What happens if your business insurance lapses?

Helping you understand what type of insurance policy you have and what could happen if it were to lapse

With all the challenges last year presented, keeping on top of business insurance may no longer be a top priority. Whether you have decided to close your company or if you are between contracts, discontinuing your business insurance may seem like the easiest choice. However, before making any decisions, you should seek to understand how your policy works and the risk that comes with a lapse in business insurance.

When buying an insurance policy, you need to make sure that it reacts when you come to make a claim, that’s why you buy it. Equally, when it comes to lapsing an insurance policy you already have in place, you need to be sure that in doing so, you are not left ‘uninsured’.

 

Types of policies and how they react

The main consideration when looking at your insurance policies is what the policy covers – that is, what is the insured event and what benefit will be received by the policyholder. However, an often overlooked element of the cover is how/when a policy is triggered by a perceived insured event and a key question here is whether the policy operates on a claims made, or claims occurring basis. 

The following policies are arranged on a ‘claims occurring’ basis:

• Public and Employers Liability Insurance

The following policies are arranged on a ‘claims made’ basis:

• Professional Indemnity Insurance
• Tax Liability Cover
• Tax Enquiry Insurance
• Jury Service and Legal Protection

What is the difference between ‘claims made’ and ‘claims occurring’?

‘Claims occurring’ policies react where the event giving rise to a claim occurs during the period of insurance.

To use Employers Liability Insurance as an example, this means that if an employee were injured as a result of an accident during the course of their employment, the Employers Liability policy that was in place at the time of the accident would react.

‘Claims made’ means that the policy will react to any claims made during the period of insurance. This is when you call upon the policy to react, not when the incident giving rise to the claim occurred.

Therefore, by its very nature, a ‘claims made’ policy must be active/in force in order to obtain the benefit. Because of this, you should consider keeping a ‘claims made’ insurance policy in place for as long as you are exposed to the risks insured, or your exposure is such that you are comfortable being uninsured. Please note that whilst a ‘claims made’ policy will react to claims made during the period of insurance, all policies will contain provisions around policies being taken out after an insured is aware a claim will need to be made. 

 

What if your ‘claims made’ business insurance policy lapses?

If you are considering discontinuing or allowing your business insurance to lapse, you should consider the risks. Whether cancelling is based on the closure of your company or a simple mistake in not renewing, if your ‘claims made’ policy is no longer in place and you seek to make a claim, you will not be in a position to do so. This is the case even if the claim relates to when you had an active insurance policy.

Not all insurance claims are raised instantly. In the context of Professional Indemnity Insurance, a claim may be brought against you by a client based on a mistake in work undertaken years prior. Even if your company is no longer running, you can still be responsible for dealing with the claim and liable for the losses.

For example, an IT contractor has a valid Professional Indemnity Insurance in place during the time they undertake a contract. A few months after the work is completed, they find themselves temporarily out of contract and therefore allow their insurance coverage to lapse. Months after their Professional Indemnity coverage has lapsed, an error in the services that they provided causes the client to sustain a financial loss. As a result, the company they provided their services to decide to take out a claim against them.

Regardless of the fact that they are no longer providing services to this company, the IT contractor would still be responsible for dealing with this matter. Without an active Professional Indemnity Insurance policy at this time, the contractor would be uninsured and would be liable themselves for the defence costs and any legal liability they have for their former client’s losses.

 

What if your ‘claims occurring’ business insurance policy lapses?

Because of its nature, a ‘claims occurring’ policy only needs to be active during the timeframe in which an incident may occur. This kind of policy may cover you as long as the insurance policy was active when the claim event occurred, even if you now no longer have the insurance in place when the claim is made.

Because of this, if you are no longer providing services, you can consider allowing your ‘claims occurring’ based insurance policies to lapse.

It is worth stressing, however, that you need to be sure you are no longer exposed to an incident occurring. If a ‘claims occurring’ policy is lapsed or cancelled and you continue to provide services or have an exposure to incidents which may fall under the scope of coverage, you will be uninsured for the period you didn’t hold an active policy. It is unlikely that cover can be ‘backdated’ for this period should you choose to resume cover at a later date.

 

How long should I continue my business insurances?

The length of time you keep the policy in place depends on a range of factors, as such, there is no ‘one size fits all’ answer. However, you should give great consideration to continuing your policy whilst you are still exposed to claims. Your exposure will vary depending on a number of different factors:

• The risk insured by the policy in question
• The work undertaken, differing industries may have different exposures to claims
• The complexity of the work undertaken
  
• External factors such as HMRC’s focus (important when considering Tax Insurance)
• How litigious a client may be
• Any time limitations that apply. For Professional Indemnity Insurance the majority of, but not all, negligence claims are subject to a time limit of six years following the date of the negligent act

Once you have considered and understand your exposure, you will then be in a position to determine how long you keep your policy in place and a driving force here will be your risk appetite. Qdos are able to provide policy information and answer any questions you may have to allow you to make an informed decision regarding your insurance. 

We specialise in contractor insurance products for the self-employed and our insurance policies can be quoted and purchased entirely online within minutes. If you wish to discuss renewing your insurance here with Qdos, get in contact with a member of our team. Give us a call on 0116 269 0999 or email us at [email protected].