New Machine Shop Owner: Insurance to Have at Closing

A new machine shop owner usually needs workers' compensation, general liability with products coverage, property insurance on the machines at replacement cost and business income coverage in place at closing, in the name of the entity that owns the shop. Add cover for any customers' material held in the shop, and business auto if the shop drives vehicles. Equipment breakdown, pollution, cyber and an umbrella are worth pricing, depending on the shop's parts, customers and lender. This guide is for buyers of job shops, precision parts makers and tool and die shops who inherited the seller's program.

The short answer

Have workers' comp, general liability with products coverage, property and business income in place at closing in the owning entity's name, plus business auto if the shop drives vehicles. Policy rights generally cannot be passed to you without the insurer's written consent, so confirm what is in force, and in whose name, before closing.
Next come the shop's own questions: who insures customers' material in your building, whether the machines are insured at replacement cost, and whether a breakdown, spill or lost program file is covered at all.
Lenders and customers set minimums. A Small Business Administration (SBA) loan, a lease or a supply agreement can dictate wording and limits the seller's program never had to meet.
Use the first 30 days to confirm names, values, lender wording and contract terms.
A quote or an application is not coverage. Coverage exists only when the carrier binds the policy.

What has to be in force on closing day?

Policies in the name of the entity that now owns and runs the shop. A policy's rights and duties generally cannot be transferred without the insurer's written consent, and that includes workers' compensation. In a stock purchase the company's policies may keep running, but the insurer still needs to be told the owner changed. In an asset purchase the buyer usually starts fresh. Keep the seller's insurance or start over walks through the choice.

Workers' comp rules differ by state: in North Dakota, Ohio, Washington and Wyoming it is bought from the state fund, not from private insurers, and most Texas private employers may choose not to carry it, according to the Texas Department of Insurance. The workers' comp guide for machine shops has more.

Many general liability forms add a newly acquired organization automatically for up to 90 days, but the standard wording leaves out acquired partnerships, joint ventures and limited liability companies (LLCs) and does not apply where the acquired company has similar insurance of its own. It also helps only a buyer who already has a policy, such as a holding company adding a shop.

If you used an SBA 7(a) loan over $50,000, SBA rules call for hazard insurance on pledged collateral, with equipment insured for full replacement cost (or maximum insurable value) and a lender's loss payable clause. Your loan documents set the exact terms, and a shop's machines are often the equipment collateral. See SBA lender insurance requirements after closing.

Which policy answers which machine shop exposure?

Match what happens in the building to the policy that usually responds. Wording varies by carrier and form, so treat this as a list of questions for your declarations pages and endorsements.

Machine shop exposures and the policies that usually respond
What can happen	Policy that usually responds	What to confirm
A machinist cuts a hand clearing chips	Workers' compensation, not general liability	Class code, payroll basis and the ownership change report. See workers' comp and payroll for a machine shop
A bracket you made fails in service and damages other equipment or injures someone	General liability, the part that covers damage a part causes after it ships (products-completed operations)	Products aggregate, and whether pre-closing parts are covered
You must redo or replace your own out-of-tolerance parts	Generally not general liability, so a business risk	Contract terms and quality controls, see the gaps guide
Customer-owned bar stock, castings, fixtures or tooling sit in your building	Property of others (bailee) coverage, meaning cover for other people's property in your care	Whether the form covers it, at what limit, sized to peak holdings
Fire damages machines and the building	Commercial property	Replacement cost or actual cash value, coinsurance, lender clause
A spindle or controller fails mechanically	Equipment breakdown coverage	Whether the policy has it and how it treats computerized controls
Production stops after a covered loss	Business income and extra expense	Waiting period, length of restoration and customer dependence
A coolant or solvent release at your site	Pollution liability, a separate policy	Any site pollution exclusion on general liability, and any stricter total pollution exclusion
Ransomware locks the shop software, drawings and programs	Cyber liability, usually claims-made	Whether customers' controlled drawings are handled
A delivery pickup hits another vehicle	Business auto, plus hired and non-owned auto	Drivers, vehicle schedule and employee errands

For the policy-by-policy detail see general liability, commercial property and manufacturers insurance, and the series review of product liability for manufacturers.

What happens to a shop's insurance after an overnight fire?

