Run-off insurance provides cover for claims arising after a firm or individual has ceased trading. With the exception of conveyancing firms regulated by the Council of Licensed Conveyancers, the cost of run-off is not included in the cost of the annual Professional Indemnity (PI) policy, so must be budgeted for and purchased upon closure.
Why is it needed?
PI is a ‘claims made’ policy, so it is the policy in place when a claim is notified that provides the cover and not the policy that was in place when the work was undertaken.
For example, if a firm ceases trading in 2017, a claim may still arise from the work they have done prior to closure at any time up to 15 years later. Run-off cover is purchased to cover this, although it’s rarely purchased for 15 years after closure. The requirement to purchase run-off cover may be triggered by events other than a firm ceasing to trade, e.g. if a financial adviser operating as an appointed representative of a particular network transfers to a new network. In this situation, it is unlikely that the new network will agree to cover the liabilities arising from work for the former network under any umbrella Professional Indemnity Insurance (PII) arrangements that may be in place. The appointed representative would therefore have to arrange run off for the past liabilities.
We are often asked: “What might happen if my former employer fails to maintain run-off cover?”
This is a valid question, as there isn’t an insurance product available to former employees to cover their personal liability. Although on occasion, however, a new employer may be willing to cover past liabilities of the individual in question, if starting their own business, may be able to include cover for their past liabilities in the policy for their new company.
Alexandra Anderson of RPC provides further commentary: “The issue of personal liability is not entirely clear-cut but, as a general rule, if you are employed by a company, any liability should rest with the company rather than you as an employee. If you are the individual who did the work, it is hypothetically possible that you could be held personally liable. However, the 2014 cases of Matthews v Ashdown Lyons & Maldoom and Mavis Russell v (1) Walker & Co (2) Robert Chisnall & Others saw the court reject claims brought against valuers personally, where the original surveying firm had gone into administration.
If you are a director of the company and the company has failed to maintain run-off, you may face personal liability if you can be treated as the guiding or controlling mind of the company.
For partnerships, all partners will be jointly and severally liable for any errors or omissions by a partner providing services on behalf of that partnership, as well as the individual partner who did the work. The only way for the other partners to protect themselves in that situation is by making the partnership a limited liability partnership
Run-off and regulators
Some professional bodies, for example The Royal Institution of Chartered Surveyors (RICS) and the Solicitors Regulatory Authority (SRA), impose run-off cover as a regulatory requirement to ensure that clients can seek redress for any claims that arise after a firm has closed down. The mandatory requirement for run-off cover is also designed to protect the personal liability of directors or partners of a business following closure.
For conveyancing firms purchasing a PI policy approved by the Council of Licensed Conveyancers, the cost of run-off is incorporated into the annual premium for the standard PII policy. There is, therefore, no need to purchase run-off upon closure.
There is no mandated requirement for run-off for financial advisers, although many firms purchase it to for run-off for financial advisers, although many firms purchase it to safeguard the personal liability of the directors.
Other regulators will impose varying requirements, so you should ensure you are familiar with both the requirements of your regulator and any contractual requirements imposed by your clients
How long does run-off cover have to be maintained for?
The SRA stipulates a minimum period of six years, whilst the RICS requires run-off to be maintained for an “adequate and appropriate” length of time with a recommendation of a minimum six years of cover. Law firms must also be aware of the successor practice rules.
In addition to complying with any requirements made by your regulator, you must also consider the maximum period during which a claim could arise. If, for example, you have agreed to a collateral warranty, you will be bound by the terms of the warranty which, since it is usually executed as a deed, will last for 12 years.
Ultimately, you must balance the cost of maintaining run-off cover against the likelihood of a claim arising and the potential costs to you personally if a claim does arise and there is no insurance policy in place to respond.
Who provides run-off cover?
Typically, run-off cover is provided by the insurer(s) which provided cover in the year prior to closure. Unlike standard PI, it is rarely possible to ‘shop around’ for run-off cover as new insurers are reluctant to take on a run-off policy for a firm they have not insured prior to closure. While the closure of a business cannot always be anticipated, it is advisable to try and remain with the same insurer two to three years ahead of closure, as loyalty may help ensure that run-off is available at a competitive rate.
Where a business has been involved in the provision of those services deemed to be high risk and/or has a poor claims history, then in extreme circumstances run-off cover may not be available. If you are concerned about this, contact your regulator or your insurance broker at the earliest opportunity.
How much does it cost?
The premium for the first year’s run-off cover will usually be the same as the premium for the year prior to closure.
After the first year, the premium will reduce by around 10-15 per cent per annum. However, like all forms of insurance, the cost will be dependent on a number of factors including the work undertaken and the claims history.
When buying run-off cover there are often two options:
- To buy it annually: the most common approach, with the insurance renewing on an annual basis.
- Block cover: one policy typically covering a period of between three and six years. Over the longer term, this may be cheaper than buying an annual policy. It provides certainty and reduces administration, but few insurers offer this facility.
Is there a situation when I may not need run-off cover?
If your company is sold and the liabilities are taken on by the acquirer, there may be no need to purchase run-off cover. However, you must be absolutely confident that insurance arrangements are accurately detailed in the sale and purchase agreement.
If you are a director, partner or employee of a firm and you retire, any liabilities arising from your previous work should continue to be covered under your employer’s PI policy. Ensure you obtain satisfactory undertakings from the continuing partners or directors that you will continue to be covered by the practice.