What Is Runoff Insurance?
Runoff insurance, also known as closeout insurance, is a crucial provision in the insurance world. It safeguards companies that have been acquired, merged, or have ceased operations. This insurance covers legal claims made against the acquired company, providing protection for the acquiring company. It serves as a shield against lawsuits targeting the directors and officers of the acquired entity.
### Key Takeaways
– Runoff insurance shields acquiring companies from legal claims against acquired or merged companies.
– It operates as a claims-made policy, offering coverage for a specific period after becoming active.
– Runoff policies extend over multiple years, unlike one-year provisions.
Understanding Runoff Insurance
When acquiring a company, not only do you inherit its assets, but also its liabilities, including potential future ones. These obligations can arise from various sources such as contract disputes, dissatisfaction among investors due to previous management practices, or allegations of intellectual property infringement by competitors. To safeguard against such liabilities, the acquiring company may require the acquired company to obtain runoff insurance.
A runoff policy differs from an occurrence policy as it operates on a claims-made basis, providing coverage for claims even years after the incident occurred. This policy is typically active for several years post its commencement, often included in the acquisition terms.
Professionals can also benefit from runoff insurance, particularly in post-business closure scenarios. For instance, a physician closing a practice could secure runoff insurance to shield against potential patient claims. Such policies are usually renewable until the statute of limitations expires, making them a wise investment.
The types of insurance policies that should have a runoff provision include directors and officers (D&O) insurance, fiduciary liability insurance, professional liability (E&O) insurance, and employment practices liability (EPL) insurance.
Runoff Insurance Example
To illustrate, consider a hypothetical runoff policy spanning from Jan. 1, 2017, to Jan. 1, 2018. This coverage applies to claims resulting from wrongful acts during that period, reported to the insurer from Jan. 1, 2018, to Jan. 1, 2023, offering protection for five years post the policy’s end.
The North American runoff reserve in 2021 reached $402 billion, as per PricewaterhouseCoopers’ Global Insurance Runoff Survey 2021, surpassing the $302 billion figure for the U.K. and Continental Europe Markets.
Special Considerations
While runoff insurance provisions share similarities with extended reporting period (ERP) provisions, there are key distinctions. Runoff provisions typically cover multi-year periods, unlike the one-year term of ERPs. Additionally, ERPs are commonly utilized during insurer transitions, whereas runoff provisions come into play during mergers or acquisitions.