

procedures within your firm;

Taking on too much work;

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Evaluation

Loss prevention techniques:

1. Always use contracts or engagement letters;

2. Assessing challenging clients/engagements;

3. Thorough and complete documentation;

4. Implement standard operating procedures;

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Engagement Letters

Your lawyer should review the engagement letter or at least the engagement letter template utilized.

Do not play lawyer when:

Client hires a lawyer for contract negotiations

Writing or responding to special legal clauses

Explicitly define the nature and terms of the services to be provided and not provided.

Clients often assume service is being provided unless specifically excluded.

“Form letters” are not helpful in defending claims

Outline the purpose of the engagement and distribution of the report.

Timing of the delivery of your services (Consulting CMA rule)

Terms, basis of fee structure and invoicing schedule (Consulting CMA rule).

You cannot remove your liability from an engagement.

Ensure letters are signed by clients and you.

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Tips on Tax Engagement Letters

Spell out duties in precise language and avoid generalities.

Identify the information the client is providing (indicate what, when and how):

State duration of engagement (ongoing or one-time return)

Inform that CRA views tax returns as taxpayer’s responsibility.

Outline risks that apply in taking aggressive tax positions.

Warn clients about penalties for inaccurate, late or underpaid returns.

State you are not responsible for:

a) Disallowance of deductions;

b) Taxation on unreported income; and

c) Resulting taxes, interest or penalties.

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Challenging Engagements/Clients

Be selective, clients with “higher-risk characteristics, include:

Experiencing financial or organizational difficulties;

History of changing accounting firms & consultants;

Un-reasonable or un-cooperative;

Fee pressures;

Frequent involvement in litigation;

Long-standing disputes with CRA;

Refusal to sign engagement letters;

U.S.A based clients.

Techniques to evaluate prospective clients: Review most recent financial statements;

Speak with previous accountant serving client;

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Challenging Engagements/Clients

Recognize hazardous engagements requiring specific care, training and expertise. For example:

Securities commission filings;

Tax shelters

Estate planning

Divorce proceedings

Mergers & acquisitions

IT projects affecting mission critical systems

Trustee in bankruptcy

Potential plaintiffs are expanded to include investors and creditors.

Obligation to know your client. Fully understand their business operations and expectations.

Courts will expect that you understood your client’s business.

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Challenging Engagements/Clients

Client risk management practices to consider:

Companies of all sizes becoming more sophisticated;

Clients aggressively downloading risk to service providers.

Watch out for the following:

Hold harmless agreements that are not reciprocal;

Waivers of subrogation (property managers request);

Demanding excessive liability limits;

Requesting to be added as additional insured;

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Challenging Engagements/Clients

Think before suing for fees:

Was your billing practice fair & accurate?

Bill and collect promptly.

Self analysis – Why is client not paying?

Suing for your fees – Inevitable result: Countersuit for malpractice or negligent advice.

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Documentation

All actions should be documented immediately.

All memos and conversations documented with: Topics discussed;

Time and date;

Actions to be taken;

Recommendations to the client;

Client’s refusal to follow your recommendations;

File hardcopy notes or electronically in client files;

Send meeting summary emails to clients.

Documentation must be objective, avoid personal opinions.

Use management letters when identifying deficiencies or recommending corrections in internal controls.

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Standard Operating Procedures

Critical for firms with staff:

Ensures consistent level of service provided;

Employees understand expectations;

Foundation for further expansion of firm;

Helps avoid employment practices related claims.

Operating procedures to consider:

Distribution of materials to staff (i.e., Employment Manual);

Routine internal audits and reviews;

Maintain an efficient and effective abeyance system to meet deadlines;

Client communication expectations for staff;

Maintain professional principles – do not provide “off the cuff” advice, do not accept last minute work;

Require subcontractors to carry E&O insurance;

Note: policy is covering work signed off by the CMA(s), CGA(s) or CA(s) listed on the policy

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High Professional Standards

Courts hold accountants to the highest duty of care

Know your professional limits:

Don’t try to be all things to all clients;

Sell your firm and services fairly;

Don’t guarantee absolute results;

Only accept engagements you are qualified to perform;

Utilize services of specialists, build a network of knowledge experts.

Be an advisor, not a decision maker:

Avoid conflicts of interest:

Do not represent both sides in sale of a business;

Document the other professionals serving your client.

Education & Professional Development:

Stay on top of regulatory changes and rulings;

Maintain education & professional development requirements for staff;

Clear job descriptions and expectations:

General job duties

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What is covered?

What is excluded?

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Primary Forms of Coverage

A) Professional Liability:

Pay for claims made against the Insured due to an error, omission, wrongful act or negligent act of the Insured.

B) Non-Profit Directors & Officers Liability:

Covers an Insured as a director or officer of a non-profit, provided:

a) Non-profit does not indemnify the Insured;

b) The non-profit has not purchased D&O insurance. Maximum amount payable is $100,000 per policy period

C) Penal Legal Costs Coverage:

Reimburse legal costs incurred in the defense of criminal charges up to a limit of $25,000 per policy term.

Insured must be found not guilty or the charges withdrawn.

D) Disciplinary Legal Costs Coverage:

Reimburse legal costs incurred in the defense of proceedings before the Society disciplinary committee of the Society

Limit of $25,000 per policy term.

