Runoff Insurance Explained: Protect Acquired Companies from Liabilities

What is Runoff Insurance?

Runoff insurance is a specialized coverage that extends protection for claims arising from incidents that occurred before a policy's termination, often during mergers, acquisitions, or business closures. This insurance shields companies and their C-suite executives from liabilities reported after the policy ends.

It is especially relevant for claims-made liability policies where the timing of claim reporting, not the incident, triggers coverage.

Key Characteristics

Runoff insurance has distinct features that differentiate it from other liability coverages:

• Claims-Made Basis: Coverage applies only to claims reported after policy expiration but related to prior acts.
• Extended Reporting Period: Offers longer tails than typical extended reporting periods, often 3–6 years or more.
• Run-Off Status: No new activities or operations are covered; only historical claims qualify.
• Premium Structure: Paid as a lump sum based on a percentage of the original earned premium, decreasing over time.
• Purchased from Prior Insurer: Must be obtained from the insurer issuing the original policy, sometimes involving obligatory reinsurance.

How It Works

When a company undergoes a change of control or ceases operations, runoff insurance activates by placing the existing policy into run-off status, covering claims tied to past wrongful acts reported after the transition. This is critical because claims-made policies require claims to be reported during the policy period or any extended reporting period to be covered.

Runoff insurance protects both the acquired company and its former leadership by isolating pre-transaction liabilities from ongoing business risks. For example, in a merger, the acquirer typically purchases separate coverage for future operations, while runoff covers historical exposures.

Examples and Use Cases

Runoff insurance is commonly used in scenarios involving risk transfer and liability management:

• Mergers and Acquisitions: Companies like Delta rely on runoff coverage to protect against claims related to pre-acquisition operations.
• Bankruptcy and Dissolution: Firms entering liquidation use runoff insurance to shield directors and officers from claims arising before the wind-down.
• Professional Retirements: Professionals such as architects or consultants purchase runoff to cover liabilities from past projects.
• Change of Control Events: Ownership shifts trigger runoff policies to cover pre-change claims, useful in industries tracked by D&B data for risk evaluation.

Important Considerations

Before securing runoff insurance, understand its limitations: it covers only historical claims and requires timely purchase from the original insurer. Failure to arrange runoff can leave gaps, exposing you to tail risk from late-reported claims.

Pricing and availability vary by risk profile; companies often evaluate runoff alongside strategies like those recommended in best growth stocks and other investments to balance operational and financial risks effectively.