My business has closed – should I cancel my Professional Indemnity Policy?

We often get queries from professional clients requesting that we cancel their Professional Indemnity policy as they will be closing their business.

Unfortunately, Professional Indemnity insurance is not quite as simple as that, and we strongly recommend that clients give consideration to maintaining their Professional Indemnity policy on a “run-off” basis for a period of time after the business has ceased trading.

The reason for this is that Professional Indemnity policies are written on a “claims made and notified basis”. This means that the policy will only respond if it is current and in force at the time that the claim is brought against the business (or individual concerned) and notified to the insurer. In other words, if the policy is cancelled, there will be no cover for any claims or allegations made by third parties after the date that the policy ceased, irrespective of when the professional services were undertaken.

Other things to think about when considering “run-off” include the following:

• Exposure to claims alleging liability in respect of the provision of (or failure to provide) professional services does not necessarily cease once the business has closed its doors. You could potentially be held liable for work that you undertook whilst the business was still trading.

• Ongoing exposure to liability may not only apply to the entity; the directors and/or employees that provided the professional services could also be exposed.

• It is not uncommon for contracts to contain provisions requiring that Professional Indemnity policies be maintained for a period of 6 or 7 years after the contract has been completed. If you have entered into any contracts, you will need to consider whether you agreed to provision to maintain your Professional Indemnity policy for a period of time following completion of the contract. Failure to maintain your policy in accordance with your contractual obligations would leave you exposed from a contractual liability perspective.

The cost of placing Professional Indemnity policies into “run-off” can vary depending on the risk and the insurer’s appetite. However, as a very general rule of thumb, insurers will usually apply a “multiplier rate” for the run-off cover based on the number of years that you wish to place the policy into “run-off” for.

As an example, the insurer may quote options as follows:

1 Year “Run-Off”

• Policy runs for 12 months at a time
• First year “run-off” premium is usually equal to the expiring premium.
• Premium for additional years will typically decrease by 10% for each subsequent 12-month renewal (as exposure to liability becomes more remote)

3 Year “Run-Off”

• Policy runs for 36 months
• Premium is approx. 2 x expiring premium

7 Year “Run-Off”

• Policy runs for 84 months
• Premium is approx. 3 x expiring premium

NOTE: The above premiums are a rough guide only and should not be relied upon for pricing purposes. If you require “run-off” cover, you should speak with your Account Manager who will provide you with reliable advice insofar as it pertains to your particular circumstances.

If you would like to discuss any of your Professional Indemnity requirements, please feel free to contact us at Bruce Insurance. As always, we will be happy to assist.