There's a common misunderstanding that run-off insurance is something entirely different to standard professional indemnity (PI) insurance. The key to understanding PI run-off cover is to appreciate the ’claims made’ approach.
As an accountant, you've no doubt been purchasing PI insurance for some years, so it's likely you know that PI policies are underwritten on what is referred to as a ‘claims made’ basis, as opposed to ’claims occurring’.
A claims made policy will cover claims made during the policy's term. The event that led to the claim doesn't have to have occurred while the policy was in force; it could have happened before the policy commencement date or when another provider insured you.
Types of policies that adopt a claims made approach include PI, and directors and officers cover. In order to be covered for a PI claim for work undertaken in the past, you must have a live policy in force when the claim is made.
Claims occurring policies are different in that they respond to a loss that occurred while the policy was in force. This means if you were to change insurance providers after the event in question happened, the insurer providing the cover at the time of the incident would deal with the claim.
Policies that use claims occurring include employers liability, public liability, and car insurance.
To maintain protection for your business when you or your employees stop trading, you'll need to have a PI run-off insurance policy in place. Run-off insurance is a PI policy that has had an endorsement added to it restricting the cover for claims made related to work carried out before the specified run-off date.
Here are some frequently asked questions about run-off cover for any accountant or professional with a current PI policy looking to retire or cease trading.
What does run-off insurance cover?
PI insurance covers firms – whether limited companies or partnerships, including Limited Liability Partnerships (LLPs) or sole traders, protecting the business's principal or partners, the directors, and the staff, both past and present. A PI run-off policy will reimburse any losses should a claim be made against those insured.
When would I need run-off insurance?
Retirement is a typical reason accountants might purchase run-off insurance; this is particularly popular with smaller firms or sole traders. Occasionally, larger accountancy firms may be sold or taken on by a working age individual who maintains the PI cover, but this is not always the case. For example, the new owner may not wish to be responsible for the legacy liabilities. Conversely, the departing owner may not want to be responsible for his liabilities being trusted to someone else.
In both scenarios, it's necessary to keep a run-off policy in force after retirement to cover any claims that may arise in the future.
What if my policy renewal date is not due?
In this case, you'll need to inform your insurer or broker that you have ceased trading. They will attach an endorsement to your policy stating that cover will not be provided for any service or work provided after that date (the run-off endorsement date).
Your insurer will offer run-off renewal terms when the policy reaches its renewal date. You may be asked to complete a proposal form to establish work you have undertaken during your last financial year of trading.
At this point, you can decide whether to take up the run-off policy. If you renew, it should carry the same terms and conditions as the previous policy, including the new endorsement noting the run-off date. Insurers will respond to any claims notified or made against you during this new policy year providing the work was undertaken prior to the run-off date.
What if I choose not to buy run-off insurance?
If you decide to make alternative arrangements, your PI cover will cease. Any claims brought against you for work carried out in the past will not be insured. It's worth noting that even false or speculative claims need defending; without PI insurance cover, these can be damaging both financially and for the business's reputation.
How long is a run-off policy maintained for?
Typically, run-off policies are maintained annually, for up to six years. Six years is the period many professional bodies require their members to carry run-off insurance as this is the usual statute of limitation, so it's a good benchmark to use for all professions. However, other factors may result in a shorter or longer period of cover being more relevant.
How much does a run-off insurance policy cost?
Generally speaking, the cost of the premium in the first year after the business closes is the same as the last year of trading. The reduction of potential liability takes several years to show any significant decrease, so from an insurer’s perspective, 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 start to show signs of typically reducing by 10% per annum – although this depends on claims and the individual insurer rates.
What is a single premium multiple-year run-off?
Many accountancy business owners choose to arrange a multiple-year run-off policy payable by a single upfront premium if this is offered by their insurer. The majority of insurers do not provide run-off insurance cover on this basis, but annual cover can be purchased for any number of years.
If you’re planning to retire or cease-trading, speak to one of our team about run-off cover. Call 0330 1734 102 or complete our form to request a callback.
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