Wrong Named Insured After an Acquisition: Entities, DBAs and Holdcos

After an acquisition, every policy should name the legal entity that now owns and runs the business, plus any holding company or affiliate that needs protection. Trade names belong on the policy as trade names of that entity. If a policy still names the seller's company, leaves out your new limited liability company (LLC) or shows only a trade name, the carrier may question whether the company being sued, the property owner or the employer is insured at all. This guide is for buyers who want to check the named insured on each inherited policy and fix it before a claim tests it.

Why must the named insured match the entity that owns the business?

A named insured is the person or organization the policy specifically names, as opposed to others (employees, additional insureds) who fall within the policy's broader definition of an insured. Each policy ties coverage to that name in a different way:

• Liability policies protect the named insured and people acting for it. If the entity being sued is not named, coverage for it may be disputed.
• Property policies pay the named insured for property it has an insurable interest in. If the assets now belong to your new company and the policy names the seller, the claim gets complicated fast.
• Workers' compensation: the standard policy says you are insured if you are an employer named in Item 1 of the information page. If your new company employs the crew but is not named, coverage for injuries to its employees can be disputed.
• Commercial auto generally expects the named insured to own or lease the covered vehicles. See vehicles still titled to the seller.

The standard common policy conditions also say a policy's rights and duties may not be transferred without the insurer's written consent. In an asset purchase, your new company bought the assets, not the seller's policies, so the seller's policies do not simply become yours. In a stock purchase, the same entity continues and the policies stay in its name, but the carrier still needs to hear about the ownership change, and any name change or new holding company needs to be reflected. One exception: if the company you bought was insured under a policy issued to the seller's parent or another seller company, it usually comes off that program at closing and needs its own policies.

What are the most common named insured mistakes after closing?

If the seller or the seller's family still appear as named insureds, drivers or officers, see do your policies still list the seller.

Is your new LLC covered automatically?

Not under the standard form, and usually not under carrier forms either. The standard Insurance Services Office (ISO) general liability form has a newly acquired or formed organization provision, but it is narrow:

• It does not apply to a partnership, joint venture or LLC, which rules out a common entity type for search fund and Small Business Administration (SBA) buyers.
• It applies only to an organization you acquire or form and keep ownership or a majority interest in.
• It lasts only until the 90th day after the acquisition or formation, or the end of the policy period, whichever comes first.
• It applies only if no other similar insurance is available to the organization.
• It does not cover injury or damage that happened before the acquisition.

The same form adds that no person or organization is an insured for the conduct of a partnership, joint venture or LLC that is not shown as a named insured. And the provision extends an existing policy, so a first-time buyer with no policy of its own has nothing for it to attach to. Carrier forms vary, and some are broader or narrower. The safe assumption: list every entity on the declarations. Holding companies doing add-ons should read adding a newly acquired company to your policies.

Should the holding company be a named insured?

If you own the operating company through a holding company, ask two questions for each policy: could the holdco be sued over what the operating company does, and does the holdco own anything, employ anyone or sign anything? Holding companies get named in lawsuits when plaintiffs allege they controlled operations, and they often sign leases or customer contracts that require them to be insured; loan agreements may also require each borrower entity to appear on the policies. Adding the holdco as a named insured on general liability and the umbrella is common for that reason. Directors and officers coverage for the board, including investor-appointed directors, and the officers is often written at the holdco level, with operating subsidiaries included; see directors and officers insurance for search fund boards.

Which entity is listed first also matters. Under the standard common policy conditions, the first named insured pays the premium, receives any return premium and receives cancellation notices. That should usually be the entity that runs the business and pays the bills. Workers' compensation should name the entity that actually employs and pays the workers; if payroll moves to a different entity or a professional employer organization, the policy has to follow. See changing payroll providers without a workers' comp gap.

How you separate the holdco from the operating company is also a legal and tax question; ask your deal counsel and accountant before restructuring who owns what. For a multi-company structure, see insurance for holding companies and roll-ups.

