M&A, Bankruptcy, and Insurance (Part 2)

Page 2 of 8

M&A insurance coverage issue: discontinued products

Insurance coverage issues may apply to both the buyer and seller in an M&A transaction. We will examine several coverage issues, such as discontinued products, discontinued operations, directors and officers, and more.

Coverage for discontinued products / discontinued operations would need to be purchased separately from general liability coverage. The old entity would be covered as "Named Insured".

It is very difficult to obtain this kind of coverage in today's insurance market, because the payout could be 100% of the final active year of production.

M&A products liability would be particularly valuable if the insured has a history of product liability losses and / or products with a long life span. This coverage allows the ability to insure exposures from discontinued products sold prior to the merger or acquisition date. This means large aggregate limits and a 10-year prepaid policy.

The cost of purchasing traditional product liability going forward is greatly reduced, since coverage for products sold prior to the acquisition would be excluded.

Looking at trigger of coverage for Commercial General Liability (CGL), the insurance applies to "bodily injury" and "property damage" for discontinued products only if:

The bodily injury or property damage is caused by an occurrence that takes place in the coverage territory, AND

The bodily injury or property damage occurs during the policy period.

If the insured is continuing in business, but discontinuing a particular product, coverage will still exist in the continuing policies. Most insurance companies will inquire about this circumstance at the time of placement. Some insurance companies will specifically exclude coverage for a discontinued product by use of an endorsement. This will most frequently occur when the product is exceptionally litigious or involves children.

If the insured is discontinuing their operations altogether and closing the business permanently, liability can still exist for certain parties, such as:

Partners or members of a joint venture or limited liability company (LLC)

Executive officers and directors of a corporation (closely held or publicly traded)

Under certain circumstances, if the entity has not maintained proper corporate assets for the public, a state court can pierce the corporate veil to the shareholders as well.

The selling or discontinuing insured should be offered coverage under a form of Discontinued Products Insurance. This is a CGL policy that has been modified to reflect "occurrence" language for manufacturing or distributing acts that took place prior to a specific date in the policy (the business stoppage date). The selling or discontinuing insured should first attempt to place with the last existing insurance carrier, and if that does not work, then the insured should go to the E&S marketplace.

If the insured is selling their business or the product manufacturing or distribution rights to another business, a lot will depend on the manner of succession. This is of particular importance in the sale of a manufacturing company.

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.