What is run-off cover?
While many of your insurance policies will no longer be required after you’ve closed, sold or handed down your business, professional indemnity will remain very relevant – and there’s one particular type of policy you’ll need to consider.
When retirement age arrives, or it’s time to move on to pastures new, you’ll no doubt be glad to escape the burden of responsibility that came with business ownership. But, unfortunately, some of that burden isn’t going to be as easy to shake off as you might think. Despite the fact you’re no longer in business, it’s still possible that legal action could be brought against you for professional advice given to clients in the past, while you were trading.
Take into account the ‘claims-made’ nature of professional indemnity (PI) insurance (i.e. that it only provides protection if your policy is active both at the time the work in question was carried out and the time the claim is made) and the importance of post-trading cover becomes all too clear. Ultimately, if you cancel your PI cover when your business closes, no subsequent claims relating back to that policy period will be covered.
Run-off to the rescue
The specific type of PI policy you’ll need in order to counter this risk is ‘run-off cover’. It’s designed to offer protection against any claims that arise against you after your business has ceased trading or the reins have been handed over to a new owner. After all, problems with professional advice given or services rendered won’t always come to light immediately – they may only become apparent to the client months or years down the line.
Providing indemnity to cover the cost of defending a claim and reimbursing any losses if the claim is upheld, run-off cover is available to limited companies and partnerships, including LLPs or sole traders. It covers the former business owner or partners as well as directors and staff insured under the policy.
If you’ve sold or handed down your business, the new owner will be tasked with maintaining its PI cover. You may find that he or she is willing to take on the responsibility for past business liabilities too, in which case there’s no need for you to arrange your own cover. This can often be the case with limited companies, which may automatically assume the liability. In all cases, it is important to check that this condition is clearly stated in your sale agreement!
However, if the new owner is not prepared to do this, if you would prefer to manage your own liabilities, or if you’re closing down the business completely, then you’ll need to discuss run-off cover with your insurer – or with an independent insurance adviser, who’ll be able to discuss your needs in detail and identify the right policy for you, at the best price.
How long you’ll need this cover for is open to debate, and depends somewhat on your individual circumstances and risk profile. However, the good news is that you should see your premiums decrease over time as the likelihood of legal action diminishes.
A weight off your shoulders
If you’re a member of a professional association (RICS for surveyors and ACCA for accountants, for instance), you may find that run-off cover is in fact a regulatory requirement. But regardless of whether it’s mandatory or optional for your business, continuing your PI cover with a run-off policy can offer invaluable protection against the potentially crippling effects of any future claims that may arise.
After all, who wants to spend their next role or long-awaited retirement worrying about skeletons unexpectedly bursting out of the closet?