Your EBIDTA looks great. The venture capital money is flowing freely. It’s finally time to sell your company. But you can’t forget to wrap up your insurance coverage.
"People tend to put the insurance on the back burner during a sale, because they think they can cancel their policy and walk away,” says Parker Berry II, CIC, executive vice president of SeibertKeck Insurance Agency. “That’s not always the case.”
When two companies tried to merge, he watched the deal get held up for 30 days because of an insurance issue. One company was ready to go, but the other couldn’t get the insurance wrapped up in the time frame that was available.
Business owners may have been protecting their company from a variety of exposures for years; now that it’s time to sell, they need to take steps to wrap everything up with their insurance. One of the last things someone wants to see after they have sold their business is an uncovered lawsuit against their former company and themselves.
To help with the closing of the business, the owner needs to seek the counsel of their agent or broker in a timely manner before the closing. This does not mean the week of the sale. The more time the business owner can provide the agent, the better.
In addition, potential buyers should take a multi-pronged due diligence approach, and one of those prongs should be insurance. They need to review current policies, make sure the coverage is appropriate, the limits for the buildings and the limits of liability are adequate, etc., at the same time they’re reviewing the financials.
What do owners need to understand about their insurance before a deal is made?
There are two general types of liability insurance policy forms, and when it comes to selling a business or being acquired, owners should not just cancel their policies and walk away if the organization has claims-made policies. The types of policies that are written on a claims-made policy are professional liability, errors and omissions, executive liability and sometimes employee benefits and tough product liability exposures.
The process to wrap up the claims-made policies is relatively simple, but can be costly depending on the exposures. The first step is notifying your broker that you’re selling. Your broker will contact your various insurance companies to request extended report period (ERP) options or tail coverage. Depending on the type of policies the ERP may be for 12, 36, 60 or unlimited months. This time frame is how long you have to report a claim to your insurance company after you have sold. If you choose not to purchase the ERP, insurance companies typically provide a free tail that is anywhere from 30 to 60 days, depending on the carrier. After the specified time period, the insurance company will deny any claim pertaining to the claims-made policy that you did not purchase the ERP option.
An occurrence policy will respond to a covered cause of loss that occurred during the time period of coverage — it doesn’t matter when the claim is turned in. With this type of policy, a business owner can cancel at the time of sale and can walk away not having to pay additional premium.
How do you recommend business owners best handle matters like these?
Even if you paid your premium at the beginning of the year, you may still have bills when you wrap up the insurance coverage. It’s good to know upfront, before you negotiate your sale price, what your out-of-pocket expense could be.
Again, if you’re going to sell your business, the more time you can give your agent the better. Start that conversation as soon as you can, asking, ‘What do I need to do to close everything up, and make sure I can walk way on X date, knowing what costs I will have, if any?’
Ideally, both the buyer and seller should put time and effort into addressing the insurance for the acquisition or the sale of the company. You want to make sure all loose ends are tied up, in order to give a fresh start to the new owner and take care of the previous owner.