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Run Off Insurance: Navigating a Business Closure
Navigating a business closure can be a daunting time. There are a few services you can wind up right away – you can terminate your lease, shut down utility accounts, end IT support and maintenance contracts; but what about Insurance?
Whilst most insurance covers can be cancelled from the date a sale is finalised; professional services policies such as Professional Indemnity, Management Liability and Cyber Liability work a little differently.
These covers are written on a Claims Made basis. This means that the policy in place at the time the action is brought against you is the policy that will respond to cover you.
In 2017 a real estate agent sold a caravan park & business. In 2019 it is realised that the boundary lines were incorrectly described in the contract and some of the caravan sites were not located on the land that was sold. Consequently, an action for damages is brought against the real estate business.
It is the Professional Indemnity insurance cover that is active in 2019 (when the action was brought against the business) that responds.
But what if the Real Estate agent had wound up their business in 2018?
Businesses who cease trading need to consider Run Off coverage to protect against future action brought against a business arising from past advice and services provided.
Your Insurer can place your active insurance policy into ‘Run Off’. This will cease providing cover for any future services and only provide coverage for all past services and advice given.
Run Off cover can be offered in two ways:
- As an annual renewable cover
- As a lump-sum multi-year policy (typically 5 or 7 years in length)
How to choose the correct run off length
Typical run-off periods taken vary on the type of services and advice provided. You need to consider the advice you have given through the life of your business, and how long it could reasonably take for one of your past clients to suffer a potential financial loss arising from the advice/services provided by you.
It is important to remember that Run Off coverage will not provide cover for future advice given; it is designed for businesses who no longer provide the insured services and advice. If you have closed a part of your business and still provide professional services or advice, you may still require an active policy.
If you are a current McKenzie Ross client and thinking of retiring or winding up part, or all of your business, give us a call on (03) 9691 2222 to discuss your options for run-off coverage.