Should I Keep the Seller's Insurance or Start Over? A Decision Guide

Keep the seller's insurance only when four things line up: the policies can legally continue for your company, the carriers accept you as the new owner, the coverage fits the business you now run, and the price matches the real exposures. In an asset purchase you usually need new policies at closing anyway. In a stock purchase you can often keep the program for now, fix urgent gaps by endorsement and decide at renewal. This decision guide is for new owners holding the seller's policies and wondering whether to leave them alone.

Can I legally keep the seller's policies?

It depends first on how the deal was structured. Your deal counsel can confirm which structure you used and what the purchase agreement says about insurance.

In a stock or membership interest purchase

You bought the same legal entity, so its policies, claims history and contracts stay with it. The policies usually continue in the same named insured. That does not mean nothing changes:

• Many claims-made policies, especially directors and officers (D&O) and some employment practices policies, have change in control provisions. When control changes, coverage often narrows to acts before the deal, and some wordings end coverage or require prompt notice.
• Workers' compensation policies commonly require you to report an ownership change within 90 days.
• Carriers may re-underwrite at renewal once they learn the business has a new owner.

In an asset purchase

Your company, often newly formed, bought the assets. Standard Insurance Services Office (ISO) common policy conditions say the policy's rights and duties may not be transferred without the insurer's written consent, and the standard workers' compensation policy has a similar condition. So the seller's policies keep insuring the seller's company. To "keep" them, the carrier would have to agree in writing, usually by endorsement or by writing a new policy for your entity. Either way, the carrier underwrites you.

Starting over does not wipe the slate clean. Under the National Council on Compensation Insurance (NCCI) rules used in many states, buying the assets and taking over the operations still counts as a change in ownership. The seller's workers' compensation experience usually transfers to your company, and new carriers will still price on the business's loss runs. See the workers' compensation review guide.

For the deeper question of which policies respond to claims from before closing, see stock deal vs asset deal: whose insurance responds to old claims.

When does keeping the existing policies make sense?

Keeping the program, at least until the first renewal, is often the sensible choice when most of these are true:

• You bought the stock, or the carrier has confirmed in writing that your entity is now the named insured.
• The coverage fits: limits meet your contracts and lease, property values reflect replacement cost, and the major lines you need are present.
• The exposures on the policies (payroll, revenue, vehicles, locations) are close to reality, so there is no large audit surprise building.
• The claims-made policies have a retroactive date (the earliest date of work they cover) that reaches back over the company's past work. Replacing them could lose that continuity.
• The renewal is near, so a change now would cost cancellation charges for little benefit.
• The seller's broker and carriers have served the account well and know its history.

That last point matters. A seller's broker who kept a business insured for years may have done a good job for an owner-run company. The question is fit for you as the new owner, not whether anyone did something wrong.

When should I replace the seller's insurance?

Replacement, or a remarket (asking other carriers to quote), is usually worth it when one or more of these apply:

• The named insured cannot be fixed. The carrier will not endorse your entity, or the policy still names the seller's company with no path to change it. See wrong named insured after an acquisition.
• Material gaps. No umbrella when contracts require one, no cyber for a business that holds customer data, property limits far below replacement cost, or exclusions that remove the core risk.
• Wrong exposures or class codes. Payroll in the wrong workers' compensation classes, or general liability rated on a business description that no longer fits.
• The carrier does not want the account. A nonrenewal notice, a sharp re-rate for the new owner, or a carrier that does not write your planned growth.
• You are consolidating. A holding company folding an add-on into one program often moves the new company onto its own policies. See consolidating insurance across add-on acquisitions.
• Service does not fit how you run the business. You need certificates the same day, reporting for a board, or help with lender and contract compliance.

Should I keep, fix or replace? A decision table

What does switching mid-term actually cost?

Cancelling a policy before it expires is rarely free. Before you replace anything mid-term, weigh:

• A smaller refund. Under standard ISO common policy conditions, when the insurer cancels, the refund is pro rata (in exact proportion to the unused time); when the insured cancels, it "may be less than pro rata," and some carriers apply a short-rate penalty or keep a minimum earned premium. The standard workers' compensation policy applies a short-rate penalty when the insured cancels unless the state's rules say otherwise; some states waive it when the whole business has been sold, so ask the carrier.
• The refund goes to the first named insured. In an asset deal that is the seller. Ask deal counsel how your agreement handles prepaid premium.
• Lost claims-made continuity. A new professional, D&O or employment practices policy may start its retroactive date on its own start date, leaving past work uncovered unless a tail is bought on the old policy (in an asset deal only the seller, as first named insured, can buy it) or the new carrier agrees to cover prior acts. See prior acts and tail coverage after an acquisition.
• The final audit still comes. A cancelled workers' compensation policy, and a general liability policy rated on payroll or revenue, is usually still audited, and any bill goes to the policy's named insured. Your purchase agreement decides who bears that cost, so ask deal counsel.

