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The Critical Role of ‘Run-Off’ Insurance When Selling or Closing A Business
When the time comes to bid farewell to your business due to a sale or retirement, it’s not just the memories you’ll want to preserve. Many financial liabilities can continue after you leave the business, so talking to your accountant and insurance adviser is important.
Run-off cover is key to providing peace of mind and protection against future legal action and claims against the prior owners and managers.
Why do you need run-off cover if the business is closed?
- Directors, officers and managers can be held liable for their negligent actions as professionals, principals, partners and employees even if a business no longer exists;
- Companies that have been wound up can be reinstated by the court to start legal action;
- Some obligations agreed in contracts & deeds signed by the company will continue after the business is closed, leaving on past directors, officers and managers to take legal action against; and
- Some sale agreements require entities to purchase run-off insurance to cover past liabilities.
How long can Run-Off cover be in place?
Run-off policies can be purchased for periods between 1 year and up to 7 years.
Insurance policies where Run Off cover is usually purchased
Run-Off cover is usually purchased for ‘Claims Made’ insurance policies, including:
- Professional Indemnity Insurance
- Management Liability Insurance
- Association Liability Insurance
- Directors’ & Officers Liability Insurance
- IT Liability Insurance
Run-off coverage for other policies, such as product liability and cyber insurance, can also be purchased.
What does Claims Made insurance mean?
A claims-made policy provides cover when a claim is made against the insured during the current policy period, regardless of when the wrongful act that gave rise to the claim took place.
So, a policy must be current and in force to be able to make a claim.
Summary
Run-off cover ensures that you remain protected against legal action or damages that arise many years after the business was sold or the owners have retired.
This cover is particularly crucial in law, accounting, or architecture professions. For example, if a structural flaw in a building design manifests several years after the project’s completion, run-off cover would protect the retired architect.
It’s easier to pay a fixed premium for the run-off cover than to find the money to pay for legal costs and possible damages years after leaving the business.