Run-off cover is put in effect should an entity cease to trade or a practice cease to operate. Run-off cover provides protection for previous work undertaken in the event a claim may arise after the practice has closed. Run-off cover is in effect for a period of seven years and does not provide cover should any activities recommence.
Why run-off cover is necessary
Professional indemnity insurance is underwritten on a ‘claims made’ basis. A trading practice is therefore only covered against claims that may be made against it whilst an active policy is in place. Once trading has ceased, the run-off cover takes over and responds to any claims made against the practice from previous work performed.
RG 194 requires registered liquidators to have automatic run-off cover provided by their policy. Any liquidator who enters into, renews, varies or extends their professional indemnity insurance needs to ensure that this extension is included.
Who is eligible for run-off cover
Run-off cover can only be provided to a practice which is no longer operating. Such a practice may be closed because the principal has retired or following the sale of the business to another practice. You should contact your broker prior to the date you cease to operate.
Run-off cover for sole practitioners
When a partner leaves a practice the continuing professional indemnity insurance generally provides cover for the work done before leaving, effectively providing run-off cover for that partner. But, when a sole practitioner closes a business there is no-one left behind to maintain the insurance protection. A sole practitioner, therefore, needs to purchase run-off cover and factor the cost of this ongoing insurance into their decision to close the business or retire.
The CPA Australia Professional Indemnity Insurance Policy, for example, offers seven years of run-off cover for a sole practitioner as an extension. This extension can be triggered by the sole practitioner at the next renewal date after closing the business.
How long run-off cover is necessary
There is no limitation on your liability to your clients and therefore no limitation on the period of time for which the insurance needs to be continued. Cover simply needs to be continued until the practice is comfortable that there is no longer any likelihood of problems with their work.
Run-off cover: The facts
A policy which only provides run-off cover is a professional indemnity policy which limits the cover to work done prior to the date when the practices ceased to operate.
- Many insurers will only offer run-off cover to practices which have been insured with that insurer immediately prior to closing.
- The cost to purchase run-off cover should reduce the longer the practice has been closed but it may not change in the first year that the insurance is purchased. This is also dependent on any prior claims notified.
- Insurers normally do not allow a practice to buy more run-off cover than the amount of cover the practice held whilst in business.
- Some insurers offer run-off policies for more than one year at a time.
- Anyone contemplating the sale or closure of their practice should factor in the cost of buying run-off cover for a number of years to come.
Terms and conditions
The products and services are underwritten and issued by QBE Insurance (Australia) Limited ABN 78 003 191 035 (AFSL 239545) (QBE) through its broker, Fenton Green Insurance Services Pty Ltd (Fenton Green). CPA Australia is solely a mere referrer of the products and services. CPA Australia makes no warranty as to the accuracy or completeness of any information contained on this webpage and/or fact sheet, nor does CPA Australia accept responsibility for any acts or omissions in reliance upon any such information. Before acting on such information, consider the appropriateness of the products and services that are promoted having regard to your objectives, financial situation and needs. Independent professional advice should be sought with respect to the product(s) and service(s) and any information referred to on the webpage and/or fact sheet. To the extent permitted by applicable law, CPA Australia, its employees, agents and consultants exclude all liability for any loss or damage claims and expenses including but not limited to legal costs, indirect special or consequential loss or damage (including but not limited to, negligence) arising out of or related to: (a) information contained on the Landing Pages; (b) Third Party Information; and/or (c) the products and services offered by any Partner. As a 'mere referrer', CPA Australia may receive revenue from QBE.