The cancellation math, with a worked example, is in when to remarket.

A hypothetical example. A holding company buys the stock of a 30-person engineering firm. Its general liability, auto and workers' compensation policies fit the business and renew in five months. Its professional liability policy has a retroactive date that reaches back 12 years. A new carrier quotes professional liability for less, but only with a retroactive date starting the day the new policy begins. Switching would leave 12 years of past projects uncovered unless the firm bought a tail on the old policy. The buyer first confirms that the old policy's change in control terms neither end coverage at the sale nor limit it to work done before the sale (run-off), or gets the carrier to waive them by endorsement. It then keeps the program, adds the holding company as a named insured by endorsement and reports the ownership change for workers' compensation. At renewal it remarkets, asking new carriers to match the existing retroactive date. The numbers are illustrative.

Is there a middle path between keeping and starting over?

Usually, yes. Most new owners do not have to choose all or nothing.

• Keep the policies, fix by endorsement. Correct the named insured, add locations and vehicles, add additional insured or waiver endorsements contracts require, and correct values.
• Add what is missing. A cyber, crime or umbrella policy can be placed on its own without touching the rest.
• Change the broker, not the policies. A broker of record letter tells a carrier you have appointed a new broker for an existing policy. Carriers set their own waiting periods, and some rewrite the policy. See broker of record letters.
• Remarket at renewal. Use the months before renewal to clean up exposures and loss information, then shop the whole program. See how to remarket an inherited program.

What should I ask the seller's broker and the carriers?

1. Is my entity now the named insured on every policy? Please confirm by endorsement.
2. Which policies have change in control or ownership change provisions, and what notices do you need from us and by when?
3. Has the workers' compensation ownership change been reported, and what do you expect it to do to the experience mod?
4. What payroll, revenue and vehicle figures is each policy rated on, and when is the next audit?
5. What are the retroactive dates on the claims-made policies?
6. If we cancel early, would the refund be pro rata or short-rate, and is there a minimum earned premium?
7. Are any open claims or known incidents on the account?

If you want a second set of eyes on the keep, fix or replace call, Morrow can review the seller's policies and the answers to these questions and request quotes where a change makes sense. Nothing changes until a carrier binds. For the order of operations after closing, see your first 90 days of insurance.

Keep reading

• Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?
• When to Remarket Business Insurance: Mid-Term or at Renewal?
• Broker of Record Letters: Switching Brokers Without Switching Policies
• Prior Acts and Tail Coverage After an Acquisition: Who Pays?
• Your First 90 Days of Insurance After Buying a Business: A Checklist
• All guides for new business owners

Frequently asked questions

Do the seller's policies transfer to me automatically in an asset purchase?

Usually not. Standard policy conditions say the policy's rights and duties cannot be transferred without the insurer's written consent, so the seller's policies keep insuring the seller's company. Your new company needs its own coverage in force at closing, or a written endorsement from the carrier adding it.

We bought the stock. Can we just leave the insurance as it is?

Often for now, but not without checking. The policies stay with the company, yet many claims-made policies have change in control terms that narrow or end coverage after a sale, and workers' compensation policies commonly require an ownership change report within 90 days. Confirm both, then decide at renewal.

Will I get a refund if I cancel the seller's policies?

The refund goes to the first named insured, which in an asset deal is the seller. If the insured cancels, the refund may be less than pro rata depending on the carrier's filed rules and state law, and some policies keep a minimum earned premium. Ask deal counsel how your purchase agreement handles prepaid premium.

Can I keep the seller's broker but change carriers?

Yes. Many brokers work with several carriers and can remarket the account at renewal. If you would rather keep the policies but change brokers, a broker of record letter does that, subject to each carrier's process.

When is the best time to replace inherited policies?

For an asset deal, at closing, because your new company needs its own coverage. For a stock deal, usually at the first renewal, unless a policy has a serious gap or the carrier will not accept the new owner. Start the remarket 90 to 120 days before renewal.

References

• Insurance Services Office: Common Policy Conditions IL 00 17 11 98 (carrier-hosted copy)
• NCCI: Workers Compensation and Employers Liability Insurance Policy WC 00 00 00 C (carrier-hosted copy)
• NCCI: Reporting Ownership Change Information
• IRMI: Short-rate cancellation
• IRMI: Retroactive date
• Hunton Andrews Kurth (ABA Business Law Today): Four D&O Coverage Issues to Consider in M&A 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.