If you plan to exit your recruitment business—whether through retirement, sale or ceasing trading, protecting against the risks that may continue even after your departure is crucial.
One essential part of the exit process is securing run-off insurance, which can protect you from potential claims arising after your business operations have ceased.
But what is run-off insurance? When should you arrange it, and how long do you need it? This guide gives an overview of everything you need to know.
What is run-off insurance?
Run-off insurance, sometimes called "run-off cover," is a type of professional indemnity insurance that protects against claims made after your recruitment business has stopped trading. Even after exiting the business, you could still face legal claims relating to the services provided or advice given before departure.
For a recruitment business, this might include claims related to wrongful placements, employment disputes, or breach of contract. Run-off insurance covers these claims, ensuring that you're not left personally liable for historic incidents.
Why run-off insurance is crucial for recruitment businesses
Like other professional service providers, recruitment businesses face the possibility of claims long after services have been delivered. For example, if a candidate you placed in a position later sues your former client, alleging wrongful termination, the client might hold your recruitment business responsible for placing the "wrong" candidate. Without run-off insurance, you could be personally liable for legal defence costs or settlements even though you're no longer associated with the business or it's no longer operating.
Here's why run-off insurance is particularly important for recruitment businesses:
Extended risk cover—professional liability claims can emerge years after a placement or contract. Run-off insurance protects you against these risks long after your business has ceased operations.
Peace of mind—stepping away from your business is a significant transition. Run-off insurance provides peace of mind, allowing you to retire, sell, or close your business without the lingering worry of potential legal claims.
Protection of personal assets—without run-off insurance, a significant claim could threaten your personal assets, such as savings or property. Run-off cover protects you from this financial risk.
Assisting business sale—if you're selling your recruitment business, having run-off insurance in place can make the sale more attractive to potential buyers. Buyers will be reassured knowing they won't be liable for past issues, which can be a significant advantage in negotiations.
When should you purchase run-off insurance?
The best time to purchase run-off insurance is when finalising your exit strategy. Whether you plan to sell the business, retire, or close it down, securing run-off cover before it officially ceases operations is critical. This timing ensures no gap in cover, protecting you from any claims that might arise after your departure.
If you're selling the business, discussing the need for run-off insurance with the buyer is advisable. In some cases, the buyer may agree to cover the cost of run-off insurance as part of the sale agreement. Alternatively, they might require you to purchase it to protect both parties from future claims.
How long do you need run-off insurance for?
The length of your run-off insurance term varies depending on the nature of your recruitment business and the potential risks. Typically, run-off policies are maintained annually for up to six years. They can offer cover for specific periods, such as three, five, seven years, or even indefinite coverage. Considering the typical timeframe for claims in the recruitment industry is crucial when choosing a policy that offers adequate protection.
If you're unsure, consulting with an insurance broker specialising in run-off insurance for recruitment businesses is a good idea. They can help you assess the risks and protect you as you exit your business.
Supporting employees when they leave
As well as making provisions to protect your business from risks after an employee’s departure, supporting them as they leave your business is a responsibility and an opportunity to strengthen your company’s reputation. Whether an employee is departing due to retirement, redundancy, personal reasons, or pursuing a new opportunity, ensuring they feel well-supported during the transition is crucial, especially in relation to employee benefits.
While it may seem counterintuitive to focus on those departing, handling exits properly reflects well on your business. It demonstrates a commitment to your people, even at the end of their journey with your company, and helps maintain positive relationships, which can be vital for future business and reputation.
For more information or for a run-off insurance quotation click here or call us on 0330 818 7634. To find out more about a ‘group leavers’ packages, click here.
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