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, so talking to your accountant and insurance adviser is important to protect yourself into the future.
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?
Various insurance policies are written on a “claims made and notified” basis, which means you must have an active policy in place when a claim is made against you.
A claims-made policy will only respond to claims made against you and notified to the insurer during the current policy period, regardless of when the work was performed or advice provided.
This cover is particularly crucial in legal, accounting, consulting 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.
The potential for claims to be made against you does not end when your business has been wound up or a project has been completed. Cover may still be required to protect you in situations such as:
- Directors, officers and managers can still 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 and deeds signed by the directors of 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. The period of run-off cover required often depends on your profession and the likelihood of a claim being made against years after you initially provided your advice or design.
Which insurance policies required run-off cover?
Run-off cover is typically purchased for claims-made insurance policies, including:
- Professional Indemnity Insurance
- Management Liability Insurance
- Association Liability Insurance
- Directors’ and Officers Liability Insurance
- IT Liability Insurance
- Cyber Insurance
- Product Liability Insurance
Protecting yourself in the long run.
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.
It’s often easier to pay a fixed premium for the run-off cover before the business is wound up or sold, rather than trying to find the funds to pay for legal costs and possible damages years later.
To discuss if run-off cover is required for your business, contact your Adviser.
General Advice Warning: This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to be a constitute personal advice. We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.
