What’s run-off cover and who needs it?

So that’s it. You’ve decided to call it a day. It’s time to hang up the briefcase, close the laptop, and head off to the beach/pub/golf course (delete as appropriate).

Is that what professional indemnity insurance run-off cover is, then? Insurance for your new post-business life?

Well, yes and no. It won't cover you if you come a cropper doing your best Baywatch impression, or smash a golf ball through somebody's patio windows. But it will protect you if someone makes a claim against you for work you did in the past.

What’s run-off cover for professional indemnity insurance?

It's a common assumption that once you shut up shop you can cancel your business insurance. And to a certain extent, that's true.

Public liability insurance, employers’ liability insurance, and office insurance can be ditched. But you might want to keep your professional indemnity (PI) insurance ticking over by adding something called 'run-off cover'.

PI run-off cover comes into play when you’re no longer trading. It’ll protect you if a claim for past work catches you out after your business shuts up shop.

There may be trouble ahead

If you’ve had professional indemnity insurance for some time, you’re probably aware it’s a ‘claims made’ policy.

In simple terms, that means that any claims against you are only covered if your policy is running at two points: when you do the work and when the claim is reported.

If you cancel your policy, and a client then claims against you, the claim isn’t covered – even if it relates to work you did when the policy was up and running.

The thing is, it can take months or even years for mistakes and problems to come to light. And if it turns out your work's at fault, you’ll have to pay to make good – whether you’re still in business or not.

That makes it important to keep your professional indemnity insurance going with run-off cover after you’ve ceased trading. Especially if your business had any employees. In that case, PI run-off protects not just your past work, but your staff's, partners', directors', and associates' too.

Do I need run-off cover for my professional indemnity insurance?

Run-off cover protects businesses and sole traders who are no longer trading – and especially ones who offered any kind of specialist, expert, or consultant services.

Generally, you’d only need it if:

• you’ve retired (or are about to retire)
• you’ve sold, merged, or closed your business
• your professional body requires you to maintain PI run-off cover after you've stopped trading.

There are some exceptions, though. For example, you might not need run-off cover if you’re leaving or retiring from a firm that’s still trading. You should check with them, of course. But their professional indemnity insurance should still defend you against claims relating to your past work.

Run-off insurance examples

Obviously, your run-off cover can't behave like a full-blown professional indemnity insurance policy. It can only protect you from claims for work you've already done. And only after you've stopped trading.

What it does do is help avoid the sort of hassle and expense you can do without when you're supposed to be taking it easy. So you don't have to worry about untangling yourself from a tricky scenario where an alleged error, omission, or act of negligence comes back to haunt you.

It might be helpful, then, to think of run-off cover as professional indemnity insurance that’s frozen in time.

To get an idea of how PI run-off works and who might need it, here are some examples of it in action:

The web developer

A web developer builds a website for a client. Five years later, after the developer has closed their business, the client discovers a security flaw in their website that allows hackers to steal their customers' data. The client sues the developer for negligence. However, run-off cover from the developer's original PI insurance helps to defend the lawsuit.

The architect

An architect designs a building. Four years later, cracks start to appear in the building’s foundations and the building owner sues the architect for coming up with a faulty design. The architect has since retired; fortunately, the run-off cover from their PI policy provides them with the financial backing they’d need for their legal defence.

The accountant

An accountant helps their client fill out their tax return. Five years later, HMRC spots a discrepancy in the numbers and orders the client to pay fines and extra tax. The client claims the accountant’s work was negligent. Even though the advisor has since stopped trading, their PI run-off cover is activated to deal with the claim.

How much does professional indemnity insurance run-off cover cost?

Paying for professional indemnity insurance when you’re not working anymore might sound a bit counterintuitive. After all, you’re not taking on any more risk than you did when you were still in business.

Also, the likelihood of a PI claim being made against you should reduce as time passes by. Surely that means the cost of your PI run-off cover reduces in synch with the shrinking risks?

It makes sense, logically. But it’s not always the case.

Insurers consider a range of factors when deciding how much your run-off cover should cost, including your claims history and current market trends. Some professions, like architects and designers, might find that problems with their work are more likely to crop up later down the line. Their risk, in fact, increases over time.

Realistically, adding run-off to your PI policy might mean you pay more or less than when you were trading. Or you might pay the same. It just depends.

Though quite frankly, if there’s even a remote chance your past work might come back to bite you, having run-off cover is worth it. It’s an answer to the many £thousands in legal fees and compensation you might have to pay to make a claim go away.

How long do I need run-off cover for?

You might have trouble deciding how long you'd need to keep your professional indemnity insurance run-off cover going for. Generally, and somewhat unhelpfully, there’s no minimum or maximum length of time you have to have it.

Chartered accountants, architects, and surveyors are the exceptions here. Their professional bodies will usually specify how long they’d need to maintain PI run-off after they stop working (generally, it’s between two to six years).

For everyone else, it depends on what you or your business did and how likely you think it is that there could be a claim. If your contracts involved working on a bunch of low-risk projects that were unlikely to carry long-term results, then you might only want to keep your run-off cover ticking over for a year.

It's worth noting that the limitations period for starting legal proceedings against someone is six years from the date of an alleged incident. Whether that’s enough or too much for you is your call.

How do I buy professional indemnity insurance run-off cover?

To buy run-off cover, you must have an active professional indemnity insurance policy that hasn’t expired yet.

If you’re planning on hanging up your hat, you’ll need to tell your insurer as soon as possible. They’ll want to know the dates of when you want to stop trading (or, if you’ve done so already, when that was).

At your next professional indemnity insurance renewal, your insurer will offer you new run-off terms. They might also ask you to fill out a form detailing any work carried out between your last renewal and when you stopped trading.

Your PI insurance cover should then continue for another year under its original terms. However, it'll now include an amendment with your run-off date; meaning that only claims for work carried out before that date are covered.

Run off with me

Who you buy your professional indemnity insurance (and consequently your run-off cover) with is up to you, of course. We’d always recommend going with a broker, who can advise you on your options and make sure that any cover you buy is in line with your professional body’s requirements.

At the very least, you should buy run-off cover from an insurer that’s supportive and reputable.

If you're thinking of putting your feet up and would like some advice on how best to stay safe, feel free to give us a call on 0345 222 5391.

Image used under license from Shutterstock.