KEY TAKEAWAYS
- Run off insurance covers negligence claims that come up after you’ve stopped trading, as long as they relate to work you did before you stopped.
- Typically, run off insurance cover can protect you for up to six years after you have sold, closed or merged your business.
- To take out run off insurance, you must have an active professional indemnity insurance policy. This means run off insurance is something that needs to be sorted before you stop trading.
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If you earn a living providing professional or creative services – whether you work as an accountant, a graphic designer, or run a consulting business – then you are probably already familiar with the risks associated with your line of work.
For example, if you give bad advice, accidentally breach intellectual property law, or make a mistake in your analysis, a client could lose money by following your recommendations. If you are accused of professional negligence, you could end up fighting a lengthy court case, forking out for compensation, or both.
In most cases, this is where your professional indemnity insurance would kick in. But what happens if you wind down your business, cancel your indemnity insurance and then face a negligence claim years later, relating to work you did before you stopped trading?
Thankfully, run off insurance exists to protect against exactly this nightmare scenario. Read on for everything you need to know.
What is run off insurance?
Run off insurance is an extended form of professional indemnity insurance that can protect anyone whose work requires them to offer their knowledge, skills, or expert advice.
For some professions – such as accountants, architects and chartered surveyors – professional indemnity insurance is required by regulators and professional bodies. For other professions – like advertisers, consultants, designers and public relations professionals – indemnity insurance is strongly recommended, even if it’s not always a set-in-stone requirement.
If a client loses money as a result of following your advice or ends up out of pocket because of a mistake you made, they can sue you to reclaim the money they lost. But if you have professional indemnity insurance, your insurer should cover the cost of compensation and any legal fees arising from the claim.
So far, so simple. But imagine you wind down your business, and then, out of the blue, a client you haven’t heard from in ages claims they’ve taken a financial hit because of a mistake you made years ago. Problems don’t always come to light straight away, and even though you’re no longer in business, you could still be liable for mistakes you made when you were.
Run off insurance exists to pre-empt exactly this sort of thing. It’s an extension of professional indemnity cover which protects you after you’ve wound down your business, covering you for work done in the past.
Or, in technical terms, run off insurance covers you if you face a claim for work done in practice but arising after that practice has ceased.
» MORE: Do I need business insurance?
What does business run off insurance cover?
If you’re haunted by mistakes or negligence claims relating to work you did in the past, run off insurance can cover compensation and legal fees, just like professional indemnity insurance. In short, run off insurance keeps your professional indemnity insurance ticking over, even though you’re not working any more.
Generally speaking, run off cover can protect you for up to six years after you finish trading. This is because in most cases, a client has six years from the point at which they lose out to make a negligence claim. If a client waits longer than this, their claim may be thrown out (although in some cases, there can be a three-year extension to this deadline).
Assuming you aren’t bound by the laws of a professional body or regulator, you can make your own decision about how many years of run off cover you need.
In some regulated industries, however, professional bodies set their own guidance for how long your run off insurance needs to last. Accountants, for example, need to be covered for the full six years after they finish trading.
» MORE: Compare Business Insurance
What isn’t covered by run off insurance
Run off insurance will only cover you for claims relating to work you did in the past. That means that if you start trading again, your run off cover will not protect you from claims arising from new work.
If you go back into business, you’ll need to take out a new professional indemnity insurance policy to cover yourself against negligence-based lawsuits and compensation claims.
Who needs run off insurance?
You don’t need run off insurance if you’re still actively trading. Assuming you give expert advice or guidance as part of your work, you need professional indemnity insurance instead.
Run off insurance is for people who have retired (or who are about to retire) or who have sold, closed or merged their business. It’s especially important for employers, since run off cover will protect you from claims arising from your employees’ work as well as your own.
It’s also worth noting that to take out run off insurance, you must have an active professional indemnity insurance policy. This means run off insurance is something that needs to be sorted before you stop trading.
If you are a member of a professional body, you may be required to have run off insurance for a certain length of time after winding down the business.
How much does run off insurance cost?
Just like with professional indemnity insurance, the cost of run off insurance will vary based on the size and nature of your business, the size of your cover, and how exposed you are to professional risks.
The price you’re charged for run off insurance could be based on the cost of your last annual professional indemnity premium, so the more expensive your indemnity insurance was, the more expensive your run off insurance will be.
Many insurers offer six-year run off insurance packages (meeting the six-year limit for most negligence claims).
It may also be possible to buy run off insurance on a year-by-year basis, although this will probably be more expensive than buying a six-year block.
Run off insurance can be pricey, and it’s something you should plan and budget for before you wind down your firm and sail off into the sunset.
After all, you’ve worked hard for your retirement, and the last thing you need is for your well-earned years of relaxation to be ruined by a historical negligence claim.
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