It’s a sad fact of life that many businesses – particularly small businesses – don’t reach their first birthday and fewer still reach their third birthday.

If you have owned a business (big or small) that has had at its core a provision of professional skill or advice then you will probably have had Professional Business Indemnity Insurance (alongside other business insurance types like Employers’ Liability Insurance and Public Liability Insurance). That insurance would have covered you against claims brought by clients for negligence or errors that led to them suffering financial loss, and any related legal fees.

That was, of course, the responsible thing to do and might well have saved you a fortune in legal fees and compensation pay outs – if any of your clients had sued whilst you were in business.

But what happens after you close your business, or retire? Clients can normally claim for up to six years after they have had work completed for them (even longer if they can persuade a judge that the six year time limitation on claims should be waived). That could mean that you could receive a letter informing you that your former client is suing you any time up to six years after your business has finished (or perhaps even later than that).

And if you have no business assets to be able to pay such a claim, how will you afford the legal fees, let alone the compensation? Professional Indemnity Insurance is only available on a ‘claims made’ basis – so they only pay out if a claim is made whilst you hold the policy and not afterwards.

The answer is to swap your Professional Liability Insurance for Run-Off Cover before you close your business. Run-Off Cover is less expensive than Professional Liability Insurance, month-by-month, and will cover you for any claims that stem from whilst you were in business.

If you think you need Run-Off Cover, you’ll need it for at least six years, or until you think that there is little or no risk that a past client will have cause to sue you. That should cover you for claims made against you for breach of contract or any personal injury incurred.

However, some industries (notably Will-Writing), where mistakes might not reasonably be discovered for many years, could require Run-Off Cover for an indefinite period. An alternative would be to sell your bank of Wills to another Will-Writer on the basis that they assume all liability (and insure against) all claims arising from past clients.

If you decide you need Run-Off Cover it’s always worth shopping around and getting a few quotes – but always check the small-print to make sure that your business will be protected and that the circumstances that might apply to your business are not excluded.

This entry was posted on Wednesday, May 9th, 2012 at 4:00 pm and is filed under Insurance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.