Run-off cover

Run-off cover is insurance for claims made against a law firm after it has stopped doing business.

It makes sure that:

• clients can be compensated for claims made after a firm has closed
• retired partners of the firm have financial security and won’t be personally liable for any claims

Run-off cover lasts for six years after your firm’s PII has ended.

Run-off cover only applies to SRA-authorised firms.

The run-off requirements for freelance solicitors are set out in our practice note.

Why you need run-off cover

Clients can claim for compensation after your firm has closed.

Most claims are made at the time, or very soon after, the alleged error is discovered. However, about 40% of claims are made more than three years after the event.

For example, this can happen when a client buys a property, and only discovers they were given negligent advice during the purchase when they decide to sell it years later.

When you should have run-off cover

Under clause 5.1 of the SRA minimum terms and conditions (MTC), your PII policy must include run-off cover if your firm ceases to practise.

For these purposes, an insured firm's practice shall be regarded as ceasing if it becomes a non-SRA firm. The cessation takes effect on that date.

Successor practices

If you have a successor practice, you may choose to start the run-off cover under your current PII policy (clause 5.3 of the MTCs).

If you do this, you must pay your run-off premium before the date of cessation, otherwise the cover will not be effective. Your insurer must tell the SRA about this decision within seven days.

If you do not start run-off cover, or do not meet the notification and premium payment requirements, the insurer of the successor practice will be required to cover claims against your ceased firm.

You will not need to purchase run-off cover if:

• there is a successor practice willing to take on the risks of a prior practice, and
• an insurer is prepared to insure both entities

How much run-off cover to have

The insurer covering at the time of the firm's cessation must provide six years of run-off cover from the expiry date of the policy (even if the firm ceases or merges part way through the policy year).

For example, if your firm ceased without successor on 1 August 2010 then it would be provided with run-off cover for the balance of the indemnity period (until 30 September 2010) and for a further six years to 30 September 2016.

Read about the scope of run-off cover in section 5.2 of the MTCs.

Cost of run-off cover

Your insurance policy will have details of the cost of your run-off cover.

The cost is determined by your contract with the insurer but is usually about two to three times the cost of the last annual premium.

Because it covers six years, this means the run-off premium is approximately 50% of what PII cover would have cost.

The cost of run-off cover is unregulated. This means the SRA does not set the level of premium so it cannot waive your requirement to pay this to the insurer if your firm ceases to practise.

Run-off cover is a significant overhead that you should budget for as part of your retirement or succession plan.

You should consider it when comparing PII quotes, especially if you may cease to practise within the next indemnity year.

After the six-year run-off period

Your insurer is only required to provide run-off cover for six years.

However, claims can be made after this period because of provisions in the Limitation Act 1980 that extend time in certain cases (see sections 14A and 32).

Cover beyond the six-year period is called supplementary run-off cover. The profession provides this through the Solicitors Indemnity Fund (SIF).