Your Client Wants a Refund. Your Malpractice Insurer May Already Consider It a Claim.

In November, a client of a small accounting firm receives an unfavorable tax assessment and emails the responsible partner: “Your advice caused these penalties. I want my $15,000 in fees returned.” There’s no lawyer and no threat of a lawsuit. The partner treats it as a customer service issue and plans to discuss a credit after the firm’s policy renews in December.

In February, the client’s lawyer demands $500,000 for penalties, interest, and lost business opportunities.

A Refund Demand Can Be a Claim

Professional liability policies commonly define a claim to include a written demand for money or services arising from an alleged error in professional services. The client doesn’t need to use the words “malpractice” or “lawsuit.” An email that blames the firm’s advice and asks for money back may satisfy the definition.

However, a routine billing question, such as a request to correct an invoice, is different. Whether a particular message is a claim depends on the policy’s definition and what the message actually says, not its tone.

Claims-Made Policies Have Strict Reporting Rules

Most professional liability policies are claims-made, and many are claims-made-and-reported. Coverage generally depends on when the claim was first made and when it was reported to the insurer. If the November email was a claim and wasn’t reported during that policy period or its reporting window, the insurer may argue that the February demand relates back to the earlier claim and is therefore uncovered under both policies.

Renewing the policy doesn’t cure an earlier failure to report, and telling a managing partner or the firm’s internal risk manager isn’t notice to the insurer. Many policies, however, also allow, or require, notice of circumstances that could become a claim, which can lock in coverage under the current policy even before a formal demand arrives.

Reporting a Claim and Paying It Are Different Questions

A demand can be a claim without every dollar requested being covered. Many professional liability policies exclude or limit coverage for returning fees the professional was paid, sometimes as restitution or disgorgement. An insurer may refuse to reimburse the $15,000 refund while still owing a defense against the larger negligence claim.

Most policies also prohibit admitting liability, making voluntary payments, or settling without the insurer’s consent. A refund issued to resolve an accusation of professional error, without the insurer’s agreement, may jeopardize coverage for what follows. A goodwill credit with no admission involved is a different situation, but the line isn’t always clear.

Responding to the Complaint

The original message, the engagement letter, the work product, and later correspondence should be preserved. The policy’s reporting provisions should be checked immediately, and notice given if the message may be a claim or a reportable circumstance. Reporting doesn’t admit fault, and an accurate notice describes the demand, the services involved, and the known facts, without speculating or conceding anything.

We help professionals and businesses evaluate professional liability policies, client refund demands, claim definitions, and reporting obligations. If a client has demanded repayment or alleged an error in your professional services, contact us to assess the communication, applicable deadlines, and available coverage.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.