Reviewed by Apr 15, 2021| Updated on
Runoff insurance is a provision under insurance policies that include claims that are made on the organisations that are merged with another organisation, acquired, or have stopped their functions. Runoff insurance is also referred to as closeout insurance. This is availed by those companies that are being taken over and indemnifies liabilities of the acquiring organisations from any lawsuits against the directors of the taken over organisation.
Acquiring an organisation means that the acquirer will not only get to possess all its assets but also liabilities; it may arise at some point in future as well.
This may happen for numerous reasons. Third parties can come out and say that they were not managed fairly in deals or contracts. The investors may express their dissent over the past directors and employees that were a part of the business previously.
Rival companies may go onto claim copyrights over the intellectual properties, and the company that acquired the previously existent company will be held accountable as they are no more functional. The acquiring company will be in charge of all liabilities. It is for this reason that all acquired companies will be asked to avail runoff insurance to stay away from this kind of liabilities.
Runoff policies fall under the class of ‘claims-made policy’ and not the occurrence policy. A difference is seen in the type as the claim can be made after several years of the occurrence of the incident, which may cause losses and damages and the occurrence policies offer cover only for that period over which the insurance policy was in place.
The tenure of the runoff policy is also referred to as the ‘runoff’. It is generally fixed for numerous years after the insurance policy is effective and starts offering coverage. This provision is bought by the acquiring firm, and the purchase money is generally covered in the price of the acquisition.