During a transition services agreement (TSA), each side usually insures its own people, property and operations. The seller should keep its policies in force for the services it still provides, and the agreement should require that. Your own policies need to cover your business from day one. The gaps usually appear in three places: the seller cancels its insurance at closing while it is still providing services, the agreement says little or nothing about insurance, and nobody plans for the day the services stop. This guide is for new owners whose seller still runs payroll, IT, bookkeeping or a shared building for a while after closing.
The short answer
- Each party usually insures its own employees, property and operations. A TSA does not put you on the seller's policies, and it does not put the seller on yours.
- In an asset sale the seller's company often cancels its policies at closing. If it is still providing services, the agreement should require it to keep specific coverage until the services end.
- TSAs often cap the seller's liability at the fees you pay, and your liability policies do not cover your own losses when a service fails. So a failed service may be a cost you absorb.
- People who stay on the seller's payroll while working for you raise workers' compensation, employment and crime questions that need answers in writing.
- Plan the exit: payroll, workers' comp, IT, the building and vehicles each create a gap risk on the day the TSA ends.
What is a transition services agreement, and why does insurance matter?
A transition services agreement is a short contract, signed at closing, under which the seller keeps providing some services to the business for a set period, often a few months. Common examples are running payroll and benefits administration, keeping email, software and data on the seller's systems, doing the bookkeeping, sharing a warehouse or office the seller still controls, or lending vehicles and equipment until titles and leases are moved.
Insurance matters because a TSA splits one business across two companies for a while. Your staff may work in the seller's building, your data may sit on the seller's servers, and some people doing your work may still be the seller's employees. When something goes wrong, the question is whose policy responds, and the honest answer is often "it depends on what the agreement and each policy say."
One thing a TSA usually cannot provide is insurance itself. Standard commercial policies say an insured's rights and duties may not be transferred without the insurer's written consent, so in an asset deal your new company generally cannot stay on the seller's policies as a "service." In a stock deal the company usually keeps its own policies, though some, especially management liability policies, have change-in-control terms worth checking. A carve-out from a larger seller may have relied on the parent's program. Whatever the structure, confirm that coverage in your company's own name is in force at closing. See stock deal vs asset deal.
Who insures what during the transition?
This table shows how the risk usually splits. Your agreement and the policy wording decide the actual answer.
| Service the seller provides | Who usually carries the risk | Policies involved | What to confirm |
|---|---|---|---|
| Payroll and benefits administration | The seller for its errors in processing; you for your own employees | Your workers' comp; the seller's errors and omissions coverage, and clients' property crime coverage, if it has them | Your employees are on your workers' comp policy, not the seller's |
| People on the seller's payroll doing your work | The seller as employer, with claims against you possible | The seller's workers' comp and employers liability; your general liability and employment practices liability insurance (EPLI) | Whether the seller's policy covers work done for you, and whether you can be added as an alternate employer |
| Email, software and data on the seller's systems | Shared: the seller runs the systems, you own the data | Each side's cyber liability policy | Whether your cyber policy responds to a breach of data held by a vendor |
| Bookkeeping, billing and payments | You for your money; the seller for its staff's conduct | Your crime policy; the seller's crime policy | Whether your crime policy's definition of employee reaches people the seller supplies, and whether the seller's crime policy has clients' property (third-party) coverage that reaches your funds |
| A shared building the seller controls | The seller for the building; you for your contents and operations | The seller's property and liability; your property and general liability | Your property policy lists that location, and the agreement has a mutual waiver of subrogation. If the arrangement becomes a lease, see when the seller is your landlord |
| Vehicles and equipment still owned by the seller | The seller as owner; you as the user, if the agreement says so | Both commercial auto and equipment policies | A written arrangement and matching policy entries; see vehicles still titled to the seller |
What if the seller cancels its insurance at closing?
In an asset sale, the seller's old operating company often winds down after closing. Its owner wants the cash, so the policies get cancelled at closing and the unearned premium comes back. That makes sense if the company has stopped working. It does not make sense if that same company is still employing people who do your payroll, running servers that hold your customer list, or controlling the building your crew works out of.
Even if the seller keeps its policies, check that they fit its new role. A company that used to run its own operations is now providing services to another business for a fee. Its general liability, professional liability or cyber policy may describe only the old operations, and its carrier may need to be told about the new work. Ask for written confirmation, not just a certificate, that its policies apply to the TSA services.
If the seller's coverage lapses during the TSA, a claim arising from its services may have no policy behind it, and the seller's promise to indemnify you is only as good as the money behind it. See seller indemnities vs insurance.
A hypothetical example. A buyer acquires the assets of a distribution company. Under a 90-day TSA, the seller's old company keeps two bookkeepers on its payroll to run billing for the buyer. The seller cancels all of its policies at closing. In week six, one bookkeeper slips on ice in the buyer's parking lot and is out for three months. The seller's company has no workers' compensation policy in force, so the injured bookkeeper's lawyer looks to the buyer. The claim could come as a borrowed employer claim under workers' comp, or as a premises lawsuit that the buyer's general liability policy may have to defend. The buyer's own workers' comp policy may or may not respond, depending on the state and the policy terms. At the year-end audit, its carrier may also charge premium on the uninsured bookkeepers' pay. A clause requiring the seller to keep workers' comp and employers liability through the end of the TSA, with a certificate at closing, would likely have sent the claim first to the seller's insurer, subject to that policy's terms. The facts are illustrative.
What insurance clauses belong in the transition services agreement?
