Australian businesses are navigating a rapidly evolving risk environment in 2025, with regulatory reforms, business closures, and M&A activity on the rise. For directors, professionals, and company owners, runoff insurance has become a crucial—yet sometimes misunderstood—tool for safeguarding against lingering liabilities after an entity ceases trading or changes hands. But what exactly is runoff insurance, who needs it, and what’s changed this year?
What Is Runoff Insurance?
Runoff insurance is a type of professional indemnity or directors and officers (D&O) insurance policy designed to protect businesses and their key personnel from claims made after a business has stopped trading, merged, or been acquired. Unlike standard policies, which only cover claims made while the policy is active and the business is operating, runoff insurance continues to provide coverage for alleged wrongful acts that occurred during the business’s operational period—even if claims are made years later.
- Example: A consulting firm closes in 2025. Two years later, a former client alleges negligent advice from 2024. If the firm had runoff insurance, it would cover the legal costs and potential damages.
- Coverage Duration: Most policies offer 7 years of protection, aligning with the Australian Corporations Act’s record-keeping obligations.
- Trigger Events: Business closure, merger, sale, or director retirement commonly trigger the need for runoff cover.
Why 2025 Is a Pivotal Year for Runoff Insurance
The landscape for runoff insurance in Australia has shifted notably this year. Several trends and policy updates are driving increased demand and scrutiny:
- ASIC Enforcement and Regulatory Change: The Australian Securities and Investments Commission (ASIC) has stepped up enforcement actions in 2025, especially around insolvent trading and director duties. This has increased the risk profile for former directors and officers.
- Surge in Insolvencies: With economic headwinds and the end of some pandemic-era support, Australia has seen a spike in voluntary business closures and insolvencies. This has led to more businesses needing runoff protection as they wind up.
- M&A Boom: 2025’s competitive market has fueled mergers and acquisitions. Both buyers and sellers are seeking runoff insurance to manage legacy liabilities and ensure clean transaction exits.
- Claims Lag: Many claims—particularly for professional negligence, misrepresentation, or breach of duty—can emerge years after a business event. Runoff cover is now seen as essential, not optional.
According to leading Australian brokers, average premiums for runoff insurance have risen 10-15% in 2025 compared to last year, reflecting this heightened risk and demand.
Who Needs Runoff Insurance—and When?
While runoff insurance is particularly relevant for professional services firms, it’s increasingly recommended for a broad spectrum of businesses and individuals:
- Professional Services (accountants, lawyers, engineers, consultants): Required by many professional bodies and regulators to maintain runoff cover after ceasing practice.
- Company Directors and Officers: Protection against historical claims, especially post-sale or retirement.
- SMEs and Family Businesses: Those closing, selling, or restructuring should assess runoff needs as part of their exit strategy.
- Medical and Allied Health Practices: Regulatory bodies often require extended cover after practice closure.
Timing is crucial: runoff insurance should be arranged before the cessation of trading, sale, or merger, as retroactive cover is rarely available after the fact. Many policies allow for a one-off premium to cover the full runoff period, while others may be renewed annually.
Tips for Securing the Right Runoff Cover in 2025
- Assess Your Risk Profile: Consider the nature of past work, client base, and potential for delayed claims.
- Review Policy Terms: Pay close attention to exclusions, claims handling procedures, and the length of cover offered.
- Consult with a Specialist Broker: Insurers’ appetite for runoff business varies—an expert broker can help tailor coverage and negotiate terms.
- Document Key Events: Insurers will require evidence of business closure, sale, or director resignation to trigger runoff cover.
- Plan Early: Delaying can result in higher premiums or reduced coverage options.
Given the evolving regulatory and economic environment, runoff insurance is no longer a niche concern. It’s a core part of risk management for any business or professional considering a major transition in 2025.
