When it comes to insurance policies, in most cases, once you no longer own the asset, you also don’t need the insurance anymore. For example, once you’ve sold a car, you usually cancel the insurance policy for it. However, if you run a professional advice-based business and hold professional indemnity insurance, you might receive claims or complaints after you retire or leave the profession as a result of the advice you provided while you were running your business – and this is where run-off cover comes in.

So, what is run-off cover and how does it work? Let’s take a look.

Run-off cover definition

Professional indemnity insurance is designed to help cover you and your business if a client alleges your advice or service caused them a financial loss and takes legal action against you. It could help cover your legal fees as well as compensation you might be required to pay. Allegations of professional negligence of this nature can come about while you’re still practising but can also occur many years after the advice was provided. Run-off cover could provide cover for allegations of professional negligence after you’re no longer practising or have retired. In most cases it is not automatically included under professional indemnity policies; it needs to be applied for and an additional premium may apply.

In some cases – for example, if you have insurance through a scheme – there may be complimentary run-off cover. However, even if this is the case, typically you do still need to apply for the run-off cover before your current policy ceases.

Run-off cover: professional indemnity insurance

Run-off cover is only applicable under some forms of insurance and professional indemnity insurance is one of them. It applies primarily to policies that are on a ‘claims-made’ basis, which means that for a claim to be submitted, the policy must be active at the time a claim is being made.

Another example of policies that are claims-made is management liability. This is different to other insurance policies, such as public liability insurance, which is typically occurrence-based. Under occurrence-based policies, a policy only needs to be active at the time an incident occurs.

What does ‘claims-made’ basis mean?

A claims-made policy responds to claims that are made against you and notified to the insurer while the policy is in force (during the policy period), regardless of when the incident that gave rise to the claim took place. For example, the incident may have occurred five years ago but if your client takes legal action today, it is the policy that is in place today that can respond to the claim, as long as the services were provided after the commencement of the retroactive date.

If your professional indemnity policy is a claims-made policy, then it will usually include a retroactive date. Only incidents occurring after this date will be covered by the policy. On the other hand, claims for incidents occurring before the retroactive date will not be covered. If your policy has an unlimited retroactive date, it means your policy can provide cover for a claim regardless of when the alleged incident of professional negligence occurred, including if the relevant professional services were conducted before the commencement of the current policy period.

The claims-made basis of professional indemnity insurance means it is very important that you promptly notify your insurer or broker of any circumstances that may give rise to a claim, or any claim itself as soon as practical, before your policy renews or expires. For example, if a client threatens to take legal action, your broker should be notified, rather than waiting until a formal claim is made. If your client does decide to take legal action against you at a later date, you may not be indemnified if the insurer wasn’t notified when you become aware of the incident.

Why is run-off cover important?

Run-off cover exists due to the complex nature of providing professional advice or service; sometimes the advice you provide can have long-lasting implications. When you’re in the business of providing advice, clients can take legal action against you if they believe you were negligent and, as a result, your client alleges your service or advice caused them some form of loss. However, this can manifest differently depending on the specific situation.

Not all claims result from civil action; in some cases, you may be required to respond to an investigation or official complaint made to a regulatory body in relation to your insured professional service. In this case, you may require legal advice and assistance and still incur legal fees by having to respond to the regulatory body. An allegation can come about unexpectedly and you might find yourself quickly overwhelmed with legal fees to defend yourself. Even when you leave a profession or retire, claims can still be made against you for services you provided when you were working.

Therefore, run-off cover is important to keep in place, as it’s intended to provide cover for claims that arise after you’re no longer practising or retire.

What if I’m just taking some time off?

If you are taking a break from your profession and are unsure whether you will continue in the future, it is important to keep your professional indemnity policy active due to the ‘claims-made’ nature of the policy, ensuring you have an active policy to respond to insured incidents/claims that may arise regarding your professional services (subject to the retroactive date and unknown circumstances).

If you decide to come out of retirement and continue the same profession, you will need to contact your broker to discuss your options prior to commencing your services. Run-off cover can only respond to claims if the professional services were provided before the commencement date of the run-off cover. If you re-enter the profession, you will need to ensure your policy is no longer in run-off, so you have an active policy that can respond to claims when you resume your professional services.

How to organise run-off cover

When you know you’re going to retire or leave the profession, contact your broker prior to ceasing your professional services and discuss the process with them. It’s important that you know what you need to do to arrange a run-off cover and allow enough time to have everything in place.

Find out more

Aon is the preferred professional indemnity CA ANZ Member Benefits partner for practitioners in Australia. Visit Aon to learn more.