What To Do When a Wolf Is At The Door
Five Steps Accountants Should Follow When Facing Claims, Suits From Clients

Bill Edwards
So, you have just received a letter that a now former client is making a claim against you and intends to file suit.  What do you do?  Well, there are five steps you should follow to immediately protect yourself and prepare for the day when the Summons and Complaint is actually placed in your hands.

First Step: Contact your insurance agent and check on the status of your professional liability insurance policy.  These policies are almost universally a “claims-made” policy that, as the term implies, only covers you at the time the claim is first made.  Therefore, it is imperative that you report this claim or potential claim to your agent.   Various policies have varying definitions of what constitutes a “claim,” but the gist of most of them is that if you are aware of the potential of a claim being made against you, you should provide notice to your insurance carrier.  A good rule of thumb is when in doubt, report it.  Should the potential claim amount to nothing it should not affect your underwriting; whereas, the failure to report a claim may lead to a defense being raised by your insurance carrier as to whether you complied with a condition precedent under the policy.  Since we practice in the State of Arkansas, I can tell you that Arkansas insurance coverage provisions are very strictly construed when the matter of timely notice being given to the carrier is under consideration.

Another benefit to immediately contacting your agent is your carrier will often become involved with you in a proactive manner to avoid or minimize any losses and, if the situation warrants, even step in and settle the case so as to avoid any disruption in your practice, damage to your business relationships, and risk.  While policies will vary, most carriers provide pre-litigation assistance that does not trigger your deductible.  This is prepaid assistance to you that should be utilized at the earliest opportunity.  These services may be something as simple as legal assistance in complying with a subpoena for documents, as well as having an attorney present during your deposition and counseling with you prior to your deposition even if you are “only” a witness.  You should be aware that many lawsuits against accountants and other professionals start with that individual’s involvement as a witness.

Second Step: Make your partners aware of a potential claim so that your firm can assess and evaluate the potential risk.  This should be done at the earliest opportunity in order to solicit the collective wisdom and support of your partners.  It is highly unlikely that you would be able to keep this potential claim a secret in light of the necessity of taking the third step as set out below.

Third Step: Immediately collect and segregate all working documents that form this client’s file.  This would include engagement letters, all audit materials including financial statements and work papers, tax materials and most importantly e-mails.  You should take steps through your IT manager to ensure that each employee who was engaged in working for this client has all e-mails collected and stored under some form of lock-out protection to ensure that the files are neither corrupted nor changed as of the date of your first notice.

Fourth Step:  Decide what person in the firm will act as a point person through which information is received and information conveyed to your counsel.  This person should be someone intimately familiar with the client and the details of the engagement.  If necessary, a secondary person can also be involved depending upon the work level of the primary contact.  However, consistency in communication and the ability to have all information flow through one or two people is key.  (Normally this is not a problem as anybody not directly involved with this particular client will be running for the hills in an effort to not become involved in anything that smacks of potential litigation).

Fifth Step: The last step is perhaps the hardest.  Sit down and objectively evaluate why this claim is being made and what is the level of risk to you and your firm. Sure you tell yourself you have represented this client for years and you have always had a good relationship, but who can predict the effect of a buy-out by another company or a change in the Board of Directors or upper management, or even a bankruptcy filing by your client with the recently appointed bankruptcy Trustee making the decision on whether to file suit.  Your first reaction is to deny that you have done anything wrong and this is often the case.  However, bear in mind that any potential case of this nature will not be before a jury of accountants; but rather, before a jury drawn from all walks of life.  People can be swayed by sentiment and sensationalism.  In short, this prospective claim may not be about whether you are right or wrong; but, what can you prove and what are the risks?   In this instance having another set of eyes in the form of a consulting accountant or a review of the file with your lawyer can be invaluable. 

The thing to always remember is that you, the accountant and as the insured under a professional liability policy, ultimately controls whether the lawsuit will be settled or tried.   Almost all professional liability policies contain what is commonly known as a “consent clause.”  This clause essentially provides that the case cannot be settled without the consent of the insured.  Before a case is settled or even negotiations have begun, an insurance company will ask you to sign a consent to settle document.  You should discuss this freely with your partners and ask questions of your counsel as to any questions with respect to this document.  Bear in mind that the insurance company also has protective clauses built into most of these policies, the most extreme of which is known as a “hammer clause.” Under this provision, if the carrier feels that the insured is unreasonably insisting that the case not be settled upon what it views as very favorable terms, it can invoke this clause to limit the insured’s coverage amount to that of the plaintiff’s settlement offer.  By way of example, if you have a $1 million policy and the plaintiff offers to settle this claim for $5,000 and you refuse, the insurance company would have the right but not the obligation to reduce your coverage level to the $5,000 offer.  If the plaintiff subsequently secured a verdict against you for $50,000, then you would only have $5,000 worth of coverage and the remaining $45,000 would have to be paid out of your pocket.

This article is intended to be a very general discussion of typical provisions found in many policies and is in no way intended to be an explanation of what your particular coverage or policy provides.  Your insurance agent can provide you with answers to these questions.  A great time to take up some of these issues with your agent is at the same time you are shopping for renewal of your coverage.  The decision of litigating or settling your case is often a three-way decision between you, your counsel and your insurance carrier.  However, this difficult decision is one well worth exploring at the early stages of litigation. In the end, your best option may be litigation, but sometimes it should be a last resort. The hard part is telling the difference. It's up to you and your counsel to thoughtfully weigh the pros and cons and choose the option that's in your best interests. 

William H. “Bill” Edwards is a member of the Professional Liability Defense Practice Group at the Barber Law Firm. He can be reached at    See More Articles > > >