Once a product enters the marketplace, or certain work is performed to completion, liability associated with that product or completed operation is ongoing. While a business is still active as the same entity that provided the product or work, coverage is usually handled under a Commercial General Liability policy that includes Products/Completed Operations protection.
Consider an example.
Jims’ Playgrounds was a partnership that operated for nearly 20 years. Jim Plank Jim Rauster were skilled carpenters and handymen who specialized in installing playground equipment. For every year they were in existence, they purchased CGL with Products and Completed Operations coverage. Two times they were sued on behalf of children who were injured due to collapsed equipment. Their insurance handled both losses.
A CGL’s Products/Completed Operations coverage is usually available only for losses that occur during the time that a policy is in force. Insurers prefer to provide coverage to operations that are ongoing and which are correctly identified concerning its legal status. Those parameters aren’t met when businesses end, either due to actual termination of an original business, a change in the form of entity (such as from a partnership to a corporation), or which is caused by an acquisition or merger. Mergers and acquisitions are very complex legal transactions that, besides substantially altering regular operations, can also affect an organization’s insurance needs.
Closing the deal that merges entities, as is the case with ending or selling a business, can result in exposures that may fail to be addressed without special action under an insurance program. The products or completed operations exposure does not cease with the sale or merger of an original manufacturer or service provider. Liability claims may occur many years after a product was first produced or sold and/or after certain work has been completed. In other words, liability still exists for operations that have been discontinued. Therefore, different coverage is needed.
We introduced the concern caused when a business ends, whether by closure, change of entity status, sale, or via merger or acquisition. Even if the original business owner only sells its assets and retains its corporate structure, regardless, it will also retain the liabilities connected to the original operations. A business can purchase discontinued operations coverage to help in such instances.
For example, Utility Trailers, Inc. built small trailers. Utility Trailers’ owners accept an attractive offer from another company and sells the business on an ‘assets only’ basis. Utility Trailers, Inc. was not dissolved as a corporate entity. A year later, some customers sue Utility, claiming loss caused by defective trailers. All the claims involve trailers that were built and sold before the sale. Their Discontinued Operations coverage will respond to the lawsuits.
Discontinued Operations coverage would provide coverage for bodily injury or property damage caused by defective products. Coverage can also protect contractors that have ceased doing business.
Let’s consider Jims’ Playgrounds again. The Jims have decided to retire and have decided to close their business. Naturally, they will also cancel their insurance coverage at the same time they close their doors. They have to deal with the fact that they have installed hundreds of playground sets. Can they rely on their now-canceled policy to protect them? No, that is why they should consider specific protection for their discontinued business.
Of course, a business must consider the cost of Discontinued Operations Insurance. It is a specialty coverage that is expensive and non-standard. The latter means that policies provided by various insurance companies may be substantially different concerning coverage features, exclusions, limits, and premiums. Premiums may be based on the amount charged for the products and completed operations carried while the business operations were active. However, premiums usually decline with each subsequent policy term. Declining premiums reflect the fact that, as time passes, the operation exposures also decline.
A different, but equally important consideration is how long should such coverage be carried? The answer to this question depends upon the type of operation. Different products or work have different post-operation lengths of exposure or tails. Former business owners should get competent insurance and legal help to assess their situation properly. A Hertvik Insurance Group professional can assist with evaluating different policies and costs.