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If you're considering selling, closing or retiring from your service-based business it's worth looking at run-off insurance protection — because some types of liability cover don't protect you against future claims. Run-off cover protects you against future claims on certain types of insurance policies. Here are three key benefits having run-off cover on these policies can provide.

Peace of mind: Run-off insurance offers peace of mind by protecting against unforeseen liabilities even after business operations have ceased. This means business owners can move on to their next chapter without worrying about potential claims arising from past work.

Protection from 'zombie' claims: Even after a business has closed, past clients could discover oversights or omissions in completed work. Run-off insurance, also known as tail coverage, can protect against these 'zombie' claims, saving former business owners from the inconvenience and cost of defending themselves.

Claims made policies: Certain types of insurance policies, known as 'claims made' policies, only cover claims made while the policy is active. This means that if a claim arises after the policy has lapsed, even if the work was completed while the policy was in force, the business owner would not be protected. Run-off insurance extends the policy to cover claims made for a specified period, even after the business has closed. This is particularly important for service-based businesses.

Which business insurance policies carry 'claims made' limitations?

Some of the common types of business insurance policies that carry claims made limitations are also the most useful for liability claims protection. They include:

  • professional indemnity (PI): accountants, doctors, engineers, hairdressers, natural therapists, tattooists and other professionals who provide services
  • directors and officers' (D&O) liability: executives and senior managers who can be held accountable for their business's activities
  • product liability (PL): businesses that manufacture of distribute products which may prove to be unsafe or faulty
  • management liability: similarly to D&O past managers and employees can be held responsible for negative outcomes
  • information technology liability: errors, omissions or any negligence may be discovered after providing IT service to a client.

Under what circumstances should a business opt for run-off insurance cover?

There are a number of possible scenarios when run-off cover offers vital protection from allegations of negligence, duty breaches and insolvency claims, among others.

If the business is being wound up, merged with another company, sold or you, as a senior manager, are leaving, you could still be held liable personally for a past mistake.

If any of these conditions apply, then run-off insurance offers essential protection.

  • Change of corporate structure: such as sale to or merging with another business and transferring control to another entity. The cover provided by policies such as PI and D&O will lapse effective from change to the business.
  • Retirement: even if you have retired from an active role in your business your former clients and stakeholders can still make a claim of misconduct or mismanagement against you.
  • Business closure: having closed the business also won't exempt you from any claims your previous clients or employees may file against you.
  • Contracts: some commercial contracts may require that your work remains covered by insurance for a period after completion of the job.
  • Industry standards: some industries or professional associations stipulate insurance cover should remain in place for a specific number of years. This includes professions such as doctors, accountants, engineers and architects.
  • Non-renewal: for various reasons your insurer may decline to renew your policy, but run-off cover ensures you remain protected for a set period.

Some points about run-off insurance to consider

Before making any major changes to the business or your role in it review the insurance program, paying particular attention to policies subject to 'claims made' limitations.

Some policies may provide automatic run-off cover for the remainder of the period of policy cover for claims for actions, errors or omissions that occurred prior to the change in business, such as sale or closure, taking place.

Extended run-off insurance is generally provided on an annual basis, with multi-year options dependent on the insurer.

Some factors to consider in purchasing extended run-off insurance might include liabilities and obligations such as:

  • contractual specifications
  • terms of the sale agreement
  • statute of limitations requirements
  • regulatory obligations
  • potential costs.

How we can help with specialised insurance needs

We work with a large variety of businesses, each exposed to unique risks and dealing with individual sector challenges and circumstances. As a leader in risk management, with relationships spanning both local and overseas insurance markets, we can provide support with expertise and tailored solutions in critical insurance program outcomes.

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Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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