Legal Precautions

[Snaggletooth]

Been out-of-town for awhile and just tonight catching up on some of your posts. I've been doing mass reading now for some time, but haven't responded.

As I read how many of you respond to situations and run your business, I am really overwhelmed by just how much of your time and effort is spent NOT on tax matters, but avoiding legal problems. This has got to be the ultimate in non-productivity.

I won't make an argument that it isn't necessary, but most of you do much more of this than I do. I realize that working in blissful naivity subjects the preparer to the hostility of ever-avaricious lawyers just looking for clients and revenue, and some tax preparer, innocent or not, to be the target of some cumbersome litigation. Kudos to the rest of you who have somehow figured out how to navigate your operations through the minefield of potential legal potholes.

So much of your time and effort is spent in assuming the worst, and writing letters, and covering yourself that I don't know how you can effectively or enjoyably get anything else done with any degree of reason.

It's a shame that it has come to this. I support a purge of bad and dishonest tax preparers, but the rest of us are having to deal with that element which creates a litigious society rewarding the legal profession for prosecution of things only perceived or alleged.

[Bees Knees]

We are a litigious society.

At an accounting seminar, I heard the speaker read a quote from a magazine marketed to lawyers. The quote said that when naming defendants in a lawsuit, don’t forget the accountants. They are the ones with the deep pockets. Probably in reference to their errors and omissions insurance that most accountants carry.

[JG EA]

Lower $ policy.

At an accounting seminar, I heard the speaker read a quote from a magazine marketed to lawyers. The quote said that when naming defendants in a lawsuit, don’t forget the accountants. They are the ones with the deep pockets. Probably in reference to their errors and omissions insurance that most accountants carry.

I also heard this about going after accountants. The speaker recommend just a small amount of insurance - that if the insurance was high then an attorney might go after it. But by that same reasoning then having no insurance would be even less of a target would it not?

I have begun to take steps to protect myself by the written word. But not so much because I live in fear of being sued, but to have answers for clients who begin to question everything.

Since it is impossible to cover everything, then I will be able to show them in writing what things I will cover.

[Gretel]

Insurance

Right now I need to make the decision in regards to my E&O insurance. So far I had only one for tax preparation limit $10,000, costing $ 165.

Since I also do payroll and accounting I decided to switch to a company where this in included. I am still debating going with $10,000, $20,000 or $100,000. I thought it wouldn't make any sense any more to go with a low deductible, low coverage amount, since with low claims you probably think twice before reporting. And then, insurance companies can kick you out anyway.

Then I thought the only thing that makes sense is to go with a higher deductible and $100,000 coverage because $10,000 doesn't cover anything in ligitation. BUT I really want to refuse to think all the time of the bad things that can happen. I could have a good engagement letter, keep good records of conversations and then that's it. No insurance, no feeding of fears what can happen.

I could as well think a client likes me so much to put me in his will or gives me a large tip or is just a very pleasant client. I know we attract what we fear so I will refuse to live in fear. After all my office could burn down or I get hit by something fallen from heaven.

Boy, writing all this really helps me to come close to the decision to not carry any insurance any more.

[taxmandan]

Boy, writing all this really helps me to come close to the decision to not carry any insurance any more.

I look at E&O as prepaid legal protection, carry $150,000 and know that it is more than the loss any of my clients might incur from my work. I believe that good insurance coverage is better for asset protection than relying on engagement letters, disclaimers, notes, legal structure of the business, etc.

How hard would it be for you to start over in business if you lost everything to a judgement? That should help you decide if buying insurance is worth the cost. Some folks have little in the way of assets and losing what they have and starting over is not a big deal. Others have homes, boats, rental properties, stocks & bonds, etc. and protecting those assets is important.

Based on your work for clients, what is the biggest financial loss that one of them can incur from your work? That should help you decide how much E&O insurance to carry.

[JG EA]

$250,000

The speaker recommend just a small amount of insurance - that if the insurance was high then an attorney might go after it.

The speaker's "small amount" recommended was $250,000 by the way.

[S T]

Sources for E & O Insurance

Can anyone provide sources for E & O coverage. I have looked at several, but it seems very costly.

Sandy

[Black Bart]

E I E I & O

Can anyone provide sources for E & O coverage. I have looked at several, but it seems very costly.

Sandy

Sandy/ Somebody posted this before, but here it is anyway.

EZ Insurance Solutions
Affinity Insurance Services
Program Administrator
159 East County Line Road
Hatboro, PA 19040

Phone: 866-225-8464
Fax: 800-853-5227
Net: www.ezinssolutions.com

I got this quote December 13, 2004 and it may still be good. I don't know how often they raise rates.

Option # 1
Limits of liability: $100,000 per claim / $250,000 maximum for the year. $500 total annual deductible. Does not cover employee dishonesty. Annual premium - $ 444.00

Option # 2
All same except with $250K per claim / $500K annual max. Premium - $ 625.00

[Black Bart]

And furthermore (of course),

as to the philosophical side: I agree with Snag absolutely. We spend so much time worrying about this and so much effort trying to cover every possible contingency, that it's a wonder we ever find time to do any tax work.

