Run-off insurance for contractors: why your liability doesn’t end with the contract
Many contractors might be surprised to learn that they can be liable for any mistakes they may have made many years after an assignment was completed. Hiscox Insurance’s Charlotte Lawson explains more and how contractors can protect themselves against an unexpected future liability with run-off insurance.
Most contracts end without incident. The contractor completes their assignment to the satisfaction of their client and – after the handshakes good bye and the promise to keep in touch – moves on to their next contract, or takes time off work, or goes back into a permanent role. That’s that then. Or is it?
Blast from the past
Many contractors are surprised to learn that for a period of time – in some cases as many as six years or more – they remain liable for any mistakes they may have made during an assignment. Take this example of an insurance claim we dealt with here at Hiscox. A small UK tech company delivered an HR platform to an engineering company in Canada. The engineering company moved all of their employees and consultants’ data on to the new platform. After five years the companies decided to part ways, at which point, the UK tech firm deleted all of the engineering company’s records. Unfortunately, due to a data retention requirement for three years, when the engineering firm requested that all the data be returned to them, the UK Tech firm was unable to do so. The UK company was liable to put the Canadian firm back in to the position they were at the point of service.
Professional indemnity insurance (PI) works on a ‘claims made basis’ which means that regardless of when the incident or mistake happened, a contractor’s current professional indemnity insurance handles the claim. In this case, as the company’s current PI Insurance provider, we supported our client to the total claim cost of close to £3m. But what if the tech company no longer had PI insurance in place?
Dealing with claims from past work done can be hugely difficult if a firm or contractor lets their PI insurance lapse because they will continue to be liable. It is one reason why run-off insurance is a good option for contractors who let their PI cover lapse for whatever reason – whether it’s taking time off or taking on a permanent role.
So what is run-off insurance and how does it work?
Explaining run-off insurance
Bought when a business stops trading, run-off PI insurance will protect the contractor or business should they have a claim made against them for any past work they have completed. It is particularly important for partnerships where liability isn’t limited and the business can’t simply be wound up. A run-off PI policy will meet the cost of defending the claim as well as paying for any losses if the claim is upheld by a court.
Of course, the problem for many is the need to continue paying an insurance premium every year for the run-off cover even though they may no longer be working and have no income coming into the firm. Annual costs though should decrease. At Hiscox, we would expect the premium to fall by between 20% and 25% per year (in the absence of any claims).
So how long should you buy run-off cover?
Many professional bodies say that their members should have run-off PI cover for six years which would be a good benchmark for those unsure. There are other factors to take into account, one of which is the relevant limitation period fixed by law – the time within which a claimant must take action against a professional. A PI policy covers a company’s liability both in contract and tort – basically any civil wrong that causes another to suffer harm or loss – and claims in tort can be made up to 15 years after the deadline set for contract based claims. If a contract is drafted as a deed, deadlines for making a claim can be extended to 12 years after completion.
Given that unpredictability, it is very difficult to know exactly how long run-off cover is needed which means it is worth reviewing contracts at the beginning of an assignment with clients and discussing this requirement.
At Hiscox, we offer companies the option to hibernate their PI policy. This is designed for companies and contractors between contracts but who still want to have active PI cover. Similar to run-off cover, we ask clients to tell us when they would like their policy to be in hibernation and we then charge 50% of their PI annual premium every year. This gives our clients a flexible policy and premium savings, whilst being adequately insured for all of their past work in the event of a retrospective claim.
At Hiscox, we would expect the premium to fall by around 25% per year subject to hitting our minimum premium (in the absence of any claims).
To find out more about Professional Indemnity insurance visit our dedicated partner page here or call our UK-based team of experts on 0800 280 0359. Please note that we are unable to provide any advice on the suitability of products.