.

Defense Digest

Develop the Helpful Habits to Ward Off Litigation

Defense Digest, Vol. 29, No. 2, June 2023

June 1, 2023

by Raymond J. Michaud

Reprinted with permission from the Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of Certified Public Accountants.

CPAs provide services in an environment that is susceptible to litigation, as they often work on or with financial information on behalf of individual or corporate clients. Any accounting litigation is predicated on a theory of professional malpractice based on the facts surrounding the services provided. This article offers insight into how to prepare for the potential of unforeseen litigation. 

A CPA can do little after the fact to prevent a plaintiff’s perception that the services provided damaged the plaintiff in some way. The time to prepare for unforeseen litigation is during the opening of an engagement, before any possible litigation tornado begins to swirl. This task requires a basic understanding of the roots of a malpractice claim. 

A plaintiff can establish litigation upon very little, even an inconspicuous act suggesting advice beyond your training. There could be an extensive menu of facts or incidents that can be molded into a sustainable cause of action. 

Acts are evaluated against various accounting standards, such as generally accepted accounting principles (GAAP). A malpractice claim could arise if there is a perceived deviation from a standard. Unfortunately, a plaintiff’s perception becomes a CPA’s litigation reality. 

A deviation from established standards is characteristically the result of either an affirmative or a negligent act. The prospective plaintiff’s malpractice claim must prove that the CPA violated some standard in one of two causes of action: breach of contract or negligence. 

When an accountant has affirmatively (intentionally or otherwise) performed or omitted an act that is a departure from a recognized standard, it is a cause of action for breach of contract. The elements of a cause of action for a breach of contract require the following: 

  • An agreement for the CPA to provide their professional services. 
  • A breach of duty owed under the contract (failure to meet an appropriate standard of professional care). 
  • The failure of the CPA results in damages to the plaintiff. 

When a CPA breaches a duty of care owed to the plaintiff it is a cause of action for negligence. A cause of action for negligence requires the following: 

  • The CPA owed a duty of care.
  • The CPA failed to exercise ordinary skills and knowledge. 
  • The failure is the proximate cause of the harm.
  • The plaintiff sustained damages. 

The common thread for breach of contract and negligence causes of action is the assertion that the CPA deviated from the standard of care by violating some accounting standard. This means the CPA failed to use the skill, learning, and care normally used in similar circumstances. In many cases of malpractice, the CPA will present a fact derivative of the accounting services, and that fact is later determined to be incorrect. The rub is that the perceived deviation from the standard is that the CPA should have known the fact was incorrect. While all risks cannot be contained, some can be minimized by trusting your experience, insight, and pre-litigation preparation habits. 

The first step in developing a defense is in the pre-engagement phase; the cornerstone of which is the engagement letter. The scope of the engagement should be clear and not open for interpretation. Describe the scope of work, how the work will be executed, and the parties’ individual responsibilities. Just as crucial, identify the scope of services excluded to reduce any possible misunderstanding or an expansion of services. 

You can avoid claims by avoiding engagements outside your professional competency. A modest task can develop into an enormous mistake. Providing extraordinary services to a client may seem appropriate, but the risk is significant. Avoid the risk; instead, make a referral to a colleague with the required skill set and experience. 

The second step is to communicate and manage your client’s expectations. Communication and the development of expectations are critical to meeting the client’s needs and avoiding misunderstandings – the seeds of future litigation. The parameters of accounting services are finite, and you must explain the limitations. Once boundaries have been established, take the next step to manage realistic expectations through a clear and concise explanation of what your services are, and what they are not. 

Continuous communication with clients allows you to ensure their understanding and keeps them informed of the unanticipated. Clients are often more accepting of changes or issues when these are presented as soon as possible. Keep the client in the decision-making process, so they are part of any resolution. 

The last critical step is to document, document, document. Contemporaneously record everything. A key document prepared during the engagement is an invaluable tool to defend a professional malpractice claim. Develop the habit of keeping records of appointments, correspondence, telephone logs, and notes (amongst other things). You will have a roadmap of dates, topics discussed, and decisions made to refer back to if you are targeted with a professional negligence claim. 

It can be a burden to hang up the phone with a client and prepare correspondence to memorialize the discussions and decisions. Often, we believe this is not necessary and slows the process. Don’t fall into that perception trap. Protect yourself and your reputation from unfounded claims and misunderstandings. Document everything! 

*Raymond is a shareholder in our Mount Laurel, New Jersey, office. He can be reached at 856.414.6306 or rjmichaud@mdwcg.com.

 

 

Defense Digest, Vol. 29, No. 2, June 2023, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.

