When conducting due diligence as part of the purchase of a business, it is crucial that you carefully review the seller’s existing insurance policies. This review can reveal problems associated with the seller’s business and help you evaluate the risk of indemnification claims. Your review of the seller’s insurance should be comprehensive and should include an examination of the seller’s claim history for at least the three-year period before closing, and an analysis of the seller’s existing insurance coverage. Problems may be revealed. For example, an inordinate number of workers’ compensation claims may indicate that the seller’s workplace safety rules are not adequate. Or, if a seller employs truck drivers, a large number of automobile accident claims may show that the seller’s hiring or training practices need to be improved. A review of the seller’s insurance will also allow you to weigh the cost to you that may arise from a third party claim. If the seller has adequate insurance in place, certain claims will be covered by insurance. You should examine not only the types of insurance coverage the seller maintains, but whether the coverage is claims made or occurrence based insurance. Ideally, the seller should have occurrence based insurance, meaning that the insurance will cover an event if it occurred while the insurance was in place, regardless of when the claim is made. If the seller operates in an industry with particular risks, you should determine whether the seller has insurance specific to the risks presented in that industry. For example, a company that regularly handles hazardous substances should have environmental insurance. By obtaining a clear understanding of the seller’s existing insurance and claims history, you can better evaluate the risks posed by your potential acquisition.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress
ABOUT OFFIT KURMAN
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