Insurance Issues Involved In Business Transfers
 

Property and Casualty ("P&C") - In addition to the general need for insurance coverage for loss protection, most transactions involve financing, with the business' assets being used as collateral.   Prior to closing, the lender will require proof, in the form of a certificate, that the lender is named as an additional insured on a policy with sufficient coverage amounts.  If a lease is involved in the transfer, the Landlord will also require appropriate insurance protection.  Often times, the Seller's existing insurance agent is the most efficient source for coverage, as the agent is familiar with the business and the facility.

Health Insurance - One of the tenets of a smooth transition of ownership is to make the transfer as transparent as possible for the employees, and a change in health insurance coverage can be disruptive.  Discreet conversations with the Seller's existing agent to ensure a smooth transfer of coverage without gaps in coverage will go a long way in providing assurance to the employees that the change in ownership will not negatively impact them or their families.  With the scheduled implementation of mandated employee coverage provisions of the Affordable Care Act taking place in 2015, businesses with the appropriate number of employees may be required to provide different coverage. It may be important to visit with a knowledgeable professional to calculate the cost ramifications of that change and implement appropriate coverage.

Life Insurance - In addition to protecting the economic needs of his or her family, the buyer of a business obtaining SBA financing may be required to provide a life insurance policy in the amount of the loan to the lender as a prerequisite to closing.   If the buyer has an existing policy with sufficient coverage in place, the assignment of that policy can be fairly routine.  If a new policy is required, the process can be time consuming and postpone closing, as the buyer will probably be required to undergo a physical and address any preexisting medical conditions.

Representation and Warranty Insurance - In special circumstances, usually on larger, more complex transactions, the buyer and seller may confront a deal-breaking issue, such as a potential tax or environmental liability.  In those circumstances, it might be feasible to purchase a special policy to insure over that event.  Although expensive and time consuming, it can be an option to save the deal.

Tail Insurance - Although most insurance matters impact the buyer more than the seller, in certain situations, such as the sale of a manufacturing business, it might be appropriate for the seller to purchase a "Tail Policy" to protect the seller against post-closing claims.  In the case of the manufacturing business, this could include a tort claim due to a defective product.

Insurance matters can be very complex and it is important to deal with experienced professionals with access to different insurance options for the parties.

(originally published in August 2014 eNewsletter)