Firm Highlights

Thought Leadership

The Tolling Trap: Filing Alone Will Not Toll the Statute Without Good-Faith Service

The Eastern District of Pennsylvania recently reinforced a critical limitation on bad faith claims, holding that a timely filing alone will not preserve a cause of action absent a good-faith effort to serve the original process. The plaintiff had presented a claim for underinsured motorist benefits to his auto insurer. The insurer evaluated the claim and determined that the plaintiff’s accident-related damages did not exceed the bodily injury liability insurance limits of the at-fault driver and denied his claim. Among other claims, the plaintiff sought to present a claim for insurance bad faith under 42 Pa. C.S.A. § 8371, to which a two year statute of limitation applies. He first filed a praecipe for writ of summons before the expiration of the statute of limitation. However, the plaintiff did not attempt to serve the praecipe or writ until after the statute of limitations had expired. Additionally, the service failed as the plaintiff had mailed the original process to an incorrect address. Despite receipt of the Postal Service’s failure to deliver the original process, the plaintiff did not attempt to re-serve the writ. Two months later, the plaintiff filed a complaint and then successfully served that complaint. The insurer sought to dismiss the plaintiff’s bad faith claim as time-barred by the statute of limitations. The district court agreed. Though the plaintiff had filed a praecipe for a writ of summons prior to the expiration of the statute of limitations, the statute is only tolled if there is a good faith effort to serve that original process. In this case, the court determined that the plaintiff had failed to perform a “good faith effort to serve the original process”. Additionally, though the filing and service of a complaint can serve as alternative original process when the lawsuit is commenced by the filing of a praecipe for a writ of summons, the plaintiff filed his complaint after the statute of limitations had expired. The plaintiff’s bad faith claim was therefore determined to be barred by the statute of limitations and dismissed by the court, with prejudice. A key takeaway for the defense is not to assume that the statute of limitations has been successfully tolled by a plaintiff merely because a praecipe for a writ of summons or complaint has been filed prior to the expiration of the statute. A filed complaint or writ is only part of the equation. The defense should carefully review the docket and filings to confirm that the plaintiff also performed the requisite good faith effort to serve that original process. A thorough review of the docket may reveal that the plaintiff failed to make the good-faith service efforts necessary to toll the statute of limitations.

graphic announcing our 6 2027 Super Lawyers & Rising Stars

News

Marshall Dennehey Announces 2027 New Jersey Super Lawyers And Rising Stars

Defense Victory Obtained in Workers’ Compensation Case

Result

Defense Victory Obtained in Workers’ Compensation Case

Bret E. Dubbert Joins Marshall Dennehey’s Orlando Office as Special Counsel in the Casualty Department

News

Bret E. Dubbert Joins Marshall Dennehey’s Orlando Office as Special Counsel in the Casualty Department

Event

CLM 2026 Focus Conference

Allison joins three insurance industry leaders to discuss how cyber coverage disputes, the growing impact of social inflation on bodily injury claim valuation, and the use of artificial intelligence are reshaping the bad faith landscape. The panel will examine emerging sources of extra-contractual exposure, including evolving cyber insurance coverage issues and the challenges of accurately valuing bodily injury claims. Practical approaches to claim evaluation using AI, along with defense strategies designed to help prevent or successfully defend against bad faith litigation, will also be addressed. 

Thought Leadership

Commonwealth Court Reaffirms the Constitutionality of Act 111's IRE Provisions

In this case, the claimant sustained a work injury of January 6, 1994, which was acknowledged by Notice of Compensation Payable (NCP). After the claimant’s receipt of 104 weeks of temporary total disability benefits, the employer filed a Request for an Impairment Rating Examination (IRE). The IRE was performed in May 2023 and the IRE physician found that the claimant had a 5% whole person impairment, under the AMA Guides. The employer filed a Petition based on the IRE results, and the Petition was granted by the WCJ. During litigation, the claimant argued that the IRE provisions of Act 111 (Section 306(a.3) of the Act) were not applicable to her injury, since it predated June 24, 1996, the date Act 57 went into effect, and that the IRE provisions were unconstitutional. The Workers’ Compensation Judge (WCJ)) granted the Petition and the Board affirmed. On appeal to the Commonwealth Court, the claimant argued that Act 111 violated the nondelegation doctrine and that its retroactive application to the claimant’s injury was unconstitutional. The court rejected the arguments on the basis that they had already found the same arguments without merit in multiple, prior cases. The court also addressed an argument made by the claimant that Act 111 was procedurally defective under the Pennsylvania Constitution because it was only considered on two days in each House after having undergone amendments and reassignments. The court noted that the Pennsylvania Constitution requires every bill to be considered on three different days in each House. The claimant maintained that, according to the legislative history, the bill did not receive three separate days of consideration from each House when it was assigned a new bill number. The court pointed out, however, that the bill number, H.B. 1840 remained constant and was considered on three occasions by the House. Further, the court concluded that minor amendments to the bill were germane to its original subject, which was to modify the Act’s IRE process, in accordance with Protz II.

