The rate of mergers and acquisitions in our industry doesn’t seem to be slowing down anytime soon.
As an errors and omission (E&O) agency exclusively for independent agents, we are taking phones calls almost weekly from agents who have sold their agency, are in the middle of selling or simply thinking about selling. Recently, I’ve noticed a trend related to mergers and acquisitions and E&O insurance.
What happens to your E&O during a sale?
All too often we, your agent, aren’t notified of an agency’s sale until after it has occurred – or worse –not until renewal time. The best possible scenario is learning about the sale of the agency prior to the actual closing.
When we know beforehand that you’re selling your agency, we can advise you and help you understand your E&O policy and the notification requirements.
Whether it’s called “change of control,” “mergers and consolidations” or simply “sale, transfer or assignment,” there is a provision in the conditions section of your insurance policy. It seeks to clarify what happens to your insurance policy once you sign the sale agreement and have a majority change in ownership. In some policies, the coverage available under your E&O policy ceases on the date of the sale.
What does this all mean?
Professional liability policies have an automatic extended reporting period that begins on the date coverage terminates and allows for claims reporting for an additional 30 to 60 days depending on the policy form.
Once your automatic extended reporting period begins, the clock starts ticking off the days that are left for you to purchase the optional extended reporting period or “tail coverage.” If you don’t purchase this tail coverage, you could be left uninsured.
Unlike occurrence-based policies, E&O insurance is written on a claims-made basis. This means you must have a policy in force on the day the loss is reported to trigger coverage.
The automatic extended reporting period is typically 30 to 60 days (depending on the policy form) in which you can still file claims for wrongful acts that occurred prior to the cancellation of your policy and after your retro date. Therefore, this extends only the reporting time and not the policy period.
What happens when coverage ends?
Here’s how this works if your E&O policy has a provision that coverage ceases on the day you have a majority change in ownership.
If you sell your agency effective June 1, the policy coverage terminates. You now have 60 days (approximately August 1) to report any wrongful acts that occurred prior to June 1 but after the retro date on your policy.
If you wish to extend the reporting time (and typically you are required in contract with the buyer to purchase tail coverage) you only have until August 1 to purchase the optional extended reporting period. This ranges from 1 to 10 years depending on the carrier.
Once the 60 days are exhausted, you no longer have the option to purchase tail coverage and you will not have any coverage for wrongful acts that are alleged to have occurred prior to the termination date.
Without coverage, you are now personally responsible for defense and any settlement or judgements that occur. In addition, you are in breach of contract with the buyer.
Take Action now!
If you’re selling your agency or thinking of selling, please call your E&O representative to discuss your policy. Already sold your agency? Contact OIA's E&O team immediately if you’re unsure of the next steps — we’ll help you navigate through the E&O process!
