Run Off Insurance Explained
When a colleague or business director walks out the door, or you close the door yourself on a business venture or project, unfortunately, the window for risk stays open. Run Off insurance is there to help protect Directors & Officers against claims made for past work, even if your business no longer exists.
To understand more about how run off insurance works and whether this policy is something you should be considering, check out our run off insurance guide below.
What is Run Off Insurance?
Run off insurance is a form of insurance designed to offer protection for claims made against you or your business after your business stops operating / distributing products. Things can get complicated when it comes to fully understanding how run-off insurance works, so here are the main points to get you started:
- Run off Insurance helps protect acquiring Directors from certain claims that are made against the company they are acquiring.
- Directors & Officers often purchase run off insurance to cover their professional liability after they cease practicing or their business closes. (Note that some professional industries require run-off cover to be considered, such as Chartered Accounting).
- Run off cover is an important consideration when you hold 'claims made' (explained below) style policies as well as Product Liability polices as it provides protection for a certain period of time, even after the business ceases to trade or manufacture / distribute products.
The difference between claims made liability and occurrence based liability
If the mention of a 'claims made policy' above has you scratching your head, that's understandable; not all liabilities are the same.
Claims Made Liability
Under a claims made insurance policy, cover is provided for the insured on claims made against them, provided that their policy is current. Operating under a claims made basis means that the date that the incident occurred is irrelevant. So long as the claim was made during the current period of insurance, it can be considered.
If the incident occurred prior to the cover's start date, then the claim wouldn't be considered. This is why it's so important to consider your run-off cover needs before cancelling an active insurance policy, particularly if it's a claims made policy.
Keep in mind: if you hold a claims made policy such as Professional Indemnity insurance, an important consideration should be the retroactive date. A retroactive date sets out how far back an incident can occur in order for the insurance policy to cover the claim.
Not all policies have unlimited retroactive dates; instead, some specify a date as the cover's starting point. This means that any claim made against you or your business for an event that occurred prior to that date may not be covered.
Occurrence Based Liability
An occurrence based liability is such that, despite when the claim is made, the insurance policy that was in force at the time the event occurred will cover it (regardless of whether the policy has lapsed). In the event that a claim arises for something that happened years in the past, the claim would be referred to whichever insurer issued the policy which was active at the time.
This being said, if a company manufacturers or distributes products, cover is required to protect against claims made on a product malfunction once the company ceases manufacturing or distributing the products. Despite Product Liability insurance typically being an occurrence based policy, run-off cover is still required, for this reason (the incident can be caused by the product at a later date).
Do I need run off insurance?
Unless your financial situation is strong enough to withstand being held liable for any claims made against you once you complete a project, close a business or stop practicing, then the chances are you will need run off coverage.
A run off policy is able to be implemented before your business ceases trading or you end your career. This way, if claims caused by wrongful acts, omissions or errors pop up, you can feel secure in knowing that your insurer has you covered.
To understand how run off could work in a claims made policy, consider the below example.
- In 2016, a client obtained professional services from a Financial Advisor.
- In 2019, the Financial Advisor then retired and cancelled their Professional Indemnity cover.
- In 2021, the client uncovered a large error from 2016 that has caused significant financial loss.
- Without run off cover, the Financial Advisor would be held personally liable for this claim.
If the Financial Advisor did not have run off insurance but had an occurrence based policy in 2016, the event would be covered under that policy.
For the above example, retirement could have been the catalyst to look into run off options, however, there are other common events that trigger a need to receive guidance from an Insurance Broker about protecting yourself from claims in the future:
Closing a business
If you choose to wind up your business, unfortunately, closure doesn't protect you from being at the center of an insurance claim.
Management change, acquisition or merger
Once there is a change in control of your company, most directors & officers and professional indemnity policies cease. This means any former management could be at risk of allegations of negligence, breaches of duties, regulator enquiries, insolvency claims or impropriety. This is particularly relevant if the change in corporate structure was due to bankruptcy or business liquidation.
If you operate in certain industries, such as Chartered Accounting or Medicine, then your relevant legislation or association may require that you maintain cover for a specific period of time. There are also professions that require run off cover to be endorsed within a Professional Indemnity policy; to confirm that the insurer will offer run off when required.
If you work under contracts, clients can seem happy at the time, only to become disgruntled down the track. This is why several commercial contracts often stipulate that you have run off cover for a number of years after the contract ends or the work is complete.
Keep in mind: If your commercial contracts do have a run off cover requirement, it is important to factor in this addition cost to your tender pricing.
When an insurer doesn't renew
Sometimes, for a number of reasons, an insurer may not renew your business insurance policy. If this happens, it could leave you exposed. It is almost impossible to obtain run off cover from an insurer that didn't hold the policy prior to when run off was required.
Does my insurance policy need run off cover?
Of course, everyone's financial situation or needs vary, but at Hunter Broking Group, we always suggest to consider discussing run off cover with us to strengthen the following policies:
- Directors and Officers Insurance
- Information Technology Liability
- Professional Indemnity Insurance policies
- Management Liability
- Cyber Liability
- Product Liability
How far back should your run off policy cover?
How long your run off insurance covers really is up to you, your profession and your circumstances. As a rule of thumb, most insurers in Australia will offer a standard seven year term for run-off cover. The period of 7 years is usually suggested as it aligns with Australia's Statute of Limitations.
It is prudent to check the Statute of Limitations that apply for Civil Proceedings for each of the states and territories that your company or business operates in, as well as the laws and jurisdictions that apply to contracts everywhere that you operate.
Understanding what statute of limitation applies to your industry or profession can guide you on how long you should hold run off cover.
Do I need an insurance broker to get run off cover?
Insurance brokers are more than just a vehicle to reach competitive premiums on insurance policies. Accessing a reputable commercial insurance broker, such as Hunter Broking Group, can be pivotal in not only sourcing the most suitable policy for your business, but also in understanding your insurance needs, including any gaps that may be present in your existing policy arrangement.
Accessing Brisbane-based Insurance Brokers
One of the benefits of accessing Hunter Broking Group is that we provide a range of services such as contract reviews, advisory, risk management and claim management. We are with you every step of the way and can access hundreds of insurers to ensure you have adequate coverage.
Run off cover is complex, which is why partnering with a professional such as Hunter Broking Group is so important.
If you're ready to protect your future with over 50 years of collective insurance experience, contact us today.
This article originally appeared on Hunter Broking Group Media and has been published here with permission.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Hunter Broking Group.