RISK MANAGEMENT
policy. However, please remember that the E&O carrier
must approve this before the sale is completed. You must
contact your E&O agent as soon as you begin the buy/
sell process. You will be required to provide a loss history
of the seller. The carrier may require an application giving
information about the business mix, gross annual premium,
commissions, staff, etc. In some cases, the carrier may not
agree to provide prior acts due to claims history, nature of
the book of business, etc. In that case, the seller should
purchase tail coverage from their current E&O carrier.
One thing to keep in mind is that the cost of tail coverage
or additional premium expense if the buyer provides the
prior acts, can, and should, be considered in determining
the sale price of the agency.
SELLING AN AGENCY
As a seller of an agency, you may feel that it is important
to maintain your agency’s legacy. If it is important to you,
be sure to discuss this with your attorney so that it is
appropriately addressed in the agreement. If you have
valued employees that you wish to provide for, you should
include how they will be taken care of in the agreement.
This may be a source of negotiation as the buyer may not
wish to add any permanent staff, so make sure this is
brought up in your discussions with the buyer.
An important aspect, mentioned previously, is protection
for you if a claim should arise after the sale. As stated
before, the best way to ensure this is to purchase tail
coverage from your current E&O carrier. While you may not
want to add the expense of tail coverage and you believe
you are protected because of your agreement with the
buyer that they will provide coverage for prior acts and
maintain an E&O policy, you have no guarantees that it
will be done. It is not unheard of after an agency sale for
the buying agency to either go out of business, sell their
agency to another party who will not agree to provide prior
acts, or have their E&O policy terminate either voluntarily
or involuntary. In each of these cases, you could be left
without coverage.
Should your agency be added as an additional insured on
the buyers’ policy, you’ll need to consider that any claims
will be subject to the policy limit of the buyers’ policy -
regardless of whether multiple claims are resulting from
either agency. In other words, are you comfortable that the
policy limits of the buyer’s E&O policy are sufficient to cover
both your and their claims? Also, it should be made clear
who will be responsible for any deductible payment.
MERGERS
If you are merging with another agency to form a new
agency or continue one of the two, there are a couple of
different ways to handle your E&O coverage. One way is
to have a new E&O policy for the newly created entity.
A new policy ensures a clean slate for all involved. If a
new policy is created, each of the former agencies can
purchase tail coverage, or they can be added as additional
insureds on the new entity policy. Again, keep in mind that
any claims will be subject to the limits of the remaining
policy. Remember that the E&O provider must approve this
before the completion of the agreement to ensure that
the carrier can comply with your wishes. Another way to
handle a merger is to terminate one policy and have that
agency added as an additional insured to the “surviving”
agency’s policy. The agency that is terminating its policy
can purchase tail coverage or be added as an additional
insured upon approval by the E&O provider.
Internal sale
Often, an owner has a key agency employee who they
believe is qualified to take over the agency. Everything
that has been stated before applies just the same in
these situations. There should be due diligence by both
parties, attorneys should be retained, agreements drafted
and entered into, and all other aspects of the change of
ownership should be carefully contemplated and resolved.
Transfer of a book of business
Remember, even if all you are doing is transferring a book
of business, all of the previously mentioned apply. While
you might think that a transfer of only a small book of
business should be uncomplicated, as soon as a claim is
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