5 Insurance Pitfalls to Avoid When Buying a Business

Growth comes in many ways. 

In today’s landscape, one common way businesses grow is through mergers and acquisitions.  But as with most things, there are insurance pitfalls, so today we’ll be covering The Top Five Things to Know When Buying a Business. 

Let’s begin! 

Insurance From the Prior Owner Does Not Transfer 

This is very important to understand.  

When you buy a new business, you assume assets and liabilities, but not the insurance policy. When the sale is finalized, that policy is cancelled. You’ll be responsible for finding new coverage for the new entity once the merger or acquisition is complete.  

This is an important detail that needs to be addressed, or it could possibly hold up the final deal.  

Talk to Your Insurance Agent BEFORE The Sale 

There is a reason insurance agents are called advisors. 

Good agents don’t only guide you through your insurance needs, but through any obstacles insurance may present in your business ventures. There are multiple contract clauses in both policies ending and beginning that you should know, especially regarding claims and who will be responsible.  

With a merger or acquisition, that’s additional locations, assets, and liability. Your insurance premium will be vastly different afterwards, and you should understand how that may impact your plans.  

Make sure you prioritize a conversation with your insurance agent before you enter negotiations to purchase another business.  You don’t want to have an unpleasant surprise after the merger is finalized.  

Understand How Prior Claims Will Be Handled 

You don’t want to be left holding the bag for someone else.  

When it comes to a policy ending and/or its start date, the language is always specific. Before the sale, these are all details that need to be sorted out. If they aren’t, you could start your new venture without any protection.  

Even if you think there are no prior claims, an unreported claim could rear its ugly head.  If that happens, you’ll want clarity on whether the responsibility lies with you or the prior owner. 

How Return Premium is Handled 

Where does the money go? 

Always a prudent question. When you buy another business, the previous insurance policy is cancelled. Before the sale is finalized, it should be clear who the return premium, if any, will be distributed to.  

If it was an all-stock sale, with all assets and liability transferring, then the prior insurance company will cut a check in the name of the new business and owner. If it was an asset only sale, then keep in mind if you are the seller, that you keep the prior bank account open until the return premium check clears.  

The process will vary with every insurance carrier, so as we’ve stressed before, get all the details sorted before finalizing the sale.  

Don’t Assume Unnecessary Liability 

It’s all or nothing with the sale. 

But not quite. 

It is true that when you buy a business, you get both their assets and liabilities. But there is a piece of liability you could possibly avoid. When you buy the business, you may end up with the liability of any unreported claims.  

The way to avoid this would be to talk to the previous owner and make sure they have a tail.  

No, not a protrusion of the back, but rather the common name for an extended reporting period which they can purchase. This will cover any claims during the transition period, and your new insurance policy won’t be burdened with handling any of those claims.   

It’s something that should be discussed during negotiation, and it will save you any unexpected headaches post-merger.  

There it is! The Top Five Things to Know When Buying a Business. We hope this can serve as a guide when you choose to expand your operations.  If you have any questions, don’t hesitate to ask us!