Discontinued Products and Operations Coverage
Coverage After a Business Ceases Operations
When a business ceases operations, the owners often let the business liability coverage lapse. The owners assume that a business that's no longer operating doesn't need liability insurance. This assumption may be wrong. Former business owners may be liable for injuries that occur after the company has ceased operating if the injuries are caused by the former company's products or completed work. To protect themselves against lawsuits, business owners can purchase discontinued products and operations insurance.
Who Needs It?
You should consider buying discontinued products and completed operations insurance if your company is going out of business, and it makes a product or performs work for others. Products your company produces may remain in the marketplace long after your firm has ceased operating. Likewise, work you have finished may exist for many years after you have completed it. Defects in your products or completed work may injure someone after your company has gone out of business. If the injured party files a lawsuit against you, the suit won't be covered by your former company's liability policies.
Occurrence Policies Don't Cover Future Injuries
Why won't your previous policies cover injuries that occur after your business is discontinued? General liability insurance is normally written on occurrence policies. It covers claims or suits alleging bodily injury or property damage that occurs during the policy period. It doesn't cover claims alleging injury or damage that occurs after the policy has expired. Consider the following example:
Frank owns Fancy Furniture, a company that makes home furnishings. Frank decides to retire, and his company ceases operations on December 31, 2018. Fancy Furniture's general liability policy expires on that date. On June 1, 2019, Frank is notified of a lawsuit. Steve, the plaintiff, purchased a table at a retail store in January of 2019. The table was manufactured by Fancy Furniture. On March 1, 2019, the table collapsed, injuring Steve. Steve is demanding $50,000 in compensatory damages. Fancy's general liability policy won't cover Steve's claim because his injury occurred after the policy had expired.
Completed Work or Operations
Lawsuits can also arise from work your firm completed before it went out of business. For example, Mike owns Miraculous Masonry, a masonry contracting company. Miraculous is hired by A-1 Apartments to construct a wall. Miraculous completes the wall in October of 2018. Mike retires and dissolves his masonry firm on December 31, 2018. The liability policy covering Mike's firm expires on that date.
In March of 2019, the wall collapses and injures Jane, an apartment resident. Jane sues Mike, the owner of Miraculous Masonry, for bodily injury. Jane claims that the wall collapsed as a result of Miraculous' poor workmanship. Mike has no coverage for the claim under his firm's most recent liability policy. Jane's injury took place after the policy expired.
Discontinued Products or Operations Coverage
If you are thinking about closing your business, you should discuss discontinued products and operations coverage with your insurance agent or broker before your company ceases operations. This coverage is similar to the products-completed operations insurance that is provided under a general liability policy. It covers claims for bodily injury or property damage arising out of your product or completed work if the injury or damage occurs during the policy period.
Discontinued products or operations insurance does not cover a company's business premises or ongoing operations. It is not intended to cover a company that is still in business.
Many states have enacted laws called statutes of repose, which protect building contractors against lawsuits. These laws typically bar suits after a certain time period has elapsed, such as ten years after a building has been completed. When a building contractor goes out of business, the owner will need discontinued operations coverage only during the time in which suits are permitted by state law. If you are a building contractor, ask your attorney to explain how the law applies in your state.
Other Reasons To Buy Coverage
You may need discontinued products and completed operations coverage if you are selling your business, and the buyer will not assume liability for any injuries caused by products sold before the date of the sale. For instance, you sell your business on December 31, 2018. As a condition of the sale, you must assume liability for any injuries that occur after that date if they result from products you sold prior to the sale.
You may also need discontinued products and completed operations coverage if you have restructured your business from one type of legal entity to another. For example, suppose you have switched from a partnership (John Smith and Bill Smith) to a corporation (Smith Inc.). The policy that lists Smith Inc. as the named insured will not cover claims against the partnership. The partnership will need to buy discontinued products and completed operations insurance to protect the partners from claims that arise from injuries that occur after the reorganization.
Cost of Insurance
Once a business ceases operations, its risk of claims drops. This risk continues to decline each year. For this reason, the cost of discontinued products and operations coverage falls over time. The premium is typically a percentage of the amount charged for an ongoing business. The percentage declines from one policy period to the next.
For example, suppose that the products-completed operations premium for an ongoing business like yours is $30,000. For the first year of discontinued products and operations coverage, your insurer might charge, say 25 percent of $30,000 or $7,500. The premium for the following year might be 20 percent.
Not The Same As Tail Coverage
Don't confuse discontinued products and operations coverage with an extended reporting period (ERP). Often called "tail" coverage, an ERP is a provision found in many claims-made policies. It provides additional time to report claims. Discontinued products and operations coverage normally applies on an occurrence basis, so tail coverage is not relevant.
Article edited by Marianne Bonner