Runoff Insurance: Why It Matters After Business Closure or Acquisition

Updated • Apr 5th '25

What Is Runoff Insurance?

Runoff insurance is a special type of liability coverage that applies after a business has ceased operations or undergone a structural change like a merger or acquisition. It is also commonly used by professionals—such as doctors, lawyers, consultants, and accountants—who are retiring or closing their practices.

Unlike traditional liability insurance, which protects during the active life of a business or professional service, runoff insurance protects after the operations stop. It covers legal claims that arise from past work, even if the claim is filed years later.

For example, suppose a consulting firm closes down in 2024. A client then sues in 2026 for alleged negligence in a project completed in 2023. Without runoff insurance, the firm would have no active coverage and may have to pay legal expenses out-of-pocket. But with a runoff policy in place, the insurer would handle the claim.

How Runoff Insurance Works

Runoff insurance operates on a claims-made basis. This means the policy responds only to claims made and reported during the policy period, even if the event causing the claim happened earlier. In contrast, “occurrence-based” policies respond to incidents that occurred during the policy period, regardless of when the claim is filed.

In the case of runoff insurance, the policy starts when the company is acquired, merged, or closed — and extends coverage for a defined period (commonly five to seven years). Any claims filed during this time for events that occurred prior to the policy's start date are covered.

Let’s break it down with an example:

A company is sold on January 1, 2025.
A runoff policy is activated for five years.
A lawsuit is filed on March 10, 2027, based on a service provided in 2023.
Since the event occurred before the sale and the claim was made within the five-year runoff period, the policy covers it.

This kind of protection is especially important because legal claims can be delayed due to lengthy investigations, evolving circumstances, or statutes of limitation in various jurisdictions.

Who Needs Runoff Insurance?

Runoff insurance isn’t just for big corporations. It serves a wide range of individuals and businesses during significant transitions. Here are the main groups that should consider it:

1. Companies Being Acquired or Merged

When one company acquires another, it also inherits its past liabilities. That means any undiscovered legal issues, unresolved disputes, or allegations of misconduct may become the new owner’s problem.

To prevent this, the buyer typically requires the seller to purchase a runoff insurance policy. This ensures that any post-deal legal claims related to the seller’s past business are handled by the insurer—not the new parent company.

This is a standard practice in mergers and acquisitions across various industries, especially where long-term contracts, regulatory oversight, or intellectual property are involved.

2. Professionals Retiring or Closing Their Practice

Professionals like doctors, engineers, and financial advisors often carry professional liability insurance during their careers. However, when they retire or close their practice, the policy expires — and with it, the protection.

But clients or patients may file complaints or lawsuits after a professional has stopped working. For instance, a former patient may bring a malpractice claim years after receiving treatment.

In such cases, a runoff (or extended reporting) policy allows professionals to continue defending against claims related to services they provided in the past.

3. Directors and Officers (D&O)

Corporate executives and board members are particularly vulnerable to lawsuits stemming from their decisions while in leadership roles. When a company shuts down or is acquired, D&O runoff coverage ensures they remain protected against claims of mismanagement, breach of fiduciary duty, or financial misconduct — even after stepping down from their roles.

What Does Runoff Insurance Cover?

The coverage provided by a runoff policy is similar to the original liability insurance it replaces. It typically includes:

Legal defense costs – This includes lawyer fees, court charges, and any other legal costs involved in handling a claim.
Settlements and judgments – Compensation awarded to claimants
Professional errors or negligence – Mistakes in service delivery or advice
Breach of duty – Especially for directors, officers, or fiduciaries
Employment-related claims – Harassment, wrongful termination, or discrimination (in business contexts)

The exact coverage depends on the type of business or profession, but the principle is the same: protect against claims related to past actions that surface after operations cease.

What Isn’t Covered?

While runoff insurance offers critical protection, it doesn't cover everything. Here are common exclusions:

Claims from new activities – Anything that happened after the policy start date is not covered
Known legal issues – If a claim was expected or underway before the policy was purchased, it’s often excluded
Criminal or fraudulent behavior – Illegal actions or intentional wrongdoing are not covered
Contractual liabilities – Breaches that fall outside the scope of professional duties may be excluded

It’s important to thoroughly review policy terms and consult an insurance advisor to ensure proper protection.

How Long Does Coverage Last?

Runoff policies are generally available for terms ranging from three to ten years, with five years being the most common. The duration should align with the statute of limitations in your field or jurisdiction. In some sectors, like healthcare or finance, lawsuits can be filed several years after services were rendered.

For retiring professionals, it’s advisable to keep the policy active until all possible liability periods have expired.

Some insurers offer options for annual renewal, while others require a one-time premium payment for the entire period. Discussing this upfront helps avoid coverage gaps.

How Much Does Runoff Insurance Cost?

The cost of runoff insurance varies based on several factors, including:

Size and type of business or practice
Claims history and industry risk profile
Duration of coverage (longer terms cost more)
Geographic location and local legal climate

As a general estimate, a runoff policy can cost 100% to 300% of your last annual premium. So if your annual professional liability insurance was $4,000, a five-year runoff policy might cost between $4,000 and $12,000.

Although this may seem expensive, consider the potential cost of defending a lawsuit — which could easily exceed six figures.

When to Purchase Runoff Insurance

Timing is critical. Runoff insurance must be purchased before the business closes, is sold, or merges. If you wait too long, coverage may be denied, or you may have fewer policy options.

For business sales and acquisitions, runoff coverage is often negotiated in the contract. In retirement scenarios, professionals should speak to their insurers well in advance to arrange smooth coverage continuity.

Benefits of Runoff Insurance

Runoff insurance offers more than just peace of mind — it provides:

Long-term protection against legal risks
Financial security from unexpected lawsuits
Stronger merger/acquisition deals due to risk mitigation
Credibility and professionalism during business transitions
Legal support for defending your reputation

For anyone planning a major change, having a runoff policy in place is one of the smartest risk-management steps you can take.

Frequently Asked Questions (FAQs)

Is runoff insurance mandatory?
Not always, but it may be required in acquisition contracts, or by regulatory bodies in certain industries like healthcare and finance.

Can I buy runoff insurance after closing my business?
It’s not recommended. You should purchase it before closure. Post-closure options are limited and costly.

Is runoff insurance the same as tail coverage?
They are similar but not identical. Tail coverage is an extension of an existing policy, while runoff insurance is a new policy that activates after closure or acquisition.

How do I choose the right policy duration?
Consider the average statute of limitations for your industry. Five years is common, but high-risk sectors may need longer periods.

What happens if a claim is filed after my runoff coverage expires?
It won't be covered. That’s why choosing an adequate policy duration is essential.

Key Takeaways

Runoff insurance protects against future claims stemming from past business activities
It is crucial for companies being sold, merged, or closed, and for retiring professionals
Coverage is claims-made, not occurrence-based, meaning it only applies during the runoff period
Typical policy terms range from three to ten years
The cost depends on risk factors, industry, and desired coverage duration
Purchasing early ensures better pricing and fewer coverage gaps

Final Thoughts and Call to Action

Whether you're winding down a company, merging with another organization, or preparing for retirement, don’t leave your past unprotected. Legal claims can surface years later — long after your business is gone or your career has ended.

Runoff insurance is your safety net. It’s not just about covering lawsuits — it’s about protecting your legacy, finances, and peace of mind.

Don’t wait until it’s too late. Talk to a licensed insurance provider today and explore the right runoff coverage for your business or professional needs. Prepare for the future by securing your past.