Claims can be made against you for many years after you stop practicing. In some cases your liability could end after 6 years, however, it is possible that you could be liable for up to 15 years.
The nature of Professional Indemnity Insurance means that cover is provided on a claims made basis, so in order for cover to be provided insurance must be held when a claim is made, rather than when an incident occurred.
This why it is important that you ensure that you have in place adequate “run-off” cover when you cease to practice, whether because of retirement or the closure of a business, to cover work previously undertaken.
It is recommended that you acquire a minimum of six years` worth of run-off cover and continue to monitor any risk you have of a claim being made against you after this time. This cover should be held at the same Limit of Indemnity amount as its highest level in the three years prior to the cessation of practice.
Liability can even continue after death so professionals should ensure that their executors are aware of the risk and continue cover for at least six years after the date that the last professional work was undertaken.
It is standard market practice for cover to be arranged by firms rather than by individual practitioners, but ex-employees and past principals should not take this for granted, particularly in the present economic times when firms are becoming insolvent or may be reducing cover to save cost, It is particularly important that owners of firms speak to us early if they are considering closing or selling their practice as it is often easier to ensure that effective run-off cover is put in place while the firm is still practicing.
The policy would be renewed on an annual basis and you would expect to pay 100% of the expiring PI policy annual premium in the first year then for the premium to reduce by somewhere in the region of 5-10% at each renewal. This is presuming no claims have been notified or paid by Insurers and nothing has occurred to bring about a hardening of rates. The reduction is also very unlikely to apply if you are already paying Insurers minimum premiums.
Run-Off Overview
Statistically, this type of insurance can be of higher risk but low value to insurance companies. People may only purchase the insurance for a year or so after closure, while they feel the risk of a claim is at its highest. For this reason, there is little to no appetite or competition in the insurance market to provide this cover, and it is usually the incumbent insurer at the time of closure who provides the insurance on an ‘accommodation’ basis. This means that an alternative quotation can be very hard to find. Occasionally an insurer may express some interest (so it’s worth giving us a call to ask) but it’s rare.
Some regulators make it a condition of insuring their members (e.g. the RICS, ICAEW, FCA etc.) that the insurance company must provide a specified number of years run-off cover when their member ceases to practice, but other than that it usually falls to the discretion of the incumbent insurer.
Going into run-off
Once you have decided you need to provide run off insurance for your business, you need to advise your current insurer.
If your policy has a while to run before its renewal date, you will need to inform your insurer that you have ceased trading. They will attach an endorsement to your policy stating that cover will not be provided for any service or work provided after that date. At the next renewal, the insurer will offer run off renewal terms and may ask you to complete a proposal form as in the past, so as to establish what work you undertook from the last renewal to the date your company closed.
You will have the option to then either take up the run off policy for another twelve months or not. If you renew the policy, it should carry the same terms and conditions as the previous policy, but it will also now include the new endorsement noting the run off date. Insurers will respond to any claims notified or made against you during this new policy year so long as the work was undertaken prior to the run off date.
If you do not take up a new policy and or make any alternative arrangements your professional indemnity cover will cease and any claims brought against you for work undertaken in the past will be uninsured. You should remember, even spurious or speculative claims require a defence and without Professional Indemnity Insurance cover these can be damaging.
Traditionally, run off insurance would be maintained in this way every year for up to six years. Six years is the period many professional bodies require their members to carry run off PI for, this is therefore a good benchmark to use for all professions. That said, there are other factors that should be taken into account when considering the period that run off needs to be maintained for and which may result in a shorter or equally longer period of cover being more relevant.
Updated 14/02/2022