Run-off cover is an important means to protect Insureds against the financial recovery of a claim that may arise from professional services undertaken in the past and is usually provided by the insurer providing cover at the time of cessation.
As the RICS states in their Professional Indemnity Insurance Requirements Version 4; the purpose of having Professional Indemnity Insurance are:
- to ensure that if the firm faces a claim, it is protected from financial loss that it cannot meet from its own resources;
- protect the insured member or firm against the consequences of its liability to pay damages to third parties for breaches of professional duty that it commits through its professional activities; and
- ensure that the firm’s clients do not suffer financial loss, which the firm cannot meet.
Historically, the RICS has mandated regulated firms or individuals to have 'adequate and appropriate' Professional Indemnity Insurance (PII) run-off cover at the time a business ceases to trade, followed by a recommended period of at least six years.
The definition of ‘adequate and appropriate’ has often been criticised for being vague, at least up until 01st April 2019 where changes to RICS run-off have now taken effect.
As a result of the new changes, the term "adequate and appropriate" can now be understood to mean a minimum of six years for consumer claims (any natural person acting for purposes outside their trade, business or profession), whereby insurers will now provide an automatic £1,000,000 aggregate indemnity limit for consumer claims under the RICS minimum wording at no additional cost to the policyholder. In addition, the Assigned Risks Pool (ARP) will be opened to include a Run-Off Pool.
For those firms unable to obtain "adequate and appropriate" cover for commercial claims, the RICS Run-off Pool will provide an additional option for those firms that cannot reasonably procure run-off for commercial claims on the open market. It should, however, be treated as a fall-back.
Run-off cover has not previously always been available or affordable and therefore these changes will bring welcome news to the profession.
What should you consider?
It will be important for businesses to consider their risk exposure to evaluate how susceptible they may be to claims extending outside the automatic cover, including but not limited to:
- whether the £1,000,000 aggregate limit for the whole 6 years would be adequate to cover all applicable claims that may arise; or
- whether the business has provided services for and on behalf of commercial clients i.e. secured-lending valuations; or
- whether 6 years is a sufficient timeframe for cover to be in force
Howdens Legal Professional Executive; Jenny Screech talks about how long claims can be brought and advises in her article on Limitation for Claims against Surveyors; “each case turns on its own facts. Decisions regarding limitation can be very complex. It is always important to take advice from your insurer and their legal advisors”.