Run off cover

 

                                                                RUN OFF COVER

Mergers and Acquisitions are a common phenomenon in the world of business. One company takes over the business, or is merged with the other for financial viability and cost control. In the process companies are taken over, wound up and all assets & liabilities are transferred to the new owner. While assets are welcome for the combined entity the liabilities need proper provisioning and handling.

After a business is wound up or a project is finished potential claims may be still in the offing. Claims made any time in the future require provisioning and Run Off insurance is the most valuable protection in such cases. 

WHAT IS THE COVER?

• Professionals, Principals, Partners, Directors, Officers and Employees can be held liable for negligence, even if a company no longer exists.
• Contracts & Deeds signed by the company can exceed the life of the company and attach to individuals and the obligations must be addressed.
• In the event of a sale, agreements require entities to purchase run-off insurance to cover past liabilities.
• Run off cover clause under liability policies provides cover and indemnifies liabilities of the acquiring Company from any lawsuits against the Directors of the new Owners.

Simply put, it is the insurance cover for claims due to newly acquired liabilities or continuing liabilities due to professional negligence in services or accruing liabilities. In order to comply with regulations it is the sensible option to purchase this cover and protect against all eventualities.

WHEN TO BUY THE COVER

A run-off insurance policy can be purchased prior to, the cessation of the business or the finalization of a project. It will provide coverage to an insured for future claims made against them which arise from acts, errors or omissions which occurred prior to the inception of the run-off policy. Run-off policies can be purchased on an annual basis or a multi-year basis with one upfront premium payment. 

DETAILS OF COVER

The most important factor for a claim to trigger under run off clause would be the winding up of the business. It is hence different from Claims made cover as in Claims made basis, the cover continues for a length of period provided the business and insurance policy are in force.

Run off insurance is different from liability insurance, as the length of the cover extends to a certain period after the company is closed. Once a company winds up its business the existing  policy has to be endorsed limiting its cover for work completed only before the date  business closed down, and not after. This is an endorsement that insurers use until an existing policy expires.

Once the policy expires a new run off policy may be issued by the Insurer covering such liability only provided the liability policy before closure was in place.

A run off insurance policy will include the same terms as a previous insurance policy, but with an added endorsement detailing the run off aspect. Claims data if any must be provided to the Insurer, only those claims that fall within the period of indemnity and policy purview of policies that have been active.

Not renewing a policy will be huge risk as the costs are high considering the closed business. Although a claim may not be admissible as per policy terms and conditions, defending the claim would cost a huge amount especially in the face of a wound up business.

WHAT IS PAID AS CLAIM?

It is the most prevalent liability cover for professionals and companies.  After a company has closed down, run off insurance will provide cover for legal costs and claims relating to existing and previous staff members and directors covered under Run off clause in the policy.

WHAT IS PERIOD OF RUN OFF INSURANCE?

Length of the time for such Run Off covers are decided by the organisation and can be determined by a number of factors. Regulators and Compliance Authority have laid a common standard across many professions. It is also bound by the Limitation laws for claim filing as it sets out the applicable time limits depending on the type of claim being made.

An in depth analysis of these aspects must be understood before determining the length of period for this cover. Most insurers offer Professional Indemnity run off cover for a period of up to 7 yrs.

Examining the exact cover, Terms & conditions and choosing the right cover to suit Organization’s needs is the best approach while purchasing Run off Cover.

We at Zen Insurance assist in choosing the right cover; you may contact us for assistance.

 

Disclaimer:   

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products,.