Do You Need Run-Off Cover When You Close, Sell or Retire From Your Business?
Closing a business, retiring or selling a professional practice does not necessarily end your exposure to claims. A client may raise an allegation months or years later in connection with advice, services, reports, designs or work you completed before you stopped trading.
That is why Professional Indemnity run-off cover can be important.
Run-off cover is designed to continue protection for claims made after your business closes, is sold, merges, or you retire from professional practice. It is particularly relevant to businesses with Professional Indemnity Insurance because PI policies are commonly written on a claims-made basis.
What is run-off cover in Professional Indemnity Insurance?
Run-off cover is an extension of insurance protection for claims arising from past professional work after you have stopped providing those services.
It may apply when you:
Retire from your profession
Close or wind up a business
Sell a professional practice
Merge with another business
Stop trading under a particular entity
Leave a partnership, directorship or professional firm
Change careers and no longer provide professional services
The work has ended, but the risk of a future claim can remain. A former client may only later identify an alleged error, omission, breach of duty or financial loss.
Australian Government guidance notes that businesses closing down may need run-off insurance to protect against claims made after closure that relate to previous acts, errors or omissions. business.gov.au guidance
Why is run-off cover important?
Professional Indemnity Insurance is commonly claims-made. This generally means the policy needs to be active when a claim is first made and notified to the insurer.
Without run-off cover, a claim made after your PI policy has ended may not be covered, even if the relevant advice or service was provided while you were insured.
For example, an architect retires after completing a project. Several years later, a client alleges a design issue caused financial loss. If the architect has no active PI policy or run-off cover at the time the claim is made, they may have no insurance protection for defence costs or any covered liability.
Who should consider Professional Indemnity run-off cover?
Run-off cover may be relevant to many advice-based and professional businesses, including:
Accountants and bookkeepers
Mortgage brokers and finance professionals
Consultants and management advisers
Architects, engineers and building designers
IT consultants, software providers and digital agencies
Real estate agents, property managers and strata professionals
Surveyors and quantity surveyors
Marketing, HR and recruitment consultants
Designers, project managers and specialist contractors
It can be particularly important where your work has a long-tail risk profile. This means an issue may emerge well after a service is delivered—for example, after a project is completed, a client acts on advice, a system goes live or a transaction settles.
Is run-off cover needed when selling a business?
Often, it should be considered carefully.
Selling the business does not automatically transfer all historical liability away from the former owners, directors, partners or professionals. The sale agreement may set out who is responsible for historical claims, but insurance arrangements must be reviewed separately.
Before selling a business, consider:
Who will be responsible for claims relating to work completed before settlement
Whether the purchaser’s policy covers prior acts
Whether the seller, former directors, partners or employees remain exposed
The required length and limit of run-off cover
Contractual indemnities in the sale agreement
Whether the retroactive date and continuity of PI cover are preserved
Do not assume a buyer’s insurance automatically protects you for past work. The structure of the transaction, the policy wording and the insurance arrangements all matter.
How long should PI run-off cover last?
There is no single correct period for every business. The suitable duration depends on your profession, services, contracts, past projects, regulatory requirements, claim history and the time it may take for an alleged error to be discovered.
Higher-risk or long-tail professions—such as architecture, engineering, accounting, consulting, technology and financial services—may need a more careful assessment. Some contracts, professional bodies or regulatory frameworks may also set specific obligations.
The question is not simply, “How long can I buy run-off cover for?” It is, “How long could my past work realistically create a claim?”
What does run-off cover protect?
Subject to policy terms, conditions, exclusions and limits, run-off cover may help with claims alleging:
Professional negligence
Errors or omissions
Breach of professional duty
Incorrect professional advice or services
Misrepresentation
Breach of confidentiality
Civil liability connected to past professional work
Legal defence costs associated with a covered claim
It does not make every historic issue insurable. Known circumstances, deliberate conduct, excluded activities, work outside the insured services or claims arising before the retroactive date may not be covered.
Run-off cover vs retroactive cover: what is the difference?
These terms are related but very different.
Retroactive cover looks backward. It determines how far back your current Professional Indemnity policy may cover past professional work.
Run-off cover looks forward. It keeps protection in place for claims made after you stop trading, retire or sell the business.
A professional business needs the correct retroactive date while operating, then may need appropriate run-off cover when it ceases professional services.
What should you do before closing or selling your business?
Before cancelling Professional Indemnity Insurance, review:
Your current policy expiry date
Your retroactive date
Any known complaints, disputes or circumstances
Your past work and major client engagements
Professional, contractual or regulatory obligations
Whether run-off cover is included or must be purchased separately
The required limit of indemnity
The appropriate run-off period for your profession and risk profile
It is usually better to review these issues before your policy expires or the business is deregistered. Arranging cover can become more difficult once there is a gap.
Professional Indemnity run-off cover for Australian businesses
Ending a business chapter should not mean leaving past work uninsured. Professional Indemnity run-off cover can be an important part of a responsible exit strategy for professionals, consultants and service businesses across Australia.
Clarke Lyons Insurance can help you review your current PI policy, past services, retroactive protection, future claim exposure and run-off cover options before you retire, sell or close your business.
Contact Clarke Lyons Insurance for a tailored Professional Indemnity run-off cover review.
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