Generally speaking, run off insurance isn’t something you need to worry about until you cease business operations (retire, sell etc.).
It’s important to remember that Professional Indemnity insurance is offered on a ‘claims made’ basis. Put simply, you need to have cover in place at the time you make a claim, whether it be for past or present work. If you do not have an active Professional Indemnity policy, it is unlikely you’ll be able to lodge a claim (even if you had the policy when you did the work).
When it comes time to ‘close up shop’, you will have the option to purchase run off insurance. The insurer will generally provide you the following options:
- Annual run off insurance – cover that you renew each year
- Multi year run off insurance – cover for multiple years up front (generally up to 7 years maximum)
Which is Better?
If you can purchase multiple years up front, it will be more cost effective and you’ll be protected against future premium increases and market changes.
How Much Does It Cost?
Your first year of run off insurance cover will have a similar cost to your final year of normal cover. It will then reduce slightly every year (generally 5-10%), however, this is always subject to underwriting review every year.
If you take multi-year run off insurance, they will charge a multiple of your final year cover. For example, it might be 4 times your annual premium for 7 years cover.
Why Do I Need to Keep Paying If I Was Insured at the Time?
This all comes down to the way Professional Indemnity policies are structured and the ‘claims made’ nature of the cover. If the insurance companies didn’t offer policies this way, the cost of the cover would be prohibitive and would not be as commercially available as it is currently. The insurance companies would need to charge a premium that was reflective of their ‘long tail’ liability for the risk (in most cases up to 6 years). It’s highly likely that the premiums would be 5-10 times higher than what is currently paid.
More information can be viewed in our Professional Indemnity FAQs.
To discuss your specific requirements so we can provide tailored advice to your business, please give us a call on 1300 932 237 or email us.
This information is intended to be general in nature and we have not taken your personal circumstances into account.