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Professional Indemnity Run-off Cover: Retiring, Selling, or Ringfencing Liability
Exiting a professional practice, retiring from a board, or dissolving a corporate entity does not automatically extinguish your past liabilities.
Simplfied Summary
“Long Tail Liability” Protection
Run-Off cover is an extension to your Professional Indemnity insurance, that amends the reporting period under your current policy to allow you to notify claims that you are currently unaware of, for work already undertaken.
Just because you have stopped trading, retired, or sold the business, does not mean there isn’t a liability for the work already undertaken. Your clients may become aware of an issue that causes them a financial loss long after you provided the service.
Given PI Insurance is written on a claims-made basis, you will require a policy to be in force when you become aware of circumstances that may give rise to claim under your policy. Run-off cover keeps that protection in place for historic work, even though the business may not be operating.
Change in Control
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Check your Policy Wording for ‘Change in Control’ and ‘Acquisition or Dissolution' provisions. These will typically state that as soon as the majority shareholding changes, or the company is wound-up, the cover will only provide protection for work performed prior to this date.
Some policies will identify an Automatic ‘Run-Off’ or ‘Extended Reporting’ Period for 12 months option within the Schedule or Policy Wording.
Extended Reporting Period
Run-Off is typically an extension to your existing policy and offered by Insurers once they understand the background. Periods of 12 months, 36 months, and 72 months will typically be offered. However, it is always recommended that a period of six years is purchased to meet your long tail liability under the Statutory Limitation Act 1980.
Run-Off Premiuns
Whilst the percentage of annual premium can vary, the standard market practice if there have been no claims activity is usually 12 months @ 100%, 36 months @ 200%, and 72 months @ 300%.
The “Three Paths” to Run-off
Path A: Sale of the Business
M&A buyers are highly sensitive to hidden legacy risk. The acquirer will be concerned about PI claims arising from historic work performed and whether liabilities could arise in the future.
A six-year Run-Off policy is often used as part of the sale to ringfence the potential liability. As a one-off cost attributed to the transaction, the extended reporting period provides a valuable mechanism to protect everyone involved.
From a transaction perspective, this can make the business cleaner to acquire, reduce friction, and provide a clearer allocation of post-sale risk between buyer and seller.
Path B: Retiring or Winding up
If you are retiring from a business, your exposure does not end once you leave. Claims may still be brought long after your services were performed.
However, if the business continues to operate, as long as the business continues to purchase PI Insurance, work undertaken by yourself prior to your retirement will continue to be covered. The risk arises if the company is wound up after you leave the business and they don’t purchase Run-Off cover.
If winding up the business means there is still a chance of future claims from past work, run-off cover is often deemed essential. If you are unable to purchase PI Run Off, a further backstop is recommended in the form of D&O Run-Off that can protect the personal liability of the directors and owners of the business.
Path C: Corporate Restructure
Run-off cover is also widely used in restructures where a firm is hiving off, disposing of, or separating a particular division. In these scenarios, the challenge is to stop the historic liabilities of that business unit from contaminating the parent company’s ongoing insurance programme.
By placing the past work of the divested or restructured division into a dedicated run-off arrangement, the business “ringfences” that historic exposure. This helps protect the main group policy from being tagged by future claims linked to part of the business that has already been sold, closed, or separated.
Don’t forget the Directors
In some circumstances the liability from the sale, disposal, retirement, winding-up or restructure can extend directly into your personal assets.
Therefore, it is recommended you should also consider D&O Run-Off cover in conjunction with PI Run-Off to protect the personal liability of the directors and senior management, separate to the business.
Frequently Asked
Questions
Why can’t the new owners purchase PI for the legacy work?
If there has been a change in control (defined as 50% or more change in ownership), the beneficiary and the terms upon which cover was provided has changed. Insurer’s standard Policy Wordings contain automatic provisions that upon the acquisition, the policy automatically goes into Run-Off and only covers the work undertaken prior to the acquisition for the remaining policy period.
The new majority shareholding owners of the business will need to arrange PI for the services they expect to undertake over the next 12 months, which could be materially different to what was previously performed. Cover for the NewCo (even if the legal entity name remains the same) will only be provided on a Retroactive Date Inception basis, which creates a clear separation between the Run-Off policy.
If the standard run-off is 6 years, why are we being asked for 12 years?
The interaction between Collateral Warranties and Construction PI Run-off potentially means a longer run-off period may be required. A collateral warranty creates a direct legal link between you (the main contractor) and a third party (a funder, purchaser, or tenant).
The length of your Run-Off requirement is dictated by how the warranty was signed, contracts signed as deeds will typically require 12 years Run-Off.
What if my incumbent insurer won’t provide Run-Off Cover?
As a specialist PI Broker we have access to some insurers that will consider offering Run-Off cover, even if they aren’t the incumbent insurer. Whilst the options are limited and the costs higher, there are potential options available to ensure protection is provided.
What happens to our Run-Off if our insurer goes insolvent?
If your Run-Off insurer fails, the Financial Services Compensation Scheme (FSCS) typically provides a backstop for UK-regulated policies. However, for firms using offshore or unrated capacity, an insurer's insolvency could leave the directors personally liable. Which is why we prioritise A-rated security for all Run-Off placements.
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