After an earlier post on the subject of retroactive dates, I received a comment from Charlie Hall asking for more information on what happens when your business ceases trading.
That’s a good point. At some time or other, you are going to stop running your business and there are many reasons why. It could be that you are selling your business to someone else, possibly due to your retirement. It could be that you are changing direction and going back into employment. Or it could be that it has struggled and gone into administration.
Whatever reason you have, if you have professional indemnity cover in place you need to consider what to do about your policy.
An automatic assumption that many people make is that they can simply cancel their policy – and that’s true, they can (subject to the terms & conditions of the insurer). But, that leaves you exposed to claims which could arise after you are no longer trading for work you performed before that date.
If you have retired and moved to Torquay for the quiet life, or are working flat-out on a project for a new employer, do you really want to carry the risk of an unhappy ex-client seeking you out and attempting to make a claim for something you did up to six years ago? Do you still have all the paperwork? Are you still in touch with any ex-employees to answer questions? Do you have the funds to hire a law firm to help defend you – and do you have the time to manage the situation? A claim out of the blue could be very worrying and stressful.
Many of the more formal professions – ACCA for accountants, RICS for surveyors, for example – require that members carry professional indemnity for a period of time after they cease trading. If you belong to a professional body, you should check whether requirements like that apply to you.
So, what are your options?
If you are selling your business, you can include as part of the sale a requirement that the new owner takes responsibility for your past business liabilities. Ensure that is documented in your sale agreement.
If transferring liabilities in this way is not an option, you can approach your insurer and ask about ‘run-off’ cover. This is a professional indemnity policy that covers you after you cease trading for work done in the past. Because no new work is being done, premiums would normally be lower than a policy to cover a live business, and should reduce over time (because the risk of a claim reduces the longer the time since the work was completed).
How many years run-off should you buy?
As the statute of limitations means you can be sued for up to six years after the problem occurred, you should consider up to six years-worth of run-off. Many businesses choose to buy for a shorter period, however, reasoning that if a claim is going to happen it will do so within a far shorter period of time – for example a year, or three years. It really depends on the nature of the work you do, your client-base, and how likely it is for a claim to arise years after the work was completed.
The cost of protecting yourself from work done in the past is definitely something you should factor in when selling or winding up your business. A good insurer will have a solution to make this easy and cost-effective for you to manage.