A federal judge here has ruled that a professional liability insurer is not obligated to defend or indemnify an accounting firm in connection with the recommendation by a firm member of a tax-shelter transaction. In its ruling, the court held that the firm member was acting as an agent for the company that marketed the plan.
Trace, Geary & Myers LLC, a Salisbury, Md., accounting firm, purchased a professional liability insurance policy from Camico that contained a "Special Exclusion Endorsement," which excluded from coverage "any claim in connection with or arising out of any act, error or omission by any insured in his/her capacity as an agent or broker for the placement or renewal of insurance products or for the sale of annuities.
"The transaction in question arose from the sale of a defined-benefit pension plan funded by Hartford life insurance policies, and was marketed by Hartford as a way to obtain significant tax benefits under Section 412(i) of the Tax Code. In a third-party suit against Hartford, plaintiffs alleged that a member of the firm recommended the plan without disclosing that he was a Hartford agent and would receive a commission from the sale.In 2004, the IRS made several rulings about funding 412(i) plans. The plaintiffs alleged that the firm member wrongly represented that the rulings would not affect them, which induced them to pay Hartford additional premiums and file tax returns without the required forms for a listed transaction. As a result, the plaintiffs incurred substantial audit-related expenses and may be liable for impermissible deductions.
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