Bought a Light Manufacturer? Insurance Checklist

After you buy a light manufacturer, first confirm that product liability covers what the plant makes, including products the seller shipped before closing. Recall is a separate cost that most liability policies exclude, so price it on its own. Then check equipment breakdown, business income for the one machine or supplier the plant cannot run without, workers' comp and machine safety, pollution, and the insurance terms in your customer supply contracts. This checklist is for searchers, Small Business Administration (SBA) loan buyers and holding companies that just closed on a fabrication, molding, assembly, machining or other small production business.

The short answer

General liability products coverage responds to injury and damage caused by your products. It usually does not pay to recall, repair or replace them; recall insurance is separate.
Ordinary property policies commonly exclude mechanical and electrical breakdown. Equipment breakdown coverage fills that gap and can include lost income.
Business income usually pays only after physical damage. Map single points of failure such as one press, one building or one supplier, and size the limit and time period to match.
The seller's workers' comp experience usually carries over to you. Machine guarding and lockout practices drive both claims and premium.
Standard general liability excludes most pollution. Solvents, coatings and storage tanks may call for pollution coverage.

Does product liability cover what the plant makes, and what the seller made?

Your general liability policy is where product claims usually start. The standard Insurance Services Office (ISO) form covers the products-completed operations hazard: injury or damage caused by your products away from premises you own or rent, once they are out of your possession. It gives that hazard its own aggregate limit, separate from the general aggregate. Check that limit against your sales, your customers' contract minimums and the type of products you make. Parts that go into vehicles, aircraft, medical devices or safety equipment often draw exclusions or need specialist coverage.

Products the seller shipped before closing can injure someone after closing. The standard form defines "your product" to include goods made or sold by a business whose assets you acquired, so the buyer's products coverage may respond. Whether you are legally liable for the seller's products depends on state successor liability law, which can reach an asset buyer in some states even when the purchase agreement says otherwise. Ask deal counsel, and ask your carrier to confirm in writing how it treats predecessor products. Also confirm that every product line the seller ever made, including discontinued ones, was disclosed on the application. See the product liability review and successor liability in an asset purchase.

Why is product recall a separate policy?

Because general liability excludes it. The standard form excludes the cost of withdrawing, inspecting, repairing or replacing your product, often called the recall or sistership exclusion. It also excludes damage to your own product. And it commonly excludes a customer's losses when a product containing your defective part is not physically damaged but cannot be used until the part is replaced, often called the impaired property exclusion. So if a batch of parts fails a customer's inspection, or you discover a defect and pull product from the market before anyone is hurt, those costs usually land on you.

Product recall insurance can cover costs such as notification, shipping and disposal, and depending on the policy, replacement product, a customer's recall expenses and your lost income. Customers in food, automotive and consumer products sometimes require it. Also check your supply agreements: many make the supplier pay the customer's recall costs if your part caused the problem. Separately, manufacturers, distributors and retailers of consumer products have duties to report certain defects to the Consumer Product Safety Commission (CPSC). Ask counsel how that applies to your products.

Is your production equipment covered if it breaks down?

Often not under the basic property policy. Commercial property forms commonly exclude mechanical breakdown and electrical failure inside the machine. Equipment breakdown coverage (sometimes called boiler and machinery) responds to sudden, accidental breakdown of equipment such as motors, compressors, presses, controls and electrical panels, and usually covers repair or replacement and damage the breakdown causes. Many forms can add lost business income, spoiled materials and extra expense.

Check that equipment breakdown is on the policy, what its business income terms are and whether there is a separate waiting period or deductible. Ask how the policy treats older machines, and whether it pays to upgrade to current code or replaces like for like.

A hypothetical example. A plastics molder's largest press runs work for 40 percent of revenue. Its main motor burns out. The property policy excludes the breakdown, but an equipment breakdown endorsement pays $180,000 for repairs. The replacement motor takes 16 weeks to arrive, and the plant loses $600,000 of gross profit while it pays a competitor to run some of the work. Because the endorsement included business income and extra expense with adequate limits, most of that is recovered after the waiting period and deductible. Without it, the owner would have been explaining a missed quarter to the lender and investors. The numbers are illustrative.

Does business income cover your single points of failure?

Only if the loss starts with physical damage. Standard business income coverage pays lost net income plus continuing expenses, including payroll, when operations stop because of direct physical loss or damage to property from a covered cause. It does not pay when a key customer leaves or demand drops. List the things the plant cannot run without and test each against the policy.

Single points of failure and the coverage question each raises
Single point of failure	Coverage to check	Question to ask
One building	Business income and extra expense	Is the limit sized to a realistic rebuild time, not 12 months by habit?
One critical machine	Equipment breakdown with business income	Does it include income loss, and how long are replacement lead times?
One key supplier	Dependent property (contingent business income)	Is the supplier named or covered on a blanket basis, and for what limit?
One major customer's plant	Dependent property for customers	Does the extension include customer locations?
Utility power	Utility services interruption	Does it require physical damage to the utility's property, are overhead power lines included, and what waiting period applies?