Many TSAs are drafted quickly from a template, and the insurance section is often a single line. These are the points to raise with your deal counsel:
| Clause | What it does | Why it matters to you |
|---|---|---|
| Insurance each party must carry | Lists the lines and minimum limits, such as general liability, workers' comp and employers liability, cyber and crime | Stops the seller from cancelling coverage it still needs |
| Duration | Coverage stays in force until the services end, plus any wind-down period | Claims-made policies may also need a reporting period after the TSA ends |
| Additional insured status | Adds you to the seller's liability policy for claims arising from its services, where the carrier allows it | Gives you rights under the seller's policy, within the scope of the endorsement, not just a promise |
| Waiver of subrogation | Each party gives up claims against the other for losses its insurance covers, so its insurer cannot pursue the other party after paying | Common for shared buildings; your policies must permit it |
| Indemnity | Says who pays when one side's acts cause a claim against the other | Should match what each side's insurance can actually back up |
| Liability cap and exclusions | Often limits the seller's liability to the fees paid and excludes lost profits | Your own losses from a failed service may be yours to absorb |
| Data security and breach notice | Sets security standards and how fast the seller must tell you about an incident | Your cyber policy has its own notice deadlines |
| Bank and system access | Says who can approve payments and change vendor details | Reduces the risk of theft and funds transfer fraud |
| Certificates and notice of cancellation | Requires proof of coverage at signing and notice if a policy is cancelled | A certificate is information only, so ask for the endorsements too |
The liability cap deserves a careful look. Your liability policies pay claims others bring against you. They generally do not pay for your own lost revenue when the seller's payroll run fails or its server goes down. For a buyer with acquisition debt, a missed payroll or a week without billing is a cash flow problem first. If a service is critical, negotiate the cap, or plan for that risk another way.
Who is the employer when the seller's staff work for you?
This is the question that surprises buyers most. When people stay on the seller's payroll but take direction from you, both companies can end up treated as their employer for some purposes.
- Workers' compensation. The seller's policy should cover its own employees, but state law may also treat you as a special or borrowed employer. Some carriers can add you to the seller's policy with an alternate employer endorsement. Also, the standard workers' comp policy charges premium for people "engaged in work that could make us liable" who lack their own coverage, so uninsured staff doing your work can show up on your audit. See workers' compensation.
- Employment claims. A seller employee who is let go when the TSA ends may name both companies in a claim. Check whether your EPLI policy covers claims from people who were not on your payroll.
- Crime. Theft by people the seller supplies may fall outside your crime policy if its definition of employee is narrow.
- Professional work. If seller staff advise your customers, check that your professional liability policy covers services performed on your behalf by others.
If the seller used a professional employer organization (PEO), its coverage for the seller's workforce does not automatically carry over to your new entity in an asset deal. You need your own arrangement in force at closing.
If your people stay on the seller's health or retirement plans during the TSA, ask your benefits advisor and deal counsel two things: which company sponsors each plan, and what happens to coverage when people move to your payroll. Those are not property and casualty insurance questions. See group health benefits after an asset sale.
What gaps open when the transition services end?
The exit is where most TSA insurance gaps appear, because each service ends on a different day and someone has to move the coverage with it. Work through this list a month before each service stops:
- Payroll and workers' comp. If employees move from the seller's payroll to yours, your policy has to pick them up the same day, with the right class codes and payroll estimates. See changing payroll providers without a workers' comp gap.
- IT and email cutover. Migration weeks are a favorite time for fraud and data loss. Confirm your cyber controls and policy terms before the switch. See cyber risk during IT and email migration.
- Leaving a shared building. Add the new location to your property policy before you move in, and ask about coverage for property in transit or temporarily at another site.
- Vehicles and equipment. Retitle or lease them before the seller stops covering them.
- Known incidents. Ask the seller to report any incident during the TSA to its insurers before its policies end, especially claims-made policies.
- Certificates. Customers who received certificates showing the seller's coverage need yours instead.
A Morrow review can map each TSA service against your policies and the seller's, and flag the dates where coverage needs to move.
Keep reading
- The Seller Stays On as a Consultant: Are They Covered?
- Changing Payroll Providers Without a Workers' Comp Gap
- Cyber Risk During IT and Email Migration After You Buy a Business
- Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?
- When the Lease or Building Stays in the Seller's Name: Who Insures What
- All guides for new business owners
Frequently asked questions
Can my company stay on the seller's insurance during the transition?
Usually not. Standard commercial policies say rights and duties under the policy cannot be transferred without the insurer's written consent, so in an asset deal your new company generally needs its own policies at closing. Do not rely on a TSA to provide insurance unless the carriers agree in writing.
Should I be added to the seller's liability policy during the transition?
Often, yes. This is called additional insured status, and it is reasonable for services that could lead to claims against you, such as staff working at your sites or a shared building. Whether it is available depends on the seller's carrier, and it applies only within the scope of the endorsement. Ask for the endorsement itself, not just a certificate.
Who covers an injury to a seller employee working for me under a TSA?
The seller's workers' compensation policy should be first in line for its own employees, but state law may also treat you as an employer. Require the seller to keep workers' comp and employers liability through the TSA, and ask whether you can be added as an alternate employer.
Does my insurance pay if the seller's payroll or IT service fails?
Usually not for your own lost income or extra costs. Liability policies cover claims others bring against you. Your protection for a failed service is mainly the TSA itself, and many TSAs cap the seller's liability at the fees paid.
What should I do with my insurance when the TSA ends?
Move each piece of coverage on the day the matching service ends: employees onto your workers' comp, the new location onto your property policy, vehicles onto your auto policy, and data onto systems your cyber policy and controls cover.
References
- ISO: 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)
- ISO: Commercial General Liability Coverage Form CG 00 01 12 07 (carrier-hosted copy)
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.
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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.