Who Is Liable for Work the Seller Did Before I Bought the Company?

It depends mostly on how the deal was structured. In a stock purchase, the company you bought usually keeps its past liabilities, so they are now yours to deal with. In an asset purchase, the seller usually keeps them, with important exceptions. Which insurance pays is a separate question: it turns on your purchase agreement and on whether the policy looks at when the damage happened or when the claim was made. This guide is for new owners who want a plain map of who is on the hook for the seller's old jobs, products and advice, and what to set up now. It is general information, not legal advice; your deal counsel should confirm how it applies to your deal.

What decides who pays for the seller's old work?

Three separate questions decide it. Keep them apart, because the answer to one does not settle the others:

1. Who is legally liable? This turns on deal structure and the law of the state that applies.
2. Who bears the cost between you and the seller? This turns on the purchase agreement.
3. Which insurance responds? This turns on the policy trigger, the policy wording and whether you can reach the policy.

These are general patterns, not answers for your deal. The structure comparison is in stock deal vs asset deal: whose insurance responds to old claims.

How does stock vs asset change who is liable?

In a stock or membership interest purchase, you bought the same legal entity. Its contracts, insurance policies, claims history and liabilities, including ones nobody knew about, stay with that entity. A lawsuit over a job the company did three years ago names the company, and the company is now yours.

In an asset purchase, your company (often a new one) takes only the assets and the liabilities the agreement transfers. The general rule is that an asset buyer does not become liable for the seller's debts just because it bought the assets. But courts recognize exceptions, for example where the buyer agreed to take on liabilities, where the deal was really a merger, or where the buyer is essentially a continuation of the seller. Some federal employment claims and some tax and environmental laws follow different rules. Those exceptions are explained in successor liability: when an asset purchase is not clean. Whether any of them applies to your deal is a question for your attorney.

What does the purchase agreement change?

The purchase agreement allocates the cost between you and the seller, even where it cannot change who a third party can sue. Look for these sections, and read them with your attorney:

• Assumed and excluded liabilities (in an asset deal): which obligations you took on, such as warranty work on open jobs, and which the seller kept.
• Indemnity: the seller's promise to reimburse you for losses from pre-closing matters, usually limited by a basket (a threshold before claims can be made), a cap and a time limit.
• Escrow, holdback or set-off rights: money set aside or withheld so the indemnity is backed by real cash.
• Insurance covenants: promises about keeping old policies, buying tail coverage or giving you access to the seller's policies.

A promise to indemnify is only as good as the money behind it. See seller indemnities vs insurance.

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

Most liability claims about past work go to general liability. The standard form is written on an occurrence basis: it can cover bodily injury or property damage that happens during the policy period, whenever the claim is filed, subject to its terms, exclusions and limits. Professional liability, directors and officers, employment practices and cyber policies are usually claims-made: they cover claims first made during the policy period, for acts after the policy's retroactive date. See occurrence vs claims-made.

• The seller's old occurrence policies can still respond years later to injury or damage that happened while they were in force, unless their limits are used up. Whether your company can use them depends on deal structure, state law and especially the purchase agreement wording.
• After an asset deal, your new company's general liability policy may not cover the seller's old jobs. The standard form treats products sold by a business whose assets you bought as your products, but it has no matching wording for that business's completed work. It also excludes injury or damage that was known before your policy started. Ask your carrier how it would treat a claim about the seller's jobs. In a stock deal the old jobs are the company's own work, so its current policy treats them as its own, as the example below shows.
• Claims-made policies need continuity. If your new policy's retroactive date is your closing date, it will not cover claims about earlier work. In a stock deal, ask the new carrier to keep the company's existing retroactive date. In an asset deal your new company has no history, so covering the seller's earlier work under your policy needs the carrier to agree to cover a predecessor's prior acts, which is an underwriting decision. A tail (an extended reporting period) on the seller's policy usually protects the seller's entity, not automatically your company if a claimant names you. See prior acts and tail coverage after an acquisition.

Why might the claim land on my desk anyway?

Even when the seller is legally responsible, customers know the business by its name, its trucks and its phone number, not by the entity on the purchase agreement. In practice:

• The customer calls you about a leak, a failed part or a bad report.
• A lawsuit names your company along with the seller, and you need a defense while the question is sorted out.
• You choose to fix the problem to keep a valuable customer, even if you were not liable. That is a business decision, and insurance usually does not pay for goodwill repairs you volunteer.

Report anything that might become a claim to your broker promptly, even if you think it belongs to the seller. Late notice can hurt coverage. Your broker can notify your own carrier, and you should tell the seller in writing so it can notify its former carrier.

