Professional indemnity insurance is a ‘claims made’ policy and provides coverage for claims made during the policy period, regardless of when the incident occurred. This means that the policy must be active at the time the claim is made for coverage to apply. If you don’t have a run-off policy in place, and a claim is made a few years after your firm has ceased, then even if you had insurance when the work was done, there won’t be any cover for the later claim. This is why run-off insurance is crucial for accountants and other regulated professionals who stop practicing.
Why is run-off cover important?
Run-off cover is important for several reasons:
Protection against claims
Even after ceasing to practice, professionals can face claims related to their previous work. For example, when an ex-client approaches a new firm, the new firm may spot something that was overlooked or an error or mistake in the previous firm’s work and therefore this period after cessation can be a time when new claims arise. Even if you have not received a single claim whilst being in practice this doesn’t mean that it will never happen. Run-off cover ensures that insurance is in place and that claims are managed.
Remember your insurer will often appoint and cover the costs of lawyers appointed to defend any claim made against you. This means insurance is important for even those claims that are unsuccessful.
Regulatory compliance
Having appropriate run-off cover is a regulatory requirement. The PII Regulations (2.7 - 2.8) make clear that firms/members must have run-off cover in place. This is in the member’s best interest, regardless of whether a future claim is anticipated.
Peace of mind
Knowing that you are protected against potential claims provides peace of mind and allows you to focus on your retirement or new ventures. Run-off cover can provide peace of mind to your family and loved ones, protecting your estate should anything happen to you and claims later emerge.
Obtaining run-off cover
Run-off cover is typically arranged in one of two ways:
- Annual policy: This policy is renewed each year for six years and a premium is paid each year.
- Six-year block policy: This policy is paid-for in advance and covers the entire six- year period. Many insurers will provide run-off cover in this way, but it’s not something that all insurers offer.
We understand that very few insurers will consider providing run-off cover for a risk that was insured with another underwriter prior to retirement or cessation. Additionally, insurers usually require that they have held the risk for at least two years before considering a six-year block of cover. Therefore, it is important that you let your broker know as soon as possible that you are considering cessation and may need a run-off policy so you can consider the most appropriate options.
Cost of run-off cover
Run-off still attracts a premium, even if you have ceased to trade and no longer have any income. Therefore, it is vital that you include the cost of run-off cover in any retirement/cessation planning.
Generally, the first year’s premium will be at a similar level to the premium paid when the firm was active. Insurers tell us that in the first few years of run-off there is generally as much chance of a claim being received as when the firm is trading. After that, the potential liability generally starts to reduce and premiums should fall with it. This will be subject to a firm’s individual circumstances and the general conditions within the insurance market.
Determining the amount of run-off cover needed
When deciding on the amount of run-off cover, consider the following factors:
- Size of the firm: Larger firms may require more extensive coverage due to the higher volume of work and potential claims.
- Nature of past work: High-risk areas of practice may necessitate higher coverage.
- Regulatory guidelines: Ensure that the terms and extent of the cover are equivalent to any previous qualifying insurance.
- Broker’s advice: Your broker is best placed to help you decide the amount of cover required.
How long do I need run-off cover?
If a firm ceases the relevant regulation is 2.8 and to comply with the obligations under regulation 2.8 you require run-off for six years.
| Regulation 2.8: When a firm ceases to be engaged in public practice, the members in practice in that firm at the date of cessation shall ensure that there is in place appropriate cover to meet the requirements of these regulations for at least two years following the cessation of the practice. Thereafter the former members in practice in that firm shall take all reasonable steps to ensure that cover is in place to meet the requirements of these regulations for a further four years. |
Regulation 2.8 is split into two parts and refers to an initial two year period and then requires the former members in practice in the firm to take ‘all reasonable steps’ to ensure that cover is in place for a further four years. Thereby encompassing the total six year period. The reason that the regulation is split in this way is due to clause D4 of the minimum wording (the specific type of insurance policy ICAEW members and firms are required to have) which obliges insurers to provide a minimum of ‘two years’ of run-off cover from the date of cessation. This means that all firms will be able to obtain run-off cover for the first two years, but we acknowledge that a small number of firms may encounter difficulties thereafter.
