It’s fairly common for two businesses to merge so that they can offer a more comprehensive service. But when this happens, insurance can be treated as an afterthought. The same oversight can occur in the even more common event that a business decides to wind down – be that because of a tough economic climate or the launch of a new venture.
While the reality is that your business will close, you could still be exposed to a number of vulnerabilities. And these could be even greater two or three years down the line when your cover has long since expired.
So, to help ensure you’ve tied up all those loose ends, we’ve highlighted a few key insurance considerations should you decide to cease trading.
Own the communication
Always keep your broker or insurer informed of your plans. In many cases, insurance can be cancelled by giving 30 days’ notice, with premium paid or due adjusted accordingly. Any amount owed to you may be dependent on there being no claims under the current insurance year.
The preferred approach is to proactively cancel your insurance mid-term. That way, you won’t need to declare to any future providers (including your home or car insurers) that your policy has been stopped due to non-payment.
Scale down your cover
Prompt communication means your broker can advise on any cover you might want to keep or reduce, and when to remove them. For example, it’s unwise to stop your Employers’ Liability insurance with a workforce still in place as the cover is mandatory under UK law. It is therefore better to wait until there’s no one employed at your organisation.
However, you should be able to reduce Public Liability insurance as soon as there are no live contractual requirements in place.
Consider interim cash flow protection
Once the business has been dissolved, it no longer owns any property. If you dispose of equipment in the months prior to dissolution, your premium can be adjusted downwards before the company closes. But be sure to check what you can discard if entering liquidation. It’s also important to look over any obligations you have with lease hire companies, such as those providing printing and copying equipment.
That being said, scaling down could allow you to save money and rethink your business strategy. After all, if the reason you’ve decided to close is due to cash flow problems, these could be eased by taking the steps described above.
Be wary of contractual obligations
Any contractual commitments should also be reviewed, particularly third-party cover such as Professional Indemnity. Just because you’ve ceased trading doesn’t mean you can’t be sued for poor workmanship on previous projects.
If you’re contractually obligated to hold a certain level of Professional Indemnity for a set time after contract completion, then you’re legally required to purchase run-off cover (see below) to match. And even if such obligations don’t exist, there’s still the possibility of claims for poor service, bad advice or a faulty product, years after the work was finalised.
Failing to take run-off cover when there are clear obligations to do so could result in actions from past clients against you in your individual capacity, at which point your liability is potentially unlimited.
Seek out run-off cover
‘Run off’ is an extension to an existing insurance policy, covering historic liabilities for a fixed period after the policy ends. It’s only required for certain types of insurance, typically referred to as ‘claims made’ policies. For businesses, this normally concerns Professional Indemnity and Directors’ & Officers’ Liability.
In the case of companies ceasing to operate, run-off cover is for claims made on work carried out before trading ended. They’re generally quoted for one, three or six years, and can be arranged in advance. However, the policy usually has to be paid in full, so don’t forget to account for it in your budget.
Cancel monthly payments following insurer confirmation
Many commercial insurance plans are paid in monthly instalments. So, if you’re ceasing operations, you can normally end your direct debits after receiving a cancellation date or similar confirmation from your insurers.
While it’s possible to cancel before that, there will normally be a settlement amount and you could incur additional admin charges from the credit provider. This means that, instead of receiving a return premium, you won’t need to make the future monthly payments.
Stop annual premiums mid-term
For those who pay their premium in one lump sum, cancelling mid-term means you’ll typically be due a returned premium. Some insurers provide a pro-rata refund, whereas others use their own calculation scales, sometimes only returning a premium for non-liability areas.
It’s important to remember that the return premium may be withheld or reduced if there are live claims on the policy.
How RiskBox can help
We understand that, when leaving a company you helped build, insurance is probably the last thing on your mind. That’s why we’re on hand to make the process pain-free, and ensure you’re protected from any fallout.
Speak to a member of our team today to find out how we can help.
Photo by René Ranisch on Unsplash
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