Thought Leadership

Florida Supreme Court Rules Florida Statute §627.70152 Does not Apply Retroactively

In a decision that resolves years of appellate uncertainty and confirms that insurers and insureds alike can rely on the legal framework in place when a policy is issued, the Supreme Court of Florida last week found that Florida Statute §627.70152, which involves an insured’s requirement to provide an insurer with pre-suit notice before filing a suit, cannot be applied retroactively. In Universal Property & Casualty Insurance Company v. Hughes, the Court was presented with the issue of whether the statutory pre-suit notice requirement applied retroactively and whether it would apply to a breach of contract of an insurance policy that was issued before the statute went into effect. Before the Court was an appeal from a homeowner, Ms. Hughes, who sued her insurance carrier, Universal Property & Casualty Insurance Company (Universal) for breach of contract under an insurance policy that was in effect from April 24, 2019 through April 24, 2020. During the policy period, Ms. Hughes suffered a loss and, on May 29, 2019, made a claim for water damage. The carrier investigated the loss and issued payment; Ms. Hughes disputed the payment, finding the amount insufficient for repairs. On July 1, 2021, Florida Statute §627.70152 went into effect, which required insureds to provide notice of intent to initiate litigation against the carrier prior to filing a lawsuit; if an insured filed the lawsuit without complying with §627.70152, a court must dismiss the case without prejudice. On August 4, 2021, Ms. Hughes filed her lawsuit against Universal for breach of contract. Universal moved to dismiss based on her failure to comply with §627.70152. Ms. Hughes contended the notice requirement could not be applied retroactively. The trial court disagreed and dismissed the lawsuit without prejudice, and Ms. Hughes appealed. During the appeal, the Fourth District Court of Appeal, in Cole v. Universal Property & Casualty, 363 So. 3d 1089 (Fla. 4th DCA 2023), ruled that Florida Statute §627.70152 did apply retroactively to policies issued before the effective date of §627.70152. However, the Sixth District Court agreed with Ms. Hughes and overturned the trial court’s ruling, finding the statute could not retroactively apply to policies issued prior to the statute effective date. Thereafter, the other district courts weighed in, with the Third District Court agreeing with the Fourth District Court, and the First, Second and Fifth District Courts agreeing with the Sixth District Court. In resolving the conflict amongst the district courts, the Supreme Court advised “as a general rule, ‘the statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that contract.’ Hassen v. State Farm Mut. Auto. Ins. Co., 674 So. 2d 106, 108 (Fla. 1996). The Court applied the two-step test when deciding whether a statute has retroactive application: “First, the Court must ascertain whether the Legislature intended for the statute to apply retroactively. Second, if such an intent is clearly expressed, the Court must determine whether retroactive application would violate any constitutional principles.” Menendez v. Progressive Exp. Ins. Co., 35 So. 3d 873, 877 (Fla. 2010). In analyzing the Legislature’s intent, the Court must determine whether the Legislature has manifested a clear command for retroactivity in the statutory text.  In review of the statutory text, the Court found nothing in the language of the statute to indicate that the phrase “all suits” was serving another purpose of expanding its reach to suits based on policies that both predate and postdate the enactment of the statute. Buis v. Universal Prop. & Cas. Ins. Co., 394 So. 3d 738, 741 (Fla. 2d DCA 2024). Further, the Court noted the statute has an effective date, which has long been considered to be evidence against retroactive application of a statute. The Court concluded that, on its face, no provision of §627.70152 speaks to application of the statute to insurance policies issued before the statute’s effective date and therefore, the Legislature did not clearly command retroactivity of the statute to include insurance policies issued prior to the enactment of the statute. The Court briefly reviewed Universal’s argument that the presuit notice requirement was procedural, not substantive, and therefore should be applied retroactively; however, the Court agreed with the Sixth District Court’s finding that, in its entirety, §627.70152 transformed an insured’s ability to sue an insurance company under a property insurance policy and an insurer’s obligations to respond to and pay insurance claims, thus making the requirement a substantive change. The Court thereby upheld the decision of the Sixth District and disapproved the decision of the Fourth District in Cole.

Complete Victory Obtained in a Workers’ Compensation Matter

Result

Complete Victory Obtained in a Workers’ Compensation Matter

Marshall Dennehey Named a Standout in Litigation by BTI Consulting Group

News

Marshall Dennehey Named a Standout in Litigation by BTI Consulting Group

business meeting photo

Result

Summary Judgment Obtained in Insurance Coverage Case