Clients with product liability or professional indemnity insurance policies may be recommended to buy run off insurance, but what is run off insurance and how does it protect you
Run off insurance covers a business that has ceased trading against claims after the cessation of trading that are not covered by the insurances in force during its operational activities.
Who needs run off insurance?
Run off insurance is required to ensure continuance of insurance protection after a business has ceased trading in respect of its ongoing liabilities arising from its historic business activities.
When do I need run off insurance?
Run off insurance is required when there is potential for a claim to made or to occur after a business has ceased trading, as the insurances that were operational during trading may not respond to such claims.
Run off insurance is primarily considered when an operational policy that has been on a ‘claims made’ basis is no longer required, but consideration should also be given to run off cover when insurance on a ‘claims occurring’ basis has been in place.
Do my previous policies protect me?
There may be some protection provided by previous policies but this depends on the type of policy and basis upon which the insurance was underwritten.
An insurance on a ‘claims made’ basis covers claims made and reported to the insurer during the policy period in respect of work undertaken after the retroactive date in the policy. Therefore, if a ‘claims made’ policy is lapsed or cancelled there is no cover for claims made after cessation of the policy, even if as a result of work undertaken during the period of cover, so the previous cover paid for is effectively worthless. Run off cover is required to protect against liability arising from work undertaken prior to cessation of the operational insurance, as the operational insurance does not cover provide any cover unless the claim was made during the policy period.
An insurance on a ‘claims occurring’ basis covers claims that occurred during the policy irrespective of when the claim is made. So this basis of cover provides greater protection than the claims ‘claims made’ basis because if a policy is lapsed or cancelled there is still cover for claims made after cessation of cover that occurred during the policy period. However, there is no cover for claims that occur after the cessation, even if arising from products, goods or services provided during the period of cover. Run off cover is required to protect against liability arising from goods, products or services supplied that occurs after cessation of the operational insurance.
What classes of insurances does this apply to?
Run off cover should be considered when a policy provides protection against claims that may take some time to manifest themselves. Most commonly these are professional indemnity and product liability.
Professional Indemnity Run Off Insurance
Professional indemnity, and its derivatives such as medical malpractice, treatment risk, directors and officers liability and trustees indemnity are on a ‘claims made’ basis so there is protection against claims made after cover has been lapsed or cancelled.
Product Liability Run Off Insurance
Product liability is normally on a ‘claims occurring’ basis, so there is no protection against claims that occur after cover as been lapsed or cancelled. Certain high risk products, e.g. medical products, and extensions to a public/products liability policy, e.g. financial loss or retroactive cover, may be on a ‘claims made’ basis.
How much does run off insurance cost?
Like the operational insurances, run off insurance is an annual contract. The first year of run off insurance is likely to be similar in cost to that of the operational insurance due to the proximity to the risk exposure. The cost of run off insurance should reduce over time as the likelihood of a claim diminishes.
Where can I buy run off insurance?
The obvious provider of run off cover is the operational risk insurer, but alternatives may be available from many of the insurers that usually operate in the markets for which cover is required.