Why going without run-off cover is not an option

When a business ceases to trade, its professional indemnity cover will lapse. Accordingly, the business will find itself without coverage for any claims relating to past work undertaken. The consequences for those without adequate run-off cover may be expensive, and directors may be held personally liable.

Run-off cover explained

Run-off insurance is a form of professional indemnity insurance (PII) providing cover for the past liabilities of a business once it has ceased trading. It is necessary owing to the ‘claims made’ nature of PII, which necessitates that it is the policy in place on the date a claim is made, not the date on which the work was carried out, which provides coverage.

Without run-off cover, businesses who cease to trade will immediately trigger a lapse in their PII, at which point that business would cease to have coverage. As a result, the business would be unprotected from any claims that may be brought against it.

In addition, once a business stops trading, it not only stops receiving income, but also typically distributes its assets to its shareholders. This means that the company (whether that is an LLP or a Limited Company) ceases to hold any assets, and is no longer able to pay for any claims itself.

How long should run-off be maintained?

The number of years for which run-off cover should be maintained will differ depending on each business’ exposure.

Firstly, if you are regulated by a professional body, you should ensure your run-off cover meets their basic requirements. These are in place to ensure that clients are protected, and to uphold public trust in the relevant profession.

Examples of some of these requirements are as follows:

Professional Body

Run off cover requirement

Royal Institute of Chartered Surveyors

6 years following cessation of trading

Architects Registration Board

6 years following cessation of trading at the highest level of cover you had in the 3 years preceding cessation of trading

Royal Institute of British Architects

6 years following cessation of trading at the highest level of cover you had in the 3 years preceding cessation of trading

Secondly, businesses should consider their potential liability under the Limitations Act. In the absence of any specific agreement, typically the time period to bring a claim is 6 years from the date of breach. However, this has been amended under the recent Building Safety Act, such that certain claims relating to building safety now have a limitation period of 15 years, while those relating to personal injury have a limitation period of 30 years.

Finally, businesses must take into consideration any contractual liability periods to which they have agreed. Appointment contracts and collateral warranties will set out the period of time during which any claim is to be brought, as well as setting out the amount of time you are required to maintain insurance. These time periods are both often set at 12 years following a project’s completion.

If a business fails to maintain insurance it will be in breach of the contract, despite having ceased trading. In addition, the employer would still be able to bring a claim under the contract until the end of the limitation period, regardless of whether the business is still trading or not.

What if I just dissolve the relevant company once it stops trading?

You may think that an easy get-out-of-jail-free card may be to simply dissolve the company such that it no longer exists, and no claim can therefore be made against it.

This issue here is that courts can compel companies (including LLPs) to be reinstated for the purpose of a legal action. Furthermore, under the new Building Safety Act once again, courts can not only make an order against a dissolved company, but also to attach liability to any existing parent or sister company.

What is the process for taking out run off cover?

Your current PI policy will set out the process as to what happens if you cease to trade during the policy period. As soon as this occurs, you should notify your current insurer. Usually the PI policy will act as run-off insurance for the remainder of the policy period.

It is important that you truly are no longer trading at this point, as you will not be covered for any claims received relating to any future work undertaken. Run-off cover only applies to work done prior to the declaration that you had ceased to trade.

Businesses should also note that while they are likely to be required to maintain run-off cover for 6 years, it is generally no longer possible to purchase this in a single block. Instead, your period of indemnity will typically be 12 months, following which you must either renew the cover for another 12 months, or obtain another run-off insurance policy. This process will need to be repeated for every year that a business wishes to maintain run-off insurance.

For further information, please contact:

Nick Rains, Contract Review Manager

T: +44 (0)117 9065 004

E: nick.rains@lockton.com (opens a new window)