Runoff Insurance Coverage Defined – Is Your Future Liability Protected?
Related Matters: Canada’s retail exodus: Here’s who’s closed stores in Canada
Everything Must Be Sold. Clearance. Store Closing Sale. Across Canada, signs of changing times for bricks and mortar businesses are everywhere. Retailers that make the tough decision to close some or all outlets, liquidate inventory and lay off workers are making headlines from coast-to-coast-to-coast. With the shuttering of Future Shop, Target, Sony, Jacob and the scaling back of Holt Renfrew and Sears Canada, businesses are making big investments and reshaping how goods are delivered to Canadian consumers.
There is a silver lining in all this change. Savvy business leaders who are looking to expand now see good value and many new opportunities in the retail property sector, but there is also considerable risk of failure when executing on a new strategy. When failure becomes a reality Runoff coverage needs to be considered to protect the tail liability of the organization for any/all claims made insurance policies like Directors & Officers Insurance and others.
Runoff Insurance Coverage Defined
The International Risk Management Institute (IRMI), notes that a runoff provision is “a provision in a claims-made policy stating that the insurer remains liable for claims caused by wrongful acts that took place under an expired or canceled policy, for a certain time period.”1
To understand runoff insurance you first need to know the difference between a coverage trigger in an occurrence policy versus a claims-made policy. Note that:
- Under an occurrence policy, the occurrence of injury or damage is the trigger; liability will be covered under that policy if the injury or damage occurred during the policy period.
- Under a claims-made policy, the making of a claim triggers coverage. Coverage triggers serve to determine which liability policy in a series of policies covers a particular loss.
IRMI explains this further: “For example, consider a policy written with a January 1, 2015-2016, term and a 5-year runoff provision. In this situation, coverage will apply under the runoff provision to all claims caused by wrongful acts committed during the January 1, 2015-2016, policy period that are made against the insured and reported to the insurer from January 1, 2016-2021 (i.e., the 5-year period immediately following the expiration of the January 1, 2015-2016, policy).”2
According to IRMI, “Although runoff insurance provisions function in a manner that is identical to extended reporting period (ERP) provisions, there are several differences. First, ERPs are generally written for only 1-year terms, whereas runoff provisions normally encompass multi-year time spans, often as long as 5 years. Second, while ERPs are most frequently purchased when an insured changes from one claims-made insurer to another, runoff provisions are generally used when one insured is acquired by or merges with another. In such instances, the acquired company buys a runoff provision that covers claims associated with wrongful acts that took place prior to the acquisition but are made against the acquired company after it has been acquired.”3
Related Matters: Tail Coverage Insurance: The Fine Print.
To discuss situations where your organization will need or may want runoff coverage, to better understand claims caused by wrongful acts, how an extended reporting period works and/or other ALIGNED products and services contact an ALIGNED Insurance Advocate Today.
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Sources: 1,2,3 IRMI.com