Rethinking the purchase of malpractice self-insurance

The prevailing wisdom has always been that CPA firms need to carry malpractice insurance. Nevertheless, many smaller firms do not actually have such coverage -- roughly half of all CPA firms do not have malpractice insurance, raising the question of whether malpractice insurance makes sense for all CPA firms. There are a number of measures that should be taken by firms that opt not to purchase professional liability insurance. These include structuring the firm and the assets of its owners in such a way as to make them less vulnerable to liability claims. Perhaps the first step a firm should take is to organize itself in a limited liability format, such as a business corporation or as a limited partnership, LLC, or LLP. A second measure that an uninsured firm should take is to compartmentalize its assets and practice. One of the most important steps an uninsured firm can take is to establish a defense fund.