Run-off insurance provides cover from when your full Professional Indemnity policy ends usually for a period of 6 years. Many contracts contain a condition that you hold PI insurance for at least 6 years after the contract ends so even if you no longer trade it is essential to maintain PI cover to protect yourself from claims received.
In relation to an acquisition or merger, run-off insurance is generally purchased by the company being acquired and protects it and its officers and directors from claims filed relating to the company’s activity prior to the date of acquisition. If you are a freelance contractor, who is between contracts, you would purchase run-off insurance to ensure your previously completed work was covered.
Professional Indemnity is on a claims made basis meaning the policy will need to be live on the date that any claim against you is presented. If you were insured at the time you completed the work/contract but allowed your policy to lapse you would not be covered.
In simple terms, you as a contractor complete an IT project for a client in 2017, yet in 2020 there is a system error which causes your client to lose money and as a result they file a claim against you for negligent work. The live policy you hold in 2020 will respond to the claim, not the policy you held back in 2017 when you completed the work.
The length of the “run-off” as it is referred to, covers several years after you complete the work or contract. For details of run-off timescales, see the ’Claims in relation to’ list later in this article.
Due to the rollout of private sector off-payroll reform (IR35) on April 6th 2020, run-off insurance has never been more relevant to UK contractors.
Many contractors are not renewing their annual insurance premiums in favour of closing their limited companies in an attempt to mitigate tax charges in relation to the private sector IR35 off-payroll reform.
What many contractors are forgetting to consider is their liabilities in relation to historic work, with many contractors neglecting to take out run-off cover.
This can be because they think that closing their limited company will protect them from any potential claims, or in some cases because they simply do not know about run-off cover or have not been offered run-off by their insurance provider. Many contracts contain a clause stating that you should hold PI insurance for a minimum period of 6 years after the work is completed.
The following list of claims periods show why run-off insurance is so important.
As can be seen from the list above, as a contractor you are vulnerable to a claim being made against you for up to 6 years after you have completed a contract. It is a good idea to review your contracts at the beginning of an assignment and discuss this requirement with your clients.
Typically, the first year of run-off cover is the same cost as the preceding year of full coverage, when the company was still trading with the chance of liability claims taking a number of years to decrease from an insurer’s perspective.
This means there is as much chance of a claim in the first few years of run-off as there was in the few years prior to run off.
After the first full year of run-off, you should see a decrease in your premium, in some cases by up to 50%.
To enquire about Caunce O’Hara’s 6-year run-off insurance, call our award-winning team on 0333 321 1403