How a Clean Loss History Can Raise Exit Value

A clean loss history can raise what a buyer pays at exit. Buyers read your loss runs (the carriers' claim reports) as evidence of how well the business is run, and your claims feed the premium the next owner will pay, which comes out of the earnings they are buying. Few claims, small claims, closed claims and a clear explanation for each make the business easier to underwrite and its earnings easier to trust. This guide is for owners partway through a hold period who want the insurance record to help at sale.

The short answer

Buyers, their lenders and their diligence providers commonly ask for three to five years of loss runs (the carriers' claim reports) on every line.
Claims history usually follows the business. Under the workers' compensation rating rules used in most states, your claims feed the experience modification factor (mod), a score that compares your claims with similar businesses. The mod generally transfers to the buyer, so claims late in your hold can raise the next owner's premium.
Clean does not mean zero claims. It means low frequency, controlled severity, few open claims, realistic reserves and a documented fix for anything large.
The habits that keep loss history clean are operational: safety, driver standards, contract risk transfer, prompt reporting, return to work and closing old claims.

Why do buyers review your loss runs?

A loss run is the carrier's report of every claim on a policy: dates, descriptions, amounts paid, amounts reserved for the future and whether each claim is open or closed. See loss runs. At exit, several parties read them, each for a different reason.

Who reads your loss runs at exit and why
Reader	What they look for	How it can affect the deal
The buyer and its advisors	Patterns that point to weak safety, hiring, driving or quality control	Confidence in the operation, questions in diligence, deal protections
The buyer's broker and carriers	Frequency, severity, open claims and reserves	The premium the buyer will pay after closing
Financial diligence providers	One-time insurance recoveries or uninsured losses in earnings	Adjustments to earnings before interest, taxes, depreciation and amortization (EBITDA)
The buyer's lender	Claims that could hit cash flow or collateral	Loan terms and required coverage

Loss history also shows up in the purchase agreement. Buyers usually ask the seller to list claims and confirm insurance facts in representations and a disclosure schedule. If the buyer uses representations and warranties insurance (RWI), matters the buyer already knows about, such as disclosed open claims, are typically excluded, so buyers often ask for a specific indemnity or escrow for them instead. How those terms work in your deal is a question for deal counsel.

You were on the other side of this table when you bought the business. If you used our guide to reading loss runs then, the next buyer will apply the same lens to you.

How do claims change the next owner's premium?

Underwriters price a business partly on its past. When the next owner asks for quotes, carriers will look at your claims history and expect the future to resemble it unless something has clearly changed.

Workers' compensation makes the link explicit. The experience modification factor (mod) compares a business's claims with those expected for similar businesses, using roughly three years of payroll and claims. Under the National Council on Compensation Insurance (NCCI) rules used in most states, that history usually follows the business to a new owner, whether the deal is a stock or an asset purchase. Claims in the last years of your hold can therefore show up in the buyer's mod and premium after closing.

Three timing details matter:

The most recent policy year is usually left out because its losses are not yet valued.
So a claim in your last year can reach the buyer's mod a year or two after closing and stay in it for up to three years.
The formula weighs how often claims happen more than how large they are, because the first part of each claim (the primary loss) counts most.

Several states use their own rating bureaus, and North Dakota, Ohio, Washington and Wyoming run monopolistic state funds, so the details vary. See experience modification rate.

Liability, auto and property have no standard bureau score like the mod (some carriers apply experience rating credits or debits on larger accounts), but underwriters read loss runs closely. Frequency (how often claims happen) often worries them more than one large claim, because it suggests a pattern. Open claims with large reserves are a known cost still to come.

What does a clean loss history look like?

No buyer expects zero claims from a business with employees and vehicles. What they want is a record that looks controlled and explained.

How buyers and underwriters tend to read loss history
Signal	Reads as clean	Reads as a concern
Frequency	Few claims relative to size, steady or falling	Many small claims, rising year over year
Severity	Mostly small claims, large ones rare and explained	Repeated large losses of the same type
Open claims	Few, recent and actively managed	Old claims still open with growing reserves
Reserves	Close to what claims actually settle for	Reserves that keep increasing
Explanations	A short write-up of cause and fix for each significant claim	No one can explain what happened
Continuity	Complete loss runs for every line and year	Missing years or carriers that cannot be accounted for

How much can loss history move the price?

A hypothetical example. Two otherwise similar businesses each earn $3,000,000 of EBITDA and are priced at an illustrative 6x multiple. The first has a steady, explained loss history. The second had a run of injury and vehicle claims in its last two years. The buyer's broker reports that, on the second business, carriers expect premium about $80,000 a year higher, partly from a higher workers' compensation mod. If the buyer treats that as a recurring cost, restated EBITDA falls to $2,920,000 and the value at 6x falls by $480,000. The buyer may also ask for a larger escrow or specific indemnity for open claims, which affects your proceeds and timing.

