Most CPAs will never face the underbelly of an accounting malpractice lawsuit. Those who do, however, will say the challenges are something they never want to experience again in their lives.
A malpractice claim against a CPA (I will refer to as you) may arise from several causes such as a business failure, bad advice (primarily regarding tax) and fraud. Regardless, some critical decisions made early in the process can lower the cost and the angst, especially in time and frustration.
Assuming you have malpractice insurance coverage, the matter is not as simple as notifying the carrier, which is required by the policy. At first hint of the possibility of a lawsuit comes the time to thoroughly read and understand the policy. This is also the time to make at least one critical decision: Do I hire my own lawyer or simply rely on the lawyer the insurance company refers?
Allow me to answer the question by stating emphatically, “hire your own lawyer.”
Unfortunately this means you will have two lawyers, but huge benefits are derived. The malpractice insurance policy is a legal contract written by lawyers. In the contract the CPA has agreed to, many key provisions were most likely never considered. Some policies may differ, but you must review your policy to understand.
- You pay the retention amount before the insurance company (carrier) pays any expenses. Retention is really the deductible. This includes the initial attorney fees for the attorney hired by the carrier to represent you.
- The attorney is hired by the carrier. You don’t get to choose. Even though you have paid premiums and you are the defendant being sued, that attorney’s client is the carrier.
- Policy expenses, including attorney fees, are deducted from the face amount of the coverage. For example, if you have a $1,000,000 policy and attorney’s fees after a retention total $300,000, you only have $700,000 of remaining coverage. This balance is available for the carrier to pay to a plaintiff either a negotiated settlement of a claim or a judgement rendered in court. If a court judgment is more than $700,000, you will pay the excess.
- Understand that you cannot negotiate a settlement, admit liability, assume liability or incur any claim expense without the approval of the carrier. Furthermore, if you do not consent to a settlement acceptable to the carrier and a plaintiff, the carrier’s obligation to defend you ends.
- The carrier’s attorney hired to represent you may have a conflict. Although I would like to believe your interests will be served, there may be some serious concerns here.
Motions, filings, pleadings, discovery, depositions and hearings in court consume an enormous amount of time, and the process moves at a snail’s pace. Until confronted with litigation, most people do not understand the costs and lack of control experienced. The early settlement of a case can seriously limit the cost and resultant fees, plus the headaches, frustration and diversion.
Bottom line, litigation in accounting malpractice is a legal minefield and a tough as nails battlefield. You will have to pay your own legal counsel. Is the cost worth it? I have served as an expert in over three dozen accounting malpractice cases. In my opinion, if you are represented by experienced independent legal counsel of your choosing, who can direct and oversee the whole process for your benefit, your savings will be substantial.