Whether or not a solicitor needs run-off insurance depends largely on whether or not they are SRA authorised, as well as the contractual obligations they have with clients.
SRA-authorised solicitors. It's a requirement for SRA-authorised solicitors who stop practicing or whose company ceases trading, merges, or is acquired to purchase run-off cover as a condition of their SRA membership.
Solicitors not authorised by the SRA. solicitors who are not SRA authorised may not be required to purchase run-off cover (or even hold professional indemnity insurance to begin with) as a condition of any regulatory oversight. That said, run-off cover is often specified as a contractual obligation with clients. This is especially true in some industries, such as construction.
This article will explain more about what run-off insurance is, which solicitors need it and what to keep in mind when buying a policy.
Tables of Contents
- What is run off insurance?
- Do other policies have run-off options?
- What does ‘Claims made’ mean?
- How long is solicitors run-off insurance?
- What is run off insurance?
- What are the types of run-off insurance claims?
- Important considerations when buying run-off cover
What is run-off insurance?
Run-off insurance is an extension to professional indemnity and/or management liability insurance (e.g. directors & officers insurance) policies. Essentially, run-off insurance provides ongoing cover for businesses or professionals that have ceased trading, whether due to a company closure, retirement, or other means. This specialised type of cover ensures that claims made against businesses for work done in the past can still be covered by insurers. The result is security for both retired partners and previous clients.
Do other policies have run-off options?
Other types of business insurance such as public liability and employers’ liability do not require run-off options. This is because they are sold on a ‘claims occurring’ basis (as opposed to a 'claims made' basis, which is how professional indemnity and directors & officers insurance are written).
'Claims occurring' means that a claim can be made months or years after the event which caused it and will still be covered by insurers as long as there was a policy in place when the event occurred. With claims occurring policies there is no need for an active policy to be in place at the time the claim is made, so there is no need for run-off cover to exist for these policies (e.g. public liability and employers' liability).
What does ‘Claims made’ mean?
A ‘Claims made’ policy will only cover claims if they are made against the policyholder during the active period of the policy, even if the event that caused the claim occurred before the policy was put in place. That's why run-off insurance is necessary for claims made policies—to continue to cover a business in case a claim is made at a later date.
Usually, claims made policies have a ‘retroactive date’ which specifies where the ‘cut off’ for historic events is. If the event that caused the claim happened before this date, it won’t be covered. Professional indemnity and directors and officers policies are both claims made.
For more information, read our guide on claims made vs claims occurring policies.
How long is solicitors run-off insurance?
Solicitors run-off insurance is typically for 6 years, although it can be held for longer if there is a contractual reason for doing so with previous clients, or where potential liabilities exist which exceed the typical limitation periods.
When buying run-off insurance, take note of the length of the policy and premium payments as different insurers sell the product in different ways. For example, some insurers take a single payment upfront for the full 6 years’ cover.
On the other hand, insurers might renew a run-off policy annually. In those cases, the premium would typically reduce each year to reflect a lower risk profile as more time passes since a business completed work (presumably there's a lower chance of a claim many years after working with a client). If a run-off policy works this way then it is a good idea to call your insurer at each renewal to discuss your options and ask for a discount.
Who is run-off insurance for?
Run-off insurance benefits businesses by ensuring that they can comply with regulatory and contractual requirements, but it also safeguards a business’ reputation and the assets of its directors in the event of a claim. Run-off insurance also protects the clients of a business from being unable to claim when a business has ceased trading, and preserves the good reputation of any given industry by ensuring these clients always have some recourse.
What are the types of run-off insurance claims?
Typically run-off claims fall into the same categories as professional indemnity and directors and officers (management liability) claims, the key difference being that any claim against a run-off policy will have been discovered after a business ceases trading:
- A client’s will was poorly written, resulting in conflicting views between beneficiaries and large expenses incurred in determining inheritances. The solicitor responsible no longer trades at the time the will is activated but their run-off policy addresses the claim for professional negligence.
- Two years following its acquisition the new directors of a business discover debts that were not disclosed prior to the company acquisition. They claim against one of the prior directors personally for the value of the outstanding debts. The claim is taken up by insurers under the terms of the in-place run-off policy.
Important considerations when buying run-off cover
The retroactive date on any solicitors policy, run-off or otherwise, should be the date that the solicitor or business started trading. Checking this at the point of issue will save any issues later on.
It’s uncommon for other insurers to quote for run-off for companies they have not covered on a full policy for at least a year, meaning that if you are looking last minute you may be unable to escape punitive or uncompetitive run-off terms. Consider asking your insurer or broker about run-off rates a year or two prior to ceasing trading, if possible, so that you can select the best option for you in advance.
As a run-off policy progresses, the risk of a claim steadily reduces. It may be possible to obtain run-off at lower levels for more competitive premiums as the perceived risk to your business drops, although you may still be required to maintain a level as specified by the SRA as suitable.