Selling a company is a big deal. Ideally, the seller gets a fair price and can leave that part of his or her life in the past. But what happens if the buyer falls on hard times and can’t pay the balance of what is owed?
It’s important to make certain the liabilities arising out of the sale of a business are clearly understood by each party and that appropriate insurance is in place. This should be addressed in the buy/sell agreement.
There is a distinction between an asset purchase and a stock purchase, and this likely will determine who is responsible for what. A stock purchase includes both the assets and the liabilities. In these situations, the seller should ensure it is protected from liability arising out of pre-sale activities. Because the buyer now has responsibility for those liabilities, the buyer generally will insure them.
Following is sample insurance policy language the seller might require of the buyer.
Commercial General Liability
Insurance with a limit of not less than $X million each occurrence and a $X million aggregate limit. CGL insurance shall be written on the current version of the ISO occurrence form CG 00 01 (or a substitute form providing equivalent coverage) and shall cover liability arising from premise’s operations, independent contractors, products/completed operations, personal injury and advertising injury, and liability assumed under an insured contract (including the tort liability of another assumed in a business contract).
Seller shall be included as an “additional” insured under the CGL, using current versions of ISO additional insured endorsements CG 20 10 and CG 20 37 (completed operations) or their equivalents. Additional insured coverage as required in this subparagraph shall apply as primary insurance with respect to any other insurance or self-insurance programs afforded to the seller. A copy of the additional insured endorsement will be submitted with the certificate of insurance.
Cross Liability Coverage
If the buyer’s liability policy does not contain standard ISO separation of insured’s condition or substantially similar clause, there shall be an endorsement to provide cross liability.
Business Automobile Liability Insurance
The buyer shall maintain business automobile liability insurance with a limit of not less than $X million each accident. Such insurance shall cover liability arising out of any auto (including owned, hired and non-owned autos), and shall be written on the current version of ISO form CA 00 01, or a substitute form providing equivalent liability coverage. If necessary, the policy shall be endorsed to provide contractual liability coverage equivalent to that provided in the 1990 and later editions of CA 00 01.
Workers’ Compensation and Employer’s Liability Insurance
The buyer shall maintain workers’ compensation and employer’s liability insurance as required by statute. Employers liability limits shall not be less than $X million for bodily injury by accident or disease.
Excess Liability Insurance
The buyer shall maintain an excess liability policy that extends over the CGL, auto and employers liability coverages in an amount of $X million per occurrence.
Professional Liability Insurance
If applicable, the buyer shall assume responsibility for the seller’s prior acts, errors or omissions. The buyer will maintain professional liability insurance in an amount not less than $X million per claim and $X million aggregate. The buyer will make certain that the retroactive date on its policy will be the same as, or precede, the retroactive date on the seller’s policy.
Prior to close of escrow, the seller will notify its existing insurance company of any claims that have yet to be reported or circumstances that could give rise to a claim. Insurance will be maintained in force for so long as the company operates.
In the event the buyer decides to cease operating the business or if the buyer sells the business to a third party, then the buyer shall purchase an extended reporting period endorsement that extends coverage for 10 years after the date of dissolution or sale. The retroactive date for both the seller’s and buyer’s prior acts will not be advanced under any circumstances.
Directors and Officers Liability and Employment Practices Liability Insurance
$X million per claim and aggregate will be maintained in force for so long as the company operates. This will cover the seller’s exposure from the date of acquisition forward. The seller is responsible for purchasing an extended reporting endorsement from its existing D&O liability insurance company for the period of time deemed appropriate.
In the event the buyer decides to cease operating the business or if the buyer sells the business to a third party, then the buyer shall purchase an extended reporting period endorsement that extends coverage for three years after the date of dissolution or sale.
Cyber Insurance
$X million per claim and aggregate will be maintained in force for so long as the company operates. In the event the buyer decides to cease operating the business or if the buyer sells the business to a third party, then the buyer shall purchase an extended reporting period endorsement that extends coverage for three years after the date of dissolution or sale.
Best’s Rating
All coverages required above will be placed with insurance companies licensed to do business in the state, with a minimum A.M. Best rating of A-VIII.
Evidence of Insurance
Prior to commencing the work, the buyer shall furnish the seller with certificates of insurance, executed by a duly authorized representative of each insurer, showing compliance with the insurance requirements set forth above. If requested, the buyer shall furnish copies of policies for each coverage required.
Cancellation of Insurance
The buyer’s insurer or insurer’s representative must provide 30 days notice if the insurance company elects to cancel or non-renew coverage for any reason other than nonpayment of premium.
No Representation of Coverage Adequacy
By requiring insurance herein, the seller does not represent that coverage and limits will necessarily be adequate to protect the buyer, and such coverage and limits shall not be deemed as a limitation of the buyer’s liability.
Representations and Warranties Insurance
One additional coverage that should be considered is RWI, which protects the insured against the unintentional and unknown breaches of a seller’s representations and warranties. The benefit of RWI is that it allows the unintentional and unknown breaches of specific (or blanket) reps and warranties from the parties to an insurance company for a fixed price. The cost generally ranges from 2 percent to 8 percent of each dollar insured.
RWI is a unique coverage that is heavily underwritten. Generally, there is an underwriting fee of $15,000 to $20,000 or more just to get a quote. If coverage is written, the fee is applied against the cost. Be aware that the coverage exists and evaluate whether it is worth considering based on the specific characteristics of each deal.
The limits of coverage required will be specific to each transaction. The length of the extended reporting period for claims made policies also may vary.
Generally, coverage through applicable statutes is recommended; however, this is negotiable.
