Just as beauty is in the eye of the beholder, safety is in the hand of the policy holder. Things can go wrong for the most proficient of practitioners even when retired so don’t forget your run-off cover.
To quickly recap, the nature of professional indemnity insurance policies are generally ‘claims made’ or ‘claims made and notified’ policies which means that they respond to claims made against you and reported by you to the insurer during the policy period (usually twelve months), even if those claims relate to projects you worked on in previous years. For professional indemnity claims, it is the insurer on risk when the matter is notified that will respond to a claim made against you, and not necessarily the insurer on risk at the time you did the work on the project.
Given the nature of ‘claims made’ insurance, it is important to maintain professional indemnity run off cover insurance even after you cease to practice. This insurance will cover your professional services that you have carried out in the past ie. it will cover you from claims of negligence or loss resulting from services provided when previously operating but it will not cover any new work.
If you forget or elect not to purchase run off cover, you lose all the protection that your previous professional indemnity insurance provided you with and this could expose you and all of your assets in the event a claim was made against you. Individuals can be held liable for their negligent actions even when the company behind it no longer exists. However, securing run off cover which is usually on the same terms and conditions as your previous policies, means that you continue to have the full protection of your professional indemnity insurance.
Let’s look at an example so that we can understand how run off professional indemnity cover applies in practice.
You are a sole practitioner who designed numerous homes in Melbourne between 2017 and 2018. At the time, you held your professional indemnity insurance with XYZ insurance. You retire in December 2019 and do not renew your professional indemnity insurance or obtain any run-off cover. In September 2019, you receive and notify a claim for the negligent administration of the construction contract of a home in Hawthorn which you designed in 2017. This claim is covered even though the claim does not end up proceeding to a court hearing until 2022, because at the time you received and notified the claim, you had a professional indemnity insurance policy in place. Later, in 2021, you receive a separate claim for design errors leading to water ingress in a home in Kew which you designed in 2017, and that one is not covered at all because you have let your insurance lapse at the time the claim is made against you.
As you can see, it is essential to obtain run off cover if you are thinking about retiring or have just retired. If you’re reaching that point in your business lifecyle, your insurance broker at Planned Cover will be happy to discuss what options are available.
This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.