Having worked as a professional indemnity insurance broker for many years, I know there is one very important part of insurance cover that many clients are unfamiliar with – run-off insurance.
Why you need to keep insuring your past work with run-off cover
Run-off insurance is professional indemnity insurance cover provided for the past liabilities of a business once it has ceased trading. This is to protect both the business and its clients from financial losses suffered as a result of professional negligence.
How long should I hold run-off insurance?
Many regulated professionals are required to obtain run-off insurance and maintain cover for a minimum period as specified by their regulatory body.
For professionals like accountants, who are regulated, run-off cover is mandatory and ACCA requires their members have a minimum of six years’ cover.
Professional indemnity insurance policies operate on a ‘claims made’ basis – this means that for the policy to respond there needs to be cover in place at the time the claim is made, rather than when the negligence occurred. So, for example, if a client makes a claim against you tomorrow for alleged negligent advice given in 2015, then it will be the policy you currently have in place which will respond to the claim.
It is therefore important not only to maintain cover but to also maintain an adequate level of cover once you have ceased trading.
The time limit for professional negligence claims is outlined in the Limitation Act 1980. In general, a claimant has six years to make a claim against you from the date they have suffered the financial loss. This is known as the primary limitation period. If a claim is made after this period, then it could be time barred.
However, in some instances, there is a possibility of bringing a claim after the primary limitation period – this is known as the secondary limitation period and gives an additional three years from the date the claimant first become aware of the negligence.
Professional negligence claims usually have a 'longstop' of 15 years. If it is discovered that negligent advice had been provided from a professional over 15 years ago then it may not be a possible to pursue a claim. There are some exceptions to this rule, for example if someone has deliberately concealed evidence or relevant facts then an additional six years could be added. If the negligent act involves a minor, then they may also have additional time from when they reach 18 regardless of the 15-year rule.
Do I still have to pay if I have ceased trading?
Yes, a claim can still be made against you even if you have ceased trading. Those who operated as a sole practitioner or a partnership may be liable personally for any compensation if found to be negligent. If you traded as a private limited company or a limited liability partnership a claim may still be possible.
Who is liable if I have sold my practice?
This depends on what was agreed between buyer and the seller. It is important that this is discussed and forms part of the sales agreement. It is usual that the past liability is insured by the seller by way of a run-off policy. If you are a buyer then consider whether you want to cover the past liability of a firm where you have had no input in the risk management or work practices. Should a claim come in from work undertaken by this firm after you have purchased it, then it could negatively affect your own insurance policy. As a seller, by maintaining your own run-off insurance you can be assured that you have cover for your past liabilities and are not dependent on someone else maintaining this cover for you.
What if my firm has become insolvent?
Compensation can still be recoverable for negligence against a firm that has become insolvent. The Third Party (Rights Against Insurers) Act 2010 came into force in August 2016. It allows for a claimant to pursue a claim against a firm or their insurer without having to resurrect the (insolvent) insured firm.
What if claims come in during the run-off period?
Claims that arise after a practice has been placed into run-off are no different to claims that could have arisen when the practice was still trading – it is just a matter of when the negligence/loss is discovered. This could be many years after the initial work was undertaken or the advice given.
As explained above, there is still a reasonable period of time after negligence is discovered in which a claim can be brought, regardless of whether a firm is still trading. Remember, if there is no Professional Indemnity cover in place when the claim is first made, then you will have no alternative other than to fund any legal advice, defence costs or losses incurred yourself - which can not only be expensive but time consuming and very stressful.
Mark Grinter – account manager, Lockton Companies
In partnership with Lockton, ACCA is running a series of webinars in 2022 on risk. The first one on anti-money laundering and the risk to your insurance cover is now available on demand.
If you have any questions about professional indemnity insurance, please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com.
Lockton is ACCA’s recommended broker for professional indemnity insurance