While the importance of professional indemnity insurance for a wide range of business owners and those providing a service is well understood, you may not be so familiar with the concept of run-off cover. Indeed, there is sometimes a temptation to incorrectly regard run-off insurance as representing something significantly different to ordinary professional indemnity cover.
“Claims made” vs. “claims occurring” protection
To understand how run-off insurance works, it is important to appreciate the “claims made” nature of the protection it provides.
The professional indemnity cover that your business may already have in place will be underwritten on what is called a “claims made” basis, rather than a “claims occurring” one. This means that your policy will respond to a claim – or an event possibly leading to a claim – that the insurer is first notified of while the policy is actually in force.
In other words, the policy will respond to a claim made during an insured period, even though the event giving rise to the claim might have actually occurred before the policy started, or when the policyholder was still being insured by another insurer.
This is different to how “claims occurring” policies – such as employers’ liability, public liability, or car insurance – work.
These particular insurance policies respond to losses that occurred while the policy was in force. So, if the policyholder has switched to another insurer since the event giving rise to the claim, it will be the company that provided the insurance at the time of the event that will deal with the claim.
So, how does this apply to professional indemnity cover?
In the case of your business’s professional indemnity insurance, it is crucial to ensure you have a policy in force to protect you in the event of a claim being made against you or your former practice for work carried out in the past.
This explains the need for a run-off insurance policy to be purchased and maintained while the professional liability period to your clients is still “running off”.
Run-off insurance, then, is a form of professional indemnity cover that takes effect when you or your employees cease to trade, with any claims made under such a policy relating to work undertaken before the run-off cover commenced.
What should your next steps be if you might need run-off insurance?
Those retiring from their business often purchase run-off insurance; its very nature makes it especially suitable for smaller firms and sole traders.
It is important to remember that with even speculative or spurious claims still needing to be defended, the right run-off policy can give you invaluable peace of mind. It will cover the costs of defending claims, and reimburse any losses that occur in the event of a claim being upheld against you as the insured party.
Anyone who required the protection of a professional indemnity policy while providing services and advice therefore stands to benefit from having run-off cover in place.
If you conclude that you do indeed require run-off insurance for your business, your next step should be to advise your current insurer or broker of this. If it is a while until your current policy’s renewal date, you will need to tell your present insurer or broker that you have stopped trading.
The insurer or broker will attach an endorsement to your policy, making clear that they will not provide cover for any service or work provided after that date – the “run-off” endorsement date. When the renewal date arrives, the insurer will present you with run-off renewal terms, and may request that you complete a proposal form setting out the work you have carried out between the previous renewal date and the date you ceased trading.
It will then be up to you whether to commit to the run-off policy, or instead make alternative arrangements. A run-off insurance policy typically continues for up to six years, although your business’s particular circumstances and requirements may dictate a shorter or longer period of cover. Note, too, that after the first full year of run-off, your premiums on such a policy should begin to show signs of decreasing from what you paid for indemnity cover while trading.
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