Not automatically. A seller who stays on as an independent consultant is often not an insured (a person the policy protects) the way an employee is. Whether they are covered depends on how they really work, each policy's list of who is insured, and the consulting agreement. Your company's own policies may still protect the company when the seller's work leads to a claim, depending on each policy's terms, but the seller personally, and some types of loss, can fall through. This guide is for new owners who kept the seller on for a transition period.
The short answer
- Employees are usually insureds under general liability and many other policies for acts within the scope of their job; an independent consultant usually is not, unless an endorsement adds them.
- Whether the seller is really an employee or a consultant depends on how the relationship works in practice, not just the label. Ask your employment counsel or accountant.
- In a full change of ownership financed with a Small Business Administration (SBA) 7(a) loan, the seller generally may stay only as a consultant. The limit is 24 months in total for loans numbered on or after October 1, 2026, and 12 months under the earlier rules. Confirm with your lender.
- Workers' compensation, auto and crime coverage all turn on status, and each can surprise you.
- Write the insurance terms into the consulting agreement: status, scope, who carries what, indemnity, vehicle use and system access.
Is the seller an employee or a consultant?
It matters more than most buyers expect. Insurance policies, tax rules and workers' compensation laws all treat employees and independent contractors differently, and the label in the agreement is not the last word. Government agencies look at how the relationship actually works: who controls how the work is done, whether the person sets their own schedule, who supplies the tools, and whether they work for others. The Internal Revenue Service (IRS) and the Department of Labor each publish their own tests, and state workers' comp laws have their own. A seller who still comes in every day, supervises staff and uses a company truck can look a lot like an employee, whatever the contract says.
Deal financing can decide the label. In a full change of ownership financed with an SBA 7(a) loan, the seller generally may not remain an officer, director, stockholder or employee. The business may hire the seller as a consultant instead. For loans that received their SBA loan number on or after October 1, 2026, that can last up to 24 months in total, including extensions. Loans numbered earlier follow the prior SBA rules, which capped consulting at 12 months. Partial buyouts follow different rules. Confirm the arrangement with your lender and deal counsel before you set it up, and see insurance after an SBA acquisition loan.
Do your policies protect the seller, policy by policy?
Each policy has a section, usually called "who is an insured", that lists the people it protects. Employees are commonly on that list; independent consultants usually are not. This table shows how it tends to work. Your policy wording decides.
| Policy | If the seller is an employee | If the seller is an independent consultant | What to check |
|---|---|---|---|
| General liability | Usually an insured for acts within the scope of employment | Usually not an insured; the company may still be defended if it is sued over the seller's acts and the claim falls within the policy | Whether an endorsement can add the seller as an insured |
| Professional liability | Usually an insured for professional services for the firm | Some forms include independent contractors working on the firm's behalf; many do not | The definition of insured and of professional services |
| Directors and officers (D&O) | Covered if they are a director or officer, sometimes as an employee | For consulting work, an outside adviser is often not an insured person. In a stock deal the seller usually remains an insured person for past acts as a former director or officer, subject to any change in control run-off. | Whether advisers or consultants can be added |
| Employment practices liability insurance (EPLI) | Usually an insured, for example as a manager | Often not an insured, even if they supervise staff | Whether independent contractors can be added as insureds |
| Workers' compensation | Usually covered as an employee, subject to state rules for owners and officers | Generally not covered unless state law treats them as your employee | State tests and how the premium audit treats their pay |
| Commercial auto | Insured when driving a covered company vehicle with permission | Also usually an insured as a permissive user of a covered company vehicle | Driver list, and their own car used on company errands |
| Commercial crime | Theft by an employee is the core of employee theft coverage | The standard Insurance Services Office (ISO) crime form counts a former employee, partner, limited liability company member or manager, director or trustee who is retained as a consultant as an employee while performing services for you. Non-standard forms vary, and an asset deal into a new entity can blur whether the seller is your former employee. | The definition of employee, any exclusion for theft by owners or members (if the seller kept equity), and the prior-dishonesty condition |
A note on general liability: even when the seller is not an insured, your policy can still defend the company when a claimant sues it over the seller's conduct, subject to the policy's terms. The gap is the seller personally, and any claim where the seller is the only one sued. See general liability.
Who pays if the seller's advice goes wrong?
Two very different situations hide under "bad advice".
- The seller advises customers on your behalf. If a customer claims the seller's recommendation cost them money, the customer will usually sue your company. Your professional liability policy is the one built for that claim, if it covers the services involved and the people performing them. Check whether its definition of insured reaches independent contractors.
- The seller advises you. If the seller's guidance on pricing, a supplier or a hire costs your own company money, your liability policies generally will not pay. They cover claims by others, not your own business losses. Your protection there is the consulting agreement and the purchase agreement.
A retiring seller often does not carry their own professional liability policy. You can ask them to buy one, but it is often impractical. So buyers often ask their own carriers whether the seller can be added, and spell out an indemnity in the consulting agreement.
What happens if the seller gets hurt or drives on company business?
Injury. If the seller is your employee under state law, your workers' compensation policy generally responds, subject to state rules, and their pay belongs in the premium. If they are a genuine independent contractor, your workers' comp policy generally will not cover their injuries; they could sue the company instead, and your general liability policy may defend that suit, subject to its terms. If the state decides they were really your employee, workers' comp is generally the policy that responds, subject to state rules and the policy's terms. A workers' comp policy also bills premium for people "engaged in work that could make us liable" who lack their own coverage, so a consultant doing hands-on work can show up at audit. See 1099 contractors and the workers' comp audit and workers' comp for 1099 contractors.
