Completed Operations Claims From the Seller's Past Jobs: Who Pays?

A claim about a job the seller finished before closing can reach your company years later. Which policy responds depends on when the damage happened, whether you bought the stock or the assets, and the policy wording. In a stock deal, the company's own general liability policy may respond. In an asset deal, there can be a gap between the seller's old policy and your new one unless the deal planned for it. This guide is for buyers of contractors, installers and service trades who inherited a long list of past jobs.

What is completed operations coverage, in plain words?

A general liability policy has two broad parts for a contractor. One covers injury or damage while the crew is on site. The other, called the products-completed operations hazard, covers injury or damage that happens away from your premises and arises out of your finished work or your products. A water heater the crew installed that floods a basement two years later, a deck that collapses, a wiring fault that starts a fire: these are completed operations claims. See completed operations.

Under the standard Insurance Services Office (ISO) general liability form, work counts as completed at the earliest of three points. All the work in the contract is done. All the work at one job site is done. Or that part of the work is being used for its intended purpose by someone other than another contractor on the same project. Work that may still need service, correction or repair, but is otherwise complete, is treated as completed. Completed operations also carries its own aggregate limit (the most the policy pays for all such claims in a policy period), separate from the general aggregate. See products-completed operations aggregate.

One limit matters for every legacy job. General liability generally pays for injuries and for damage to other property caused by faulty work, not the cost to repair or redo the faulty work itself. The standard form excludes damage to your own work, with an exception for work a subcontractor performed. Warranty callbacks and redo costs on the seller's jobs usually fall on the business, or on the seller if the purchase agreement says so.

Why do claims from the seller's jobs show up years later?

Many defects stay hidden until something fails. By the time the owner of the property calls a lawyer, the seller may have retired, and the business (often with the same name, trucks and phone number) is yours. The claimant usually sues the business they remember.

How long a claim can still be brought depends on state law. Many states have statutes of limitation and, for construction, statutes of repose that cap how long after completion a claim can be filed. The periods differ by state and type of claim, so ask your deal counsel what applies to the states where the seller worked.

Which policy responds to a claim about the seller's work?

Start with the trigger. On the standard occurrence form, the policy covers injury or damage that occurs during the policy period, whenever the claim is made. So the question is not when the seller did the job, but when the damage happened and which policy was in force then. See occurrence vs claims-made.

For the full liability map, see who is liable for work the seller did. This table covers finished jobs only.

Every row depends on the actual policy wording and the facts. The standard form treats products a predecessor sold as "your product", which helps a buyer of a distributor or manufacturer. It has no matching language for a predecessor's work, which is why contractors bought in an asset deal deserve extra attention.

Whether your company is legally liable for the seller's work at all is a separate question, covered in the liability guide above and in stock deal vs asset deal. Even when you are not liable, your company may still need a defense, and a policy that responds can pay for it.

How can you close the gap for the seller's past jobs?

There is no single fix. These are the tools buyers and their brokers usually discuss, ideally before closing:

• A discontinued operations policy for the seller. Some carriers write coverage for a business that has stopped operating, so the seller's entity keeps completed operations protection for its past work after the regular policy ends. It protects the seller's entity, not automatically yours, so ask whether your company can be added and how.
• Keep the seller's policy in force to expiration. In an asset deal, the seller cancelling on closing day ends any protection for damage after that date. Letting it run to its natural end narrows the gap but does not remove it.
• Ask your carrier for a written position. Before binding, give the carrier the seller's job history and ask whether, and on what terms, your policy will respond to claims about predecessor work. Some carriers will add wording by endorsement; others will not.
• Purchase agreement terms. A specific indemnity from the seller for claims about pre-closing work, backed by an escrow or holdback, gives you a source of money if insurance does not respond. See seller indemnities vs insurance.
• Check the completed operations aggregate. If claims from old and new jobs share one aggregate on your policy, a bad year of legacy claims can use up limits you need for current work. Your umbrella may sit above it; check the schedule.

If you have already closed. Several of these tools still work. Ask the seller whether its general liability policy is still in force and, if it was cancelled, whether it will buy discontinued operations coverage now; the purchase agreement may already require it. Raise predecessor work with your carrier now or at renewal, with the past-jobs register below in hand. When a call comes in about an old job, report it to your broker right away so notice can go to your carrier and to the seller's.

