Facts One Should Know About Runoff Insurance
Meaning of Runoff Insurance
Runoff Insurance is a specialized kind of Insurance.
It extends the period of Insurance cover for claims against a company that has been acquired, merged, or ceased its operation in past.
It is also known as “Tail Insurance” or “Extended Reporting Period”, which extends the policy covers for years so that, if any claim arises after years will also cover by the Runoff insurance policy.
Why require Runoff Insurance
In this corporate world, daily many companies registered as startups, and at the same time, many companies closed down or merged, or acquired by some other companies.
So in this process, the existing Insurance policy of any organization is not able to protect the Management by existing Insurance covers.
For example, in Directors & Officers Indemnity policy(D&O Insurance) have ‘Change in Control Clause’, which typically means the existing D&O policy will cease as there is any change in Organization’s Management structure.
The existing D&O policy will cover action against only directors before any change in Management but will not cover actions against Directors after the change in Management took place.
Change in Control under D&O Insurance is defined by each Insurer differently.
But still below is the situation where there is Change in Control clause plays:-
1. If a company is merged, acquired, or sold, or any event that results in a change of over 50% of the voting power or right to elect the board
2. When a company has declared bankruptcy
3. When an administrator or receiver is appointed to handle the affairs of the company
4. When a company is being wound up
Also, it might be possible that the claims against any acquired company can be made after some years say 3 years, in that scenario only Runoff Insurance Policy, can cover these types of claims against any acquired company.
Duration of Runoff Insurance
As Runoff insurance policy is a Claims-based policy rather than an Occurrence-based policy, so the duration is not fixed under Runoff Insurance policy.
The reason is under this cover the Claims are made after months or years after the occurrence of loss or damage.
Runoff Insurance vs. Extended Reporting Period
Runoff Insurance policy covers claims which arise even after years say after 3 or 5 years against acquired company whereas an Extended reporting period normally allows covering claims up to one year after the expiry of the policy term.
So it is always advisable for acquiring company to take immediately run-off insurance policy as a merger or acquisition process complete.