Why Bookkeepers Need Professional Liability Insurance

Profits, losses and taxes can be risky matters these days. If you make an error on a client’s books and the business takes a loss, you may find yourself in legal jeopardy. The result may be the same if you exaggerate profits, which may lead to extra tax liabilities.

Confounding matters is the fact that the bookkeeping industry is government regulated and deadline driven. You could be in hot water if you violate a key regulation or blow past a filing date. But there’s good news: You can avoid these risks by acquiring professional liability insurance. This type of insurance shields your firm against the financial impact of litigation, letting you focus on what you enjoy doing most: running a successful bookkeeping firm.


What Are Bookkeepers?

Bookkeepers are business professionals who record a firm’s daily transactions. Their objective is to provide an accurate picture of a firm’s financial standing at a given time. How do they differ from accountants? It’s a matter of perspective. Bookkeepers are more micro-oriented, zeroing in on a company’s present financial condition. Accountants use bookkeeping information to conduct macro-analyses of a firm’s strategic strengths and weaknesses and future opportunities.

Bookkeepers commonly handle tasks such as:

  • Recording financial transactions.
  • Posting credits and debits.
  • Creating and sending invoices and following up on late payments.
  • Handling payroll­— making sure employees get paid on time and government withholdings are accurate.
  • Reconciling the books against bank accounts to ensure accuracy.
  • Producing and balancing ledgers, accounts and subsidiaries.
  • Summarizing a firm’s financial condition every month.
  • Developing tax returns.
  • Preparing year-end financial statements.
  • Helping business owners develop budgets, including making revenue and expense projections.
  • Coordinating with the firm’s in-house or outsourced accountant, assuring that person or entity receives timely information.

A bookkeeper’s highest priority is to maintain the financial viability of their companies (or clients). Recording transactions properly and on time ensures the timely payment of bills and taxes. This prevents disputes with clients, regulators or tax authorities.

Beware the Risks

Because you work with financial data, making a bookkeeping error can create legal exposure for the business owners you serve. For example, if you issue a vendor check that bounces due to insufficient funds, you may have a problem. According to the Uniform Commercial Code, people with check-signing authority are personally liable to payees unless they can prove management did not want them to have that responsibility.

Another possible risk is failing to pay payroll taxes. For example, suppose your firm is low on cash and you elect to pay vendors with Federal Insurance Contributions Act (FICA) money. In that case, you will likely be held personally responsible under two scenarios:

  • Your company gave you formal decision-making authority for vendor payments. In other words, you can decide which bills get paid and when.
  • You purposely neglected to pay the taxes. Your boss or other entity telling you not to pay them does not eliminate your liability.

The risk of data breaches is also a bookkeeper liability concern. If customer data residing on a local server or in the cloud gets stolen, you and your company might face consequences for not safeguarding it.

Furthermore, when you prepare tax returns, your risks expand significantly. Legal problems may arise when you make mistakes preparing and filing tax returns, especially those related to tax payments or refunds due.

But those are just four possible risk exposures. There are many others, including:

  • Not expensing an asset properly, which may trigger asset depreciation errors and tax overpayment. 
  • Mistakenly generating invoices and recording payments, leading to overstated income.
  • Missing a double posting because you failed to reconcile your accounts, distorting your tax calculations. 
  • Not correctly tracking account receivables, jeopardizing future payments from big customers.
  • Missing out on potential expense tax deductions due to sloppy bookkeeping.
  • Failing to detect unusual transactions resulting from employee fraud.
  • Having a client misstate revenue for many years and refuse to correct the problem despite your advice.


Introducing Professional Liability Insurance

Professional liability insurance reduces the risks of operating a bookkeeping business. It’s a form of insurance that helps to defend you against claims of professional negligence. How? By providing funds to hire a lawyer. Also, if you lose your case, your professional liability insurance will pay for court-mandated judgments or settlements and expenses related to your case, including court administrative fees and hiring expert witnesses. Your policy will not only safeguard your personal and business assets against third-party claims, it will also pay for an attorney to resolve nuisance lawsuits.

How do professional liability policies work? Put simply, they protect you when you make a mistake or forget to do something important. If you make an error or omission that financially injures a client, your insurance will act to protect your financial interests. Based on your policy’s insuring clause, your insurer will:

  • Assign a vetted defense attorney to your case at no expense to you.
  • Provide you with a company adjuster to manage claims and legal processing.
  • Hire expert witnesses if needed to buttress your defense.
  • Pay for arbitration, mediation or other forms of resolving disputes, potentially saving time and money.
  • Pay for court administrative expenses.
  • Pay for mandated settlements and judgments (assuming they’re covered).

Total claim costs can reach six figures or higher. Without insurance, you may have no option but to pay them out of pocket. You might have to liquidate business and personal assets to fulfill your legal obligations If you lack liquid cash. This might lower your current standard of living or delay your retirement. Worst case: You might never be able to retire.

Benefits of Bookkeepers Professional Liability Insurance

In short, it’s hard to deny the advantages of having bookkeepers’ professional liability insurance. Here are some of the benefits you’ll experience after buying your policy:

  • You’ll have less financial doubt– Being insured replaces a significant, unknown risk (the chance of being sued) with a smaller known expense (paying for insurance). Most bookkeepers know that certainty trumps uncertainty regarding business finances.
  • You’ll have instant access to an experienced defense attorney– You’ll want to hire an attorney fast if a client sues you. But finding qualified counsel on a deadline can be challenging. If you have professional liability insurance, your insurer will assign you a capable lawyer to immediately launch your defense. Having a skilled attorney in your corner will give you peace of mind.
  • You’ll experience less stress– Getting sued increases the chance of being on the hook for a large settlement or legal judgment. That’s not the worst of it. Litigation raises questions about your professional capabilities, which usually enter the media (both traditional and social). When you have insurance, your policy will pay for an attorney with experience getting malpractice claims dismissed or settled privately. Access to this expertise is one of the most important benefits of having professional liability insurance. It helps to preserve your reputation so you can continue making money as a bookkeeper.  
  • You’ll have insurance protection that other insurance policies don’t provide– Many bookkeepers think their general liability or business owner’s policy (BOP) will shield them against professional errors and omissions. It doesn’t; it only protects against third-party injuries and property damage and not mistakes you make while keeping the books. To protect your assets against clients suing you for work-related errors, buy professional liability insurance.

Shopping for Professional Liability Insurance

Protecting yourself, your business or your employer's company against client lawsuits is crucial. For this reason, selecting an insurer that will stand behind you is essential. Here are some shopping tips to consider:

  • Ensure the insurance company issuing your policy has top ratings from analysts such as A.M. Best. This means it will have the financial staying power to make good on its promises.
  • Work with an insurance broker who understands the needs of bookkeepers and has selected appropriate insurance solutions that address those needs. Ideally, this person or entity should regularly attend bookkeeper professional association conferences and other industry events.
  • Look for insurers and brokers who do a good job explaining policy features and benefits in plain English.
  • Choose a broker that provides a simple online application and the ability to download an instant certificate of insurance.
  • Make sure your policy is competitively priced.
  • Research to determine whether the insurer and broker provide world-class customer service.
  • Confirm the policy will cover you, your employees (if any) and your independent contractors, including protection for “additional insureds.”
  • Check to see if your insurance team can educate you about risk-mitigation business practices.

Finally, ensure your insurance policy covers disciplinary hearings, subpoena response, defendant’s expenses and employee theft.

As a bookkeeper, you work in a risky profession. Fortunately, professional liability insurance is widely available to reduce your legal exposure. Take steps to protect your business today.