Legal Case Studies

Not sure financial professionals get sued? Read these case studies.

Professional liability insurance is also referred to ‘errors & omissions insurance.’ If a client suffers financial harm based upon the professional advice of an accountant or financial advisor, it may result in a lawsuit. A client may merely be unsatisfied with your services and decide to sue. A case may be dismissed by the court, but still requires you to mount a legal defense. Any of these situations can cost thousands of dollars. ;

The following three cases are real life examples of ‘errors & omissions’ claims against financial professionals. Each provides the details of the case, what the plaintiff alleged, and the costs involved.

State Audit Yields Lawsuit

An accountant prepared income tax returns and provided consulting services for a contractor for several years. The client also employed an in-house bookkeeper.

The state department of revenue conducted a Sales and Use Tax Audit of the client.

The audit revealed that the client purchased materials out of state that were used on in-state jobs.
These materials were subject to use tax, but the client did not remit the tax.
The outstanding taxes plus interest totaled approximately $100,000.

The contractor sued his accountant, alleging that tax preparer failed to advise him of the need to remit the tax. The taxes due were on closed jobs that had concluded several years earlier and therefore were not recoverable from the contractor's clients.

In his defense, the accountant claimed that he was engaged only to prepare income tax returns and provide some limited consulting advice. He presumed that the contractor’s bookkeeper was advising and following up with the owner regarding sales and use tax obligations. The owner alleged he relied on the accountant for all tax-related advice.

Due to the fact that there was no written agreement, such as an engagement letter, between the accountant and the client defining the scope of services to be performed, the matter was settled out of court.

Settlement Amount:
$50,000

Incomplete IRA Rollover Instructions

An accountant prepared annual income tax returns for an individual. The client changed jobs and asked the accountant about the rules for rolling over an existing traditional Individual Retirement Account into her 401(k) plan with her new employer. The accountant advised her to seek a direct rollover from the IRA to the new plan.

The client instead received a check when she closed out the IRA account. The client did not deposit it to the 401(k) account timely. As a result, the entire distribution was treated as ordinary income tax and a 10% premature distribution penalty was incurred.

The client subsequently made a claim against the accountant, alleging that he failed to advise her of the rules regarding both direct and indirect rollovers of IRA distributions, and that she would not have chosen an indirect rollover had she been advised of these risks.

While the accountant alleged that their discussion revolved around completing a direct rollover and that the client was properly advised of these rules, he had no notes from the conversation and there were no letters or e-mails evidencing the advice provided to the client.

Settlement Amount:
A portion or the $20,000 in taxes and penalties incurred by the client

Failure to Advise Regarding Risks

An investment adviser managed a couple's stock portfolio for several years. Against the adviser's advice, the husband liquidated some stock and used the money to engage in day trading, resulting in some significant losses. He passed away shortly thereafter.

At approximately the same time as the husband's death, the stock market experienced a significant downturn.
Between the prior losses and the downturn in the market, the portfolio declined in value by more than one third.

The widow was elderly and in declining health and purporting to rely solely on the investment adviser. She sued the investment adviser, asserting he negligently managed the portfolio and failed to advise her regarding the risks associated with investment performance and the need to diversify.

An investigation indicated that the stocks held in the portfolio which were purchased on the adviser's recommendation outperformed the market during the period in question. In addition, the fees charged for services rendered were reasonable under the circumstances. Nevertheless, based upon these allegations and the fact that the widow would have elicited substantial jury sympathy at trial, the case was settled out of court.

Settlement Amount:
$200,000

The purpose of these articles is to provide information, rather than advice or opinion. They are accurate to the best of the author's knowledge as of the date of the articles. Accordingly, these articles should not be viewed as substitutes for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA.

To the extent these articles contain any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice.

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