Do Accountants Have Insurance Coverage When They Form Business Entities?

Accountants and accounting firms generally maintain liability insurance against losses caused by negligent acts, errors, or omissions in the performance of their “professional services.”[1] Not surprisingly, the term “professional services” is defined in accounting liability policies to include only services performed in the insured’s practice as an accountant.[2] In addition, such policies may also contain exclusions for criminal acts, errors, or omissions by the accountant.[3] As a result, accountants and accounting firms will almost certainly not have insurance coverage for any acts they engage in that constitute the unauthorized practice of law, which is, by definition, not practice as an accountant and is, in addition, a criminal act.[4]

When does an accountant engage in the unauthorized practice of law? In general, the practice of law means more than just appearing in court. It also includes “the preparation of legal instruments and contracts by which legal rights are secured, whether the matter is pending in court of not,”^[5] even if the legal documents being drafted are “not complex.”^[6] As such, the courts have agreed that “the preparation of charters, bylaws and other documents necessary to the establishment of a corporation, being the basis of important contractual and legal obligations, comes within the definition of the practice of law[.]”^[7] It follows that for someone not licensed as an attorney “to draft documents creating a business entity on another’s behalf is unquestionably the unauthorized practice of law.”^[8] In short, accountants and accounting firms will lose liability coverage even if they just fill out basic forms available from a secretary of state’s office or website to establish a business entity on behalf of their clients.[9]

If accountants cannot draft legal documents needed to form corporations and other business entities for their accounting clients, how far can they go in coordinating the formation of entities without engaging in the unauthorized practice of law? The answer is not very far. An accountant can refer a client to a lawyer who provides formation services as part of his legal practice, and should be able to refer a client to an online service that provides blank forms for incorporating an entity. Beyond that, however, the accountant is running an unnecessary risk.

A recent case involving an online document-preparation service is informative.[10] In that case, consumers brought a class action against the operator of a website that provided legal document forms and services, alleging that the company engaged in the unauthorized practice of law in Missouri. The website offered blank legal forms that customers could download, print, and fill in for themselves. The court noted that providing blank forms and instructions regarding how to complete the forms was the equivalent of a “do-it-yourself” kit and was not the unauthorized practice of law.[11]

But the website also offered a second service—an Internet portal through which the customer could fill out an automated online questionnaire. Once the questionnaire was completed, the company’s software created a data file containing the customer’s responses, which were reviewed by a company employee for completeness; spelling and grammatical errors; and consistency of names, addresses, and other factual information. If everything looked okay, the information was then automatically entered by the software into a template corresponding to the type of document sought by the customer, including business formation documents, which was then printed and shipped to the customer.[12] The court concluded that, unlike the first service, this “we’ll do it for you” internal portal service that prepared the documents based on the customer’s responses did constitute the unauthorized practice of law.[13] The court stressed the distinction between facilitating “the consumer’s own preparation of legal documents” and actually assisting the consumer in preparing those documents.[14]

Following this reasoning, an accountant cannot obtain blank entity-formation papers from an online service or secretary of state’s office and fill in those forms on behalf of the client, regardless of whether the accountant then gives the forms to the client to file, without engaging in the unauthorized practice of law. And the problem exists even if the accountant obtains completed documents from an online service and provides them to his client for filing, as the accountant, like the online service, is then assisting the client in preparing the legal documents, as in the Missouri case. The problem is only exacerbated if the accountant marks up the fee charged by the online service and holds himself out as having prepared satisfactory documents and handled the formation of the company on behalf of the client.[15]

In sum, accountants and accounting firms run a significant risk of engaging in the unauthorized practice of law, and thereby losing the protection of their liability insurance, if they get involved in their clients’ formation of business entities beyond simply referring the client to a lawyer or online service and participating no further in the process after that.

[1]See, e.g., Navigators Ins. Co. v. Hamlin, 96 F. Supp. 3d 1181, 1185 (D. Or. 2015), appeal dismissed (9th Cir. Aug. 10, 2015); Salomon v. Phila. Ins. Cos., No. 13-10378-DPW, 2014 WL 294320, at *4 (D. Mass. Jan. 23, 2014).

[2]See Navigators Ins. Co., 96 F. Supp. 3d at 1185 (policy defined professional services as “[s]ervices in the practice of accounting,” including in the capacities of an accountant or accounting consultant or investment adviser); Salomon, 2014 WL 294320, at *4 (definition of professional services in policy included “services performed or advice given by any INSURED to others for a fee or otherwise in the conduct of INSURED’s practice as an accountant”).

[3]Cf. Minn. Lawyers Mut. Ins. Co. v. Mazullo, No. 09-830, 2010 WL 1568465, at *1 n.1 (E.D. Pa. Apr. 19, 2010) (lawyer’s liability policy insuring against errors or omissions in the rendition of “professional services” was subject to exclusion for criminal acts, errors, or omissions).

[4]See, e.g., Cal. Bus. & Prof. Code § 6126(a) (engaging in the unauthorized practice of law is a misdemeanor criminal offense); N.Y. Jud. Law § 485 (same).

[5]In re Garcia, 335 B.R. 717, 728 (B.A.P. 9th Cir. 2005) (applying California law); accord Benninghoff v. Superior Court, 136 Cal. App. 4th 61, 68, 38 Cal. Rptr. 3d 759, 763 (2006), review denied (Apr. 19, 2006); see also Wynns v. Adams, 426 B.R. 457, 462 (E.D.N.Y. 2010) (in New York, the practice of law includes “drafting legal documents”), aff’d, 435 F. App’x 27 (2d Cir. 2011).

[6]Garcia, 335 B.R. at 728.

[7] Fla. Bar v. Town, 174 So. 2d 395, 397 (Fla. 1965); see also Fla. Bar v. Mills, 398 So. 2d 1368, 1368 (Fla. 1981) (“Drafting articles of incorporation is the practice of law.”).

[8]Columbus Bar Ass’n v. Verne, 99 Ohio St. 3d 50, 2003-Ohio-2463, 788 N.E.2d 1064, ¶ 4.

[9]Miami County Bar Ass’n v. Wyandt & Silvers, Inc., 107 Ohio St. 3d 259, 2005-Ohio-6430, 838 N.E.2d 655, ¶¶ 4, 11-13.

[10]See Janson v. LegalZoom.com, Inc., 802 F. Supp. 2d 1053 (W.D. Mo. 2011).

[11]Id. at 1063.

[12]Id. at 1055-56.

[13]Id. at 1063.

[14]Id.

[15]See Cal. Bus. & Prof. Code § 6126(a) (it is illegal for a person to hold himself out as practicing law).