Professional Indemnity insurance is usually a ‘claims made’ policy. This means the policy that will be claimed against will be the one that is in force on the day you first become aware of circumstances that may give rise to a claim. You also must have told your insurers as soon as you become aware. It's no good going back and saying, “Oh, we knew about this last year, so we want to claim on the policy”. It's got to be notified.
And the other side of that is what we call the retroactive date. The retroactive date is the date from which claims for work you do are covered. So, if you have a claim for work that you did prior to the retroactive date on your policy, which will normally be either the date you started buying insurance or the date you started trading, then that won't be covered. So, that is a restriction. People don't always perceive it as such, but it is a restriction in cover. The ideal policy will either be silent on the matter or say ‘Retroactive date – none’. That just covers your liabilities back forever.
Looking at if you are retiring or planning to cease trading you need to consider two aspects. If you are a limited company selling to another company you're normally selling all your liabilities as well as all your assets. Therefore, the new company take on the professional liability. On the other side, if you sell your business as a partnership or sole-trader you are selling your goodwill and you will be left with the liabilities. So, you would want to consider buying run-off cover for six years or more.
The reason that it's for six years is the Limitation Act. The Limitation Act limits claims to six years from the date of the negligent advice. There are deeper considerations. Someone can bring a claim in tort which is six years from the date they suffer the loss but can be extended by a further three years from the date you become aware. And in some cases contracts can be signed ‘in deed’ or even under seal. In those cases the Limitation Act is 12 years. In all cases there is an absolute longstop of 15 years to bring a claim
So, if you’re in your late fifties, for example, and you sign something as a deed you may be paying for insurance well into retirement when you’re not receiving an income from the business.