So you're launching your accounting or CPA practice. You've got your credentials, your first clients lined up, maybe even an office space picked out. But here's what catches most new firm owners off guard: the insurance you need on day one is different from what you'll need six months from now, and completely different from what you'll need when you have five employees. Get it wrong, and a single client complaint could wipe out everything you've built.
The good news? Insurance for accounting firms is more straightforward—and more affordable—than you might think. This guide walks you through exactly what coverage you need at each stage of your firm's growth, what mistakes to avoid, and when to add new protections as your practice evolves.
Day One Coverage: What You Need Before Your First Client
Even if your state doesn't legally require professional liability insurance for CPAs—and most don't—you're going to need it anyway. Why? Because your clients require it. Corporate clients, government agencies, and increasingly even small businesses won't sign an engagement letter without proof of coverage. They want to know that if you make a mistake on their tax return or financial statements, there's insurance to cover the fallout.
Professional liability insurance, also called errors and omissions (E&O) insurance, protects you when clients claim you made a mistake, gave bad advice, or failed to deliver services as promised. This covers your legal defense costs and any damages awarded, even if the claim is completely baseless. For accounting firms, the median cost is around $420 annually—less than $35 per month. That's remarkably affordable protection against claims that could reach six or seven figures.
You'll also need cyber liability insurance from day one. As an accounting firm, you're handling social security numbers, bank account information, tax records, and financial statements. A data breach or ransomware attack isn't just a technology problem—it's a business-ending crisis. Cyber insurance covers notification costs, credit monitoring for affected clients, regulatory fines, and legal defense. For accounting firms, this runs around $696 annually on average, though costs vary based on your security measures and the volume of sensitive data you handle.
General liability insurance rounds out your day-one coverage. This protects against physical accidents—a client trips over a power cord in your office, or you accidentally damage a client's property during an on-site visit. Most commercial clients expect you to carry $1 million to $2 million in general liability coverage, and they'll ask for a certificate of insurance before signing contracts.
Growth Triggers: When to Add More Coverage
Your first hire changes everything from an insurance perspective. The moment you bring on an employee—not an independent contractor, but an actual W-2 employee—you need workers' compensation insurance. Most states require this coverage immediately with your first hire. California mandates it from day one. Georgia requires it after three employees. Check your state's specific requirements, but assume you need it the moment you make your first offer letter official.
As you hire staff, you should also add employment practices liability insurance (EPLI). Your professional liability policy specifically excludes employment-related claims like wrongful termination, discrimination, harassment, or failure to promote. EPLI fills this gap. It's not mandatory, but a single employment lawsuit can cost $75,000 to $125,000 to defend, even if you win.
Another critical trigger: expanding your service offerings. If you start doing financial planning or business consulting beyond basic accounting services, your standard E&O policy might not cover these activities. You'll need endorsements or additional coverage specifically for those services. This is where many firms get caught—they dabble in adjacent services without updating their insurance, then discover they're uninsured when a claim arises.
If you start performing attest work—audits, reviews, or compilations—your insurance costs will increase significantly. Attest work carries higher risk, and insurers price accordingly. Budget for $800 to $3,000 annually for combined E&O and cyber coverage if you're doing attest services. Firms serving Fortune 500 companies or publicly traded entities should expect to carry $3 million to $5 million in professional liability limits, as these clients require enhanced coverage before granting access to sensitive financial data.
Common Coverage Mistakes That Leave Firms Exposed
The biggest mistake accounting firms make is letting their coverage lapse. Here's why that's devastating: professional liability insurance works on a claims-made basis, not occurrence. This means the policy that's active when the claim is filed is the one that pays—not the policy that was active when you did the work. Let your coverage lapse, and a new policy will come with a current retroactive date, leaving all your prior work uninsured. A client could sue you over tax work you did three years ago, and you'd have zero coverage.
Late reporting kills more claims than you'd expect. CPAs get busy during tax season and often don't recognize a potential claim as it develops. Maybe a client emails expressing concern about how you handled their return. You think it's just a question, so you don't report it. Six months later, it becomes a formal lawsuit—and your insurer denies coverage because you didn't report the initial complaint promptly. Most policies require you to report potential claims, not just lawsuits. When in doubt, report it.
Another gap: assuming your policy covers independent contractors. If you use 1099 contractors to handle overflow work, verify that your firm's professional liability policy covers their work, or confirm they carry their own insurance. Otherwise, you're exposed to claims arising from their mistakes.
Firms also underestimate the importance of tail coverage when switching carriers or closing the practice. When you cancel a claims-made policy, you need to purchase extended reporting period coverage (tail coverage) to protect against future claims for past work. This typically costs 150% to 200% of your annual premium, but it's essential. Without it, you're gambling that no client will ever sue you over work you did while that policy was active.
What Actually Triggers Claims
Filing errors have become the leading cause of accounting malpractice claims, even surpassing incorrect tax advice. We're talking about missed deadlines, mathematical errors, wrong forms, or data entry mistakes. These aren't dramatic failures—they're the mundane mistakes that happen when you're managing dozens of clients during tax season. Your E&O policy covers these, but prevention is obviously better than making a claim.
Incorrect tax advice remains a top trigger. A client asks whether they can deduct their home office. You give a quick answer without fully reviewing their situation. The IRS disagrees and hits them with penalties. They turn around and sue you for the penalties plus the additional tax. This is exactly what E&O insurance is designed to cover.
Audit mistakes represent the highest-dollar claims. When you perform audit work, you're certifying that financial statements are accurate. Miss something material, and the consequences can be catastrophic—especially if investors or lenders relied on those statements. This is why attest work requires higher coverage limits and costs more to insure.
How to Get Started
Start by getting quotes for professional liability and cyber insurance before you sign your first client. Most insurers will want to know your services (tax prep, bookkeeping, audit, consulting), your annual revenue or projected revenue, your experience level, and whether you have prior claims. Shop around—premiums can vary significantly between carriers, especially for new firms.
Consider working with an insurance broker who specializes in professional liability for accounting firms. They understand the specific risks CPAs face and can help you avoid common coverage gaps. They'll also know which carriers offer the best terms for firms at your stage—some insurers specialize in solo practitioners, while others focus on larger firms.
Review your coverage annually as your firm grows. When you add employees, expand services, or increase revenue, your insurance needs change. Don't wait for renewal—contact your broker mid-year if you have significant changes. It's much easier to add coverage proactively than to explain to an underwriter why you've been providing uncovered services for the past six months.
The right insurance setup protects everything you're building. Budget for professional liability and cyber coverage from day one, add workers' comp and EPLI as you hire, and increase your limits as you take on larger clients or attest work. Avoid coverage gaps, report potential claims promptly, and maintain continuous coverage to protect your past work. Get this foundation right, and you can focus on what you do best—helping your clients succeed.
