WHAT IS RUN-OFF INSURANCE?
Run-Off insurance, also known as the ‘Discovery Period’ or ‘Extended Reporting Period’ is an insurance policy provision that provides tail coverage for various financial lines products written on a ‘claims made and/or notified basis’. Run-Off insurance provides protection from claims of negligence or loss resulting from a breach of professional services or wrongful acts by Management prior to the date of transaction (being an acquisition, merger, or cessation of operations).
Policies typically written on a ‘claims-made and/or notified basis’ include:
- Directors and Officers Liability
- Management Liability
- Professional Indemnity
- IT Liability
- Cyber Liability
- Statutory Fines and Penalties
- Employment Practices Liability
For a claim to be triggered under these products, an active policy must be in force at the time a claim and/or notification is made. If a policy has lapsed and is not active at the time a claim is brought against a director and/or the company, cover will not respond, regardless of when the wrongful act occurred.
An acquiring company will commonly require the company being acquired to purchase Run-Off insurance to protect itself from past liabilities. Run-Off insurance can be purchased on an annual basis or multiple periods for an upfront payment.
WHY IS RUN-OFF INSURANCE IMPORTANT?
If a company has been acquired, merged, or ceased operations, it is vital that Run-Off insurance is purchased for policies issued on a ‘claims made and/or notified basis’ to ensure protection is in place in the event a claim arises. We recommend our clients purchase Run-Off insurance for a period of 7 years to coincide with the statute of limitations. Under the statute of limitations, companies and directors can be held liable for decisions made for up to 7 years.
WHAT ARE THE CURRENT ECONOMIC CHALLENGES?
Insolvency is among the top concerns for Directors & Officers Liability and Management Liability insurers, as insolvency administrators typically look to regain losses from directors. Over the past 12 months, insurers have taken longer to review submissions and are being more rigorous and prudent in requesting detailed information about the effects of COVID-19, along with audited financials.
Run-Off insurance is made available at an insurer’s discretion. It is therefore imperative that you review the ‘Discovery Period’ clause in your policy wording to ensure you are aware of the insurer’s terms and conditions. If insurers are uncomfortable with a company’s financials, insolvency exclusions will likely apply, often going hand in hand with a Discovery Period Deletion clause, deleting the Discovery Period entirely. At Honan, we recommend contacting your insurance advisor to confirm your ‘Discovery Period’ clause.
HOW MUCH DOES RUN-OFF INSURANCE COST?
Premiums provided are at each insurer’s discretion, however, typical coverage costs are as follows:
1 Year = 100% of expiring premium
3 Years = 150% – 200%
5 years = 200% – 350%
7 years = 350%+
WITH YOU ALL THE WAY
If you have any questions or concerns about Run-Off insurance, please reach out to your Honan adviser.
Senior Client Executive – Professional & Executive Risks
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