When mergers, acquisitions and business closings occur and operations are discontinued, or when a sole proprietorship becomes a partnership or limited liability company, the liability of the defunct organization often continues. In some cases, unforeseen liabilities arise even years after the business changes or closes.
About To Merge, Acquire Or Close A Business?
When you stop purchasing insurance to cover your business, you will no longer be protected against defence or indemnity costs from events occurring after the policy was cancelled. When businesses become partnerships or joint ventures, new insurance policies do not cover current and past partnerships or joint ventures that are not listed on the policy as named insureds.
On the other hand, sole proprietors that close a business should consider purchasing discontinued operations insurance, which covers damages that occur after the Commercial General Liability (CGL) policy had been cancelled for ceased activity or when it changes through merger, acquisition or change in legal status. These policies are typically offered for a declining percentage of the annual CGL premium to cover potential problems. Insurance purchased during the first year of coverage may cost the same as the CGL policy, but in year two, the premium may be 10 to 15 percent less, then 20 percent less in year three, and so on.
If a corporation (especially a closely held one) is sold, it is important to determine whether the seller transferred all interest or whether the buyer has acquired only the assets of the corporation. If the seller retains the corporate shell, liability comes with it, and the seller may not be able to pay for subsequent liability. If a business is sold to an entity that refuses to accept liability stemming from injury or damage arising from products made or sold prior to the liquidation or sale, the seller will benefit from discontinued operations insurance.
Discontinued Operations Insurance vs. CGL Policies
Most businesses have a CGL policy to cover damages occurring during the term of the policy. If damages and resulting claims occur after operations are discontinued, a CGL policy does not provide protection. Though it does not make sense to pay premiums for a CGL policy when the business is closed or operations have ceased, there is reason to remain protected in the event of property damage, a defect or bodily injury. If a construction company builds a structure with CGL coverage and then goes out of business, it is still liable for subsequent damages due to defects in the structure, but the entity is not covered by the policy.
What are the Key Exclusions for Discontinued Products and Operations Coverage?
The key exclusions for Discontinued Products and Operations Coverage are usually similar as Product and Completed Operations coverage that forms part of a General Liability Insurance policy for your business during regular operations. For the most part, only third-party damage is covered. The exclusions are as follows:
- Intentional damage – any damage or injury caused by intentional damage would be excluded from coverage.
- Damage to work or product – your own work or products damaged by defects would not be covered. In other words, if your product or work is not what you promised, it would not be covered.
- Non-bodily injury or property damage – damage to a product or completed work is only covered if it causes third-party damage. If it simply fails on its own, it would not be covered.
- Product recalls – your Discontinued Products and Operations Coverage would not be covered recalled products.
- Impaired property damage – if your product is used as a component in another product and causes that product to be damaged, and if your product was removed and the product would then function, you are not covered.
How Long do you Need Discontinued Products and Operations Coverage for?
The length of time to hold Discontinued Products and Operations Coverage will vary according to the nature of your discontinued business or products. Generally speaking, the risk of liability falls over time and policy costs will often decrease by a certain percentage year-to-year. However, depending on your industry, product and operation liability may be governed by either the provincial or federal government. Contact ALIGNED to determine your business’ specific needs.
What is Covered by Discontinued Products and Operations Coverage?
Your Discontinued Products and Operations coverage will be similar to what is covered under your Commercial General Liability policy for products and completed operations insurance. Claims for bodily injury or property damage that may come out of your products or completed work will be covered if they occur during your policy’s timeframe. It’s important to note that you must purchase Discontinued Products and Operations Coverage prior to selling, closing your business or otherwise ceasing operations as they have previously occurred.
How is Discontinued Products and Operations Coverage Priced?
Given that the risk involved with the work or products of a discontinued or closed business decrease over time, in most cases the cost of your policy will similarly reduce as times goes on. Typically, your premium will be a percentage of what is charged for products and completed operations work under your Commercial General Liability policy when you were in business. This percentage will decrease over time as your risk and liability also go down. Normally you can purchase either a claims-made or occurrence policy, depending on your business. The best option is to speak with a specialized ALIGNED agent to determine your best Discontinued Operations Liability Insurance needs.
If your organization is discontinuing some or all of its operations, being acquired, merging or changing its legal status from, for example, a sole proprietorship to a limited liability company, contact ALIGNED for more information on how to remain protected from liability.
To learn more about discontinued operations insurance and other ALIGNED insurance solutions, talk to one of our advocates today. We can help you secure the best products, services and solutions for your business.
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