When we asked our Insurance Advisors what cover they wish clients took more seriously, one answer stood out: run-off cover.
Many business owners with Professional Indemnity insurance cancel their cover when they retire, sell their business, or stop trading.
They often think they no longer need insurance.
But without run-off cover, they will not be protected for work they did in the past.
What Is Run-Off Cover?
Run-off cover is an extension to Professional Indemnity insurance. It protects a business after it stops trading.
Professional Indemnity insurance is a claims-made policy. Because of this, it is important for businesses to add run-off cover.
To understand this, it helps to see how different types of insurance work.
Occurrence-Based Insurance (e.g. Public Liability)
Most insurance, such as Public Liability insurance, respond based on when an incident happens.
For example:
- A business had Public Liability insurance from 2010 to 2015
- Someone slipped at the business premises in 2014
- The claim was made in 2020
In this case, the policy from 2014 can still respond. This is because the incident happened while the insurance policy was active.
Claims-Made Insurance (e.g. Professional Indemnity)
Professional Indemnity insurance works differently.
It is a claims-made policy. This means there must be an active policy when the claim is made.
For example:
- A business had Professional Indemnity insurance from 2010 to 2015
- The business stopped trading and cancelled the policy in 2016
- A claim was made in 2020 about advice given in 2014
Even though the business had insurance when the advice was given, there is no active policy in 2020 when he claim is made.
Because of this, there will be no cover to protect the business.
Without run-off cover, the business will need to pay legal costs, settlements, or compensation themselves.
Other common claims-made insurance include:
- Cyber Insurance
- Management Liability insurance
How Run-Off Cover Helps
This is where run-off cover is important.
If a business takes out run-off cover after it stops trading, it can still be protected if a claim is made later.
Run-off cover is especially important for:
- Retiring business owners
- Businesses being sold
- Professionals changing industries
- Anyone cancelling a claims-made insurance
Why Run-Off Cover Matters
Claims for advice or professional work can take years to appear.
Sometimes a problem is not found until long after the job is finished.
The Good News
Run-off cover is often cheaper than active insurance.
The cost can also go down over time as the risk reduces.
Many industries suggest around 7 years of run-off cover. But the right time depends on the business, contracts, and industry.
Speak to Your Broker Before Cancelling Cover
It may feel natural to cancel insurance when closing a business or retiring.
But without understanding future risk, it can lead to serious financial problems later.
Before cancelling any claims-made insurance policy, speak with your broker about run-off cover.
A short conversation today could help protect you from a costly claim in the future.