Watch the details. The standard form starts business income after a 72-hour waiting period, keeps paying for up to 60 days after you reopen while sales recover, and can be extended by an optional longer period. If a coinsurance percentage applies, a limit set too low can reduce what the policy pays on a claim. See the business income review and business interruption when the owner was the business.

How do workers' comp and machine safety affect your costs?

Manufacturing injuries tend to be serious: amputations from unguarded machines, crush injuries, burns and strains from repetitive work. Two federal Occupational Safety and Health Administration (OSHA) standards come up in almost every plant: machine guarding and the control of hazardous energy, often called lockout and tagout, which covers shutting machines down safely before maintenance. Insurers' loss control staff look for both.

The premium side matters too. The seller's experience modification (the factor that adjusts your premium for past claims) usually transfers to the buyer, even in an asset purchase into a new company. In states that use National Council on Compensation Insurance (NCCI) rules, the ownership change should be reported to the insurer within 90 days. Some states use their own rating bureaus, and North Dakota, Ohio, Washington and Wyoming require coverage from a state fund. Check that the plant's class codes fit what it actually makes, because codes are generally assigned by the business's main operation, not by each job, with exceptions such as clerical and outside sales staff. See the workers' comp review and safety programs and premium credits.

Do you need pollution coverage?

Many light manufacturers do. Standard general liability excludes most pollution claims, and some policies add broader total pollution exclusions. Solvents, cutting fluids, coatings, plating chemicals, dust and fuel or chemical storage tanks can all lead to cleanup costs or third-party claims. Contamination from the seller's years can also surface after closing, and environmental liability may follow property ownership.

Pollution legal liability insurance can cover cleanup and claims from your premises, and contractors pollution coverage can cover work at customer sites. Many pollution policies are claims-made and exclude conditions known before the policy starts, so check the trigger, retroactive date and any known-conditions exclusion. Ask whether the policy covers conditions that existed before you bought the business, and talk with deal counsel about any environmental reports from diligence. See the pollution review.

What do your customer supply contracts require?

Your largest customers' supply agreements and purchase order terms often set insurance rules that matter as much as the policies themselves. Pull the top agreements and check three things:

Indemnity. Many agreements make you defend and pay the customer for claims tied to your parts. Check whether your general liability covers liability you take on by contract, and how far the indemnity reaches beyond what the law would impose anyway.
Additional insured status, waivers and limits. Customers often ask to be named as additional insureds, to receive a waiver of subrogation and to see minimum products limits. A vendors endorsement (an add-on to a maker's policy that covers businesses that resell its products) fits resellers, but it excludes products used as a part of another product, so manufacturing customers may need different additional insured wording. Compare each minimum limit with your products aggregate.
Recall costs and chargebacks. Many agreements make the supplier pay the customer's recall, sorting and line stoppage costs, or let the customer charge them back against invoices. Those costs tie directly to the recall gap above, so read them before you decide on recall coverage.

See checking customer contracts against your policies and insurance for manufacturers.

What belongs on my first-month checklist?

Light manufacturer insurance checklist for a new owner
Check	Why it matters in light manufacturing	Ask for
Products coverage	Injury and damage from current and predecessor products	Policy, products aggregate, product exclusions, predecessor products position
Product recall	Recall costs excluded by general liability	Recall quote, customer recall clauses
Customer supply contracts	Indemnity, additional insured, limits, recall cost terms	Top customer agreements and purchase order terms
Property and equipment breakdown	Buildings, machines and breakdown losses	Values, valuation basis, breakdown endorsement
Business income	Single points of failure and long lead times	Limit worksheet, waiting periods, dependent property terms
Workers' comp	Serious injury risk and inherited experience mod	Mod worksheet, class codes, ownership change filing, safety program
Pollution	Chemicals, tanks and prior site use	Environmental reports, pollution quote

A Morrow review can compare the plant's policies with its products, equipment and contracts and request quotes where it makes sense.

Keep reading

Frequently asked questions

Does my liability insurance cover products the seller made before I bought the company?

It may. The standard general liability form treats goods made or sold by a business whose assets you acquired as your product. Whether you are legally liable for them is a state law question for deal counsel, and carriers differ, so ask for the carrier's position in writing.

Does general liability pay to recall a defective part?

Usually not. The standard form excludes the cost of withdrawing, repairing or replacing your own product. Product recall insurance is a separate policy, and many supply agreements make the supplier pay the customer's recall costs.

If our biggest machine breaks down, does insurance pay for it?

Often not under the basic property policy, which commonly excludes mechanical and electrical breakdown. Equipment breakdown coverage fills that gap for sudden, accidental breakdown of machinery and electrical equipment. For a plant that depends on a few key machines, it is usually worth checking, especially whether it includes lost income.

If our main supplier's factory burns down, are we covered?

Usually only if your business income coverage includes a dependent property extension that applies to that supplier, or you bought separate contingent business income coverage. Standard business income covers damage at your own premises. Check the extension's limit and whether suppliers must be named.

Does buying the plant reset our workers' comp experience mod?

Usually not. In most cases the seller's experience transfers to the buyer, even in an asset purchase into a new company. Report the ownership change to your insurer within the required time and check the class codes.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Just Bought a Light Manufacturer? Your Insurance Review Checklist