What happens if an unhappy client sues you?

You opened your bookkeeping business from your kitchen table and grew it to a sustainable business to support your family. You have a nice storefront business now in an office cluster and you continue to build a solid reputation for reliable and timely work. Your roster of satisfied clients grows.

And then one day you get hit with a lawsuit.

A client charges that an error or omission you made cost him or her money.

If you have no liability protection, you may have to dig into your personal savings to hire legal representation. If you lose the case, you may see your personal assets being used to pay penalties.

When you work with other people’s money, and that includes doing their books for them, and a mistake you make could cost your client money, you need to have an insurance that is commonly called Errors or Omissions Insurance or in some cases, personal liability insurance.

What Errors or Omissions Insurance gives you

An Errors or Omissions (E&O) policy provides bookkeepers with protection and peace of mind in the event of a conflict arising because of an unhappy client.

If you acknowledge that you are human and humans sometimes make mistakes, E&O Insurance can protect you from ending up in a situation where you can’t cover your legal expenses or damages resulting from a conflict.

This is another great reason to be a member of a recognized association with both The Institute of Professional Bookkeepers of Canada and The Canadian Bookkeepers Association suggesting it is something every one of their members should have and they actually contract with brokers to offer it at a reduced rate. There are many insurance firms that offer this type of insurance but just make sure they have experience with it and be sure to read your coverage carefully.

As a case of best practices, most bookkeepers would look at E&O insurance with limits of $1 million. However, policies are also available for lower amounts.

What E&O insurance does and does not cover

While liability is a good cover for a rainy day, it does not protect you from everything.

For example, it does not cover every error or bad business decisions.

What it does cover is most accidental errors, omissions and some negligent acts.

Remember that your client comes to you because you are expected to be an expert. But it can be challenging to stay abreast of constantly changing laws, regulations and audit requirements.

If you are keeping the books for a client, for example, they will often ask if you can do their taxes at the end of the year. You may have some training in taxation as well and decide to do this as an added service, but you miscalculate and penalties are levied against your client. They demand restitution from you.

Across North America, the most common reasons for lawsuits against bookkeepers involve mistakes or oversights on tax returns, failure to deliver on promised services, and incomplete or incorrect work.

What can you do to protect yourself from lawsuits?

Insurance or not, what steps can you take to protect yourself from lawsuits?

Here are five steps to take consistently:

1. Get the scope of your work for you client in writing: Whenever you start to work with a new client, always secure a letter of engagement that clearly states the scope of the work you will be doing for them. Be sure that the client signs the letter.
2. Meet your deadlines: Sometimes it is difficult as you grow your business to keep up with increased demands from clients. Be clear about what you can handle and what you can’t. It is better to say no than to say yes and disappoint the client. You also run the risk of not getting paid if you deliver the work later, and if the delay means they sustain a financial loss or penalty as a result, you will be exposing yourself to legal action.
3. Refuse any work that falls outside of your area of training and expertise. It will be impossible to defend yourself in a legal action if you take a client’s money to do work that you are not equipped to do. You cannot grow on your client’s dollar. If you want to learn a new skill, study it and get your credentials and then you can offer it to your clients.
4. Send detailed invoices, whether billing by the hour or fixed fee. Define the specific tasks that are covered on your invoices and the time each task took. Again, in a conflict, it will give you a written document that reflects what you charged and why.
5. Be extremely careful about conflict of interest situations. Be up-front with your clients if you have what might be construed as a conflict of interest situation, and let them decide if they want to use you or not. In small communities, for example, if you are the bookkeeper for one of two fiercely competing businesses, and the other business owner, unaware of your clients, asks for your help, you should let them know. Your silence when you should have spoken will be indefensible later if you are accused of not delivering sufficient services or making mistakes that cost the second client money. (It is fine to handle both clients as long as you are up front about it and handle each person’s book discretely.)

And, as always, please remember this blog is for you and we hope you will continue to enjoy the content.

Our goal is to provide you with valuable information to help you Learn, Build and Manage your Firm in future posts, so stay tuned.

Please let us know if there are any specific topics you would like us to address in the future.

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