So that’s it. You’ve decided to stop doing whatever it is you do. At this point, you might be wondering if it's a good idea to cancel your business insurance.
It might be tempting to strike your insurance off as an unnecessary expense. But it's important to remember that claims don’t always stop just because you do.
Run-off cover is there for what comes next. It’ll protect you if a client claims against you for your past work.
Here, we'll break down exactly what run-off cover is and how it works.
What is run-off cover?
Run-off cover keeps your insurance going after you’ve stopped trading – whether that’s because you’ve retired, switched to another career, stopped offering a service or treatment, or shut up shop completely.
Adding on run-off cover is especially important if you’ve had professional indemnity (PI) or medical malpractice insurance. Both of these are ‘claims made’ policies. Which means they only cover claims while the policy is active.
So if a policy ends and a claim comes in later? You’re not covered.
Run-off cover fixes that. It protects you against claims made after you’ve stopped working, for work you did before. Simple.
Why should you think about adding run-off cover to your insurance?
Problems with your work don’t always show up straightaway. And when they do, clients can still claim. Regardless of whether you’re still in business or not.
Examples could include some advice you give which later turns out to be wrong. Or a project which causes financial loss some months down the line. Or a complication during a treatment that causes unpleasant symptoms to show up later.
Without cover you’d have to deal with the problem – and pay for it – yourself.
Who needs run-off cover?
The professions that typically need run-off cover are those offering advice or a specialist service. That includes consultants, designers, copywriters, accountants, architects...basically, anyone with professional indemnity insurance.
Accountants, architects and surveyors might in fact find their professional body requires them to maintain run-off cover for a specified period after they’ve retired or stopped trading. When you think about the kinds of expensive mistakes that can crop up with these professions, this makes sense.
Another group that may need run-off cover are medical and healthcare professionals (doctors, dentists, aestheticians etc) whose medical malpractice covers them for claims of physical and mental injury.
The problem here is the fact that treatments like injectables, laser, and skin treatments can lead to issues that don’t show up immediately. Problems with scarring and pigmentation, for example, can crop up months or even years later.
Then there are company directors stepping down from their jobs. Or business owners wanting to sell, merge, or close their business. For these people, run-off cover protects not just their past work, but that of their partners and employees too.
What are some run-off claims examples?
For an idea of how 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’s owner sues the architect for producing 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.
The aesthetician
An aesthetician injects their client with lip fillers. Six months later, the client comes back complaining that the filler has migrated from the original injection site, creating a lumpy and uneven look. The aesthetician has since changed careers and is no longer offering treatments. Even so, the run-off cover on their medical malpractice policy pays for the former client’s compensation.
Do you need to extend your run-off if you're changing insurers?
A classic example of a gap in cover is where you’re changing insurers and you find out too late that your new insurer won’t cover claims for work done before the policy’s start date.
Then, if a claim for past work comes in after the switch, you’re stuck paying for it yourself. Your new insurer won’t cover it. And your old insurer won’t either as your policy with them has ended.
To avoid this kind of sticky scenario, it’s worth speaking to your insurer about run-off cover before you switch. Alternatively, you can check your new policy to see if it includes something called retroactive (or ‘retro’) cover.
Retro can protect your past work under your new policy. However, not all policies include it – and not all match your previous cover exactly. You should check your policy schedule carefully and speak to your insurer if you’re unsure.
How do you get run-off cover?
To get run-off cover, you must have an active professional indemnity or medical malpractice insurance policy that hasn’t expired yet.
If you’re planning to stop trading anytime soon, you should tell your insurer as soon as possible. They’ll want to know the dates of when you plan to stop working (or, if you have already, when that was).
At your next insurance renewal, your insurer will offer you new run-off terms. They might also ask for details of work carried out between your last renewal and when you stopped trading.
Your new insurance cover will continue for another year under its original terms. However, it'll now include an amendment with your run-off date; meaning only claims for work carried out before the run-off date will be covered.
Is run-off cover expensive?
You might expect run-off cover to be much cheaper than maintaining a full-priced policy.
The likelihood of a claim being made against you should reduce as time passes by. Surely that means the cost of your run-off cover reduces in synch with the shrinking risks?
That 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 the current market. 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 or medical malpractice 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 antidote to the many £thousands in legal fees and compensation you might have to pay to make a claim go away.
How long should you keep run-off cover going?
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. 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 only 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 to keep your run-off for is your call.
Run-off with me
Who you buy your business insurance (and subsequently your run-off cover with) is up to you, of course. We'd always recommend using a broker who can go through your requirements with you. That way, you can be sure any cover you buy will be the right fit for your business.
Want to know more about how we help businesses with their insurance? Give us a call on 0345 222 5391.
Image used under license from iStock.
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