How do the three questions play out on a real claim?

A hypothetical example. A buyer acquires a heating, ventilation and air conditioning (HVAC) contractor in a stock deal. Fourteen months after closing, a fire at a customer's restaurant is traced to a rooftop unit the company installed two years before the sale, and the restaurant's insurer sends a $300,000 demand to the company. Who is liable? The same company did the work, so the company faces the claim. Which policy responds? The fire happened after closing, so the company's current occurrence general liability policy is the first place to look, subject to its terms, deductible and limits. The broker reports the claim to that carrier the day it arrives. Who bears the cost? The purchase agreement gives the buyer an indemnity for losses from pre-closing operations. It applies only above a basket and within a survival period (how long after closing a claim can still be made), so the buyer's attorney sends the seller written notice that week. Many purchase agreements reduce the seller's indemnity by any insurance the company recovers, so in practice it often covers the deductible, amounts above the limits or anything the carrier does not pay. The figures are illustrative only.

In an asset deal, every one of those answers would be less certain. A deck contractor claim with the same timing and demand, bought as assets, is walked through in completed operations claims from the seller's past jobs.

What should I do now to protect myself?

1. Get a list of the seller's policies for at least the past several years, with carriers, policy numbers and periods, especially general liability and products. Keep copies.
2. Confirm tail coverage on the seller's claims-made policies.
3. Ask about discontinued operations coverage if the business is a contractor bought in an asset deal: whether the seller bought, or will buy, coverage for its past work, and whether your company can be included. See completed operations claims from the seller's past jobs.
4. Ask your carrier in writing how it will treat claims about the seller's pre-closing work and products, whether an endorsement is available and, in an asset deal, whether it will cover the seller's prior acts on claims-made lines.
5. Keep job and product records from before closing: what was done, where, when and by whom.
6. Read the indemnity and survival terms (how long after closing you can still make a claim against the seller) with your attorney, and calendar the deadlines.
7. Report potential claims early to your broker, even when you think they belong to the seller.

If you are still before closing, the pre-closing insurance checklist for buying a business covers what to ask for. After closing, Morrow can review your policies and the seller's policy history and flag where pre-closing work may fall between the cracks. Any coverage decision is the carrier's.

Keep reading

• Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?
• Successor Liability: When an Asset Purchase Is Not Clean
• Completed Operations Claims From the Seller's Past Jobs: Who Pays?
• Prior Acts and Tail Coverage After an Acquisition: Who Pays?
• Seller Indemnities vs Insurance: What They Are Really Worth
• All guides for new business owners

Frequently asked questions

If I bought the assets, can I still be sued for the seller's old work?

Yes, you can be named in a lawsuit, and in some situations an asset buyer can be held liable under exceptions to the general rule, which vary by state. Your purchase agreement may let you recover costs from the seller. Ask your attorney how the rules apply to your deal.

Should I report a claim about the seller's old work to my own insurer?

Yes, promptly, even if you think the seller is responsible, because late notice can hurt coverage and your company may need a defense while responsibility is sorted out. Do not agree to pay for or repair anything before talking to your carrier, because voluntary payments are usually not covered. Separately, tell the seller in writing so it can notify its former carrier.

Do the seller's old insurance policies still matter after closing?

Often, yes. Occurrence policies can respond to injury or damage that happened while they were in force, even if the claim comes years later, subject to their wording and any limits left. Whether your company can use them depends on the deal structure, state law and the purchase agreement, so keep the policy list.

In a stock deal, can I make the seller pay for old claims?

The company you bought usually remains liable to the claimant, but the purchase agreement may give you an indemnity from the seller, often limited by a threshold, a cap and a time limit. Read those terms with your attorney and give notice on time.

What is tail coverage and do I need it?

Tail coverage, or an extended reporting period, lets claims made after a claims-made policy ends still be covered for earlier acts. If the seller had professional, management or cyber policies, ask whether a tail was bought. In a stock deal, your new policies can keep the old retroactive date. In an asset deal, a tail usually protects the seller's entity, not automatically your company, and covering the seller's prior acts under your own policy is an underwriting decision.

References

• ISO: CG 00 01 12 07, Commercial General Liability Coverage Form (carrier-hosted copy)
• ISO: IL 00 17 11 98, Common Policy Conditions (carrier-hosted copy)
• Pillsbury Winthrop Shaw Pittman: Preserving Insurance Coverage Rights in Corporate Transactions
• Ballard Spahr: The Art of the (Bad) Deal, Successor Liability in M&A Transactions
• IRMI: Extended reporting period (definition)

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.