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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 undergoes changes or closes. 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.

Risks

When you stop purchasing insurance to cover your business, you will no longer be protected against defense or indemnity costs from events occurring after the policy was canceled. 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. Policies also reflect applicable state laws, such as statutes of limitations and repose statutes. Therefore, if applicable state laws outline that a business cannot be sued 10 years after completing a job, then the discontinued operations insurance policy would be written to cover only that 10-year period.

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 operation insurance.

Commercial General Liability 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. 

Posted 8:00 AM

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