Retiring, Selling or Closing Your Practice? How PI Run-Off Cover Works

Your last day in practice does not end your exposure to claims about the work you did. A client can raise a problem with a return, a set of accounts or a piece of advice years after the job was finished, and by then you may have retired, sold the practice or moved into an industry role.

Run-off cover is how professional indemnity insurance deals with that gap. This article explains why it exists, when you need to think about it, what your professional body and the Tax Practitioners Board say about it, and what to sort out before you step away.

Why claims outlive the practice

Professional indemnity policies are usually written on a claims made and notified basis. As the Tax Practitioners Board explains, the claim has to be made against you and reported to your insurer during the policy period for the policy to respond. It is the policy in force when the claim arrives that matters, not the one in force when you did the work.

The TPB also notes that, because of State and Territory limitation periods, a civil claim can be made years after the cause of action arose, and potentially after your registration has ended. If you stop holding a policy when you stop practising, there may be nothing in place to respond when that claim arrives.

What run-off cover is

Run-off cover is professional indemnity insurance you keep in place after you stop providing services. It is there to respond to claims about work you did while you were practising. It does not cover new work.

When you need to think about it

•      You are retiring from public practice.

•      You are selling your practice, or your practice entity is merging with another firm.

•      You are closing the practice or winding up the practice entity.

•      You are leaving public practice for an employed or industry role.

•      You are surrendering or not renewing your tax agent or BAS agent registration.

What your professional body and the TPB say

If you are a CPA Australia member, the requirement is specific. After you cease to provide public accounting services, cease to practise, retire, or your practice entity merges with another entity, CPA Australia requires you to maintain professional indemnity insurance for at least seven years. That applies where your past work will not be covered by future policies, for example a policy held by the merged firm.

The TPB approaches it differently. Once you are no longer registered, you are no longer required under the Tax Agent Services Act to hold PI insurance that meets the TPB's requirements. The TPB does, however, recommend that practitioners who cease providing services assess their ongoing risk of claims and consider run-off cover, and it recommends run-off cover if you plan to stop providing tax agent services while you are still registered.

CA ANZ and IPA members should check their own body's current requirements. Where more than one set of rules applies to you, plan to the strictest.

If you are selling or merging

A sale or merger raises a practical question: who covers claims about work done before the deal? Sometimes the buyer's or merged firm's policy picks it up, and sometimes it does not. Make sure the sale or merger agreement is clear on this, check it with your legal adviser, and confirm in writing with your broker how your past work will be covered before settlement.

Before your last day: a checklist

•      Talk to your broker before your final renewal, not after the policy has lapsed.

•      Notify your current insurer in writing of anything that might become a claim, before that policy ends. Under section 40(3) of the Insurance Contracts Act 1984, written notice of those facts given before the cover expires means that policy can respond to a claim made later.

•      Check the retroactive date on your current schedule reaches back far enough to cover all of your past work.

•      Confirm how long your professional body expects cover to run, for example seven years for CPA Australia members.

•      Decide who needs to be insured: you personally, the practice entity, and former partners or staff.

•      Keep your working papers, engagement letters and file notes where you can get to them. They are your best defence if a claim arrives.

Next step

Abacus Australia has arranged professional indemnity insurance for accountants since 1990. If you are planning to retire, sell or step back from public practice, send us your current policy details through the Get a Quote page and ask about run-off cover. If you are moving the other way and starting out on your own, our guide to leaving a firm and starting your own practice covers the cover you will need from day one, and you can read more about our professional indemnity insurance for accountants.

This article is general information only and does not take into account your objectives,