Maintaining insurance cover (“run off” cover) is something that many business owners may not think about when closing their business. However, for some this discontinuation of cover can leave a major business exposure and presents a risk to the owner’s personal liabilities and retirement funds. A business may still have liability exposure even after their business has closed or ceased trading relating to products that the business has sold, serviced, repaired, installed, imported or manufactured.
A Product Liability claim needs to occur while your policy is still current for a claim to be successful.
A recent claim in 2016 involved a kitchen cabinet falling from a wall and damaging both the cabinet and the kitchen bench top underneath. The cabinet was installed by a kitchen manufacturer in 2013. The kitchen manufacturing business had closed and cancelled their insurances a few months prior to the incident. As a result of the cancellation of their Products Liability policy there was no cover in place when the damage occurred, leaving the owners out of pocket.
So how long should “run off” cover be maintained for? The answer is not straightforward as there is no standard time frame. Often the required run-off period is written into a contract, however this is not always the case. Statute of limitations relating to breaches of contract or personal injury claims vary from state to state. Longer or shorter time frames can apply depending on the nature of the claim and the cause of the liability, and courts can also extend the limitation period for exceptional circumstances. Much also depends on the type of products and services offered by the business in question, whether those products continue to be used and where they have been supplied. As you can see, a range of factors can affect the decision whether to maintain “run off” cover – and let’s not ignore the affordability factor too. “Run off” cover is nevertheless important and should be considered when looking to close a business.
Speak with your insurance broker about the risks associated with your business products and services, and the risk of not having insurance after your business ceases trading. Your broker can help you navigate what the exposures might be. Your broker can also seek terms from an insurer as to the cost for a “run off” cover policy for your business. Being informed about the exposures and the possible risk transfer solutions (such as insurance) will help with your decision about if and how long you should maintain “run off” cover for your Product Liability insurance.