Run Off Cover: Protecting your Golden Years
After successfully running a practice for a number of years, there are a variety of factors to be considered when you start looking at selling your practice, closing your practice, returning to employment with another practice or simply retiring. One of the most important things to bear in mind can be your ongoing liabilities.
What are the ongoing liabilities?
As a general rule, you will have entered into contracts with your Clients which will contain provisions detailing the period you will remain liable for the work undertaken together with the level and duration of the professional indemnity cover you will maintain.
For example, if the contract is under hand, you will be liable for six years from the date of practical completion and you will maintain cover at no less than £1m for any one claim or series of claims for six years from the date of practical completion. However, an appointment signed under deed would require you to maintain cover for 12 years.
In view of those obligations, and given the general period of time within which a negligence claim could be brought against you, we at LI Insurance Services would always recommend that when you start considering closing or selling your practice or retiring, it is essential you give consideration to obtaining ‘run off’ cover to protect your position as stated above.
What is ‘run off’ insurance?
In general terms, a run off policy is a professional indemnity insurance policy which will provide ongoing protection against a claim or claims arising from your past activities. This is usually an annually renewable policy with a reducing premium for each year the cover is maintained.
However, on the official LI PII Scheme, subject to certain qualifying conditions, there is the option to take a single six year policy to cover your past liabilities and this can be available in one of two options although in both cases cover would be limited to a maximum of £2m which may be per claim or in total depending on which option is selected.
1. ‘Any One Claim’ cover, with defence costs in addition
In effect, this policy will provide you with a limit of indemnity which applies to any one claim throughout the life of the policy. As a result, any claim made during that period will have the benefit of the full policy limit with any defence costs incurred being paid by your insurers in addition to the limit.
Insurers will charge a one-off premium which will be calculated at the point in time run off cover is required.
2. ‘Aggregate’ cover, inclusive of defence costs
An alternative available as a cheaper option to “Any One Claim” is an ‘aggregate’ policy.
While a cheaper option is always going to be attractive, it is important to understand that this is a much reduced level of cover as the selected limit is the entire ‘pot’ for the life of the policy which is to cover all claims and all costs that may be incurred in defending the claims.
By way of example, if you decide to maintain a run off policy with an aggregate limit of £1m and during the first year a claim is made and settled for £225,000 with a further £25,000 costs incurred in dealing with the claim. This means that the total of £250,000 is deducted from the £1m and you will only have a remaining pot of £750,000 for the remaining five years of the policy. If you have cover for any one claim, while the £225,000 will still be paid out but without the costs counting towards the limit. As a result, for the next claim you will still benefit from the full £1m policy limit.
Things to consider when buying Run Off cover
As the decision to take out “run off” cover can have an impact on any decisions you take regarding the future of your practice and/or your retirement, there are a number of factors that should be considered:
a) The requirements of any Appointments and/or Practical Completion Certificates
As noted above, any appointments with your Clients or Practical Completion Certificates you have issued are likely to have contained provisions regarding the level and duration of cover. If you have agreed to maintain £1m any one claim for at least six years, and you elect to take a lower or aggregate limit in run off, you may be in breach of contract.
This could result in the Client taking out additional cover to protect their position and then looking to recover the additional costs from you, or they could take legal action to enforce the terms of the contract.
b) Is the ‘six year’ policy appropriate for your needs?
While we can provide a number of options relating to your run off cover, the six year policies are subject to a maximum limit of indemnity of £2m. As a result, if you have agreed to maintain cover above this limit, then it is likely you will still need to consider taking an annual policy for the higher limit. It should also be remembered that you may still be required to maintain cover after this initial six year period depending on the ongoing contractual obligations.
While a free option may be available, when considering what steps to take in terms of retiring or closing the business, the cost of the run off should be one of the factors under consideration.
As such, our advice would be to make financial provision for the potential costs involved in maintaining cover when you start taking steps to wind down the business. This can help ensure that adequate funds are set aside to cover the costs, rather than being faced with an additional expense when work is no longer being taken on.
We at LI Insurance Services are happy to discuss your requirements and options in connection with “run off” cover.
If you would like to discuss this article or if you have any other queries regarding your insurance arrangements please contact us
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