Meaning
Customised liability insurance contract covers claims made against a company, its directors, or its officers after operations have ceased or the business has been sold. This run off policy protects against liabilities arising from actions that occurred prior to the transaction or closure date. It remains active for a specified multi-year period, which is necessary because claims for professional negligence or director misconduct can emerge years after the business closes.
Liability Coverage
Corporate acquisitions or dissolutions often trigger the need for this coverage to protect former executives from personal claims that emerge after they have departed. A run off policy does not cover new work or subsequent business activities, focusing instead on the historical liability period. The premium is typically paid as a single upfront sum at the start of the coverage period, which simplifies the winding-up or integration process.
Transactional Security
Having this coverage in place is a common condition in merger and acquisition agreements, as buyers do not want to inherit unresolved disputes from the seller’s past actions. It provides peace of mind for both the buyer and the retiring directors, allowing the transaction to proceed with fewer indemnities or escrow accounts.
Time Duration
The duration of the coverage is usually aligned with the local statute of limitations for contract or tort claims, which is typically six years. This ensures that the policy does not expire before the risk of new lawsuits has fully subsided.
