Gallagher is urging insurance brokers to inform their business clients about the potential benefits of run-off insurance, especially for those considering retirement, sale, or closure of their businesses.
This type of insurance coverage – often called “tail coverage” – extends liability protection to cover claims that may emerge after business operations have ceased.
Gallagher noted that for businesses in service-driven industries, run-off insurance can fill coverage gaps that “claims made” policies leave once they lapse, ensuring that past actions do not result in unforeseen liabilities.
Run-off insurance addresses the risk of future claims by covering liabilities that may arise after a business owner exits. Gallagher emphasised that this kind of policy extension offers former owners peace of mind as they transition to new ventures, as it can prevent costly claims tied to their prior work from arising unexpectedly.
Known informally as “zombie claims,” liabilities can surface years after a business is sold or closed, often linked to past services or client projects.
Gallagher said that without run-off insurance, these claims could leave former owners or managers exposed to substantial legal and financial risks.
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The brokerage giant highlighted that service industries relying on “claims made” policies – such as professional indemnity (PI), directors’ and officers’ (D&O) liability, or IT liability insurance – may require run-off coverage to safeguard against lingering liabilities that may not surface until years after a project’s completion.
This coverage is particularly relevant to fields where oversights or perceived negligence can lead to long-term impacts.
Gallagher stressed that without run-off coverage, former owners may face unexpected claims, even if the work in question was completed during the period of active insurance.
Gallagher outlined several key scenarios where run-off insurance may be valuable for mitigating risk in business exits.
During ownership transfers, insurance policies typically expire, potentially leaving past managers or owners liable for claims related to actions under their management.
When business owners retire, they may still face potential claims from former clients, particularly in industries that hold individuals accountable for professional standards.
Shutting down a business does not remove past liability exposure, as claims from previous clients can arise even years after operations have ended.
This brings to light the findings of CreditorWatch’s recent Business Risk Index (BRI), which revealed that Australian business insolvency rates are likely to increase in 87% of regions over the coming year, highlighting a challenging economic environment.
Certain contracts mandate that insurance protection remains active for a specified period after the work has been completed.
Professional associations in sectors like engineering, accounting, and medicine may require insurance continuity post-retirement or closure to meet standards of practice.
In instances where an insurer does not renew a policy, run-off insurance can provide essential continuity to fulfill ongoing responsibilities to past clients or stakeholders.
Gallagher recommends that businesses contemplating closure or restructuring assess their insurance portfolio, particularly for policies with “claims made” restrictions that cease coverage when policies are not renewed.
Run-off insurance, often offered on an annual basis, can also be available in multi-year increments depending on the insurer.
When selecting extended run-off coverage, businesses are advised to consider contractual terms, regulatory obligations, and any potential costs related to long-term liabilities.
