What’s run-off insurance, I hear you ask? Well, you may recall in our previous blog, ‘short term professional indemnity insurance’ we highlighted some pitfalls when purchasing pi insurance. Specifically, the risk of only buying pi cover for a short-term contract. In this blog, we explained how professional indemnity works, particularly the nature of ‘claims made’ policies. If you haven’t already done so, read our blog or seen our short video. We recommend doing so before reading further.
In FD Beck’s previous blog, we also understood that the solution to short term contracts is ‘run-off insurance’. Basically, ‘run off insurance’ is a continuation of insurance in order to maintain protection against past activities. Remember, all pi insurance policies are arranged on what’s known as a ‘claims made basis’. Basically, this means the insurance must be current when the claim is brought against you, regardless of when that work was done. So, if you don’t renew your pi policy after a contract finishes and a subsequent claim is made, there’s a problem. That’s because your insurance company will decline the claim.
For professional, contractors or consultants that have gaps between contracts, we always recommend renewing your professional indemnity insurance policy. If you’re only taking on a one-off contract, then you need run off insurance. This also applies if you’re winding up a company that has professional liabilities. This way, you will continue to be protected against claims long after the contract work has been done.
Perhaps, the best way to explain run off professional indemnity is by way of an example.
· In 2016, an interior designer was engaged by an architect to help a client select interior colours. The work involved was selecting colours at design stage for glass splashbacks for the kitchen and bathrooms.
· Due to the house designing not complying with standard Council Building Regulations the permits took 18 months to be approved.
· In 2017, construction of the home began.
· During 2017, the interior designing accepted full time job as an employee with a separate architect. She let her pi policy lapse, even though future work would be covered under the architects pi policy. Also, she knew that she would not be doing any more work as a contractor.
· By mid-2018, the glass splashbacks were installed which followed with tiling and painting.
· It was only in 2018 that it was identified that the interior designer had accidentally specified the wrong colour codes.
· The entire glass splashbacks had to be ripped out and replaced. Furthermore, this caused delays in completion and hand over.
· Scenario 1—No Run-off Cover
In 2018, A claim is made against the interior designer. They notify their pi insurer who advises no coverage is available as their policy lapsed in 2017.
· Scenario 2—Run-off Cover Purchased
During 2018, The interior designer notifies insurer who after reviewing the claim grants indemnity and paid the claim for compensation.
Run-off pi insurance can be purchased prior to cessation of the business or finalisation of a project. Also, it be purchased on a multi year basis or on an annual basis. If bought on a multi year basis, it’s just one upfront premium payment. That being said, it doesn’t mean that you need to maintain the same level of premium payments for the run-off period. Typically, run-off cover allows for reduced premium costs over time. You see, premium reductions are in line with the amount of time since the work was completed.
Often, we see clauses in contracts requiring professionals to maintain pi insurance for 6 years after completion of a contract. That being said, there is no fixed rule about how long run-off cover should be maintained. Maybe, consider things such as contractual obligations or statutory requirement needs.
Unfortunately, people think because a business is wrapped up they don’t need run-off insurance. A word of warning, individuals can be held liable for their negligent actions, even if a company no longer exists. Obligations agreed to under a contract can survive the life of the business and attach to directors. Furthermore, many company sale agreements specifically exclude past liability. In addition, they require companies to purchase run-off insurance.
To sum up, run – off professional indemnity insurance must be current when the claim is brought against you. Regardless of when that work was done. Therefore, before you let your policy lapse, consider if you need professional indemnity run-off over. If you’re a contractor, consultant or freelance professional looking for professional indemnity insurance, visit our free online insurance quoting tool . Get a free, instant, no-obligation online quote in minutes.