Here's something most accountants don't realize until it's too late: even perfect work doesn't protect you from lawsuits. A client's business fails, they're looking for someone to blame, and suddenly your tax preparation from two years ago is under scrutiny. Maybe you missed nothing. Maybe you followed every rule. Doesn't matter—you're still facing a lawsuit that could cost tens of thousands to defend.
This is why professional liability insurance—also called errors and omissions (E&O) insurance—isn't optional for CPAs and accounting professionals. It's the financial safety net between a single mistake and the end of your career. Whether you're a solo tax preparer or part of a mid-sized firm conducting audits, understanding how this coverage works could save your practice.
What Professional Liability Insurance Actually Covers
Professional liability insurance for accountants protects you when clients claim your professional services caused them financial harm. The policy covers three critical things: legal defense costs, settlements, and court judgments up to your policy limits.
Common scenarios include tax mistakes that trigger IRS penalties, missed filing deadlines that cost clients money, errors in financial statements, failure to detect fraud during an audit, or accidental disclosure of sensitive client information. A real example: a CPA incorrectly filed a client's tax return, resulting in a $15,000 IRS penalty. The client sued. Without professional liability coverage, that accountant would have paid both legal fees and the settlement out of pocket.
What catches many accountants off guard is that claims can arise even when you've done nothing wrong. Professional liability lawsuits often happen when a client's business fails and they're searching for someone to blame. Your policy pays for your defense even if the allegations are baseless—and legal defense alone can run $50,000 or more.
Claims-Made vs. Occurrence: Why This Matters More Than You Think
Most professional liability policies for accountants are claims-made policies, not occurrence policies. This distinction is crucial and frequently misunderstood.
An occurrence policy covers any incident that happens during the policy period, regardless of when the claim is filed. Simple and straightforward. But occurrence policies are rare for professional liability coverage.
A claims-made policy only covers claims that are made during the policy period. Here's the catch: the policy must be active when the claim arrives AND when the alleged error occurred (or more precisely, after your retroactive date). If you prepared a tax return in 2024 but your policy lapsed in 2025, and a client sues you in 2026, you have no coverage—even though the work happened when you had a policy.
This is why continuous coverage is essential. When you renew your policy or switch carriers without a gap, your retroactive date typically stays unchanged, preserving protection for all your work since that original date. But let your coverage lapse, and a new policy will usually come with a current retroactive date—leaving all your prior work uninsured. With statutes of limitations for accounting malpractice stretching several years in most states, that's a massive exposure.
The Retroactive Date and Defense Costs: Two Details That Make or Break Coverage
Your retroactive date is essentially your coverage start date—it determines how far back in time your protection extends. Claims arising from professional services performed before your retroactive date are not covered, period. When shopping for coverage or switching carriers, protecting your retroactive date should be non-negotiable. Losing it means losing coverage for all your past work.
The second critical detail: whether defense costs are included within your policy limits or provided in addition to them. This sounds technical, but it has huge practical implications.
If you have a $1 million policy with defense costs inside the limits, and your legal defense costs $300,000, you only have $700,000 left for a settlement or judgment. If defense costs are outside the limits, you still have the full $1 million available even after paying legal fees. Given that defending against a malpractice claim can easily run $75,000 to $150,000, this distinction matters enormously. Policies with defense costs outside limits cost more but provide significantly better protection.
How Much Coverage Do You Actually Need?
The average professional liability policy for accountants features limits of $1 million per occurrence and $1 million aggregate. For many small firms and solo practitioners, this is adequate. But if you conduct audits or serve high-net-worth clients, you'll want higher limits—typically $2 million to $5 million.
Some states have minimum requirements. Accounting corporations and CPA firms must carry at least $100,000 per CPA for each claim (capped at $1 million) and $250,000 per CPA annually (capped at $3 million) in certain jurisdictions, though these rules typically don't apply to individual tax preparers.
Your coverage needs depend on your services, client base, and revenue. A solo tax preparer serving individuals faces different risks than a firm conducting audits for publicly traded companies. Evaluate honestly: what's the largest potential claim you could face? That should guide your limits.
What You'll Actually Pay for Coverage
Professional liability insurance costs vary widely based on firm size, revenue, services offered, claims history, and location. As of 2025, expect to pay anywhere from $45 to $146 per month on average, with small firms typically paying $500 to $1,500 annually for standard $1 million coverage.
Solo practitioners or very small firms earning under $500,000 annually usually fall on the lower end of that range. Mid-sized firms or those offering higher-risk services like audits and forensic accounting pay considerably more. Geography also plays a role—North Dakota offers some of the most affordable rates at around $125 monthly, while Washington averages closer to $169 monthly.
While professional liability is typically the most expensive policy type for accounting professionals, it's also the most critical. Compare that annual premium to the cost of defending a single lawsuit—$50,000 to $150,000 or more—and the value becomes obvious.
How to Get Started and Protect Your Practice
Start by assessing your actual risk exposure. What services do you provide? Who are your clients? What's your annual revenue? These factors determine both your coverage needs and your premium.
When comparing policies, ask about the retroactive date and whether it can be preserved if you switch carriers. Confirm whether defense costs are inside or outside your policy limits. Understand the deductible structure—higher deductibles lower premiums but increase your out-of-pocket costs when a claim occurs.
Consider whether you need tail coverage if you're retiring or selling your practice. Extended reporting periods (tail coverage) protect you from future claims about past work after your policy ends. Without it, you're exposed indefinitely to potential claims from former clients.
Professional liability insurance isn't about expecting the worst—it's about protecting what you've built. One claim, even a frivolous one, can drain your savings and damage your reputation. The right coverage means you can focus on serving your clients, knowing that if something goes wrong, you're protected. Get quotes from specialized carriers who understand accounting risks, compare coverage details carefully, and don't let your policy lapse. Your future self will thank you.
