Get run-off cover before running off

Are you a professional, perhaps an engineer? Are you planning to cease trading or retire shortly? If so, please read on to safeguard the life of leisure that hopefully awaits you. Before you retreat to the sunny uplands, or out on to the golf course three days a week, the big question is: do you need to continue your business insurance? The good news is that you can dispense with most of it including, for example, your public liability (PL), employer’s liability (EL) and premises insurance. However, it would be a very good idea indeed to maintain your professional indemnity (PI) insurance by procuring a sensible level of run-off cover. It may be a surprise to learn that when you stop working you still remain potentially liable for projects you completed during the latter part of your career. PI insurance only provides cover for claims made against you and notified to your insurers during the relevant (usually annual) period of insurance. It does not cover you for claims made after the period of cover expires, even if the project you worked on fell within the policy period. This means that, if a claim is made against you subsequent to the expiry of your PI insurance, you are potentially personally liable for: (a) any damages ultimately awarded against you; (b) the opponents costs if the claim is successful; and (c) the costs of defending any claim made against you, which can altogether be potentially very

significant. Run-off PI cover operates to fill this gap (as long as the claim occurred and is reported to insurers during the period of run-off cover). It provides protection for you and your business after you've left work, when you no longer need cover for new projects but still need protection from potential claims which may arise from work you and / or your firm or predecessor business carried on before closing up shop. Whilst the majority of claims against professionals are made within a few years of practical completion, it is possible for a claim to be made up to 6 years after a project finished (or even 12 years if the contracts were by deed). In some cases, it can take even longer for latent defects and mistakes to be discovered and therefore claims made. Although there is no definitive answer to the question of how long professionals should take out run-off cover for, they should ensure it is for at least 6 years, depending on the nature of the firm's business, profile of work and former clients/projects. This will significantly limit the prospect of personal liability arising during retirement and the possibility of being forced to incur costs in defence of any claim, whether justified or not. Although it was an insolvency matter rather than a case of retirement, the landmark decision in Merrett v Babb [2001] provides the clearest example of the potential difficulties that can arise for individuals long after a company has ceased trading. In June 1992, Mr Babb, an employed surveyor, carried out a mortgage valuation of a property on behalf of his firm, of which he was then branch manager. Subsequently, the sole principal of his firm had become bankrupt and the trustee in bankruptcy had, quite properly under the insolvency rules, cancelled the firm's PI insurance. A claim was brought against Mr Babb personally for failing to identify settlement cracks in his survey report five years previously. Although Mr Babb had gone on to work for another firm, which had its own PI insurance, that policy did not respond as Mr Babb was not an employee of that firm when he carried out the relevant valuation. The court found against Mr Babb personally and he was ordered to pay the Claimant's substantial damages and legal costs himself. He did not have the benefit of run-off PI cover.

This document is intended for general guidance. It is not intended to apply to any particular case and does not constitute either legal or

insurance advice. For further information please contact the author. Version 12.12

As we live in a society which is becoming increasingly compensation-minded, the cautionary tale of Mr Babb is a strong message to any professional contemplating retirement to obtain the protection of sufficient run-off cover. So, a last meeting with your PI broker should enable you to enjoy peace of mind as you head off to the golf course.

Giles Tagg is a senior associate at RPC solicitors; he was assisted with this article by Alexis Hogan, trainee solicitor.