Munich Re Specialty’s Nick Mycyk, Underwriting Manager for Lawyers and Accountants E&O, shares insights on factors that could lead to the need for excess coverage for accounting firms over and above their primary insurance.

Experts from Munich Re Specialty are carefully monitoring the market and have observed with growing concern the rise of claims severity in the accounting space, which may lead to financial losses for accounting firms without adequate coverage. 

Higher inflation rates the last four years have impacted the cost of defending and paying claims. Legal fees, forensic accounting fees, and other costs have risen, and these costs occur before any liability payments. Legal fee increases in the United States averaged between 3% and 4% from 2010 to 2019, outpacing inflation but staying steady. Since 2020, legal fees have risen by more than 4% per year, with a 6% increase in 2023 — far above the 4% inflation rate in 2023.¹

Clients of accounting firms also experienced tremendous growth in 2023. The total market value of US publicly traded companies increased 25.1% last year.² Accounting firms are benefiting economically from this growth. US accounting firms generated $145 billion in revenue in 2023 — the highest ever. The increased value of accounting clients and higher revenues can increase the potential cost of claims as errors and mistakes have a larger financial impact. 

In the ever-changing landscape of economics, recessions pose risks to accountants. Most economists are not predicting a recession in 2024; however, they are warning of a slight downturn following 2023’s tremendous year of growth.³ Tougher economic conditions can lead to heightened investor scrutiny, prompting a closer examination of work performed by accounting firms. The scrutiny may uncover accounting errors, potentially resulting in claims against the firm. Excess limits provide a backstop to potential large claims resulting from a recession. 

Legal system abuse, often referred to as social inflation, applies to a variety of tactics the trial bar uses to initiate more lawsuits, increase litigation expense costs, increase settlements for defendants, and secure higher verdicts. When verdicts exceed $10 million, they are known as “nuclear verdicts.” A study by the US Chamber of Commerce found that the frequency of nuclear verdicts increased almost 26%.⁴ Accounting firms are not immune to this trend. Firms cannot rely upon what they have done in the past as a guide for what they should do in the future and need to make sure their insurance coverage keeps pace.

Accounting firms are currently implementing AI in their everyday operations. Investment in AI solutions continues to grow. By 2030, the US accounting industry is expected to spend more than $53 billion on AI.⁵

The impact of this investment is still unknown. It is likely to drive efficiencies and productivity gains, but it may also create new claims scenarios and unknown levels of risk. Taking a proactive approach against potential future losses involves reassessing your excess insurance coverage and asking if current limits are sufficient to effectively mitigate the unpredictability of risks that come with AI integration.⁶

At Munich Re Specialty, our experienced team of accountants professional liability underwriters are working diligently to provide excess solutions that address the increasing risks faced by accounting firms. To learn more about our Excess Accountants Professional Liability product, visit: https://www.munichre.com/us-non-life/en/solutions/specialty-insurance/excess-and-surplus/professional-liability/accountants-professional-liability.html. 

Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. It should not be construed as an offer to represent you, nor is it intended to create, nor shall the receipt of such information constitute, an attorney-client relationship. Readers are urged to seek professional or legal advice from appropriate parties on all matters mentioned herein.

Sources:

¹Josten, W. 2024. What the “State of the US Legal Market” report showed about law firm billing rate performance in 2023 and where it may go in 2024. February 24. Retrieved from: https://www.thomsonreuters.com/en-us/posts/legal/sotlm-2024-law-firm-billing-rate-performance/

²Siblis Research. 2024. Total Market Value of the U.S. Stock Market. Retrieved from: https://siblisresearch.com/data/us-stock-market-value/. 

³Konish, L. 2023. The U.S. avoided a recession in 2023. What’s the outlook for 2024? Here’s what experts are predicting. December 26. Retrieved from: https://www.cnbc.com/2023/12/26/the-us-avoided-a-recession-in-2023-whats-the-outlook-for-2024.html.

⁴ALFA International. 2024. The Exponential Rise of Nuclear Verdicts. Retrieved from: https://www.alfainternational.com/publications_news/the-exponential-rise-of-nuclear-verdicts/. 

⁵Acumen Research. 2022. Artificial Intelligence in Accounting Market Size Slated to Reach USD 53,893 Million by 2030, Due to Exponential Growth in Financial Data. July 20. Retrieved from: https://www.globenewswire.com/en/news-release/2022/07/20/2482381/0/en/Artificial-Intelligence-in-Accounting-Market-Size-Slated-to-Reach-USD-53-893-Million-by-2030-Due-to-Exponential-Growth-in-Financial-Data-Analysis-by-Acumen-Research-and-Consulting.html.

⁶Calatrava, M. 2024. Accounting Trends: Predicting Business Future in 2024 and Beyond. February 12. Retrieved from: https://www.thesagenext.com/blog/predicting-future-accounting-trends.