Runoff Insurance

From CEOpedia | Management online

Runoff insurance is a variant of insurance which can be brought to provide coverage for claims arising after the professional has ceased work or retired. This is a special area of insurance so professionals must seek advice from the expert or related lawyer. The role of the professional is to ensure that he is properly covered both at the time of the occurrence and when the claim is made. The professional may need to arrange runoff insurance for a period of time after the claim because there is often a long delay between an occurrence and a claim. That insurance can be needed for example when there are deficiencies in projects documentation. To minimize subsequent claims, the professionals have to make sure that the documentation is well prepared and that they set out specific responsibilities in their contracts with clients beforehand and deal with complaints promptly (A. Surahyo 2018, p. 119).

Insurance for contractors

We can say about runoff insurance in case the contractor faces potential liabilities during construction and mostly afterward for a large number of years. There are two types of insurance we can say about in this case (D. F. Turner 2014, p. 79):

  • The first is for contractors who perform only the occasional design and built scheme. That option insure each project by a single premium on a once and for all basis until the expiry of liability, but this is not popular with insurers and difficult to obtain.
  • The second option is for contractors who engage in design and build work regularly. It is more satisfying for contractors and probably all that they can obtain. This is annually renewable insurance that covers complaints brought in the current year, whenever they were caused. When the contractor ceases to engage in design and build work, it will be necessary to continue runoff insurance for years as remains until his potential liabilities are extinguished.

Runoff D&O Insurance

In the market depending on conditions, insureds may be effective in getting carriers to increase the asset threshold for subsidiaries to 30 percent of the insured parent company's consolidated assets as of the time of the new subsidiary's acquisition or creation. This coverage applies only to claims arising from acts committed after the new entity became a subsidiary. That insurance is for those entities which assume all liabilities of subsidiaries that they purchase from the previous owner. To cover claims arising from wrongful acts committed before the subsidiary was purchased, there is a separate runoff directors and officers insurance. There is also a possibility to build - in this coverage to the ongoing directors and officer's policy for the parent company, but this solution is not accepted by many insureds. They don't want their directors and officers runoff insurance limits of liability eroded by claims arising from acts that took place before the management control of the new subsidiary (L. Goanos 2014, p. 82).

Examples of Runoff Insurance

  • Professional indemnity insurance: This is a form of insurance that provides coverage for claims arising from the professional’s alleged negligence, errors or omissions. The coverage typically includes legal costs in defending a claim, as well as any compensation or damages awarded.
  • Directors and Officers (D&O) insurance: This form of insurance provides coverage for the personal liability of directors, officers, and trustees of a company or organisation. It covers legal costs incurred in defending claims and any financial losses suffered as a result of the claim.
  • Errors and omissions insurance: This covers claims arising from the professional’s failure to provide services in accordance with the terms of the contract. It covers legal costs incurred in defending a claim, as well as any compensation or damages awarded.
  • Public liability insurance: This form of insurance provides coverage for claims arising from the professional’s alleged negligence, errors or omissions, which lead to personal injury or property damage to third parties. It covers legal costs incurred in defending a claim, as well as any compensation or damages awarded.
  • Employer’s liability insurance: This provides coverage for claims arising from the employer’s alleged negligence, errors or omissions, which lead to personal injury or property damage to employees. It covers legal costs incurred in defending a claim, as well as any compensation or damages awarded.

Advantages of Runoff Insurance

  • Runoff insurance provides cover for claims arising after the professional has ceased work or retired, allowing them to have peace of mind in the knowledge that they are protected.
  • Runoff insurance can protect the professional from claims arising from errors or omissions made while they were working, providing them with a financial backstop in the event of a claim being made.
  • Runoff insurance can help the professional protect their reputation, as they are less likely to face financial hardship in the event of a claim being made.
  • Runoff insurance can give the professional a feeling of security, as they know that they will have financial protection in the event of a claim being made.
  • Runoff insurance can give the professional the opportunity to focus on their current work, as they know that they are protected from any previous mistakes or omissions.
  • Runoff insurance can provide the professional with the ability to plan for the future, as they know that they are protected in the event of a claim arising from any previous work.
  • Runoff insurance can provide the professional with the ability to move on with their career, as they know that their work is protected and that they are not exposed to financial risk.

Limitations of Runoff Insurance

Runoff insurance can be useful for providing coverage for claims arising after the professional has ceased work or retired. However, it also has some limitations which should be taken into consideration. The following are some of the limitations of runoff insurance:

  • It does not cover all potential claims, as some claims can arise long after the professional has retired.
  • Runoff insurance does not cover all potential costs associated with a claim. The costs of defending the claim and potential settlements may not be covered.
  • It is often expensive and may not be affordable for small businesses.
  • It may not provide adequate protection in all circumstances. Depending on the nature of the claim, the insurance may not be sufficient to cover all the costs associated with it.
  • It may be difficult to obtain runoff insurance, especially for certain types of claims. The insurer may not be willing to provide coverage for certain types of claims.
  • It may be difficult to determine the amount of coverage needed and the amount of premium to be paid. This can lead to inadequate protection and overpayment of premiums.

In conclusion, while runoff insurance can be useful for providing coverage for claims arising after the professional has ceased work or retired, there are certain limitations which should be taken into consideration. It is important to understand these limitations and to ensure that adequate protection is provided.

Other approaches related to Runoff Insurance

A number of other approaches related to runoff insurance exist, which can help to reduce the risk of claims arising after professional work has ceased or retired. These approaches include:

  • Professional Indemnity Insurance: This type of insurance covers any financial losses suffered by a business due to another party’s negligence or breach of contract. It can provide protection against claims made by third parties, including clients, as well as cover defence costs and legal fees related to such claims.
  • Risk Management Services: Investing in risk management services can help to reduce the likelihood of claims occurring. This may involve an assessment of the current risk management practices and procedures, as well as identifying potential areas of improvement and developing strategies to mitigate future risks.
  • Contractual Agreements: Negotiating contractual agreements between the professional and the client that set out specific responsibilities can help to ensure that both parties understand each other’s expectations. These agreements should also address any issues that may arise in the event of a claim or dispute.

In conclusion, runoff insurance is an important consideration for any professional who has ceased work or retired, as it can help to provide financial protection if a claim is made. Other approaches, such as professional indemnity insurance, risk management services and contractual agreements, can also reduce the risk of claims occurring and help to protect the professional from any financial losses.


Runoff Insurance — recommended articles
Insured contract — Risk transfer — Self insured retention — Period of indemnity — Insured peril — Retention of risk — Franchise insurance — Ex Gratia Payment — Retroactive date

References

Author: Joanna Milowska

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