Insured must be found not guilty or the charges or complaints must be withdrawn.

E) Civil Penalties Extension

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Who is Covered?

The designated individual professional.

The partnership or entity designated.

Any present or past partner.

Any officer, director, partner or employee, while acting within the scope of their duties for the Named Insured.

Coverage is extended to:

Any employee of the Insured, compensated or not.

Any volunteer or trainee of the Named Insured.

Sub-contracted employees if approved by AXA.

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What is Covered?

Comprehensive list of professional services covered is consistent with Consulting services listed under CMA Ontario Rules for Consulting CMAs:

Accounting and bookkeeping;

Taxation accounting;

Auditing;

Financial and taxation planning and related advisory services (NOT buying/selling securities);

Business and management advisory services;

Property management;

Trustees in bankruptcy;

Activities when acting as a member of a accreditation, standards review or similar professional board or committee for the Society;

Change management, balanced scorecard, benchmarking;

Business start-up, mergers and acquisitions, business valuation;

Treasury management;

Forensic accounting with the appropriate designation;

Computer services.

Coverage Shortcomings with Miscellaneous E&O Policies:

Professional services disclosed on your application are covered;

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What is Excluded?

Claims, losses or any fact/circumstance known to the Insured prior to the inception of their first certificate;

Claims arising out of fraudulent, dishonest or criminal acts, but an Insured who has not committed or is not involved in the act is covered

If the insured has not qualified or met the educational requirements of a CMA, except employees acting

under the supervision of an insured CMA;

Activities performed by an Insured outside of Canada: Can add coverage for a small premium.

Claims from any person/organization with an ownership stake in the Insured.

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What is Excluded cont’d?

Promises or warranties (e.g., savings, profits or economic return) made by the Insured;

Claims from bankruptcy or insolvency of the Insured;

Recommendations to clients to invest in corporations in which the Insured has a financial interest;

Investment recommendations, if the Insured received fees, commissions or any form of compensation;

Promoting, selling or buying securities (i.e., stocks, bonds and mutual funds);

Disputes involving fees, commissions or other charges;

Computer services causing damage to computer hardware;

Note: please refer to the AXA CMA E&O Master Policy for a complete list of exclusions.

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E&O Policy Comparison

Coverage Advantages

AXA policy covers all the professional services

deemed within the scope of the CMA

profession, plus we cover:

Every dollar – No deductible;

Performing professional services as a beneficiary or distributor of any trust or estate;

Property management services;

Trustee for bankruptcy;

Directors & Officers insurance;

Criminal Defense Cost Reimbursement;

Disciplinary Committee Defense Cost Reimbursement;

FREE ERP for 6 years (save thousands)

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When is it a claim?

What to do in the event of a claim?

Trends in claims

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When is it a claim?

The following cases should be treated as

potential claims:

1. Receive statement of claim or notice

from plaintiff’s lawyer;

2. Receive threatening comments from

another party either verbally or in writing;

3. You made an error or omission that may

reasonably give rise to a claim.

• When in doubt, report an incident or

circumstance

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What to do in event of a claim?

Do not admit liability or fault to the claimant.

Only state objective facts to the client.

Do not attempt to negotiate settlement:

I.e., reimbursing a client for interest charges on tax filings

Notify your insurance broker immediately:

Send a letter detailing the claim or the circumstances that could lead to a claim.

Pull together all relevant documentation on the file.

Compile a sequence of events and narrative.

Potential Benefits of reporting a claim quickly:

Determining if the situation may be repaired, settled or defended

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What happens after claim is reported?

Matter is reviewed by an in-house adjuster.

A claim file is open and preliminary reserve attached.

Adjusting firm is hired to investigate the claim.

Insured should contact LMS PROLINK if they are not satisfied with the claims service.

Insurer appoints legal counsel specialized in E&O if they believe legal action is required.

90% of E&O claims are settled out of court. Insurers can lose control of the situation;

Litigation costs are high and rising quickly (10.5%/yr);

“Deep pocket” theory.

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Summary of Program Claims

Most common types of claims: Taxation related – 46%

GST audits

Late filings

Misinterpreting tax act (e.g., tax shelters, section 85 rollovers, capital gains)

Financial statement preparation – 12%

Business and management advisory – 16%

Mergers, acquisitions and sale of businesses

Improper valuations of businesses

Other types of claims – 26%

Trustee in bankruptcy

Internal controls

Forensic accounting

Financial software implementation

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Trends in Claims

Higher damages being sought by claimants.

Sue first, ask questions later approach:

Plaintiffs refuse to take responsibility for their actions;

Easy to blame the accountant. Expert witnesses are willing to criticize your work;

Clients/lawyers know that accountants carry E&O.

Longer claims process:

Hiring more experts – “leave no stone unturned”;

Greater expectations on CMAs;

Result is higher claims costs.

Litigation can focus on details “perceived” as insignificant.

Scope of engagement expands under litigation:

Plaintiffs argue they “thought a service was included.”

CMA is responsible for ensuring clients understand what is being delivered;

Important to state what services are not provided.

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Contact LMS PROLINK

Please direct all inquiries to Derrick Leue P. 800-663-6828; ext. 7717 or DERRICKL@LMS.CA