Definition:Run-off insurance
📋 Run-off insurance is coverage that remains in effect after an insurance policy or program has expired or been cancelled, protecting the insured against claims arising from acts, errors, or events that occurred during the original policy period but are reported afterward. This concept is especially critical in claims-made lines — such as professional liability, D&O, and E&O — where a gap in reporting coverage could leave the insured exposed to latent liabilities. Run-off insurance is sometimes referred to as an extended reporting period (ERP) or, colloquially, a "tail" policy.
🔄 When a professional retires, a firm dissolves, or a merger causes one party's policy to terminate, the outgoing insured typically purchases run-off insurance to extend the window during which claims can be reported. The coverage does not expand the scope of the original policy; it simply keeps the reporting door open for a defined period — often one to six years, though some endorsements offer unlimited tails. Premiums for run-off insurance are usually charged as a one-time payment calculated as a percentage of the expiring policy's annual premium, with the exact multiple reflecting the length of the tail and the loss development characteristics of the line of business. Underwriters assess the insured's historical claims history and the nature of the underlying exposure to price this coverage.
🛡️ Securing appropriate run-off insurance can mean the difference between a clean exit and years of uninsured litigation. For corporate transactions, buyers routinely require sellers to procure adequate run-off coverage for pre-closing liabilities as a condition of the deal, and the cost is often factored into purchase-price negotiations. Brokers who specialize in transaction liability and professional lines play a key advisory role here, helping clients understand the duration and scope of tail coverage they need. From a carrier's perspective, run-off insurance represents a manageable, finite extension of exposure — one that can be reserved with reasonable confidence because the universe of covered acts is already closed, even if the claims themselves have yet to surface.
Related concepts: