What Are the Legal Requirements for Run-Off Insurance in the UK?

Run-off insurance, often referred to as run-off cover, is a critical aspect of professional indemnity insurance for businesses and professionals in the United Kingdom. It provides protection against claims made after a business ceases trading, ensuring that former clients or third parties cannot pursue legal action for work performed during the business’s operational period without coverage.

This blog post explores the legal requirements for run-off insurance in the UK, offering a comprehensive guide for professionals, particularly those in regulated sectors such as law, accountancy, and financial services.

Understanding Run-Off Insurance

Run-off insurance is a type of professional indemnity insurance that comes into effect when a business or professional practice stops trading. Unlike standard professional indemnity insurance, which covers claims made during active operations, run-off cover addresses liabilities arising from work completed in the past. These claims may surface years after a business has closed, often due to errors, omissions, or negligence discovered later. For example, a client purchasing a property may only realise they received negligent advice when they attempt to sell it years down the line.

The importance of run-off insurance lies in its ability to protect former business owners, directors, and partners from financial and legal repercussions after cessation. In the UK, certain professions are subject to strict regulatory requirements for maintaining such cover, particularly those overseen by bodies like the Solicitors Regulation Authority (SRA) or the Financial Conduct Authority (FCA).

Why Run-Off Insurance Is Necessary?

When a business ceases operations, whether due to retirement, sale, or dissolution, its liabilities do not simply vanish, clients or third parties may file claims for perceived errors or negligence long after the work was completed. Without run-off insurance, former business owners or partners could face personal liability for legal costs and damages, which can be financially devastating, especially in cases involving significant claims.

In regulated professions, run-off cover is often mandatory to ensure consumer protection and maintain industry standards. For instance, solicitors in the UK must comply with the SRA’s Indemnity Insurance Rules, which mandate run-off cover to safeguard clients and former partners. Similarly, insurance firms in run-off are subject to oversight by the Prudential Regulation Authority (PRA) to ensure they meet their obligations to policyholders.

Legal Requirements for Run-Off Insurance

The legal framework for run-off insurance in the UK varies depending on the profession and the regulatory body overseeing it. Below, we outline the key requirements for different sectors, focusing on solicitors and insurance firms, as well as general considerations for other professionals.

Solicitors and the SRA Indemnity Insurance Rules

For solicitors, run-off insurance is a mandatory requirement under the SRA Indemnity Insurance Rules and Code of Conduct. All SRA-authorised firms must maintain professional indemnity insurance (PII), including run-off cover, to protect against claims made after the firm ceases trading. The key legal requirements include:

1. Duration of Cover: Run-off cover must be maintained for a minimum of six years after a firm’s PII policy expires or the firm ceases operations. This period aligns with the legal limitation period for negligence claims under the Limitation Act 1980, which allows clients to pursue damages for up to six years after an alleged tort or breach of contract.
2. Minimum Coverage Limits: The SRA mandates a minimum indemnity limit of £2 million for sole practitioners and partnerships and £3 million for limited liability partnerships (LLPs) or limited companies. This ensures sufficient coverage for potential claims.
3. Successor Practices: If a firm merges or is succeeded by another practice, the successor firm’s insurer may be required to cover claims against the ceased firm unless run-off cover is activated. Firms must notify their insurer within seven days of cessation and pay the run-off premium before the cessation date to ensure coverage.
4. Notification Requirements: Insurers must inform the SRA of the firm’s decision to activate run-off cover. Failure to comply can result in the successor firm’s insurer being liable for claims, which can complicate transitions.

These rules ensure that clients and former partners are protected, and retired solicitors are not personally liable for claims arising from past work. For example, Legal Ex Plus, a provider of professional indemnity solutions, offers tailored run-off cover to meet these regulatory requirements, ensuring compliance and peace of mind.