How should trade names appear on the policy?

A trade name, or doing business as (DBA) name, is not a separate legal entity. It is a name your company uses. The policy should show the legal entity first and the trade name as its trade name, for example "Buyer LLC, doing business as Smith Plumbing", where Buyer LLC is the operating company that uses the name. Listing only the trade name leaves it unclear which entity is insured, and listing a trade name as if it were its own company can suggest an entity that does not exist.

This matters for certificates too. Customers, general contractors and landlords often check that the certificate shows the exact legal name on their contract. If the business kept the seller's trade name but contracts now run through your new entity, the policy, the certificate and the contract should all line up. See how to read a certificate.

How do you fix it: endorsement or a new policy?

Two rules apply whatever the fix. First, a request is not coverage: the change is in force only when the carrier issues the endorsement or binds the new policy, so get the document, not just an email or a certificate. Second, if you replace a claims-made policy to change the name, keep the retroactive date or arrange prior acts coverage so the seller's past work is not left uncovered; see prior acts and tail coverage. In an asset purchase, ask the carrier to confirm in writing whether the new policy covers work the seller's company did before closing; carriers differ.

A hypothetical example. A buyer acquires an electrical contractor through an asset purchase into Newco LLC, owned by Buyer Holdings LLC. Two weeks after closing, the policies still name the seller's corporation, the trucks are titled to the seller, and the workers' comp policy carries the seller's federal employer number. A visitor at a customer's site trips over a Newco cable and is injured, and the visitor sues Newco and Buyer Holdings. Because the general liability policy names neither entity, the carrier reserves its rights and may deny the claim, since Newco and its employees do not appear to be insureds under the seller's policy. The buyer's broker gets new general liability, auto and workers' comp policies issued in Newco's name with the holdco added, and the trucks retitled, but those policies start after the loss and do not cover it. Fixing the names at closing would likely have avoided that dispute.

Morrow can check the named insured on every inherited policy against your entity chart and request the endorsements or new policies needed; changes depend on carrier underwriting.

Keep reading

• Do Your Policies Still List the Seller? What to Fix
• Adding a Newly Acquired Company to Your Existing Policies
• Insurance for Holding Companies and Roll-Ups
• Should I Keep the Seller's Insurance or Start Over? A Decision Guide
• Vehicles Still Titled to the Seller or Family: Fixing Title and Insurance
• All guides for new business owners

Frequently asked questions

Do I need new insurance if I bought the business through an asset purchase?

Usually you need policies in your new company's name. The seller's policies belong to the seller's entity and generally cannot be transferred without the carrier's written consent. Some carriers will endorse the policy to the buyer after underwriting it; others will cancel and rewrite.

Is my new LLC automatically covered under my existing general liability policy?

Generally not under the standard form. Its newly acquired organization provision excludes limited liability companies, partnerships and joint ventures, and an unlisted limited liability company is not an insured. Have the carrier add it as a named insured.

Should my holding company be on my insurance policies?

Often, on general liability and the umbrella, if it could be sued over the operating company's activities, signs leases or customer contracts, or your loan agreement requires it. Directors and officers coverage is often written at the holdco level, with operating subsidiaries included. Review each policy with your broker and ask your attorney about structure.

How should a DBA appear on my policy?

Show the legal entity first and the trade name as its trade name, for example Buyer LLC doing business as Smith Plumbing. A trade name alone does not identify which legal entity is insured.

What happens if the named insured is wrong when a claim comes in?

The carrier may question whether the entity being sued, the owner of the damaged property or the employer is insured. That can mean a reservation of rights, delays or a denial, depending on the policy and the facts. Fixing the name before a claim can help avoid that dispute.

References

• IRMI: Named insured definition
• IRMI: First named insured definition
• IRMI: Broad form named insured endorsement definition
• Insurance Services Office: Commercial General Liability Coverage Form CG 00 01 12 07 (carrier-hosted copy)
• Insurance Services Office: 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)
• NCCI: Reporting Ownership Change Information

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.