perform an attest engagement when the engagement agreement contains indemnification or limitation of liability clauses prohibited by a law , regulation or interpretation .
Risk Management Tips Understand your risks before signing these types of agreements / contracts . As a starting point , ensure that your firm has considered the following risk management steps and has adequately provided for the potential of additional liability risks :
• Tread carefully ! Firms need to approach indemnity and / or hold harmless clauses with caution ; read the provisions carefully and if you don ’ t understand all the implications of the legalese in the agreement , do not sign the agreement . It is important to seek clarity so that you can make an informed decision on terms and conditions that may pose a higher standard and / or greater liability to the firm than what would typically be anticipated .
• Consult with CAMICO and / or your other risk advisors . Get assistance reviewing the agreement if you are unsure of the exposure and implications from a risk management perspective related to the indemnity and / or hold harmless language .
• Push back ! You don ’ t have to accept the terms as they are written in an agreement , preprinted or not .
From a risk management perspective , consider limiting any indemnity and hold harmless clauses by incorporating the following four key suggestions : 1 . Add language clarifying that any liability would need to be judicially determined by a court of competent jurisdiction ;
2 . Eliminate any obligation that would require you to incur costs related to a claim before your fault in causing such claim has been judicially determined by a court of competent jurisdiction as noted in ( 1 ) above ;
3 . Specify that the firm is only responsible for claims that arise “ solely ” as a result of the firm ’ s gross negligence or willful misconduct ; and
4 . Confirm that the firm will assume no obligation or liability arising in whole , or in part , from the client ’ s own negligence , willful misconduct or misrepresentations .
Refer to the excerpts below for example indemnity and hold harmless clauses that have been embedded in various CPA / client agreements sent to CAMICO ’ s Loss Prevention department for review . As you can see by the broad nature of these short provisions , as originally written , the firm would be contractually agreeing to cover fees and costs it may otherwise not be legally obligated to cover , which could jeopardize insurance coverage . Agreeing to such terms without modifications would be problematic for any CPA firm , but ultimately it is a business decision for a firm if they are willing to accept the added risk exposure .
For illustrative purposes , CAMICO has offered suggested edits ( highlighted and indicated below ) to limit the provisions to more reasonable terms .
Example 1 – Excerpt from a Confidentiality Agreement Firm agrees to reimburse the reasonable costs to indemnify , defend and hold harmless the Client from any and all loss , damage , liability , claims , causes of action , cost or expense ( including litigation expenses and reasonable attorneys ’ fees ) judicially determined to be caused solely arising , directly or indirectly , from the Firm ’ s gross negligence , willful misconduct , or and / or its employee agents or representatives material breach caused by the or alleged breach of any of the terms of this Confidentiality Agreement .
Example 2 – Excerpt from an Engagement Letter Firm agrees to reimburse the reasonable costs to indemnify , hold harmless and defend Client and their respective directors , officers , members , managers , employees , agents and / or representatives from and against any and all third-party claims , demands , causes of action , losses , expenses or liabilities , including costs , expenses , and reasonable attorneys ’ fees ( collectively , “ Losses ”) that are judicially determined to be arising solely out of any allegation that the Firm ’ s material has breached any of its representations , warranties or other obligations under this agreement .
• Educate your client . This enhanced awareness may help to convince your client that broad , allencompassing indemnity and hold harmless clauses are not appropriate given the scope and limits of your engagement .
• Understand the insurance coverage implications . Indemnity and / or hold harmless provisions may lead to significant costs to a CPA firm , as professional liability insurance policies as well as cyber policies typically have an exclusion for claims arising out of liability assumed by the firm under a contract unless that liability would have been present regardless of the existence of the contract . Be wary of contractually binding your firm to this added significant exposure ; indemnification and hold harmless provisions can be costly , especially if the language is broadly worded and the clauses have you paying for all claims , regardless of their merit .
• Consult with an attorney in your state . If you have questions regarding the efficacy and potential exposures to your firm of certain indemnification and hold harmless clauses , consult with qualified legal counsel before signing agreements containing such language , as indemnification laws vary by state . As the risk management guidance provided in this article specific to indemnification and hold harmless provisions in CPA / client agreements is limited in nature , CAMICO has not addressed state-specific nuances or recommendations .
Suzanne M . Holl , CPA , is Executive Vice President of Loss Prevention Services at CAMICO . With more than 30 years of experience in accounting , she draws on her Big Four public accounting and private industry background to provide CAMICO ’ s policyholders with information on a wide variety of loss prevention and accounting issues . You can reach CAMICO at 800- 652-1772 or contact the loss prevention department at lp @ camico . com . www . calcpa . org JANUARY / FEBRUARY 2025 CALIFORNIA CPA 13