Professional indemnity insurance has a characteristic that is widely misunderstood: it is claims-made cover. The policy that responds to a claim is the one in force when the claim is made, not the one in force when the work was done. A claims-made policy responds not only to formal claims but also to circumstances notified during the period of insurance: if a firm discovers an error in work already delivered, or a client signals dissatisfaction that could develop into a claim, the duty is to notify the insurer of that circumstance within the same period of cover, and a claim that later develops from it is dealt with under the policy to which the circumstance was notified. While a firm trades and renews with the same insurer, that distinction is almost invisible. However, it becomes very material on the day the firm stops trading: at retirement, on closure, or in a sale or merger. From that day, unless something is arranged, there is no policy in force to be claimed against, and work done entirely correctly, years earlier, is defended out of the former principals’ own pockets.
What run-off cover is
Without run-off cover, the moment a business ceases to trade there is no insurance protection in place for any claims made or discovered in the years that follow. Run-off cover is the insurance solution for exactly this period: it continues the professional indemnity protection after the firm stops taking on new work, covering claims made during the run-off period in respect of work done before the firm ceased, and nothing new, which is why it is priced differently from live cover. The premium is typically expressed as a percentage of the firm’s final annual premium each year, with the percentage reducing over the years as the outstanding exposure ages. How long run-off should last depends on the profession: some regulators mandate a minimum period, and in professions where claims emerge slowly, construction and property among them, the prudent period is measured in many years rather than one or two. It is most frequently the case that run-off cover is arranged with the existing insurer at the point of cessation.
Retirement and closure
For a retiring principal or a solvent closure, the two practical questions are how long and how funded. Six years is the common benchmark, because it matches the limitation period for most contract claims, and several professional bodies have built it into their rules: solicitors’ compulsory minimum terms require six years of run-off, ACCA requires six years for accountancy firms, and the RTPI recommends the same for planning consultants. Where work was signed as a deed, claims can be brought for up to twelve years, which is why longer run-off periods are common in construction and property. On funding, the premiums continue after the income stops, which is why run-off belongs in the financial plan for retirement or closure from the outset. Insurers take a variety of positions on how run-off is bought: some offer annually renewable cover only, others will convert the cover to a single multi-year block premium, and some mandate that it is purchased as a block, so the options are worth discussing with your broker as retirement or a business closure starts to be considered.
Sales and mergers
In a sale, a buyer does not normally want the seller’s historical liabilities arriving under its own policy, whilst equally a seller does not want an indemnity in the sale agreement without any insurance backing. The standard resolution is run-off bought for the selling entity, covering pre-completion work, while the buyer’s cover picks up everything after completion. The sale agreement should say so explicitly: who buys the run-off, for how long, at whose cost, and evidenced how. Where the agreement contains warranties and indemnities from the sellers, their duration is a strong clue to the minimum run-off period the sellers should want in place. In a merger, the same logic applies to each legacy firm: the merged entity’s new policy covers the future, and each predecessor’s past either comes in by agreement with the new insurer or is run off separately.
If a sale, merger, closure or retirement is anywhere on your horizon, the insurance conversation belongs at the planning stage, alongside the accountants and lawyers rather than after them. We arrange run-off cover and review sale agreements’ insurance provisions against what is actually being bought. Our professional indemnity insurance page covers the underlying mechanics, including the claims-made principle and retroactive dates.
