Are You Buying or Selling an Agency?
by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program
There have been many articles written of late discussing the issue of mergers and acquisitions among insurance agencies. While the flurry may have subsided, there is, no doubt, still a fair degree of activity.
More surprising is how many agencies, whether buying or selling, fail to give any degree of consideration to the issue of E&O when negotiating and structuring the deal. While there are many items to consider in determining whether to move forward with the deal, the failure to address how your E&O policy will respond can cause significant problems down the road.
If You are Buying
For buyers, as soon as it is determined the deal is likely to move forward, be sure to let your E&O carrier know. Contact them and find out what details they need to add coverage for the new agency to your policy. In most situations, they will ask you to complete some type of short form application on the new agency. This application will address the main elements of the agency ( size, breakdown of Personal and/or Commercial Lines and classes of business, carriers, loss history, etc.). In most cases, your carrier will include coverage from the date of the purchase forward, but understand there is no guarantee of acceptability. Of course, there may be a premium associated with the purchase. Inquire about these issues ahead of time so you are not caught off-guard.
With
few, if any exceptions, coverage for the new agency will become effective
the date that you close on the sale. Carriers will not pick up the
prior acts of the agency so you need to be careful to buy only the
assets, not the liabilities.
While this article is not designed to go into all of the due diligence that should be done, it is extremely important that you know what you are buying. In the 40-plus years that Utica National has been writing this coverage, many agencies discovered significant problems in the agencies they bought, surfacing after the fact. These resulted in claims, which then impacted the overall desirability of the agency from an E&O standpoint. No two agencies are the same, so be certain the agency you are buying is a good fit.
If You are Selling
For agencies that are selling, as mentioned above, when you sell, most agencies are only going to buy the assets, and thus you need to find a way to protect your liabilities moving forward. The appropriate way to accomplish this is by buying a “tail” on your existing policy; the technical term is “extended reporting period.” A section in most policies addresses this subject. This tail coverage protects your agency from claims that come in after the date of the sale involving errors that occurred priorto the date of the sale. You can buy coverage for various lengths of time. Typically, the options range from 1-10 years, with some states requiring “unlimited” as an option. Not only does the price tag vary based on the length of the tail, you only get one chance to make the decision. You cannot buy three years and then, when that time is up, buy three more. Tail coverage is important and not cheap, so understand this when you make the decision to sell your agency.
We are often asked what length of the tail should be purchased. This is not a simple question to answer. Among the factors that should be considered is what type of agency you had as well as the length of the statute of limitations in your state. Claims do occur, so don’t think just because you have been claims-free for the last five years that this trend will continue.
In conclusion, whether you are buying or selling, don’t forget to think about the E&O ramifications. Addressing this properly will give you the peace of mind that you are well-protected. Failure to address it could result in your biggest nightmare.