Run-off for Professional Indemnity Insurance

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Business Sale Structures and the Professional Indemnity Insurance Implications: A Guide for Brokers

As a broker, you’re often one of the first professionals clients consult when preparing to sell a business, especially those in professional services. The way a business is sold can have major implications for professional indemnity (PI) insurance, particularly because PI is written on a claims-made basis. Ensuring the right run-off cover is in place is essential to protect your client’s legacy liabilities.

This guide outlines the common business sale structures and the PI insurance considerations brokers need to address for each, including when built-in run-off cover might apply and when additional run-off needs to be arranged.

  1. Share Sale

In a share sale, the buyer purchases the shares of the company, meaning the entity and its liability exposures continue unchanged under new ownership.

Broker Considerations:

  • No Trigger for Run-Off: As the legal entity continues trading, most PI policies remain in force without triggering cessation provisions.
  • Due Diligence Support: Ensure the buyer is across:
    • The current PI policy wording and limits.
    • Retroactive date (especially if acquisitions are being consolidated).
    • Any known or unreported claims or circumstances.

When Run-Off May Still Be Needed:

  • If a key individual (e.g., principal, partner) is exiting the profession entirely, they may want personal run-off cover.
  • In some cases, buyer demands a clean break and asks the seller to carry run-off cover for a set period—this would require a bespoke run-off policy.

  1. Asset Sale

In an asset sale, the buyer acquires certain assets and liabilities, but not the company entity. The selling entity often ceases trading and is eventually wound up.

Broker Considerations:

  • Run-Off Required: The seller’s PI policy must respond to claims for past services—even after they cease to operate. This is where run-off cover is critical.
  • Built-In Run-Off Provisions:
    • Some wordings offer limited automatic run-off (commonly 12 months or until expiry of the policy).
    • Conditions often apply, such as written notice within a certain timeframe.

Additional Run-Off:

  • Brokers should obtain quotes for extended run-off, typically 7 years to align with statutory limitation periods.
  • Premium is often charged as a multiple of the expiring annual premium (e.g. 400% to 500% for 7 years of cover).
  • Ensure the limit and retro date remain unchanged.

  1. Merger or Business Acquisition (Absorption into Another Entity)

In a merger, the acquired business is absorbed into the acquirer, often leading to the closure of the original trading entity.

Broker Considerations:

  • Who Insures the Past? Determine whether:
    • The acquiring firm will cover legacy liabilities.
    • The seller needs to arrange run-off cover separately.
  • If the seller’s entity is dissolved, they must retain their own run-off protection unless explicitly absorbed into the buyer’s PI program.

Run-Off Tip:

  • Run-off responsibility should be clearly documented in the sale agreement to avoid future disputes.

  1. Sale of a Sole Trader or Partnership

In this structure, the individual or partners are legally responsible for the business and usually sell the business name, goodwill, and client book.

Broker Considerations:

  • No Entity Shield: The individual seller retains liability for historical work and must arrange run-off cover upon ceasing business.
  • Built-In Cover May Be Insufficient: While some PI policies offer automatic 12-month run-off on cessation, this rarely matches professional body requirements (e.g., legal or accounting standards).

Best Practice:

  • Offer extended run-off options for 6 or 7 years, often required by regulators and insurers alike.
  • Emphasise to clients that PI must respond at the time a claim is made, not when the work was done.

Key Questions Brokers Should Ask Clients

  1. What is the sale structure—share or asset?
  2. Is the entity being wound up or continuing under new ownership?
  3. Will your name or past work be used post-sale?
  4. Are you exiting the profession or continuing in another capacity?
  5. Have you reviewed the current PI wording’s run-off provisions?

Built-In Run-Off Cover: What to Know

Policy Feature

What to Look For

Automatic Run-Off

Usually 12 months, sometimes only 6

Trigger Conditions

Often requires cessation of trading and written notice

Scope of Cover

Same retroactive date and limits as final active policy

Extended Run-Off Options

Often purchasable in blocks of 1–7 years

Premium Basis

Charged as % or multiple of expiring premium

Final Tips for Brokers

  • Engage Early: Run-off is often overlooked until it’s too late. Get involved early in sale discussions.
  • Partner with Legal Advisors: Many decisions around run-off obligations are shaped by sale agreements and warranties.
  • Negotiate Gracefully: Some insurers are open to bespoke run-off terms—especially where there’s a good history and clear exit.
  • Document Everything: Always confirm coverage terms, notices, and any negotiated endorsements in writing.

Conclusion

As a broker, you play a vital role in ensuring your client’s PI program continues to protect them after a business sale. Whether the structure involves shares, assets, or the closure of a sole practice, your advice around run-off cover is essential to managing post-sale exposure.

Knowing the policy wording, understanding the triggers for run-off, and proactively guiding clients through the options are not just best practices—they’re part of delivering true value.

Get a quote and see how we compare, or contact with our friendly team on (02) 9003 1660.