Driving. A seller driving a company vehicle with your permission is usually an insured under your commercial auto policy, so add them to the driver list and check their motor vehicle record like anyone else. A seller driving their own car on company errands is different. Their personal auto policy usually responds first. Your hired and non-owned auto coverage, if you have it, generally protects the company, not the seller. See hired and non-owned auto.
A hypothetical example. Six months after closing, the seller, now a consultant, drives his own pickup to a key customer to smooth over a delayed order and causes a crash. The other driver's injuries total $400,000. The seller's personal auto policy has a $100,000 limit. The injured driver sues the seller and the company. The company's hired and non-owned auto coverage may respond for the company's share, subject to its terms. It does not protect the seller personally, so the seller asks the company to cover the rest. Whether the company owes him anything depends on the consulting agreement and state law, a question for the company's attorney. Figures are illustrative.
What should the consulting agreement say about insurance?
Treat the consulting agreement like any other contract with insurance consequences. Points to raise with your deal counsel:
| Clause | Why it matters |
|---|---|
| Status and control | Supports independent contractor treatment, and lets you and your counsel test whether it holds up |
| Scope and authority | Limits what the seller may do: advice only, or customer contact, supervision or signing on the company's behalf |
| Insurance each party carries | States whether the seller must carry personal auto limits, general or professional liability, or workers' comp for their own work |
| Insured status under your policies | Records whether you will ask carriers to add the seller, and for what |
| Indemnity in both directions | Sets who pays when the seller's acts lead to a claim, and limits your exposure for the seller's personal liability |
| Vehicle use | Whether the seller drives company vehicles, and minimum limits if they use their own |
| Bank and system access | Keeping payment authority and admin passwords with the new owner reduces crime and funds transfer fraud risk |
| Term | A defined end date, within the period your SBA 7(a) loan allows (24 months for loans numbered on or after October 1, 2026; 12 months for earlier loans) |
If the seller's role is really about running shared services such as payroll or a shared building, that is a transition services arrangement, covered in transition services agreements and insurance. If the seller holds the trade license, see when the seller holds the contractor license.
What should you tell your broker and carriers?
- Describe the seller's new role, status, duties and expected end date.
- Remove the seller as an officer, driver, named insured or contact where they no longer hold that role. See do your policies still list the seller?
- Ask each carrier whether the seller is an insured as a consultant and whether they can be added, and get the answer in writing.
- If the seller will handle money or inventory, confirm the crime policy's definition of employee includes a former owner (partner or member), officer or employee retained as a consultant, and that no owner exclusion applies if the seller kept any equity.
- Plan for the day the seller leaves. Knowledge walking out the door is a real risk, but business income coverage does not pay for losing a key person; see key employees leaving after an acquisition.
A Morrow review can check each policy's definition of insured against the consulting arrangement and flag where the seller falls outside it.
Keep reading
- Transition Services Agreements and Insurance: Who Covers What
- Do Your Policies Still List the Seller? What to Fix
- When the Seller Holds the Contractor License: Insurance and Bond Risks
- Key Employees Leaving After an Acquisition: Insurance and Retention
- Insurance After an SBA Acquisition Loan: What SBA and Your Lender Require
- All guides for new business owners
Frequently asked questions
Is the seller covered by my general liability policy while they consult?
Usually not as an insured, because general liability lists employees acting within their job, and an independent consultant is not one. Your policy may still defend the company if it is sued over the seller's acts and the claim falls within the policy. Ask your carrier whether the seller can be added by endorsement.
Can the seller stay on as an employee after an SBA-financed purchase?
In a full change of ownership under an SBA 7(a) loan, the seller generally may not stay as an officer, director, stockholder or employee, but can consult for up to 24 months in total on loans numbered on or after October 1, 2026, or 12 months on earlier loans. Partial buyouts differ. Confirm with your lender.
Do I need workers' comp for the seller if they are a consultant?
It depends on whether state law treats them as your employee. If it does, they belong on your policy and workers' comp is generally the policy that responds. If they are a genuine independent contractor, your policy generally does not cover their injuries, though your general liability may defend if they sue the company, and an audit may still charge for their pay in some cases.
What if the seller drives their own car for the business?
Their personal auto policy usually responds first. Your hired and non-owned auto coverage, if you carry it, generally protects the company, not the seller. Set minimum auto limits for the seller in the consulting agreement.
Should the seller carry their own insurance?
Sometimes. It is reasonable to require personal auto limits, and for hands-on or advisory work some buyers ask for general or professional liability. Many retiring sellers do not carry these, so buyers often ask their own carriers whether the seller can be added and rely on the agreement's indemnity.
References
- U.S. Small Business Administration: SOP 50 10 8.1, Lender and Development Company Loan Programs (effective Oct 1, 2026)
- Internal Revenue Service: Independent contractor (self-employed) or employee?
- U.S. Department of Labor, Wage and Hour Division: Misclassification of employees as independent contractors
- ISO: Commercial General Liability Coverage Form CG 00 01 12 07 (carrier-hosted copy)
- ISO: Business Auto Coverage Form CA 00 01 10 13 (carrier-hosted copy)
- NCCI: Workers Compensation and Employers Liability Insurance Policy WC 00 00 00 C (carrier-hosted copy)
- ISO: Commercial Crime Policy (Discovery Form) CR 00 22 (InsuranceXDate forms reference)
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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.