What exactly is run-off insurance and what does it have to do with professional indemnity?
Run-off cover is a type of liability insurance held within a Professional Indemnity Insurance policy which provides cover for work done by a business in the past. It is provided by an insurer when a business closes or is sold or the principal retires and it only covers liability for work done prior to this time.
How does it work?
Run-off cover protects a business from claims of negligence or loss resulting from services provided while it was previously operating. Such insurance is underwritten on a ‘claims made’ basis (only covers claims made while the policy is in force, regardless of when the act took place), meaning even though the business is no longer in operation, it must continue to hold run-off cover in case a claim is lodged at some time in the future.
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Is it necessary?
Professional Indemnity Insurance covers business professionals against claims of negligence due to an alleged omission, act or breach of professional duty. This could include providing inaccurate information or failing to perform a service adequately, with the result that their client suffers a loss.
And while most professionals hold Professional Indemnity Insurance over the lifetime of their business, because claims can be made retrospectively even after they have retired or their business has closed, PI Insurance including run-off cover remains a necessary cost they must continue to bear.
What will it cost?
Run-off cover will initially cost roughly the same as normal Professional Indemnity Insurance in the first year after the business closes and the run-off period begins. After that, the longer the business has been closed, the less run-off cover will cost, although it will take several years to reduce significantly, given that from the insurer’s perspective, there is still a high chance of a claim during this time.
Six years is considered to be the minimum time run-off cover should be maintained for, as this is the time limit for lodging a claim under both breach of contract and tort law, although circumstances will differ with each business.
Am I eligible?
To be eligible to purchase run-off cover, the previous business must be no longer operating. Many insurers will also only provide run-off cover to existing clients who have held Professional Indemnity Insurance with them in the past.
Can sole traders get cover?
Sole traders can purchase run-off cover and need to do so more than most. This is because if one partner in a normal business retires, the Professional Indemnity Insurance is usually maintained by the remaining partner to protect the business. But being an only practitioner, a sole trader closing their business would need to continue protecting themselves, even after retiring.