Run-Off Insurance & Why You Need It

A building inspector updates his Professional Indemnity to run-off insurance.

Are you selling or closing your business? If so, considering taking run-off insurance cover should be at the top of your to-do list. Maybe you’ve had a successful career as a pest controller and are looking to retire. Or perhaps you’re making a profit by selling your building services business.

An important way to help yourself mitigate future losses is run-off insurance cover protection. Even though you will soon no longer own your existing business, you might one day face a claim for past work done under that business name. If you don’t have a current policy to claim on you could be faced with a legal battle and significant costs.

Want to know more? Read about run-off cover in this article.

Why Do I Need Run-Off Insurance?

Let’s say you’re retired, and you’ve saved some money to send your kids to university and pay a chunk off your house. You operated a successful building business for ten years, which you then sold before retiring.  

Two years into your retirement, you get a call from an old customer. You’d inspected a property for them prior to purchase and found no major defects or safety hazards, but since buying the property they’ve found extensive termite damage in several areas. Unfortunately, it looks like a knock-down and rebuild might be required.

The customer makes a legal claim against you for damages, which amount to hundreds of thousands of dollars. If forced to pay, you’ll lose your savings and may have to sell your house to cover costs.

Luckily when you sold your business, you informed your insurer, who suggested you might consider run-off insurance, which you did. Because you put this policy in place, you can lodge a claim with your insurer who may be able to significantly contribute to legal and other costs.

Run-Off Cover And “Claims Made” Policies

Run-off cover in insurance is commonplace in professional indemnity and general liability cover, and for any “claims made” policy. Claims made policies cover you for claims that are made against you and reported to your insurer in the period of insurance.

Where run-off is valuable is when a claim is made against you for past work. Whilst you were insured at the time you did the job, if you’re not insured now then you have no policy to claim against.

But how and when should you get run-off insurance cover?

When Do You Need Run-Off Insurance Cover?

When you close or sell your business, you will usually cancel or not renew your existing insurance policy. The insurer will quite possibly ask you if you want to take run-off insurance (if they don’t, ask them for more information)!

Importantly, only your existing insurer can provide you with run-off cover, as they have already covered your previous work. It’s not insurance you can shop around for.

A building inspector amends his run-off insurance after returning to work.

Run-Off Insurance Facts

Here are some additional facts about run-off insurance cover:

  1. It has an end date. Unlike your professional indemnity or general liability policy, your run-off insurance may not be renewed every year. It depends on how long the insurer wants to provide it for and if you’ve had any claims.
  2. It won’t cover new work. If you begin working again, inform your insurer so they can update your policy to cover new work. Do so again if you expand into other business activities from there (an insurance endorsement is what you’ll need here).  
  3. Claims made policies. These are policies you can only claim on while your policy is active.
  4. Professional indemnity. Run-off insurance can only be taken with the same insurer you had a professional indemnity policy (or other claims made policy) with
  5. General liability. Run-off insurance can only be taken with the same insurer you had a general liability policy (or other claims made policy) with

How Much Does Run-Off Cover Cost?

Insurers may differ in their approach, but generally they will offer you terms based on your last period of cover, at a reduced premium. That might be 80% in your first year, reducing each subsequent year you take run-off insurance. Some insurers offer a fixed term of several years for an upfront payment.

Your run-off insurance will also be calculated on your claims history. The fewer claims you’ve had, the lower your premium will be.

How Long Do I Need Run-Off Cover?

The short answer is, it’s up to you. In our experience, claims are commonly made for work done within the past two to 24 months. For instance, a pre-purchase inspection was completed. Owners have done some renovations and found damage or defects that they allege were missed during the original inspection.

Or perhaps you treated a property for termites and 18 months later more activity is detected.

Taking out at least a few years of run-off insurance for these high-risk activities can help give you peace of mind. Our professional indemnity and general liability policies include an option for run-off cover. Even after you’ve left the business, if a claim is made against you then you’ve got cover to rely on.

Run-off cover can be anything from 12 months up to several years, and most insurers will only offer a maximum of seven years run-off cover.

Run-Off Insurance – Over To You

If it’s time to take action because you’ve been dragging your feet on this, or if you would just like to know more, then contact us here at Rapid Solutions.