Everything you and your law firm needs to know about run-off cover, ensuring you remain insured even after you’ve closed from Legal Futures’ Associate Miller Insurance [1].
What is run-off cover?
It’s where an insurer will pay claims made against a law firm after it has closed or been the subject of an acquisition.
Do I have to buy it?
Yes, the Solicitors Regulation Authority requires it to ensure that negligence victims are not left uncompensated after law firms close. You are unlikely to be able to practice law again if your firm closes without buying run-off cover.
It also offers retired solicitors peace of mind, as they could be accused of acting negligently years later: for example, a mistake made in a house purchase may only come to light when that property is resold. The Court of Appeal ruled in Merrett v Babb that a professional adviser can be held personally liable for negligence if they are uninsured.
How long does it last?
For six years after a firm’s final PI policy expires. The insurer will provide cover on the same terms as its existing policy in return for a one-off additional premium.
How much does it cost?
That varies, but usually between two and four times a firm’s annual PI premium. That single amount pays for the full six years of cover.
Why is it so expensive?
It isn’t really. Your run-off insurer will cover the cost of any claims made against your law firm in those six years, regardless of when the mistake arose that gave rise to that claim.
Are there ways I can reduce my run-off premium?
Possibly, underwriters will negotiate if you offer something in return. Claims against law firms that have ceased trading are difficult for insurers to defend because they don’t know what happened. You could offer your insurer a deal in which you commit to make yourself, and your files, available in the event of a claim made after your firm has closed, in return for a lower run-off premium.
It might make sense to not change insurer just before you want to stop work, as you’re likely to get a better run-off deal from an underwriter that has insured your firm for some time, and who knows and is comfortable with the risk it presents.
You could sell your firm to another that becomes its ‘successor practice’, taking on its past business and liabilities. That’s the simplest and cheapest way of stepping back from your law firm, but you must be aware of the potential pitfalls. If an acquirer is unwilling to become a successor practice you could ask it to pay or contribute towards your run-off premium as part of the asking price. That would enable you to walk away and the acquirer to ring-fence any liabilities from buying your firm. You can read more about selling your law firm in our previous blog “Buyer beware in legal M&A [2]”.
Run-off should be part of your retirement plan
If you’re a sole practitioner who’s considering stopping work, it’s important to start thinking about your insurance. You should begin putting money aside early to pay your run-off premium, otherwise you could have a nasty surprise – a big bill that could either eat into your pension pot or even force you to carry on working.