Occurrence-based liability means regardless of when the claim is made, the event will be covered by the insurance policy that was current at the time the event occurred — even if that policy has since lapsed. If a claim is made against you for an event that occurred years ago, the claim needs to be referred to whomever the insurer was at the time of occurrence.

For example, Professional Indemnity insurance is written on a claims-made basis. If your PI insurance policy has lapsed, and a former client decides to sue for damages, this claim cannot be referred to the old insurer — referring to the old insurer is only possible with occurrence-based claims. To be protected for future liability after your policy has lapsed, you need run-off insurance.

• Professional Indemnity
  protects professional service providers from claims regarding negligence or loss, generally being raised by their clients.

• Directors & Officers
  insurance protects Directors and Officers against personal liability for claims and allegations of mismanagement.

• Information Technology Liability
  protects against claims regarding the failure of information technology products and services.

As you can see from the flowchart, the client acted on the advice in February 2015, and the advisor retired three years later. The Professional Indemnity insurance is subsequently cancelled. In 2019 the client suffered a loss and decided to sue on the basis that the negligent advice caused their loss.

The main circumstances that warrant run-off cover are:

• Merger, acquisition or change in control.
  Most professional indemnity and directors & officers policies cease after a change in control. This means former management may be at risk after the change of corporate structure, which includes liquidation or bankruptcy of the business. Run off protects against allegations of impropriety, negligence, breaches of duties, enquiries by regulators, and insolvency claims.

• Retirement.
  Whether you sell your business or simply close the doors upon retirement, stakeholders and former clients are still able to bring about legal proceedings regarding misconduct, mismanagement, negligence or a breach of duty during your time in the business.

• Business closure.
  As with retirement, the closure of a business doesn’t protect you from any claims arising after you’ve wound up the business.

• Contractual obligation.
  Many commercial contracts regarding your work often stipulate that insurance covers remain in force for several years, even after the work has been completed and the contract has ceased.

• Industry standards.
  Many industries have legislation or association requirements that their members or certain professions must maintain cover for a certain number of years. Some professions are even required to have automatic run-off cover built into their PI policy.

• Insurers Non-Renews
  There are times when insurers are not willing to renew a policy due to the risk or their appetite changing; however, they may consider offering Run-Off coverage or the policy already has an extension to cover the past acts at a pre-determined rate and duration in the event of a non-renewal from the insurer.

Typically, it’s best practice to ensure that the period of run-off insurance purchased reflects your contractual obligations and the relevant statute of limitations. Other relevant factors to consider when determining the length of the run-off period are the laws and jurisdictions that apply to contracts in each country, state and territory that you conduct business in.

For more information on the statutory limitation (civil proceedings) in Australia, click here: Parliament of Australia.

• How long should run off be purchased for?

Generally speaking, to the standard run-off policy is for seven years in Australia. This means that once the seven years have elapsed, usually, legal proceedings cannot go ahead, meaning the insureds liability exposure has ended. The statute of limitation can vary depending on the offence. For example, the timeline for medical malpractice may only be up to three years.

• How is the pricing of run off determined?

The cost is usually a percentage of the original premium of the expired policy. Run off cover can be purchased for one year or multiple consecutive years. The pricing of the multiple year policies generally declines in line with time, to reflect the decreasing risk of a claim occurring, but is typically payable as a lump sum.

• Why do I need run off insurance if the company no longer exists?

Under breach of contract and tort law, somebody can lodge a dispute against the company, its directors and management after the fact. For example, if a client has a legitimate claim from the last day the company was trading, they can commence legal proceedings. Holding run-off cover provides protection in this scenario.