What is 'Runoff Insurance'

Runoff insurance is an insurance policy provision that covers claims made against companies that have been acquired, merged or have ceased operations. Runoff insurance, also known as closeout insurance, is purchased by the company being acquired and indemnifies the acquiring company from lawsuits against the directors and officers of the acquired company.

BREAKING DOWN 'Runoff Insurance'

Acquiring a company means taking possession not only of its assets, but also its liabilities, including those that may only be discovered in the future. Liabilities may arise because third parties feel that they were not treated fairly in contracts. Investors may feel upset with how the previous directors and officers ran the business. Competitors may also feel that their intellectual property rights were infringed upon. In order to protect itself from these liabilities, the acquiring company will have the company being acquired purchase runoff insurance.

A runoff policy is a type of claims-made policy rather than an occurrence policy. This is because the claim may be made several years after the incident that caused damage or loss, and occurrence policies provide coverage only during the period that the policy was active. The length of the runoff policy, referred to simply as the “runoff,” is typically set for several years after the policy becomes active. The provision is purchased by the company being acquired, with the purchase funds often being included in the acquisition price.

Professionals may also purchase runoff insurance to cover professional liabilities that occur after a business has closed. For example, a physician who closes his or her private practice may purchase runoff insurance in order to protect his or herself from claims filed by previous patients. This type of policy is typically renewed until the statute of limitations on filing a claim has passed. If the business continues to offer services, its policies typically extend indemnification, making the purchase of a runoff provision unnecessary.

How Runoff Insurance Works

Consider a hypothetical runoff policy written for a term between Jan. 1, 2017, and Jan. 1, 2018. In this situation, coverage will apply to all claims caused by wrongful acts committed between Jan. 1, 2017, and Jan. 1, 2018, that are reported to the insurer from January 1, 2018, to January 1, 2023, i.e., the 5-year period immediately following the end of the policy term.

Although runoff insurance provisions function in a similar manner to extended reporting period (ERP) provisions, there are several differences. First, ERPs are usually only for one-year terms, whereas runoff provisions normally encompass multi-year time spans. Second, while an ERP is most frequently purchased when an insured changes from one claims-made insurer to another, runoff provisions are generally used when one insured is acquired by or merges with another.

RELATED TERMS
  1. Unilateral Extended Reporting Period ...

    A unilateral extended reporting period provision allows the insured ...
  2. Uniform Policy Provisions, Health ...

    Uniform policy provisions are a set of clauses that state regulations ...
  3. Basic Extended Reporting Period ...

    A basic extended reporting period is a reporting period extension ...
  4. Occurrence Policy

    An occurrence policy covers claims made for injuries under an ...
  5. Claims-Made Policy

    A claims-made policy is a type of insurance policy that provides ...
  6. Sunrise Provision

    A sunrise provision is a provision that extends coverage to events ...
Related Articles
  1. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  2. Insurance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  3. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  4. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  5. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  6. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  7. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  8. Insurance

    What To Do When Your Insurance Company Won't Pay

    Struggling to get a claim honoured? Find out what you can do.
  9. Managing Wealth

    Protect Your Company From Employee Lawsuits

    Understanding employment practices liability insurance is easy, once you know the basics.
RELATED FAQS
  1. Can an Insurance Company Deny Coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances. ... Read Answer >>
Trading Center