Selling a business is a major financial and legal process, and insurance plays a crucial role in protecting both the seller and the buyer. Insurance when selling a business ensures that risks are properly managed, liabilities are addressed, and unexpected claims do not impact the final sale.
During the sales process, business owners must maintain existing insurance policies, consider additional coverage if needed, and clarify who holds responsibility for any future claims. Understanding these insurance considerations can prevent costly disputes and ensure a smooth transition for all parties involved.
What Types of Insurance Should You Maintain During the Business Sale Process?
While preparing to sell a business, certain insurance policies must remain active to protect against potential risks. These include:
1. Public Liability Insurance
This covers injury or property damage claims made by third parties, such as customers or suppliers. Even if a business is in the process of being sold, incidents can still occur, and the seller may be held responsible.
2. Workers’ Compensation Insurance
If the business has employees, workers’ compensation insurance is legally required until the sale is finalised. This protects employees in case of workplace injuries or illnesses.
3. Professional Indemnity Insurance
For businesses offering professional services, this insurance covers claims of negligence, mistakes, or breaches of duty. Sellers should keep this policy in place until the sale is complete to avoid liability for claims arising from past work.
4. Product Liability Insurance
If the business sells goods, product liability insurance is essential. It protects against claims related to defective products that cause harm. The seller may still be liable for products sold -before the handover, so coverage should be maintained.
5. Property and Asset Insurance
This covers physical assets such as buildings, equipment, and stock. The seller should maintain coverage until ownership is officially transferred to the buyer.
Also Read: Understanding How to Sell a Business in Australia Legally
Who Is Responsible for Insurance Coverage After the Sale?
Once a business is sold, the responsibility for insurance shifts to the new owner. However, the timing of this transition depends on the terms of the sale agreement.
1. Pre-Settlement Period
Before the final sale is completed, the seller remains responsible for all existing business operations and should maintain all necessary insurance policies.
2. Post-Settlement Period
After settlement, the buyer takes over responsibility for insurance. The sale agreement should clearly state when the buyer’s coverage must begin to prevent gaps in protection.
3. Leasehold Businesses
If the business operates from a leased property, the seller may still be responsible for certain insurance obligations under the lease agreement. It’s essential to check lease terms and notify the landlord of the sale.
4. Liability for Past Actions
Even after the sale, a seller may still face claims related to events that occurred before the transfer. This is why maintaining run-off insurance (discussed below) is important.
Do I Need Run-Off Insurance or Tail Coverage After Selling My Business?
Run-off insurance, also known as tail coverage, is a policy designed to protect sellers from claims arising after they have sold their business.
1. Why Is Run-Off Insurance Necessary?
Many business-related claims, especially for professional services, may arise months or even years after the business is sold. Without run-off insurance, a seller could be personally liable for these claims.
2. Who Needs Run-Off Insurance?
Business owners in professional industries (e.g., accountants, consultants, medical professionals)
Businesses with potential long-term liabilities, such as those that manufacture products
Sellers who want to limit future risks associated with past operations
3. How Long Should Run-Off Insurance Be Kept?
The length of coverage depends on the nature of the business. Some policies provide coverage for a set number of years, while others remain in place indefinitely. Seeking professional advice can help determine the right duration.
How Can Insurance Affect My Business Sale Agreement and Negotiations?
Insurance plays a vital role in structuring the sale agreement and can influence the final sale price and terms.
1. Disclosure Requirements
Sellers must disclose details about existing insurance policies, past claims, and any potential risks. Buyers may request this information to assess potential liabilities.
2. Warranty and Indemnity Clauses
Buyers may require warranties (promises about the business’s condition) and indemnities (agreements to cover specific risks). These clauses can impact the seller’s need for continued insurance.
3. Due Diligence Process
Buyers often review insurance policies as part of due diligence. A well-maintained insurance history can reassure buyers and strengthen their confidence in the business.
4. Negotiating Liability and Risk Transfer
Some sellers negotiate for the buyer to assume responsibility for certain risks after the sale. This may be reflected in the sale agreement through tailored insurance arrangements.
What Are the Common Insurance Risks to Consider When Selling a Business?
Failing to address insurance issues can lead to legal and financial problems. Some key risks include:
1. Gaps in Coverage
If there is a period where no insurance is active (such as between the seller cancelling a policy and the buyer activating theirs), unexpected incidents could create liability issues.
2. Unreported Claims
If a seller cancels their insurance without reporting previous incidents, they could be personally liable for claims that arise later. It is crucial to inform insurers of any known risks before cancelling a policy.
3. Lease-Related Insurance Obligations
For businesses operating from leased premises, failure to meet lease insurance requirements can result in financial penalties or legal disputes with landlords.
4. Product and Service Liabilities
Sellers may still be held responsible for defective products or services provided before the sale. Ensuring adequate insurance protection is key to minimising this risk.
5. Legal Disputes Over Insurance Claims
If the sale agreement does not clearly define insurance responsibilities, disputes may arise over who should cover a particular claim. Working with a lawyer can help draft a clear agreement to prevent such conflicts.
Protecting Your Business Sale with the Right Insurance Strategy
Insurance is a critical factor in selling a business, providing protection during and after the transition. Keeping essential policies in place, understanding post-sale responsibilities, and considering run-off insurance can help sellers avoid costly legal issues.
Buyers also rely on clear insurance arrangements to feel secure in their investment.
A well-planned insurance strategy ensures that both parties have confidence in the transaction, leading to a smoother and more secure sale process.
Expert Legal Support for Your Business Sale
Selling a business comes with many legal and financial considerations, and insurance is just one of them. To ensure your sale is structured correctly, protect your interests, and avoid unexpected liabilities, expert legal guidance is essential.
At Walker Pender, our experienced business sale lawyers provide tailored advice to help you through every step of the process. Whether you need assistance with insurance, contracts, or negotiations, we are here to help. Contact us today for expert legal support and peace of mind when selling your business.
