Discontinued Operations Insurance 101
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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.
Did You Know?: As long as products or completed services are still on the market, both past and present organizations may be liable for defects, bodily injury and destruction of property.
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.
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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.
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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Sources: This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2007, 2012-2013 Zywave, Inc. All rights reserved. thestar.com