Given that all businesses involve a certain degree of risk, business owners are highly recommended to secure their business by buying proper business insurance coverage. Business insurance helps you with costs related to property damage or liability claims which are inevitable in almost any business.

In certain cases, a business owner might decide to close his business for any reason. Yet, he needs to make sure that he will not stand responsible for his previous services as he is no longer offering such services. In this case, buying run-off insurance is more than necessary to prevent financial loss. Defining run-off insurance, this article helps the reader find out different applications this insurance has and lets them decide if they should go for it or not.

What is run-off Insurance, and why you need it

Every business provides a certain set of services to its clients. When a client is unsatisfied with the services he has received, he might file a lawsuit against the business in question. Now, what happens if a business is closed and one of its previous clients claims loss after a year? In such cases, the business owner would be prosecuted, and most probably punished by law, despite the fact that his business has ceased operating. To prevent such a problem, business owners buy run-off insurance before closing their business. Run-off insurance takes charge of services that a business has provided in the past and deals with claims filed by previous clients. Run-off insurance (also known as closeout insurance) is purchased by a business when it:

• is closed forever and hence does not provide any services
• merges with another business and offers new services under a new title
• declares bankruptcy
• is acquired by another business ( another business lawfully takes possession of its assets)

Common to these three situations is the fact that the business in question is somehow non-existent, and if its previous clients claim a loss, the insurer will deal with them.

Which policies are included?

When one of the above-mentioned situations applies to a business, run-off insurance should be purchased. In doing so, business owners should learn about the policy types and select the one that best suits their purpose. Here are the main policy types that are usually written on a claims-made basis in run-off insurance.

• Professional Indemnity Insurance
• Management Liability Insurance
• Association Liability Insurance
• Directors’ & Officers’ Liability Insurance
• IT Liability Insurance
• Cyber Liability
• Statutory and Fines Liability

When a claim is made against a business regarding its previous services, one of these policies should be active. If none of these policies is in force when a claim is made, no cover will be provided to the insured, no matter when the wrongful act happened.

How long is a run-off policy sustained?

As a business manager, you can decide on the duration of your run-off insurance. Considering the degree of risk involved in your business and the number of projects you have delivered in recent years, you should be able to make the right decision. Most insurers offer run-off cover for up to 7 years. The good news is that you can renew your cover annually, meaning that before your original run-off cover ceases, you can renew it for one or several more years.

How does run-off insurance work?

As mentioned earlier, run-off insurance covers all wrongful acts a business has committed before its closure. It protects a given business from legal claims made against it by its previous clients and relieves the business owner from any legal or financial punishments. As an example, consider a plastic surgeon who decides to retire. He has probably performed hundreds of various surgeries during his last two years as a surgeon. By buying a run-off cover, the surgeon can rest assured that whatever happens to his previous patients after he stops working will be dealt with by his insurer.  

What if my policy renewal date is not due?

When your policy renewal is not due, you should notify your insurer or broker that you no longer trade. They will accordingly affix an endorsement to your policy and let you know whether you will receive cover for any service or work provided after that date (the run-off endorsement date).

Your insurer will present you with run-off renewal terms when the policy is renewed. You might have to fill in a proposal form to establish the work you have taken on during your last fiscal year of trading.

At this point, you can decide whether to take up the run-off policy or not. If you renew your cover, it should contain the same terms and conditions as the former one, including the new endorsement announcing the run-off date. Insurers will reply to any claims reported or made against you during this new policy year, provided that the work was done before the run-off date.

What if I don’t purchase run-off insurance?

By now, you must have realised how valuable run-off insurance is for closing/changing businesses. Yet, many business owners do not purchase this insurance merely because they assume that none of their previous clients will file a claim against them after they close their business. Also, when people decide to end their business, they usually do not want to face any extra expenses by buying a certain type of insurance. However, you need to know that without run-off insurance, you will have to personally deal with all claims made against you for the work you have done in the past. Without PI insurance cover, you will risk your business reputation and probably face many financial issues.

How much does a run-off insurance policy cost?

Generally speaking, the price of the premium in the first year after the business ceases is the same as the last year of trading. The decrease of potential liability takes several years to indicate any considerable reduction. From an insurer’s point of view, there is as much risk of a claim in the first few years of run-off as before.

After the first full year of run-off, premiums should decrease by 10% per annum – although this depends on claims and the individual insurer rates.

What is the difference between run-off insurance and ERP?

One might notice certain similarities between run-off insurance and extended reporting period (ERP) provisions. However, there are two fundamental differences between them. While run-off provisions cover indemnity for several years, ERP provisions are credited for one year only. ERPs are usually bought by business owners who switch between claims-based insurers. On the other hand, run-off insurance is purchased when a business is bankrupted,  closed, acquired, or merged with another business.

Final thoughts

Business owners know that economising on costs is as important as making profits. Buying the proper insurance for your business guarantees financial immunity and helps take your business to the next level. Yet, there are times when you notice that your business is not going to work out, and rudimentary changes are unavoidable. Among such changes are merging your business with another one or closing it. In such cases, you need to take action against future claims made by your clients so that you face no more losses. That’s why you need to purchase run-off insurance before closing your business. Although you might have to pay a considerable amount to buy this insurance cover, it is still worth it for the reasons explained above.