What is run-off insurance and why does my recruitment business need it?

 

This is a guest blog by REC business partner partner Marsh Commercial

If you’re thinking of retiring or looking to cease trading, it’s vital you understand the importance of adding run-off cover to your current professional indemnity (PI) policy. 

In this article we’ll explain the difference between ‘claims made’ and ‘claims occurring’ policies, what run-off insurance covers and why it’s important protection for you and your business. 

To understand PI run-off cover, it's important to appreciate the ‘claims made’ approach. 
 
Recruitment businesses will usually have professional indemnity insurance, so you might already know that PI policies are underwritten on a 'claims made' basis rather than 'claims occurring'. 
 
A ‘claims made’ policy covers claims made during the policy's term. The incident that caused the claim doesn't need to have happened while the policy was in force. It could have happened before the policy start date or even when you were insured by another provider.  
 
Professional indemnity and directors and officers cover are types of policy that take a ‘claims made’ approach. To be covered for a PI claim for work done in the past, you must have a live policy when the claim is made. 
 
‘Claims occurring’ policies are different because they respond to a loss that occurred when the policy was live. So if you were to change insurance providers after the event, the insurer who provided the cover when the incident happened would deal with the claim.  
 
Employers liability, public liability, and car insurance are policies that use claims occurring. 
 
To make sure your business is protected when you or your employees stop trading, you will need to have a PI run-off insurance policy in place. Run-off insurance is a type of PI policy that has had an endorsement added to it. This restricts the cover for claims made related to work carried out before the specified run-off date. 
 
To help you understand run-off cover, we've compiled some FAQs for recruiters with a current PI policy looking to retire or cease trading. 

What does run-off insurance cover? 

Professional indemnity insurance covers limited companies, partnerships, including limited liability partnerships (LLPs), and sole traders. It protects the business principal or partners, directors, staff - past and present. A PI run-off policy reimburses any losses should a claim be made against those who’re insured. 

When would I need run-off insurance? 

Recruiters might typically purchase run-off insurance due to retirement, which is particularly popular with sole traders or smaller firms.  

Larger firms may occasionally be sold? or taken on by a working age individual who maintains the PI cover, but this isn’t always the case. For example, a new owner may not want to be responsible for legacy liabilities (not the case if it’s a liabilities purchase), and the departing owner may not want to be responsible for  their liabilities being trusted to someone else. 
 
In both cases, you need to keep a run-off policy in force after retirement to cover any claims that may arise in the future.  

What if my policy renewal date is not due? 

You will need to let your insurer or broker know that you have ceased trading. They can then attach an endorsement to your policy stating that cover won't be provided for any service or work done after the run-off endorsement date. 

You'll be offered run-off renewal terms by your insurer when the policy comes to its renewal date. You may need to complete a proposal form to establish work you’ve done during the last financial year of trading. 

From here, you can decide whether to take up the run-off policy. If you do choose to renew, it should carry the same terms and conditions as the previous policy, including the new endorsement that notes the run-off date. Insurers will respond to any claims notified or made against you during this new policy year as long as the work was undertaken prior to the run-off date. 

What if I choose not to buy run-off insurance? 

If you don't purchase run-off insurance, your PI cover will cease. So any claims that are brought against you for work done in the past won't be insured. It is important to note that even false or speculative claims will need defending, and without PI cover, they can be damaging - both financially and for the business's reputation. 

How long is a run-off policy maintained for? 

Professional bodies need their members to have run-off insurance for six years, because this is the usual statute of limitation. So six years is a good benchmark to use for all professions, but other factors could result in a different length of cover being more relevant.  

How much does a run-off insurance policy cost? 

Generally, the premium cost in the first year after the business ceases trading is the same as the last year of trading. The reduction of potential liability takes several years to show any significant decrease, so from an insurer’s perspective, there’s as much risk of a claim in the first few years of run-off as before. 
 
After the first full year of run-off, premiums should start to show signs of typically reducing by 10% per annum – although this depends on claims and the individual insurer rates. 

What is a single premium multiple-year run-off? 

Businesses can arrange multiple-year run-off policies that are paid via a single upfront premium - if their insurer offers it. Most insurers don't offer run-off insurance on this basis, but annual cover can be purchased for any number of years. 
 
If you’re planning to cease trading or retire, speak to a member of our team about run-off cover. Call 0330 818 7634 or email them at rec@marshcommercial.co.uk