17 October 2024
Understanding Run-Off Insurance: Essential Advice for Architects
As an architect, planning for retirement or closing your business involves more than just wrapping up projects and bidding farewell to clients. A critical aspect that often raises questions, especially in light of recent legislative changes, is run-off insurance. At Gallagher, we frequently receive inquiries from architectural firms about how to handle past liabilities when they retire or wind up their practices.
Planning for retirement or closing your business
When considering retirement or closing your business, it’s important to consider mitigating your liabilities in advance. Richard Holdaway, Director of Financial and Professional Risks at Gallagher, emphasises, "Architects need to plan for their retirement, limiting their contractual liability periods and exposure to substantial coverage requirements in advance of the run-off phase."
For small firms without the continuity of larger practices, ensuring coverage for past liabilities remains paramount. Unlike larger firms that might merge or be acquired, smaller practices often lack succession plans, making it essential to maintain professional indemnity insurance (PII) post-retirement.
What are the regulatory requirements?
The nature of PII means that cover is provided on a claims-made basis, so insurance must be held when a claim is made rather than when an incident occurs. The Architects Registration Board (ARB), therefore, mandates a minimum of six years of run-off cover (five years’ if you practice in Scotland), is to be held at the same limit of indemnity as the last year prior to the cessation of practice.
Recent legislative changes, particularly under the Defective Premises Act, have extended liability periods and have left a question mark over the impact of regulatory requirements relating to run-off insurance.
"While the ARB's six-year minimum hasn't changed, architects must be aware that in specific circumstances liabilities can extend beyond normal statutory time-limits, and this has been the case for many years, not just because of recent legislative changes."
Richard Holdaway Director of Financial and Professional Risks, Gallagher Specialty
How is run-off insurance purchased?
Purchasing run-off insurance involves an annual renewal process. "You can't buy six years' worth of cover in one go. It's an annual purchase, typically only available from your current insurer.” Explains Richard Holdaway. Therefore maintaining a good relationship with your existing provider is prudent as you approach retirement or business closure.
Historically, long-term run-off policies were available, but market changes, particularly post-Grenfell, have made such options scarce. Thus, architects need to prepare for annual renewals to ensure continuous coverage.
What are the cost implications?
One of the primary concerns for architects is the cost of run-off insurance. In the first year of run-off, premiums usually match the previous year's rates as liabilities are still live. Over subsequent years, premiums may reduce by 10-20%, but several factors can affect this reduction.
Richard Holdaway identifies key factors influencing cost: "Claims during run-off, market conditions, and minimum premiums for limits of indemnity can all impact the cost." For example, if a claim arises during the run-off period, it can prevent further premium reductions, and increase future run-off costs. Additionally, market fluctuations and insurers’ minimum premium thresholds can also maintain higher costs.
To manage these costs, architects might consider reducing their limits of indemnity, but this comes with caution. "Reducing the limit of indemnity can lower premiums," he advises, "but it also reduces coverage for past work, which is a significant risk and may breach your contractual obligations."
How can Gallagher help?
At Gallagher, we are committed to guiding our clients through the complexities of run-off insurance. Our team can provide tailored advice based on your specific circumstances, helping you navigate regulatory requirements, purchase processes, and cost management.
We understand that each architect's situation is unique, and our expertise in financial and professional risks positions us to offer comprehensive support. Whether it's advising on limiting contractual liabilities as you approach retirement or assisting with annual renewals, our goal is to ensure you remain protected.
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.