Buying a Business: Getting New Insurance in Place Before Closing

Closing time can be stressful for buyer and seller, because there is so much to do to get ready for the handover of ownership, while seamlessly managing the operation of the business. So, it’s good to make sure everyone plans ahead and is on the same page. Insurance is one of the key items that needs to be in place the day of closing, so that the business can stay operating in a lawful manner while protecting the new owner, the employees, customers, and suppliers. Commercial insurance is complicated to say the least, and we are not insurance experts by any means, but we just want to share our knowledge with our business buyers, so that we can nudge you in the right direction. 

 

What Insurance Does a Business Need? 

This is a very tricky question to answer, because it depends on what type of business, where it’s located/operated out of etc. The first thing a buyer should do is ASK THE SELLER what types of insurance they have and hopefully they will be able to provide you with copies of their policies. 

Most businesses will need General Liability and Workers Comp insurance (there are some exceptions) and a commercial auto policy if the business has company vehicles. 

If the business offers professional services, usually an Errors and Omissions policy or a Professional Liability policy will offer protection to a professional service-based business like a real estate brokerage, or tax practice. If a business operates primarily online, or a big part of the business is done online, Cyber Insurance or Data Breech Insurance is recommended. In fact, because most businesses operate in some capacity with internet technology, the Cyber Insurance is becoming increasingly more popular for businesses across multiple industries. If the business owns commercial real estate, then it will need to have Commercial Property Insurance for the physical building and contents. Also, there is industry-specific insurance, so you would need to check with the seller to see if they have any specialized insurance, such as the medical or construction industry for example. Construction companies will often carry Pollution Liability or Inland Marine (protects against loss of equipment while it’s being transported from job to job or on a job site) etc. 

 

Apply for Quotes 2-4 weeks BEFORE Closing Day

Getting commercial insurance quotes and binding coverage for a business is typically a lengthy process and can take weeks (depending on your specific business and/or industry). Therefore, it is a good idea to start shopping for insurance 2-4 weeks before your anticipated closing day. This gives you plenty of time to get multiple quotes, compare policies, and bind coverage. 

Get copies of the seller’s current policies if you can, and then call their current providers first to get a quote. This will be a good option for you, since you know that the carrier has already approved the business and its activities. It is a good idea to get a second and even a third quote. Shopping around is always recommended, and insurance agents/carriers will be expecting you to do so. 

 

Make Sure Coverage is Adequate and Correct

When comparing the commercial insurance quotes you get, you will want to make sure that you are looking at policies that meet or exceed the minimum coverage for your industry, and that the details are correct. The cheapest quote might not be enough coverage or be missing something. Check with the customers that you will be working with. Do they require their vendors to have specific coverage minimums? What about your landlord? Check your lease for details on insurance you are required to carry. 

You also want to make sure that the details are correct on your Worker Comp insurance. Especially the class codes for your employees. It is really important to make sure the insurance company has those right. Double check with them that they have the right industry and job function for the class code. Also, think very carefully about whether or not you want to exclude yourself as an owner (some industries it is recommended not to exclude yourself) and discuss the pros and cons with the insurance agent you are working with. Protecting yourself, your business, your employees, your customers, vendors, and suppliers is one of the most important things you can do as a business owner, so it’s important to get the right insurance coverage for your business.