Runoff Insurance

Runoff Insurance: What It Is and How It Works

Definition

Runoff insurance (also called closeout insurance) is a claims-made insurance provision that covers claims asserted after a business has been acquired, merged, or ceased operations. It protects the acquiring entity (or the insured’s former directors and officers) from liabilities that relate to wrongful acts that occurred while the target was operating but are discovered or litigated later.

Key takeaways

• Runoff policies are claims-made: they cover claims reported after the policy period for events that occurred during the covered period.
• They are commonly used in mergers, acquisitions, and business wind-downs to isolate historical liabilities from the buyer or successor.
• Typical coverages that utilize runoff provisions include directors & officers (D&O), professional liability (E&O), fiduciary liability, and employment practices liability (EPL).
• Runoff differs from an extended reporting period (ERP) mainly in duration and purpose: ERPs are usually short-term (often one year) and used when switching insurers; runoff provisions usually span multiple years and are tied to transactions or closures.

How runoff insurance protects acquiring companies

When one company buys another, the buyer assumes the target’s assets and its potential legal liabilities—some of which may surface years later (e.g., contract disputes, investor claims, intellectual property suits). A runoff policy ensures those post-closing claims are handled by insurance rather than by the buyer’s capital.

Typical mechanics:
* The policy is written on a claims-made basis: coverage applies if the wrongful act occurred during the policy period and the claim is reported during the runoff reporting period.
* The runoff period often lasts multiple years and can be negotiated based on exposure and statute-of-limitations considerations.
* The cost of purchasing runoff coverage is frequently reflected in the acquisition price or paid from escrowed transaction funds.

When professionals use runoff insurance

Professionals who close practices (physicians, lawyers, consultants) commonly buy runoff coverage to protect against claims related to past services. Such policies typically remain in force or are renewed until the relevant filing windows (statutes of limitation) expire.

Example

A runoff policy covering wrongful acts committed between Jan 1, 2017, and Jan 1, 2018, might permit claims to be reported from Jan 1, 2018, through Jan 1, 2023—creating a five-year reporting window after the policy term ends for eligible claims.

Policies that commonly include runoff provisions

• Directors & Officers (D&O)
• Professional liability / Errors & Omissions (E&O)
• Fiduciary liability
• Employment Practices Liability (EPL)

Important considerations when buying or negotiating runoff

• Length of reporting period: Match it to likely exposure and applicable limitation periods.
• Scope of coverage: Confirm whether the runoff covers legal defense costs, indemnity payments, and whether it excludes certain known claims or circumstances.
• Who pays: Determine whether the seller purchases the runoff or the buyer requires and funds it (often negotiated in the deal).
• Limits and retention: Ensure policy limits and retentions are adequate for likely exposures.
• Carrier credit and terms: The insurer’s claims-paying ability and policy wording matter—narrow exclusions or ambiguous definitions can leave gaps.
• Alternatives: In some deals, buyers retain specific indemnities from sellers or establish escrow reserves instead of or in addition to runoff insurance.

Market context

Runoff is a significant part of the insurance landscape: for example, PwC estimated North American runoff reserves at roughly $402 billion in 2021, illustrating the scale of liabilities managed through runoff programs.

Conclusion

Runoff insurance is a focused tool to transfer post-closing exposure for historical acts away from acquirers or former principals. When used thoughtfully—matching reporting periods, coverage scope, and limits to the underlying risks—it reduces deal friction and protects buyers from unforeseen legacy liabilities.