Academic journal article Journal of Accountancy

Liability Insurance Doesn't Cover Business Disputes

Academic journal article Journal of Accountancy

Liability Insurance Doesn't Cover Business Disputes

Article excerpt

Liability Insurance Doesn't Cover Business Disputes

Many CPAs mistakenly believe their professional liability policy covers disputes between members of a firm. But as the following case illustrates, a claim by one insured against another typically falls outside the scope of most insurance policies.

When is a partner not a partner?

In September 1987, Brett Cleaver and Michael Beck asked Belfa Kay Montgomery to become a partner in their accounting firm. Montgomery hesitated at first--she had stopped practicing as an accountant some years before and allowed her CPA license to lapse. Nevertheless, she was intrigued by the prospect of becoming a partner in the firm. She accepted the offer.

The firm changed its name to Cleaver, Beck, Blank, Stein & Montgomery and listed her as a partner on its letterhead.

Effective January 1, 1988, Montgomery was added as an insured to the firm's professional liability insurance policy. Cal Accountants Mutual Insurance Co. was the issuer.

The declaration page of the policy named the firm of Cleaver, Beck, Blank, Stein & Montgomery as the insured. The firm's individual partners, including Montgomery, also were listed.

Montgomery sues firm

On February 28, 1992, Montgomery filed a lawsuit against Cleaver, Beck and the firm. The firm subsequently tendered defense of the lawsuit to Cal Accountants Mutual, but the insurance company denied coverage, based on the policy's exclusion. It said the policy did not apply "to any claim or multiple claim made in part or whole by any insured or a present, former or prospective employer, proprietor, partner, officer, principal, director, owner, shareholder, employee or related individual of any insured." The insurer submitted its denial of coverage to the trial court. The court granted summary judgment to Cal Accountants Mutual based on the language of the exclusion.

Montgomery eventually settled with the firm. It agreed to pay her $180,000. In the settlement, the parties also agreed Montgomery would attempt to collect damages only from Cal Accountants Mutual. In addition, the firm assigned to her any potential rights it had to sue and collect damages from the insurance company.

Trial court ruling appealed

Montgomery decided to appeal the trial court's summary judgment in favor of Cal Accountants Mutual. …

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