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Selling your practice? Don’t forget to cover your tail

Tail insuranceDon’t let this be you: You sell your practice and all is going well. You are enjoying retired life— when all of the sudden you get a call from your practice’s new owner. A previous client is suing you and you aren’t covered. Yes, this sounds like a nightmare, but luckily it doesn’t have to be your reality. Before selling your firm, protect yourself by considering the following.  

  1. Be Aware of the Danger

When you sell or merge your practice, the potential liability claims don’t go away. Instead, they could move forward into the new firm, ready to erupt when you least expect it. Even if you simply shut down your firm, the possible claims don’t disappear. They can follow you into retirement.

  1. Understand the Limitations

The professional liability insurance you buy is typically issued on a “claims-made and reported” basis. In other words, it is good for claims that are made only while the policy is active. For example, let’s say you sell your practice to Sue’s firm as of January 1, 2018. Early in 2019, an old client makes a claim against services you performed in 2017. The claim may not be covered under Sue’s current professional liability policy, and your policy expired when you sold the firm. You and Sue may be now potentially faced with a claim that is not covered by insurance.

  1. Cover Your Tail

The solution is extended-claim reporting-period coverage, which is also known as tail insurance. Tail insurance extends the reporting period past the time your policy expires, so that claims related to past work are covered. Depending on the rules of your state’s insurance commission, the period of extended coverage could be one, three, five or an indefinite number of years.

If you’re practicing and not planning a merger or sale soon, you have no need for tail insurance right now, because your liability is covered by your current policy. Extended-claim reporting-period coverage is only something you—and your merger or acquisition partner—must think about once a transaction is in the works.

  1. Step in the Acquirer’s Shoes

For the buyer or merger partner, investigating quality control practices and past claim experience is a crucial part of the due diligence process. You should know that they may insist that your firm have tail insurance before a deal is finalized. As noted, it’s also something you should know about even if you plan to close your firm’s door on your way out to retirement, since you can’t shut the door on past liabilities.

  1. Make the Most of Existing Resources

Tail insurance is one of the many issues to consider as part of your succession planning process. For help with any succession-related concern, be sure to turn to the Private Companies Practice Section Succession Planning Resource Center. Have insurance questions? To learn more about the AICPA Professional Liability Insurance Program, visit cpai.com or call 800.221.3023.

Don’t let the problems lurking in past procedures or engagements pop up unexpectedly in retirement. Use tail insurance to put your worries to rest and stay problem free.

Clients of the AICPA Professional Liability Insurance Program through Aon Affinity may be eligible for a discounted or free extended reporting period.  The Named Insured must be a sole practitioner retiring and discontinuing the practice of accounting to be eligible for the vesting credit.  Those insured in the program as a sole practitioner for 7 or more years consecutively may receive a free extended reporting period.  Credit is subject to specific state requirements as well.  For the purposes of determining the vesting credit, a sole practitioner shall mean: One who is engaged in rendering professional accounting services alone with no other partners, CPAs, consultants, bookkeepers, or other professionals working on client engagements.

Keep in mind that policies can be structured differently so it is important to review your policy and options with your broker before retiring, selling a practice, or an M&A transaction.

Mark Koziel, CPA, CGMA, Executive Vice President- Firm Services, Association of International Certified Professional Accountants

Tail insurance is courtesy of Shutterstock.

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