What is discontinued operations and products coverage?
At its core, discontinued operations and products coverage is insurance that covers situations where damages are claimed after an insurance policy has ended because the business has shut down, ceased operations, or undergone a fundamental change to its legal status in the aftermath of a merger or an acquisition.
From a financial standpoint, the premiums associated with this insurance option may be more expensive at the outset. But over time, individuals who are looking at this insurance option should start to see prices go down.
Why do I need insurance after I close my business?
From a risk management perspective, there are at least three reasons why business owners may wish to maintain their insurance even after the business is no longer operating:
- Insurance may be able to cover legal expenses and judgment costs in the event of a lawsuit
- It could take several years for a liability claim to be made
- If you stop paying for your insurance due to a lack of activity, you may not have coverage once your term lapses
Who Needs Discontinued Operations Insurance?
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, and discontinued operations insurance is rarely explored. Discontinued operations insurance and speaking to qualified lawyer are important to consider as long as products or completed services are still “on the market”, because both past and present organizations may be liable for defects, damages, bodily injury, or property damage.
Discontinued Operations Coverage and Considerations
When you stop purchasing insurance to cover your business, you may 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 often do not cover current and past partnerships or joint ventures that are not listed on the policy as named insureds.
On the other hand, owners that close a business should consider purchasing discontinued operations insurance, which covers damages that occur after their insurance 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 premium to cover potential problems. Discontinued operations insurance purchased during the first year of coverage may cost nearly the same as the policy, but discontinued operations insurance premium will continue to decrease in year two, 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 without discontinued operations insurance. 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 Operation Insurance.
Discontinued Operations Insurance For Commercial General Liability Policy
Most businesses have a Commercial General Liability (CGL) Insurance policy to cover damages occurring during the term of the policy. If “occurrence” and resulting claims occur after operations are discontinued and CGL insurance is no longer being purchased a CGL policy does not provide protection. Though it does not make sense to pay premiums for a full 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 through discontinued operations insurance.
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 Insurance for more information on how to remain protected from liability through Discontinued Operations Insurance and other risk management strategies. We have the solutions and risk management tools necessary to keep you protected for years to come.
What is an “Occurrence” Liability Policy?
We’ve talked about occurrence liability more in-depth before, but one of the most important features of this insurance option is the fact that it allows business owners to be covered for claims of property damage or bodily injury as long as the incidents occur within the time period specified by the policy.
What this means is that if you have an occurrence liability policy, you’ll be able to receive coverage even if the incident in question happened several years ago. Depending on where you are in your company’s journey, an occurrence liability policy can make it possible for you to avoid having to pay for insurance for years after your retirement.
If you’re still deciding on an insurance policy or if you’re starting a new business, you may want to consider looking into an occurrence liability policy if you’re in a profession that commonly sees liability claims coming up years after the fact.
Are you undecided about whether you need discontinued operations and liability coverage or an occurrence liability policy? Our brokers are here to help!
Contact ALIGNED to speak with one our Advocates who are business insurance experts that assess the details of your situation and then make a personalized insurance recommendation.
Request a FREE quote or get in touch with us today!