Enquiring minds want to know. What is runoff insurance & do we need it?

Have you ever found yourself pondering, “What exactly is runoff insurance, and is it essential for my business?” You’re not alone. At ALIGNED Insurance, we’re dedicated to enlightening our audience about the intricacies of Canadian insurance coverages.

From startups to established enterprises, businesses across Canada trust us for reliable and actionable insights. Recognizing the diverse risk exposures that different commercial ventures face, it’s our mission to help you navigate and choose the best-suited coverage options.

In this guide, we’ll delve deep into the world of runoff insurance. Discover the meaning of runoff insurance, its significance, what the insurance covers, and why it might be a pivotal consideration for businesses in Canada.

Stay informed, stay protected, and, as always, feel free to reach out with any questions or concerns.

What Is Runoff Insurance Coverage & Do We Need It?

Runoff Insurance is a provision in a claims-made policy that ensures that the insurer remains liable for claims arising from wrongful acts committed during the period of an expired or cancelled policy. This coverage continues for a specified time period.

An Illustrative Example of How Runoff Insurance Works:

To truly grasp the concept of runoff insurance, one must first differentiate between the coverage triggers in an occurrence policy and a claims-made policy.

  • Occurrence Policy: The key trigger here is the actual occurrence of injury or damage. The policy will cover the liability if the injury or damage took place during its active period.
  • Claims-Made Policy: In this case, the trigger is the act of making a claim. Coverage triggers in such policies are essential to identify which liability policy in a series will cover a particular loss.

Considering Runoff Coverage?

If you’re contemplating the necessity of runoff coverage for your business or personal needs, we’re here to guide you. Our expertise allows us to assess your unique situation and recommend the most appropriate runoff insurance policy options available in the Canadian market.

Diving Deep into Runoff Insurance: Coverage and Importance

When diving into the realm of runoff insurance, it’s vital to understand the nuances of policies where runoff coverage can be of paramount value. Here’s a glimpse into four specific types of insurance policies:

  • Directors and Officers (D&O) Insurance: Unlike Commercial General Liability insurance (CGL), which primarily focuses on property damage and bodily injury, D&O insurance zeroes in on a “wrongful act.” This can range from actual or alleged errors, omissions, and misleading statements to neglect or breaches of duty. Want a deeper insight into D&O insurance? Explore more here.
  • Professional Liability (E&O) Insurance: Regardless of how dedicatedly you serve your clients, achieving perfection in every instance is a tall order. A minor oversight can spiral into complicated and expensive issues in the future. If you’re a consultant, your expertise is what clients seek. However, the inherent risk of potential errors is precisely what underscores the importance of professional liability policies for Canadian consultants and business proprietors.
  • Fiduciary Liability Insurance: At the heart of runoff coverage lies an understanding of specific insurance types, like Fiduciary Liability Insurance. But what does “fiduciary” truly mean? A fiduciary is either an individual or a corporation characterized by the following:
    • Authority and Control: They have the discretion to exercise authority or control in managing a pension or benefit plan. This also encompasses the management or disposal of the plan’s assets.
    • Investment Advisory Role: They offer investment advice, either for a fee or other compensation, particularly concerning funds or other properties associated with the plan.
    • Plan Administration: They possess discretionary authority or responsibilities in the overall administration of a benefit plan.

    Given these intricate responsibilities, a runoff insurance policy becomes vital. It ensures that, even after a policy expires, claims pertaining to acts within the policy period can be addressed—providing an added layer of protection against potential fiduciary oversights or errors.

  • 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.

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).

Extended Reporting Period vs. Runoff Insurance: Understanding the Key Differences

Runoff insurance provisions and Extended Reporting Period (ERP) provisions might seem to serve similar purposes at first glance, but they have distinct characteristics:

  • Duration: ERPs are usually structured and offered by insurers automatically for short periods of time, like 30, 60, or 90 days. In contrast, runoff provisions typically extend over several years, and a five-year policy term is most common.
  • Usage Scenarios: While an ERP is most commonly activated when an insured party doesn’t want long-term tail coverage as it’s often automatically included, runoff provisions are generally employed in cases of retirement, business closure, mergers, or acquisitions. For instance, when a company is absorbed by another entity, the company being acquired might opt for a runoff provision. This ensures coverage against claims tied to wrongful acts from before the acquisition, even if these claims arise post-acquisition.

Should you find yourself weighing the benefits of runoff insurance for your organization, we’re at your service. We invite you to discuss your distinct needs with us.

Eager to Explore Runoff Insurance? Connect with Us.

Boasting a presence in Toronto, Calgary, and Vancouver, and a central operations hub in Cambridge, Ontario, we stand out as one of Canada’s rapidly expanding insurance brokerages. We’re proud of our footprint, serving thousands of clients across the nation. At ALIGNED Insurance, our mission is to synchronize the most suitable insurance coverages with our clients’ diverse needs.

Our comprehensive portfolio spans a myriad of Canadian commercial insurance offerings, from boiler and machinery and crime insurance to office insurance. We also cater to the needs of small businesses with specialized products such as credit insurance and employee theft insurance. ALIGNED is here to support you with all of your insurance needs; get a free quote from us today!

Understanding Runoff Insurance

1. What Exactly is Runoff Insurance?

Runoff insurance operates by extending coverage for eligible claims for a designated period after the termination of a professional insurance policy. It’s essentially a provision that can be integrated into a prevailing claims-made insurance policy.

Given that claims-made policies can address claims that emerge years after the incident leading to the claim, runoff coverage becomes crucial. It serves as a protective shield for you and your business once your standard insurance is no longer in effect. The significance of this is further elaborated in the subsequent section.

2. Who should invest in Runoff Insurance?

Runoff insurance is crucial for professionals and businesses offering expert advice or professional services, including consultants, directors, and officers. It guards against liabilities from past errors or omissions.

3. Why might I need it?

  • Career Changes: If you switch careers, like moving from law to financial advisory, runoff insurance protects against potential claims from your previous profession.
  • Company Mergers: If your business is being acquired, the buying company may mandate the acquired company to purchase runoff insurance to cover events that occurred prior to the acquisition but are emerging post-merger.

In essence, runoff coverage shields against past actions as you transition to new professional phases.

4. How much does a runoff insurance policy cost?

The premium for runoff insurance is established in advance or purchase and is typically prepaid for a number of years to ensure certainty of coverage. Typically, in the initial year of your runoff coverage, the rates are roughly equivalent to 80-90% of those of your professional indemnity policy when fully operational.

As more time elapses, the perceived risk of liability by insurance providers lessens, which often leads to a decrease in rates charged for the years following the first year post-runoff, but each runoff premium is underwritten and quoted on a case-by-case basis.

For a detailed cost estimate of runoff insurance or for answers to any other questions related to runoff coverage, don’t hesitate to contact an ALIGNED Insurance advocate. We’re eager and equipped to assist you.

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