Insurance Firms and PRA Oversight

Insurance firms in run-off, meaning those that have stopped issuing new contracts of insurance, are subject to the PRA’s prudential regulations. The PRA’s expectations are outlined in documents such as Capital Extractions by Run-Off Firms (SS4/14) and include:

1. Scheme of Operations: Firms must submit a scheme of operations to the PRA, detailing how they will meet policyholder obligations during the run-off period. This includes maintaining sufficient regulatory capital to cover liabilities as they fall due.
2. Capital Adequacy: Firms must demonstrate financial soundness, holding adequate assets to meet insurance obligations. Post-Brexit, Solvency UK reforms (effective 31 December 2024) no longer require UK branches of overseas insurers to calculate a Solvency Capital Requirement (SCR) or Minimum Capital Requirement (MCR), but they must still hold sufficient assets.
3. Variation of Permissions: Firms seeking to remove their permissions to underwrite new business must submit a variation of permissions notification via the FCA’s Connect system. This ensures the firm is supervised appropriately during the run-off period.
4. Consumer Protection: For conduct-related issues, firms must adhere to the FCA’s rules, such as treating customers fairly and providing clear information about policy terms.

The PRA has facilitated the orderly exit of 45 insurers over the past eight years, demonstrating the effectiveness of its run-off regime in maintaining financial stability.

Other Professions and General Considerations

For other professionals, such as accountants, architects, or financial advisors, run-off insurance requirements may be dictated by their respective regulatory bodies or professional associations. While not always mandatory, maintaining run-off cover is considered best practice to mitigate risks. Key considerations include:

1. Limitation Periods: The Limitation Act 1980 sets a six-year period for most negligence and breach of contract claims, but claims involving deeds (e.g., collateral warranties) may extend to 12 years. Professionals should maintain run-off cover for at least six years, though longer periods may be necessary depending on the nature of the work.
2. Claims-Made Basis: Run-off insurance typically operates on a “claims-made” basis, meaning the policy must be active when the claim is filed, not when the work was performed. This underscores the importance of maintaining continuous coverage post-cessation.
3. Contractual Obligations: Contracts, such as letters of appointment, may specify liability periods that necessitate extended run-off cover. Legal advice is recommended to determine the appropriate duration.

Practical Steps for Compliance

To comply with legal requirements for run-off insurance, professionals and businesses should take the following steps:

1. Consult Regulatory Bodies: Review the specific requirements of your profession’s regulatory body, such as the SRA, FCA, or PRA, to understand mandatory coverage levels and durations.
2. Assess Risk Exposure: Evaluate the nature of your work and potential liabilities. High-risk professions, such as conveyancing or financial advice, may require higher coverage limits or longer run-off periods.
3. Engage with Insurers: Work with reputable providers like Legal Ex Plus to secure tailored run-off cover that meets regulatory standards and your specific needs.
4. Notify Insurers of Cessation: Inform your insurer promptly when ceasing operations to activate run-off cover and comply with notification requirements.
5. Maintain Documentation: Keep records of past work and insurance policies, as these may be needed to defend against future claims.

Challenges and Considerations

Maintaining run-off insurance can be costly, particularly for small firms or sole practitioners. Premiums are often based on a percentage of the firm’s last revenue statement and the type of work undertaken. A claim during the run-off period can increase premiums, especially if it highlights systemic issues or inadequate risk management.

Additionally, professionals must be aware of the risks of not renewing run-off cover. Even non-credible claims can incur significant legal costs, and credible claims may result in substantial damages. For partnerships without limited liability, personal liability for partners makes run-off cover particularly critical.

Conclusion

Run-off insurance is a vital safeguard for professionals and businesses in the UK, ensuring protection against claims arising from past work after ceasing operations. Regulatory bodies like the SRA and PRA set stringent requirements to protect consumers and maintain industry standards, particularly for solicitors and insurance firms. By understanding and complying with these legal obligations, professionals can mitigate financial and legal risks. Engaging with providers like Legal Ex Plus and seeking legal advice can help ensure that run-off cover is both compliant and tailored to specific needs, offering peace of mind in the post-cessation period.