These numbers are illustrative only. Actual effects depend on the buyer, the market and the claims. The point is the mechanism: a recurring premium increase is multiplied, and open claims invite deal protections. Deal terms are a matter for your deal counsel. For how insurance shows up in financial diligence more broadly, see insurance in your quality of earnings review.

Which habits keep loss history clean over a hold period?

Clean loss history comes from running the business well and documenting it. These habits tend to have the most effect:

Safety basics with records. Training, inspections and a named person responsible. See safety programs that earn better terms.
Driver standards. Motor vehicle record checks, clear rules and, where it fits, telematics. See fleet telematics and driver standards.
Contract risk transfer. Make subcontractors carry their own coverage and name you as additional insured where your contracts require it, and check the endorsements, not just the certificate. See contractual risk transfer.
Report claims promptly. Late reporting can hurt the outcome and, under many policies, the coverage. Most policies require prompt notice, and claims-made policies have strict reporting rules, so do not keep the record clean by not reporting. Ask your broker before paying any small loss yourself.
Report work injuries; do not pay them privately. Policies and state rules commonly require prompt reporting of work injuries to the insurer. NCCI's experience rating formula, approved in most states, counts only 30 percent of a medical-only claim, so a reported minor injury usually moves the mod far less than owners fear.
Return to work. Getting injured employees back to modified duty usually lowers the cost of a workers' compensation claim. See return-to-work programs.
Close old claims. Work with adjusters to resolve claims that linger and check that reserves are realistic. See closing old open claims.
Review loss runs every year. Catch errors, duplicate claims and stale reserves while people still remember the facts.

What should you prepare in the year before a sale?

Order current loss runs for every line and carrier for at least five years, including the years under the seller you bought from if you have them. If you bought assets rather than stock, those older loss runs belong to the seller's entity, so you may need the seller's written authorization or the copies in your own diligence file.
Check them for errors: claims that belong to someone else, closed claims still showing reserves, duplicates.
Check the mod worksheet for payroll and claim errors. See how to check your experience mod for errors.
Write a one-paragraph narrative for each significant claim: what happened, what it cost and what changed afterward.
Ask the carrier and adjuster about resolving open claims where it makes sense. Under most liability policies the carrier controls settlement, and paying or promising payment yourself can affect coverage, so do not act on a claim without the adjuster.
Gather the evidence of your controls: safety program documents, driver policies, training logs and contract templates.

With your authorization, a Morrow review in the year before a sale can pull and check loss runs across your carriers and help you prepare the claim narratives. The underwriting decisions belong to the buyer's carriers.

Keep reading

Frequently asked questions

Will one large claim hurt my exit value?

Not necessarily. A single large claim with a clear cause and a documented fix usually worries buyers and underwriters less than a steady stream of small claims. What matters is whether it looks like a one-off or a pattern, and whether it is closed.

Should I pay small claims myself to keep my loss runs clean?

Be careful. Most policies require prompt notice of incidents that could become claims, and claims-made policies have strict reporting rules. Not reporting can put coverage at risk if the claim grows. Talk to your broker before deciding to handle any loss outside the policy. For workers' compensation, do not pay injuries privately; report them to the insurer. In most states the mod counts only 30 percent of a medical-only claim, so reporting a minor injury usually costs less than owners expect.

How many years of loss runs will a buyer ask for?

Buyers and their carriers commonly ask for three to five years on every line, and sometimes more for long-tail exposures such as products or professional work. Have five years ready, valued recently.

Does an asset sale give the buyer a fresh start on workers' comp?

Usually not. Under NCCI rules, both stock and asset purchases where the buyer takes over the operations are ownership changes, and the history generally transfers to the buyer. State rules differ, so check with your broker.

Can I remove errors from my loss runs before a sale?

You can ask for corrections if they are genuine errors. Ask the carrier to correct claims that are not yours, duplicates and closed claims that still show reserves. For workers' compensation mod errors, the carrier may need to report corrected data to the rating organization.

How early before a sale should I work on my loss history?

Start at the beginning of the hold, because workers' compensation mods use about three years of claims. Begin formal preparation, such as ordering and correcting loss runs and writing claim narratives, about a year before a sale.

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.

Request a review Check a contract

Morrow · 25 New Chardon Street, 4th Floor, Boston, MA 02114

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.

How a Clean Loss History Can Raise Your Exit Value