Selling your business: Insurance implications

When you transfer ownership of your business, you’re not always eliminating your exposure to risks. Liabilities tied to past operations, employee claims or professional services can persist long after the sale is finalised.

Without proper insurance planning, these risks could lead to financial losses, legal disputes or reputational damage for both sellers and buyers.

While many business owners focus on valuation and contractual terms during a sale, insurance can play a pivotal role in safeguarding against unforeseen liabilities.

However, not all risks are automatically covered. Standard policies often exclude claims arising after ownership changes, so thinking through insurance before you sell is vital.

Insurance considerations when you sell your business

Targeted insurance strategies are critical for addressing post-sale liabilities. For example, public liability insurance should remain active until the sale closes to cover incidents related to pre-transfer operations.

Businesses that provide professional services, such as consultancies or law firms, may require run-off professional indemnity insurance to defend against claims from past clients, even years after the sale.

Workers’ compensation obligations also demand attention. Sellers must ensure their policy remains valid during the transition if an employee files a claim for an injury that happened before the sale.

Similarly, directors’ and officers’ (D&O) liability insurance may protect former leaders against lawsuits tied to pre-sale decisions, such as regulatory breaches or shareholder disputes.

One of the biggest oversights is assuming all liabilities transfer to the buyer. Policies like key person insurance or buy-sell agreements often need careful review. Some may need to be cancelled, while others may need to be adjusted to reflect new ownership structures.

How insurance addresses post-sale liabilities

Here are some hypothetical case studies about how insurance may help mitigate risks when you sell a business.

• A marketing agency sells its business, but six months later, a former client sues over a campaign strategy developed before the sale. Run-off professional indemnity insurance may cover legal fees and potential settlements, protecting the seller’s personal assets.
• A manufacturing business completes its sale, but a worker files a compensation claim for a repetitive strain injury dating back to the previous owners. Workers compensation insurance ensures the seller isn’t personally liable for the payout.
• After selling a tech start-up, regulators investigate financial disclosures made by the founders before the sale. D&O insurance may shield the former directors from legal costs and penalties.

Ensuring continuity through strategic planning

The consequences of inadequate insurance planning can be severe. A single unresolved liability such as environmental damage from pre-sale operations or an unresolved employee dispute could derail the seller’s financial stability or the buyer’s business continuity.

Tailored run-off policies or adjusted D&O cover may offer a safety net for these risks. They may also enable smoother transitions by clarifying responsibilities for claims handling, policy cancellations and documentation.

Here are some suggested steps to follow before finalising a sale which may enable smoother transition:

• Audit all active policies to identify coverage gaps.
• Negotiate with buyers on transferring or cancelling specific insurance contracts.
• Secure run-off cover for latent liabilities, such as product defects or professional advice.

Talk to BICS to design an insurance strategy that protects your interests during and after the sale. Proactive planning can help ensure your exit from the business doesn’t leave you exposed to its past risks in the future.

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