Legal Briefing: Covering Your Assets During Company Sales Transactions

When owners decide to sell their security alarm businesses it can raise insurance issues and questions. A big one is whether the seller is required to continue insurance after the sale/acquisition closing? As you can imagine there are lots of issues that come up when you are negotiating the terms of an asset purchase agreement to sell (or buy) an alarm company, some or all of the subscriber contracts and accounts.

One sticky issue that often comes up is whether the seller should have to continue carrying E&O (errors and omissions) insurance coverage after the closing of the transaction. Before addressing that let’s look at a related issue.

What if the seller doesn’t carry E&O insurance? A buyer is going to ask about the insurance if for no other reason than wanting to know where to send a claim notice for any incident arising prior to closing. The buyer may be concerned that the seller will be unavailable or unresponsive and, therefore, wants to notify the seller’s insurance company directly of any claim so as not to lose the coverage for the seller. A buyer would want coverage for the seller in case both seller and buyer are sued for a claim, and both may be responsible in some way. Two pockets are better than one when coming up with a settlement pot.

Getting back to the original issue, why should the seller be asked to continue its E&O coverage beyond the closing date? The seller won’t want to because of the expense of continuing the policy. The buyer will want the coverage continued because the seller may be partially or entirely responsible for any damages alleged in a claim and the buyer wants to be sure the seller’s carrier will step up and assume responsibility.

Proper analysis starts with understanding the type of insurance policy most if not all alarm companies have. There are two types of policies, “claims made” or “occurrence.” Every E&O insurance policy for an alarm company that I know of is an occurrence policy. A claims made policy means that a claim needs to be made during the policy period. An occurrence policy means that the “occurrence” has to happen during the policy period, and the claim can be made later outside of the policy period.

If alarm insurance policies were claims made, then a buyer would have a legitimate interest in the seller continuing the E&O policy after the closing. If the seller was not continuing in business, then the seller would buy a “tail” to the existing policy that would continue coverage during the tail period. A tail should cost less than the regular premium because no new business is being conducted.

Since the E&O policy is almost certainly an occurrence policy, the seller can terminate coverage on the closing date and continue to be covered for any loss prior to closing during the policy period. An overly prudent and cautious buyer may want a seller to continue an occurrence policy for a period of time after the closing. Since a claim may be brought against both seller and buyer, the seller wants to be sure the buyer will be defended and respond to damages if necessary.

Here is how I think this issue can be resolved to the satisfaction of both the seller and buyer. After the closing, the buyer will have to carry E&O insurance. The buyer should name the seller as an additional insured on the buyer’s policy. This additional insured coverage would insure the seller for acts of the buyer and cover them both. The coverage would cover only those claims arising after the closing, which means that the incident, the occurrence, has to be post-closing when it’s the buyer’s responsibility.

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