Why Businesses Need Protection Even After They Stop Trading
When a business ceases operation or discontinues a product line, it may appear that product-related risks end simultaneously. But for businesses that manufacture, import, distribute or sell products, liability doesn’t end on the day operations cease. Products remain in use long after a business closes, and this creates a gap many business owners aren’t aware of. This is where run-off cover becomes essential.
Product Liability at a Glance
Product liability insurance protects businesses if the products manufactured or supplied cause injury, illness, or property damage. In Australia, these policies are written on an occurrence basis – meaning the insurer responds to claims that arise when the damage or injury occurs, not when the product was sold.
This distinction is crucial. A product can be sold years ago yet may cause harm today. If the business no longer carries an active policy at the time of harm, there may not be protection.
Why Claims Can Arise After Trading Has Stopped
Even if a business shuts down, the products it created or supplied continues to exist. Many have long life cycles: machinery, electronics, tools, components, building materials, and more. If an issue occurs with one of these products months or years after a business shuts down, a claim may still be raised.
Examples of late-emerging risks include:
- Faults in electrical or electronic equipment that develop over time
- Mechanical failures in long-life components
- Building materials contributing to defects or structural issues years later
Without an active policy in place at the time of the incident, the business may be left unprotected.
What is Product Liability Run-Off Cover?
Run-off cover extends product liability protection after a business has stopped operating or stopped supplying a product. It ensures ongoing cover for claims arising from past activities, ensuring businesses remain protected against future incidents linked to previously supplied products.
Who Should Consider Product Liability Run-Off Cover?
Run-off cover is relevant for businesses that:
- Manufacture, import, or distribute products
- Supply goods with long service lives
- Operate in industries with higher-risk product categories (e.g., machinery, construction materials, electrical goods?
- Are closing, restructuring, merging or selling part of their operations
If products remain in circulation, potential liability remains as well.
Determining an Appropriate Run-Off Period
Run-off cover is determined case by case, with the appropriate length depending on several factors, including:
- The expected lifespan of the products supplied
- The severity and nature of potential injury or damage
- The inherent risk profile of the goods
- Contractual, regulatory, or industry requirements
- The recommendations of an insurance broker familiar with the business’s exposure
Higher- or long-life products may warrant extended run-off periods, whereas businesses dealing in lower-risk or short-life products may require shorter terms.
The Consequences of Inadequate Protection
Failing to arrange run-off cover can expose a business and its directors to:
- Significant legal costs
- Compensation claims
- Financial loss
- Reputational damage
- Potential personal liability in certain circumstances
Run-off cover mitigates these risks by maintaining essential insurance protection beyond the period of active trading.
The Role of an Insurance Broker
An experienced broker plays an important role in assessing a business’s exposure and advising on appropriate run-off arrangements. This includes evaluating product life cycles, risk levels, contractual requirements, and policy wording to ensure there are no gaps in protection during or after business transition
Conclusion
Liability does not cease because a business stops operation. Run-off cover provides vital protection against future claims arising from historical product exposures, safeguarding both the organisation and its directors.
Businesses preparing to close, restructure, or discontinue a product line should seek professional advice to ensure adequate run-off arrangements are in place.
Barrack Broking assists clients in assessing their exposure and securing appropriate run-off cover to protect against ongoing product liability risks.
