Run-off cover for professional indemnity insurance

Professional indemnity insurance (PII), sometimes known as errors and omissions insurance (E&O), provides insurance cover against claims of negligence. It is widely used where professional services are being provided to a developer or contractor, and will provide insurance up to a specified insured sum where negligence is proven to have been committed on the part of the service provider.

Professional indemnity insurance is generally provided on a 'claims-made' basis, meaning that insurance must be held when the claim is made, rather than when the incident occurred.

Run-off cover is a form of professional indemnity insurance that applies when a business, or individual stops operating in a particular field. This might be because the business has been sold, it has changed direction, it has gone into administration, an individual has retired, and so on.

The fact that at form of practice has comes to an end, does not necessarily mean that the possibility of claims has come to an end. Claims can arise for years after projects have been completed, and it is important that practitioners maintain PII for as long as such a risk exists. Run-off cover provides continuing indemnity to cover costs that are associated with a claim.

As the likelihood of a claim reduces as time progresses, so the cost of a run-off policy generally reduces year on year, although, some insurers offer run-off policies payable with a one-off premium as this can reduce the uncertainty of ongoing payments.

The nature of the work that has been undertaken will be an important factor in determining the length of time before a claim is likely to arise. From the date a problem occurs, the statute of limitations holds that a business or individual can be sued for up to six years. Therefore, a minimum of six years run-off cover is generally recommended, although businesses sometimes opt for a shorter period as they may judge that claims are likely to be made earlier rather than later.

NB Insurance Policyholder Taxation Manual, published by HM Revenue & Customs on 19 March 2016, defines run-off as: ‘the continuing liability of an insurers in respect of a block of past business, for example where a reinsurance contract has been terminated but a liability remains in respect of risks or cessions accepted during the period of the agreement, or where an insurer has ceased to accept new business but has not settled all outstanding claims arising on old business.’