A company that has sold, merged or ceased operations is still vulnerable to claims against it in the future, based on its past operations. Liability exposures are often reported, discovered or come to light, years after the incident occurred.
While there are certain liability policies that will respond to past incidents, there are others such as Directors & Officers (D&O) liability and professional liability policies such as Errors & Omissions (E&O) that will not protect against past incidents or losses once a company has been sold or changed its shareholder structure. Additionally, pollution or environmental liability policies may also have adverse limitations once a company is sold. It is best to consult the experts to determine the best run-off insurance.
When and why does a company need run-off insurance?
Changes to an organization’s corporate or ownership structure can affect the coverage afforded under its existing policy. For example, Directors & Officer’s policies typically contain a ‘change in control’ clause, which automatically ceases coverage for the directors and officers of a company, following a business transaction which affects its corporate structure. Although the definition of a change in control often varies from insurer to insurer, the policy wording typically includes the following situations:
- When a company is merged, acquired or sold, or any event that results in a change of over 50 percent of the voting power of the board.
- When a company is declared bankrupt.
- When an administrator or receiver is appointed to handle the affairs of the company.
- When a company is wound up.
If a change in control occurs during a period of insurance, the policy remains active, however, it will provide a limited scope of coverage – only protecting executives for wrongful acts that occurred prior to the ‘change in control’. In other words, any decisions or actions undertaken by directors after a change in control will not be covered by the existing policy. Variations of the above scenario can also apply to Errors & Omissions (E&O) and other kinds of insurance.
A runoff insurance policy is a type of claims-made
These policies are generally written on a claims-made basis because the claim is usually made several months or years after the incident that caused damage or loss. The run-off insurance policy must be in force in order at the time of the reported or discovered incident to respond to a claim. For example, a run-off policy with a two-year provision will only cover losses reported during that two-year term.
Talk to our commercial experts at Reliance Insurance - we can work with you to understand your specific needs and ensure that you are protected properly so that your business’ past doesn’t compromise your future endeavours.