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runoff provision

A runoff provision is a provision in a claims-made policy stating that the insurer remains liable for claims caused by wrongful acts that took place under an expired or canceled policy for a certain time period.

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For example, consider a policy written with a January 1, 20x5–20x6, term and a 5-year runoff provision. In this situation, coverage will apply under the runoff provision to all claims caused by wrongful acts committed during the January 1, 20x5–20x6, policy period that are made against the insured and reported to the insurer from January 1, 20x6–20x1 (i.e., the 5-year period immediately following the expiration of the January 1, 20x5–20x6, policy). Although runoff provisions function in a manner that is identical to extended reporting period (ERP) provisions, there are several differences. First, ERPs are generally written for only 1-year terms, whereas runoff provisions normally encompass multi-year time spans, often as long as 5 years. Second, while ERPs are most frequently purchased when an insured changes from one claims-made insurer to another, runoff provisions are generally used when one insured is acquired by or merges with another. In such instances, the acquired company buys a runoff provision that covers claims associated with wrongful acts that took place prior to the acquisition but are made against the acquired company after it has been acquired.

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