A stock deal needs different checks. Confirm the company's policy has no exclusion for specific past jobs or for work done before a set date (often called a designated work or prior work exclusion). Then check that the policies the seller bought were occurrence based and are on file. In an asset deal, check your new policy for the same exclusions; carriers often add them for a newly formed contractor. A general liability review covers the rest of the policy. A Morrow review can line up the seller's job history against your general liability wording and flag where predecessor work may fall outside it.

What job records should you keep from the seller?

A claim about a five-year-old job is won or lost on records. If the seller kept them in a pickup truck or their personal email, get them now, while the seller is still cooperative. Build a past-jobs register with these columns:

Ask the seller for complete copies of every general liability policy back as far as they have them, not just declarations pages. Old occurrence policies can respond decades later if limits remain, so they are worth keeping. The insurance review document checklist lists what else to collect.

How might this play out after an asset purchase?

A hypothetical example. A buyer forms a new company and buys the assets of a deck and railing contractor. The purchase agreement requires the seller to buy a discontinued operations policy and to hand over five years of job files, and the seller's carrier agrees to add the buyer's company as an insured. Fourteen months after closing, a railing the seller's crew installed four years earlier gives way and a guest is hurt. The guest sues both the seller's old entity and the buyer's company, which kept the name. The demand is $300,000.

The past-jobs register shows the job date, the permit and final inspection, and that a subcontractor set the railing posts. The claim goes to the seller's discontinued operations policy, which defends both companies subject to its terms. The defense lawyer then passes part of the claim to the subcontractor's insurer (tendering it). That is possible because the file holds the subcontractor's additional insured endorsement, which names the seller's entity for completed operations. The buyer still reports the suit to its own carrier, as its policy requires, but the claim is handled under the seller's discontinued operations policy, so the buyer's completed operations aggregate is not used. Without the records, nobody could have shown who did the work, when, or which policy applied.

Numbers are illustrative. Real outcomes depend on the policies, the purchase agreement and the state's law.

Keep reading

• Who Is Liable for Work the Seller Did Before I Bought the Company?
• Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?
• New Owner Review: General Liability
• Successor Liability: When an Asset Purchase Is Not Clean
• Seller Indemnities vs Insurance: What They Are Really Worth
• All guides for new business owners

Frequently asked questions

Does my general liability policy cover jobs the seller did before I bought the company?

It depends on the deal structure and the policy. In a stock deal the same company did the work, so its current policy may respond to new damage. In an asset deal, your policy has no standard wording that treats the seller's work as yours, and some contractor policies exclude work completed before the policy began, so ask your carrier for its position in writing.

The seller's policy was cancelled at closing. Can it still pay a claim?

An occurrence policy can still respond to injury or damage that happened while it was in force, even if the claim comes years later. It generally will not respond to damage that happens after it ended, which is why discontinued operations coverage for the seller is worth discussing.

Can the seller buy coverage for their old jobs after the business is sold?

Yes, some carriers write discontinued operations coverage: general liability for a business that has stopped operating, so its past work keeps completed operations protection. It usually protects the seller's entity. Ask whether your company can be included and what it costs before closing.

How long can a customer sue over an old job?

That depends on state law, including statutes of limitation and, for construction, statutes of repose. The periods differ by state and type of claim, so ask your deal counsel which rules apply where the seller worked.

Do claims from old jobs use up my policy limits?

They can. Completed operations claims usually share a separate products-completed operations aggregate. If legacy claims land on your policy, they reduce the limit available for claims from your current work, so check that aggregate and your umbrella.

Can I make the seller pay for a claim about their old work?

Only if the purchase agreement gives you that right, usually through a specific indemnity for pre-closing work. It is much easier to collect if an escrow or holdback backs it. Ask your deal counsel what your agreement allows.

References

• ISO: Commercial General Liability Coverage Form CG 00 01 12 07 (carrier-hosted copy)
• Kilpatrick Townsend: Top 10 Things Corporate Attorneys Should Know About Insurance (Law360 reprint)
• Pillsbury Winthrop Shaw Pittman: Preserving Insurance Coverage Rights in Corporate Transactions

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.