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Tail Coverage and Indemnification

cpamutualWEB191015InsominaImage.jpgAs risk management consultants exclusively for public accounting firms across the U.S., CPA Mutual and our risk management partner, NewGate Law, LLC, are always looking for ways to share our knowledge and experience to a broader audience. The opportunity to publish articles in national trade publications like CPA Practice Advisor is a privilege, and we hope you find these articles helpful for your practice.

What is Tail Coverage?

In the article, How ‘Tail Coverage’ Can Protect a Retiring Firm Partner, authors William “Bill” Thompson of CPA Mutual and R. Peter Fontaine of NewGate Law describe this type of liability insurance for accountants and why it is valuable for departing accounting firm partners, firm leaders and acquiring firms involved in M&A. 

“Tail coverage gives the partner and the firm some financial and legal support for representation in a case. It’s obviously bad news when a former partner is named in a lawsuit, but worse if the tail policy has been altered or cancelled, or the indemnity is no longer in place… 

“Buyers of an accounting firm often require the seller to obtain a tail policy. Not only does a tail policy help protect the selling firm and its selling and retiring partners, it should give the acquiring firm a lot of comfort. The acquiring firm’s risk of successor liability is minimized for future claims on work performed by the selling firm and its active and retired partners. Even though the acquiring firm may not have legal responsibility for work performed prior to the acquisition, experience has shown that successors are often drawn into the legal proceedings. Being named in a lawsuit still requires time and money to assert the firm’s defense. Insurance helps.”

Read the full article in CPA Practice Advisor.

Why Indemnification Benefits the Accounting Firm

Following up on our tail coverage article, attorney R. Peter Fontaine goes deeper into the meaning of indemnification for public accounting firms. He shares how indemnification conditions and terms work hand-in-hand with risk management steps in partner agreements as well as what is liability coverage for departing partners. Here is an excerpt from that article, published in CPA Practice Advisor.

“Accounting firms should eagerly give current and former partners an indemnification, subject to certain conditions and time limits. The reasons are very simple. First and foremost, it’s a good partner relations practice. Partners are more likely to act in the best interests of the firm — and possibly sleep better at night — knowing the firm protects them. Additionally, so long as the firm is covering the partners’ defense costs and liabilities, the partners are much more likely to cooperate and assist in the defense. The firm can use the lawyers of their choosing to represent the partner, advance a common defense strategy and control what happens, including a settlement.”

To view specific conditions and terms of indemnification, see the full article in CPA Practice Advisor.  

If you have any questions regarding the indemnification conditions and terms of your partner agreements or risk management steps for departing/retired partners as part of succession planning or M&A, we can help. Talk to a member of our claims team.