Despite this, we expect firms to take ‘all reasonable steps to ensure’ that cover is place for a further four years. This is for the protection of both the firm and the consumer and ensures that insurance is available if a claim were to arise in respect of work conducted when trading.
If you are unable to find run-off cover for the full six-year period, we recommend contacting ICAEW to discuss this and additional options that may be available. Run-off cover is also available in the Assigned Risk Pool.
Maintaining adequate run-off cover is crucial for protecting against potential claims and ensuring regulatory compliance. By understanding the importance of run-off cover and determining the appropriate amount needed you can safeguard your interests after ceasing to practice.
Run-off cover: frequently asked questions
-
What is run-off cover?
Run-off cover is insurance that protects against claims arising from work done while in practice but made after ceasing to practice.
-
How long do I need run-off cover?
Run-off cover is required for a six-year period. It varies between insurers whether this cover is offered in a “block” for the full six years or on an annual basis.
-
Why do I need six years of cover?
The six-year period is recommended because it aligns with the general statutory limitation period for professional negligence claims in the UK.
-
When does the six year period start?
Run-off is required upon cessation of public practice (see the ICAEW statement). The six year period can begin during your current policy, but we recommend contacting your insurer to advise that the policy should be placed into run-off cover. They will be best placed to advise you on the next steps and what information you need to provide.
-
I’m selling my firm, do I need run-off?
This will depend on the nature of the sale of the business. If the business is taken on by a new principal and the insurance policy is maintained, then it is possible for run-off cover to be provided by that policy. However, the new owner may not wish to take on the historic liabilities and in that case for example if the clients are being transferred or the legal entity is being dissolved then a stand alone run-off policy for the ceasing entity will be required. This will be factually sensitive and you should discuss your plans with your broker or ICAEW if you are unsure.
-
I’ve been winding down the business over the last few years, do I still need six years of cover given the little work I have been doing?
Yes, if you have still been servicing clients and engaged in public practice you will not have been in run-off cover. You will require six years from the date of cessation. You should advise your insurer of the amount of work you have been doing in recent year as they may take this into account when assessing the appropriate run-off premium.
-
How do I handle run-off cover if I merge with another firm?
If you merge with another firm, it’s important to discuss run-off cover with the new entity and your broker. The new firm may take on the responsibility of providing run-off cover under their existing PI policy, or you may need to arrange separate run-off cover for your previous practice.
-
Do I have to buy it annually?
While run-off cover is required for six years, most insurers tend to offer it on an annual basis. This can be more expensive initially but may reduce over time if no claims are made. Discussing options with your insurer or broker can help you find the best solution.
-
Can I switch insurers for run-off cover?
Yes, but generally, run-off cover is arranged with the insurer who provided your PI cover while the practice was trading. Switching insurers for run-off cover can be challenging, as most insurers prefer to continue covering risks they have previously insured.
-
Is run-off cover expensive?
Run-off cover is usually most expensive in the first two years and often reduces if no claims are made. The cost depends on your firm’s specific circumstances, claims history, and fee income as well as the prevailing market conditions. Your insurer or broker can provide the best advice on the likely cost.
-
When should I start planning for run-off?
It is advisable to start planning for run- off cover well in advance of ceasing to practice. This allows ample time to discuss options with your insurer or broker and ensure that you have the necessary coverage in place without any gaps as well as making provision for payment of the premium(s).
-
Can run-off cover be extended beyond six years?
Yes, run-off cover can be extended beyond six years if necessary. Consult with your insurer or broker to determine the appropriate duration for your specific circumstances.
-
Do I need to consult a broker?
Consulting a broker can be very beneficial. Brokers have expertise in the insurance market and can help you find the best run-off cover options tailored to your specific needs and circumstances.
-
I can’t get run-off, what should I do?
If you cease to trade during your current policy then your insurer must make an offer of run-off cover. Make sure you have spoken to your broker about this. If you still struggling to find a policy get in touch with ICAEW’s Advice Line and we can discuss this with you. Cover may be available in the Assigned Risk Pool.