Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?

In a stock deal you buy the same company, so its policies, claims history and old claims usually stay with it. In an asset deal your new company buys only the assets, so you usually need your own policies in force at closing. The seller's policies stay with the seller, and old claims usually go to the seller's past policies and the purchase agreement, though a claimant can still name your company, especially if you kept the name. This guide gives new owners a side-by-side view of what the deal structure changed for insurance, and what it did not.

What is the difference between a stock deal and an asset deal?

In a stock purchase (or a purchase of the membership interests of a limited liability company), you buy the owners' shares. The company itself does not change. It keeps its name, its contracts, its permits, its insurance policies, its claims history and its liabilities, including ones nobody knows about yet.

In an asset purchase, your company (often a new entity formed for the deal) buys the business's equipment, customer lists, name and other assets. It takes on only the liabilities the purchase agreement says it assumes. The general rule is that an asset buyer does not inherit the seller's liabilities just by buying assets, but courts recognize exceptions, and some laws (certain tax, environmental and employment rules, for example) can reach a buyer anyway. That topic has its own guide: successor liability.

Many small business deals, including many financed with a Small Business Administration (SBA) loan, are asset deals, but not all. Check which one you signed before you apply anything below.

What happens to insurance under each deal structure?

The table describes how things usually work; the policy wording, your purchase agreement and state law control your situation. A few terms first. The named insured is the company the policy is issued to. Loss runs are the carrier's report of past claims. The experience mod is a multiplier that raises or lowers workers' comp premium based on past claims. Change in control wording is the set of policy terms that apply when ownership changes.

Two rows surprise buyers most often: the experience mod and the audit bill. The next sections cover claims history and old claims, and the example below shows how the mod and the audit play out.

Does an asset deal give you a clean claims history?

Mostly no, at least not in the eyes of underwriters and rating bureaus. Under the rules of the National Council on Compensation Insurance (NCCI), a stock purchase is an ownership change. So is an asset purchase where the buyer takes over the operations. When the seller sells all of its operations, its workers' comp experience generally moves to the buyer. Excluding that experience is rare and requires all three of: a near-complete change of owners, a change in operations big enough to change the governing class code, and a change in the work process and hazards. Some states use their own rating bureaus, and four states (North Dakota, Ohio, Washington and Wyoming) run workers' comp through a state fund, so details vary. In NCCI states and several bureau states, the policy requires you to report an ownership change to your insurer within 90 days. See experience modification rate.

For general liability, auto and property, there is no bureau rule, but underwriters price the operation they are insuring. A new entity running the same crews, trucks and customers will be asked for the seller's loss runs, and a poor history will follow the account into pricing. See how to read loss runs.

Who pays for an old claim under each structure?

Two questions decide it: who is legally responsible, and which policy responds. They are separate.

• Stock deal. The company you own is the same company that did the work or employed the worker. If a claim comes in about the past, the company is the defendant. For occurrence policies, look to the company's policy in force when the injury or damage happened, which may be a policy the seller bought years ago. For claims-made policies, look to the current policy and its retroactive date (the earliest date of acts it covers). Your recourse against the seller for the cost is whatever the purchase agreement gives you.
• Asset deal. The seller's entity usually keeps the liabilities you did not assume, and its historical occurrence policies stay with it. A claimant may still name your company, especially if you kept the name. Whether your company can use the seller's old policies depends on the agreement wording and state law; practitioners recommend listing historic policies specifically in the deal documents rather than relying on general assignment language. Your own new policies may or may not respond to claims about the seller's work.

For the full map of liability, see who is liable for work the seller did. For contractors, the gap around finished jobs is covered in completed operations claims from the seller's past jobs, and for claims-made lines see prior acts and tail coverage.

How might the same old claim play out in each deal?

A hypothetical example. Two buyers each pay $4 million for similar office furniture installation companies. Each target had a client's employee trip over a crew's dolly at a client site six months before closing, with no claim filed yet.

Buyer A does a stock deal. The claim arrives after closing against the same company. The company's general liability policy that was in force on the date of the fall may respond, subject to its terms, and the company pays the deductible. A month later the workers' comp audit for the prior policy year bills the company $15,000 for payroll the seller underreported. Buyer A's deal counsel had negotiated a specific indemnity for pre-closing audit bills, so Buyer A claims it from the holdback (part of the price Buyer A kept back to pay such claims).

Buyer B does an asset deal into a new company. The claim is filed against the seller's entity and is sent to the seller's policy for that date. The seller owes its own audit balance. But Buyer B's new workers' comp policy still carries the seller's experience mod, and its first general liability quote reflects the seller's loss runs.

All figures are illustrative. Your outcome depends on your agreement, your policies and state law.

What should you check now that the deal is done?

1. Confirm the structure and the entity names. Match the named insured on every policy to the entity that owns and runs the business today. See wrong named insured after an acquisition.
2. Stock deal: read the change in control and notice wording on every claims-made policy, and give any required notices.
3. Asset deal: confirm your own policies were bound at closing, and get copies of the seller's historical policies for your files.
4. Report the workers' comp ownership change to your insurer, within 90 days where the policy requires it.
5. Pull five years of loss runs for the business, whichever entity they sit in.
6. Read the purchase agreement's insurance and indemnity sections with your deal counsel so you know who bears what.
7. Decide whether to keep or replace the policies, using keep the seller's insurance or start over.

A Morrow review can line up your policies against the deal structure and flag where an old claim could fall through. Legal conclusions about your agreement belong with your attorney.

Keep reading

• Who Is Liable for Work the Seller Did Before I Bought the Company?
• Should I Keep the Seller's Insurance or Start Over? A Decision Guide
• Successor Liability: When an Asset Purchase Is Not Clean
• Prior Acts and Tail Coverage After an Acquisition: Who Pays?
• Wrong Named Insured After an Acquisition: Entities, DBAs and Holdcos
• All guides for new business owners

Frequently asked questions

I bought the assets through a new LLC. Do the seller's policies cover me?

Usually not. Standard policy conditions say the insured's rights and duties cannot be transferred without the insurer's written consent, so your new company generally needs its own policies in force at closing. The seller's old policies may still matter for claims about the past.

I bought the stock. Do I need new insurance?

Not necessarily. The policies usually continue in the company's name, but change in control provisions in claims-made policies, owner and officer changes and fit for the new business are all reasons to review them soon after closing. If the company was insured under a policy in the seller's or a parent company's name, that coverage does not come with the stock, so new policies are needed at closing.

Does an asset purchase reset my workers' comp experience mod?

Generally no. Under NCCI rules, an asset purchase where the buyer takes over the operations is an ownership change, and the seller's experience usually transfers. Excluding it is rare. States with their own bureaus or state funds have their own rules.

Who pays the workers' comp audit for the months before closing?

Generally the named insured on the policy owes its audit balance. In a stock deal that is the company you now own; in an asset deal it is normally the seller. The purchase agreement decides who bears the cost, so check it with your deal counsel.

Can I use the seller's old occurrence policies for a claim about pre-closing work?

Sometimes. It depends on the deal structure, the purchase agreement wording and state law. Practitioners recommend listing the historic policies specifically in the deal documents. Ask your deal counsel how your agreement handles them.

References

• ISO: Common Policy Conditions IL 00 17 11 98 (carrier-hosted copy)
• NCCI: ABCs of Experience Rating
• NCCI: Experience Rating Plan Manual filing, Item E-1411 (Texas Department of Insurance)
• NCCI: Workers Compensation and Employers Liability Insurance Policy WC 00 00 00 C (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

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.