You're sitting on the beach, an umbrella drink in your hand, feeling the ocean breeze on your face. You finally did it, you sold your insurance agency and now it’s time to relax and enjoy the retirement phase of your life.
As you’re sipping that drink and relishing in the retirement glow you start to have a nagging feeling that you forgot something. You look down and reassure yourself that you’ve slathered on the sunscreen, check. You look over at your significant other, check. You have your beach bag with towels, wallet, and book- check, check. What did you forget?
WHAT HAPPENS TO YOUR E&O DURING A SALE?
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 that requires notification to the insurance carrier when you sell/ merge your agency, or you have a majority change in ownership. In some policies, the coverage available under your E&O policy ceases on the date of the sale or majority ownership change, while other policies allow you 60 days to 120 days to report the change.
In the majority of agency sales, we aren’t notified until after the sale or worse – not until renewal time. 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.
We can provide guidance in the purchase of “tail coverage” also known as extended reporting period, especially the cost of the coverage which can range from 100% to 300% of the annual premium depending on the amount of years you would like to extend the reporting period.
WHAT DOES THIS ALL MEAN?
In an asset only purchase any alleged wrongful acts that occur prior to the sale of your agency will be your responsibility and will need to be reported to your insurer. Therefore, it’s essential that you are aware of the provision in your policy and the amount of time that you must notify the carrier of the sale as well as your ability to purchase tail coverage. Once we are aware of the potential sale of your agency we can help you understand your options.
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 date the claim is made against you to trigger coverage. Of course, coverage is subject to the retro date and other policy terms and conditions.
Professional liability policies have an automatic extended reporting period of 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. However, you must understand, this extends only the reporting time and not the policy period.
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.
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 by contract with the buyer to purchase tail coverage) you only have until August 1 to purchase the optional extended reporting period. Your options for reporting time period extension 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!