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Runoff Insurance

Contents

  1. Exploring the Concept of Runoff Insurance
  2. Understanding Runoff Insurance:
  3. Key Insights into Runoff Policies:
  4. Unraveling the Dynamics of Runoff Insurance
  5. Policy Coverage and Scope:
  6. Real-World Example:
  7. Evaluating Market Trends and Statistics
  8. Industry Insights:
  9. Special Considerations and Distinctions
  10. Differentiating Runoff Insurance from ERPs:

Deciphering Runoff Insurance: Safeguarding Companies from Post-Acquisition Liabilities

Exploring the Concept of Runoff Insurance

Understanding Runoff Insurance:

Runoff insurance, also known as closeout insurance, serves as a protective measure for companies involved in acquisitions, mergers, or closures. This insurance provision shields acquiring companies from potential legal claims arising from the operations or actions of the acquired entity.

Key Insights into Runoff Policies:

  • Runoff insurance operates on a claims-made basis, covering liabilities that may surface after the policy becomes active.
  • Unlike occurrence policies, which provide coverage for incidents occurring during the policy period, runoff policies extend coverage beyond the policy term, typically spanning multiple years.
  • Professionals, such as physicians, may opt for runoff insurance to mitigate post-closure liabilities, ensuring protection against claims from former clients or patients.

Unraveling the Dynamics of Runoff Insurance

Policy Coverage and Scope:

Runoff insurance encompasses various types of liabilities, including those related to directors and officers (D&O) activities, fiduciary responsibilities, professional liabilities, and employment practices. The provision extends indemnification for specified periods, safeguarding businesses from unforeseen legal challenges.

Real-World Example:

Consider a scenario where a runoff policy spans from Jan. 1, 2017, to Jan. 1, 2018. Claims arising from wrongful acts during this period, reported between Jan. 1, 2018, and Jan. 1, 2023, fall within the coverage window. Such policies offer a safety net for companies navigating post-acquisition liabilities.

Evaluating Market Trends and Statistics

Industry Insights:

According to the PricewaterhouseCoopers Global Insurance Runoff Survey 2021, the North American runoff reserve totaled $402 billion in 2021, surpassing the figures for the U.K. and Continental Europe markets. These statistics underscore the significance of runoff insurance in mitigating financial risks for businesses.

Special Considerations and Distinctions

Differentiating Runoff Insurance from ERPs:

While runoff provisions share similarities with extended reporting period (ERP) provisions, notable distinctions exist. Runoff provisions typically span multi-year periods, catering to the complexities of acquisitions and mergers, whereas ERPs are commonly one-year arrangements. Understanding these nuances is crucial for informed decision-making in risk management.