Obsessing about it doesn't help, but we can use reasonable care to prevent it or soften the blow. Just about everybody could spiff up documentation, raise E&O to realistic levels, and get rid of potential "risky" clients (I threw one overboard this past year that I've been worrying about for over ten years and it's unbelievable how much better I feel). Further, I'm working on an engagement letter that would give F. Lee Bailey a hard time. My E&O coverage and premium are about the same as Gabriele's, but it doesn't seem adequate for the times--this was brought to my attention once before (that pesky Bees again), but I did nothing. Now I think I'll buy that policy above. And.....I'm going to stop thinking about it (I reserve the right to join church)!

Back to the original point, though. I'm not saying that lawsuits aren't a "clear and present danger," but I'll bet they're much less common than generally perceived among those of us in the profession. Maybe somebody -- Bees probably -- can refute this, but at least that's the way it seems to me.

I first began hearing talk about lawsuits from seminar instructors 20 years ago and, back then, a friend told me of a book entitled "How to Sue Your Accountant." That worried me). But in the long run, there's only been one in the paper since--a CPA and partner auditing a very large company were sued for a million dollars. Outside of that, I don't know of any. Do you?

I wonder how many people have actually sure-enough been hauled into court? I haven't (and you can tell by my posting how haphazard I am). Have you?

[Gretel]

EZ Insurance

Sandy/ Somebody posted this before, but here it is anyway.

EZ Insurance Solutions
Affinity Insurance Services
Program Administrator
159 East County Line Road
Hatboro, PA 19040

Phone: 866-225-8464
Fax: 800-853-5227
Net: www.ezinssolutions.com

I got this quote December 13, 2004 and it may still be good. I don't know how often they raise rates.

Option # 1
Limits of liability: $100,000 per claim / $250,000 maximum for the year. $500 total annual deductible. Does not cover employee dishonesty. Annual premium - $ 444.00

Option # 2
All same except with $250K per claim / $500K annual max. Premium - $ 625.00

It seems to depend on the % of bookkeeping and payroll. Just got quote back from them:

Option #1 $336.00

Option #2 $474.00

Maybe depending on how nice someone is or who knows what?

[Bird Legs]

Lawsuit

Have not been sued. However, I was threatened to be taken into court one time, about
2 years ago.
That is not a good feeling.

[geekgirldany]

I figured I needed some type of insurance when a client mentioned a friend of his that got audited. My client laughed and said "he blamed it all on the bookkeeper and accountant. The bookkeeper did everything". With that comment and seeing just the bad bookkeeping that clients have.

I first started out with engagment letters. I haven't done my bookkeeping engagement letters yet. But I am planning to get something drawn up this month. The tax engagement letters did not go over well. So I started saying to some clients that protested that "well I need it for my liability insurance". Big mistake. When one client got audited and thought I had made a mistake on their return they were very very quick to say "how much will you liability insurance pay". That blew me away that a client would do that.

Well I don't tell people I have liability insurance anymore. I just tell them it covers them as well as me by stating what exactly my duties are in preparing tax returns. Alot of my clients looked at the engagement letters as contracts. I told them to read it carefullly and I had included a copy for their records also. Alot of them don't want to sign them. If I know its just a simple return I won't push it. But I required it on corporate, business returns.

I've got coverage of 100,000/300,000 with a $1,000 deductiable. It went from $160 last year to $300 this year. She said I had more exposure now but it would never go over $300. We will see. I have mine through Marsh Insurance. Recommended by the NATP.

[taxmandan]

I wonder how many people have actually sure-enough been hauled into court? I haven't (and you can tell by my posting how haphazard I am). Have you?

In a previous career I was sued for $20 million. I was an employee so the company insurance handled the case. Our lawyer warned me that the policy limit was only $3 million, the other $17 million was my problem. I smiled and reminded him that the FIRST $3 million of judgement was his to pay and I was sure he would fight real hard to not have to pay anything, which he did. The case had no merit and the court found for us. Never mind any judgement to pay, the cost of legal representation would have wiped me out financially. That's why I consider it prepaid legal expense.

[JG EA]

Threatened.

I was once threatened as an employee with a lawsuit and then alternately with getting me fired. It was a case where the boss was gone and I was "minding the store".

Everything was fine while I was handling the situation until he found out I was a new employee. It was like a tiger going for the jugular. Perhaps there was no real intention to sue, maybe he was just having fun. But it wasn't fun for me. All was straightened out when the boss returned.

However, risk of lawsuit makes me more careful - just keep the vulnerability to ourselves.

[Black Bart]

Okay, we're making progress

Re.: Actual Lawsuits

So far, two threats and one twenty million bucks. Anything in between?