Everything you should know about run-off cover
One term that often comes up around law firm mergers and acquisitions is “run-off cover.” Run-off cover essentially provides an extension of liability insurance beyond the policy period for claims that arise after a firm has ceased business or has been sold. This means that the policy will continue to provide coverage for claims that arise after the policy has expired. The coverage can last for a specified period of time or until all claims have been resolved, depending on the terms of the policy. It is important for both practices and their insurers to understand how run-off cover works, and what it can do to protect them in the event of unforeseen circumstances.
It is important to note, that when a company acquires another company, it is not always necessary to have run-off legal cover. This is because the acquiring firm becomes the successor firm and takes on all the legal responsibilities of the acquired company. As a result, any legal claims or liabilities that arise from the acquired company’s past actions are transferred to the acquiring firm. This means that the acquiring company assumes all the legal risks associated with the acquired company, and there is no need for run-off legal cover. However, it is still important for the acquiring company to conduct proper due diligence before the acquisition to fully understand any legal risks and potential liabilities that may arise from the acquired company’s past actions.
The Basics of Run-Off Cover
Run-off cover is a type of liability insurance that is designed to protect firms that have ceased trading or have been sold from the risk of future claims. This is important because many insurance policies only provide coverage for claims that occur during the policy period. Once the policy has expired or ended, the insurer is no longer responsible for any claims that arise. Run-off cover is particularly important for law firms that have ceased trading or merged with another firm because legal claims can often take years to resolve, and a firm may be liable for claims that arise long after it has closed its doors or been acquired by another firm.
For example, suppose a law firm handled a case involving a client who was injured in a car accident. The case was settled for a certain amount of compensation, and the law firm’s liability insurance policy covered the cost of the settlement. However, several years later, the client’s injuries worsen, and they bring a new claim against the law firm for additional compensation.
If the law firm did not have run-off cover in place, it could be responsible for paying the cost of the new claim out of its own pocket. This could be a significant financial burden for the firm, particularly if it has since ceased trading or merged with another firm.
By contrast, if the law firm had run off cover in place, the insurer would be responsible for covering the cost of the new claim. This would provide valuable protection for the firm and its former partners or directors, allowing them to move on from the business without worrying about potential future liabilities.
Why Companies May Need Run-Off Cover
There are several reasons firms may need run-off cover. The most obvious reason is that they may face future claims even after they have ceased trading or been sold. This is particularly true in industries such as the legal sector, where cases can take a long time to settle.
In addition, run-off cover can provide peace of mind for law firm partners and directors. By knowing that they are protected against future claims, they can focus on their new ventures without worrying about potential liabilities from their previous business.
Finally, run-off cover can also be a requirement of the sale of a business. Potential buyers may require the seller to provide run-off cover as part of the sale agreement. This ensures that the buyer will not be responsible for any claims that arise after the sale has been completed.
What to Look for in a Run-Off Cover Policy
If you are considering purchasing run-off cover, there are several key factors to consider. The first is the length of the coverage period. You will want to ensure that the policy provides coverage for a sufficient period of time to protect you from potential future claims.
For more information call Neville Tel: +44 (0)20 8204 3600 If you are interested in buying a law firm click here