Enquiring minds want to know. What is runoff insurance & do we need it?
Insurance insights. Since day one, we’ve taken pride in delivering useful information about Canadian insurance coverages to our business insurance clients across the country. We recognize how important it is for people to understand the specific risk exposures their commercial operations face and align the best possible coverage options.
This post provides some timely information about questions we’ve been answering about runoff insurance for a business in Canada.
First things first. Here’s a definition for runoff insurance…
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.
And here’s a specific example of how runoff insurance works
To understand runoff insurance you first need to understand the difference between a coverage trigger in an occurrence policy vs. a claims made policy.
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.
If runoff coverage is on your mind, we can help you assess your situation and evaluate insurance options available in the Canadian marketplace.
Some types of insurance policies that require runoff consideration
When you are thinking about runoff insurance, it is important to consider the types of polices where runoff coverage would be of the greatest potential value. Below, please find some insights about four specific types of insurance policies.
Directors and Officers (D&O) Insurance
Unlike commercial general liability insurance (CGL) which only covers property damage and bodily injury, directors and officers insurance specifically covers a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty. Learn more specifics about D&O insurance here.
Professional Liability (E&O) Insurance
As much as you strive to deliver the very best services, advice and guidance to your clients, being perfect 100% of the time isn’t always achievable. In fact, one tiny inadvertent error can lead to a chain reaction of complex and costly problems down the road. If you work as a consultant in any capacity, you know that it’s your expert advice that people seek out. And the potential for things to go wrong is exactly what makes professional liability insurance worth it for Canadian consultants and business owners. Keep reading about E&O insurance here.
Fiduciary Liability Insurance
Fiduciary is defined as an individual or a corporation that:
- Exercises any discretionary authority or discretionary control in managing a pension or benefit plan or exercises any authority or control in managing or disposing of its assets,
- Renders investment advice for a fee or other compensation, with respect to any monies or other property belonging to the plan, or
- Has any discretionary authority or responsibility in administering a benefit plan.
Continue reading more about how a fiduciary liability endorsement works here.
Employment Practices (EPL) Insurance
While good human resources practices can go a long way to mitigate risk, research shows that 33% of employers have experienced an employment related allegation in the past 3 years. With thousands of harassment charges filed each year, the cost of resolving employment related lawsuits totals in the millions of dollars. While some suits are groundless, defending against them is costly, time-consuming and can have a long-term negative impact on employee morale as well as public reputation. Learn more EPL insights here.
Here’s a relevant example of how a runoff policy works
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).
Know the difference between an extended reporting period and runoff insurance…
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.
We’re available to discuss situations when your organization will need or may want runoff insurance. Let’s talk about your specific needs.
Get your questions about runoff insurance answered. Contact us today.
With locations in Toronto, Calgary and Vancouver we also have a national operations headquarters in Cambridge, Ontario. As one of the fastest-growing insurance brokerages in Canada, we are proud to serve more than 1,600 clients across the country. Each day, ALIGNED Insurance brokers support our clients by aligning the best types of insurance coverages to meet our clients’ needs.
We offer a broad range of Canadian commercial insurance products, including boiler and machinery, crime insurance, office insurance and many more. We also deliver many small business insurance products such as credit insurance and employee theft insurance, to name just a few.
1. How does runoff insurance work?
Runoff insurance works by continuing to provide coverage for eligible claims for a specific amount of time after your existing professional insurance policy has ended. Runoff insurance is a provision that can be written into an existing claims made insurance policy.
Because claims made policies can cover claims that take place years after the event causing the claim has occurred, runoff insurance is necessary to protect you and your company after you are no longer insured. More on this in the question below.
2. Who needs runoff insurance?
Anyone or any company that works as a professional giving out professional advice or services or who works as a consultant, specialist, expert, director, officer, etc., and who could be held liable for past errors, omissions and negligent acts.
One example of when you would need to purchase runoff insurance is if you are retiring or otherwise leaving your position or field of work.
Let’s say for example that you are currently a lawyer and despite your successful civil law practice, you’ve decided to switch careers and become a financial advisor. When cancelling your Errors and Omissions policy for your legal practice, and before purchasing Fiduciary insurance for your new role, you would need to purchase runoff insurance to give yourself a ‘buffer’ or a period of time that covers a reasonable amount of time within which one of your former clients could discover that they have (or feel they have) grounds to sue you for making a mistake on their case and then file a formal complaint or lawsuit against you.
Another example of when you would need to buy runoff insurance is if your company is being bought out by another. The company that acquires yours will likely require you to buy runoff insurance to cover potential claims against your company for events that took place before you were bought out but after the acquisition.
3. What is the cost of a runoff insurance policy?
Runoff insurance has a premium that is still paid each year that the coverage is in effect. Usually, the first year that you are in your runoff insurance coverage, your premiums will be around the same as your professional indemnity policy.
After that, and as time increases, the potential for liability decreases from an insurance company’s perspective. This means that your runoff insurance premiums should also decrease.
After the first year of runoff coverage, your premiums should be reduced every year unless there are any claims made against you during that time or the market rates for insurance increase. For a more specific answer on the cost of runoff insurance, or for any other questions about runoff insurance or insurance in general, contact an ALIGNED advocate who is more than happy to help.