A hypothetical example. A buyer closes on a ten-machine job shop. One night a mist of cutting oil ignites near a machining center. The fire damages the machine, the ductwork and part of the building. It also destroys $60,000 of a customer's raw material waiting for open jobs. The inherited property policy values equipment at actual cash value (replacement cost less depreciation). The machining center would cost $400,000 to replace new, and the policy would value it at $150,000 after years of depreciation.

Three things decide the outcome. The gap between the $150,000 and the $400,000 falls on the owner unless replacement cost was chosen. The $60,000 of customer material is not a general liability claim, because that form generally excludes property in the insured's care, custody or control, so it depends on whether the property policy covers customers' property and at what limit. And the shop is idle while the machine is replaced, with business income starting only after the 72-hour waiting period in the standard Insurance Services Office (ISO) form and not paying for a customer who leaves. The numbers are illustrative. Your policy wording and your carrier decide what is paid, and a lender's loss payable clause can also affect who receives the money. For a buyer carrying acquisition debt, that $250,000 gap lands on the same cash flow that pays the loan.

What might the seller's program leave out?

Programs built for an owner-run shop may reflect what the lender and the largest customer once asked for, so check them against the shop you now own. Three items worth checking first are customers' material held in the shop, machine values set from an old schedule instead of replacement cost, and equipment breakdown. This is not a criticism of the seller's broker, who may have fit the program to the business as it was. Machine shop coverage gaps: what new owners should check goes through those and the rest.

What should you confirm in the first 30 days?

Collect the documents. Declarations pages, endorsements and loss runs for five years. What documents do I need for an insurance review? lists them.
Build a machine list. Age, make, serial number, condition and replacement cost for each machine, because purchase price, book value and insurable value differ.
Check names and lender wording. The named insured should match the owning entity, and the lender's clause should match the loan documents.
Read the customer agreements and the lease. Find the insurance clauses before the first certificate request. See contracts, licenses and bonds for a machine shop.
Report the ownership change. In states that use the National Council on Compensation Insurance (NCCI) and several that use their own rating bureau, the policy requires you to tell the workers' comp insurer within 90 days, so check your state. Ask how the experience mod (the premium multiplier built from the shop's past claims) will be handled.
Ask what customers' data you hold. If you hold controlled drawings, check whether any contract carries cybersecurity duties.
Decide who will manage the program. Best insurance broker for a machine shop gives criteria and questions.

If you want a second set of eyes on the inherited declarations pages and the loan and customer clauses, Morrow can review them and flag gaps against the shop you bought. Any new terms depend on carrier underwriting. The broader timeline is in your first 90 days of insurance after buying a business, and costs are covered in what drives insurance cost for a machine shop.

Which extras should you price first?

Equipment breakdown: if two or three machines carry most of production.
Pollution: if you find coolant sumps, floor drains, a parts washer or a lease that asks for it.
Cyber: if you hold customers' controlled drawings or run the shop on one business software system and program server.
Umbrella: if a customer contract or lender asks for limits above your base policies.

The contracts guide covers registrations and what may not transfer.

Keep reading

Frequently asked questions

Do I need my own insurance if I bought the shop's stock instead of its assets?

Often the company's existing policies keep running after a stock purchase because the named insured is the same company, but you should tell each insurer about the ownership change (workers' comp policies often set a reporting deadline) and check any change-in-control terms. In an asset purchase, policy rights cannot be transferred without the insurer's written consent, so the buyer usually needs new policies at closing. Confirm with each carrier and your broker.

Whose name goes on my policies after I buy the shop?

The entity that owns and runs the shop: the company itself in a stock purchase, or your new entity in an asset purchase. Confirm the named insured with deal counsel and each carrier before closing.

What insurance does my SBA lender require on the machines?

For SBA 7(a) loans over $50,000, SBA rules call for hazard insurance on pledged collateral, with equipment insured for full replacement cost (or maximum insurable value) and a lender's loss payable clause. Your loan documents and lender add the exact terms, so ask for them in writing.

Can a machine shop buy a businessowners policy?

It depends on the carrier. A businessowners policy (BOP) packages property, business income and liability for eligible small businesses, and each insurer sets its own eligibility rules. Whether a shop is written on a BOP, another package or separate policies varies, and a BOP generally does not cover auto, workers' comp or professional liability.

When should I read the seller's policies?

Before closing if you can, and no later than the first 30 days, before the first renewal and before you sign any new customer agreement. A gap found early can still be fixed while carriers have time to respond. Any new terms depend on carrier underwriting.

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

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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.

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