If your business is shutting down, you might think you can let your business liability insurance lapse. This seems like a logical assumption. Why would a business that's no longer operating need liability insurance? Yet, your assumption may be wrong. Products or work your company sold could cause injuries or damage after your firm has ceased operations. An injured party might seek restitution by filing a lawsuit against you. You can protect yourself against such suits by purchasing discontinued products and operations insurance.
Who Needs It?
You should consider purchasing discontinued products and operations insurance if any of the following scenarios applies to you.
- Your company is going out of business. Products your company produces may remain in the marketplace long after your firm has ceased operations. 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 sues you, the suit won't be covered by your former company's liability policy.
- 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 July 31, 2019. 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 are buying a business and want to protect yourself against future bodily injury or property damage claims that arise out of products sold or work completed by the seller before the company was sold. For example, you purchase a business that manufactures kitchen utensils. The seller is insolvent and you are worried your firm could be liable for future injuries caused by products sold before you bought the business.
- You have restructured your business from one type of legal entity to another. For example, 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.
Liability Policies Don't Cover Future Injuries
If a company goes out of business the policies that were in force while the firm was operating won't cover injuries that occur after the business is discontinued. Why? Most general liability insurance is written on occurrence forms. It covers claims or suits for bodily injury or property damage that occurs during the policy period. It doesn't cover claims seeking damages for injury or damage that occurs after the policy has expired.
I. Injuries Caused By Products
Injuries may be caused by products sold while a company was still in business. For example, Frank owns Fancy Furniture, a home furnishings manufacturer. Frank retires and his company ceases operations on July 31, 2019. Fancy Furniture's general liability policy expires on that date. On January 31, 2020, Frank is notified of a lawsuit. Steve, the plaintiff, purchased a table at a retail store in September of 2019. The table was manufactured by Fancy Furniture. On November 15, 2019, the table collapsed, injuring Steve. Steve is demanding $50,000 in damages. Steve's injury occurred after Fancy Furniture's liability policy had expired so the policy won't respond to Steve's claim.
Would Steve's claim have been covered if Fancy Furniture had been covered by a claims-made liability policy? The answer is no. Claims-made policies cover claims made during the policy period. A claim is covered only if the bodily injury or property damage occurs on or after the retroactive date (if one applies) and before the end of the policy period. Steve's claim wouldn't have been covered because his injury occurred, and the claim was made after Fancy's policy had expired.
II. Injuries Caused By Faulty Completed Work
Injuries may also be caused by 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 June of 2019. Mike retires and dissolves his masonry firm on December 31, 2019. The liability policy covering Mike's firm expires on that date.
In March of 2020, 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 because Jane's injury took place after the policy expired.
If you are interested in discontinued products and operations coverage you need to buy it 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. You can purchase either a claims-made or an occurrence policy. Some insurers will provide a multiple-year (e.g., three-year) policy term.
The risk of claims from a discontinued business falls over time, so the cost of discontinued products and operations coverage drops as well. The risk and the cost continue to decline each year. The premium is typically a percentage of the amount charged for an ongoing business and it declines each year. For instance, an insurer might charge 25 percent for the first year of coverage and 20 percent for the following year.
Article edited by Marianne Bonner