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Are you planning to sell your business or retire soon? As you prepare to walk away from your business and retreat to your new life of leisure, you’ll have lots of decisions to make. One of them will be whether to continue your business insurance.

The good news is that you can dispense with most of your policies – public liability insurance, workers compensation insurance, business interruption insurance and more. But if you’ve been in the business of providing professional services, you’ll need to seriously consider whether to maintain your professional indemnity insurance by securing a suitable level of run-off cover.

Why? Because your potential liability for work carried out while still in business doesn’t necessarily end when you sell your business or retire.

What could possible go wrong?

Let’s consider a scenario.

After spending years building a successful business, John Smith decided to sell his consulting engineering firm and retire. The contract for sale specifically excluded the new firm from responsibility for work performed prior to the sale of the business.

John had never had a professional indemnity insurance claim made against him in his 35 years in the industry, and he didn’t envisage that a claim might arise after he’d ceased running his business. Although his insurance broker discussed run-off cover with him and provided a quote, he didn’t follow the broker’s advice and chose not to take out the cover.

Two years into his retirement, John discovered that a claim had been made against him. Some five years earlier, John’s firm had been the consulting structural engineer on a project to convert an old office building into apartments. As part of the project, precast concrete walls were used. Unfortunately, substantial cracking later appeared in the walls. John’s firm was accused of error and the cost of rectification was estimated to be $300,000.

John was in a real bind. Without professional indemnity insurance cover in place, he would need to appoint his own solicitors, and pay for his own defence and any compensation awarded against him.

The importance of run-off cover

This scenario illustrates why run-off cover is important, because once John’s professional indemnity insurance policy had lapsed upon sale of his business no further claims could be made against the policy. This is because professional indemnity insurance is a “claims made” type policy – that is, coverage responds to incidents arising on or after the policy retroactive date and which are reported during the term of the policy.

When an active professional indemnity insurance policy is no longer required – such as in John’s case, where he was retiring – an insurance broker can arrange run-off cover.

Run-off cover operates in the same way as regular cover, but has an end date; that is, a period of time up until which cover is required. This period can be anything from 12 months up to the statute of limitations or even longer. When considering how long to purchase run-off cover, you should seek advice from a specialist broker.

Run-off cover will cover you for the timeframe in question. But remember, when a policy is in run-off mode, cover is only applicable for claims for past work and will not apply if you take up work again.

Run-off cover is an important risk management tool to utilise upon cessation of your business. Don’t fall into the same trap as John. By securing run-off cover, you can secure your future and enjoy your retirement without the worry of a potential future claim.

Emjay Insurance Brokers provides risk management advice and insurance solutions to businesses of all sizes. If you’re planning to sell your business and retire soon, they can advise you about the cover you need to ensure your future is protected. Contact us today to discuss your needs on (02) 9796 0400.

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