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Resources
Winding up the business - Commercial/Business
Those who are successful in building businesses (as well as those who buy existing ones) often have an
additional challenge when they want to retire. When a business is closed or sold, a number of complex legal
issues can arise. When a contractor, for example, completes a structure, or a manufacturer places a product in
the stream of commerce, liability arising out of those activities does not cease merely because the business is
sold or closed, or the product is discontinued. In fact, it is not unusual for such liability to arise long after the
business no longer is in operation or the product's manufacture or sale has been discontinued.
If a corporation (particulariy a closely heid one) is sold, it is important to determine if the seller has transferred all
of his/her interest, or whether the buyer has taken only the assets of the corporation. If the seller retains the
corporate shell and any liability that attaches to the entity, one issue is whether the remaining shell can pay for
any subsequent liability.
Members of partnerships, joint ventures, and soie proprietorships who sell, close, or discontinue their operations
still may remain responsibie for their liability arising out of products or services they have placed into the stream of
commerce, or out of work or services they have performed for others.
These gaps can be closed through the purchase of discontinued operations coverage, which applies to both
products liability and compieted operations liability exposures. This type of coverage is not required by a going
concern that decides to discontinue making one of its products. As long as the manufacturer continues to
maintain products liability insurance, protection continues for claims or suits arising from the discontinued product
line.
However, if the entity goes out of business or is acquired by another business that refuses to accept any liability
stemming from injury or damage that could arise from products made or sold prior to liquidation or sale, the entity
may wish to consider the purchase of this coverage.
Another possible situation where this coverage could be considered is when a manufacturer begins business as a
sole proprietor or partnership and eventually changes its business structure to a corporation. The problems
relating to these developments were already discussed in this article.
Suffice it to say, unless the insurer of the current liability policy is willing to provide continuous liability protection
(including products) for the former business structures, discontinued operations (including products) coverage
also may be necessary.
Insurers willing to write discontinued operations or products coverage commonly use a so-called "junk code,"
44444, and determine the premium in the usual way, I.e., based on the rate of the operation (receipts) or product
(sales) as it existed prior to termination of the business.
However, the premium is usually reduced, for example, by 25% the first year, 50% the second year, or on a
percentage based on underwriting discretion, until the premium reaches the policy minimum. It also may be
possible to obtain this type of coverage from the excess and surplus market.
Sometimes prospects of discontinued operations (including products) coverage do not feel they need the
coverage and often do not want to spend the money for what they are told might be necessary. If a prospect says "show me," a case in point could be Pekin Insurance Company v. Janes & Addems Chevrolet, Inc., et al., 636
N.E.2d 34 (App.Ct. of III. 4th Dist. 1994).
The court in this case held that liability policies providing coverage for property damage occurring during the
policy period did not provide coverage for damages arising from a fire which occurred after the policies expired,
notwithstanding that the fire was aliegedly caused "by seepage of chemicals from the insured's property during the
policy period.
Under some professional liability policies, specialty insurers are willing to provide unlimited "tail" coverage, so that
whenever a ciaim is made against a retired professional (in good standing), helshe is protected. Other retiring
professionals are not as fortunate and, depending on the policy, may be able to purchase only an extended
reporting period for a shorter duration.
Whether the business is written on an occurrence or a claims-made basis, certain coverage needs to be
continued for as long as possible, given the uncertainty of a future claim brought about by past conduct. What
those coverage needs will be hinges on the nature of the exposure and the facts of each case.*
The author
Donald S. Ma/ecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee
member of the Internationa/lnsurance Section of the Society of CPCU, on the Examination Committee of the
American Institute for CPCU, and an active member of the Society of Risk Management Consultants.
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