Buying a Business: Insurance Due-Diligence Checklist

1. 1

   Identify the deal structure (asset vs stock purchase)

   The single biggest insurance-due-diligence question:

   • Asset purchase: Buyer creates new entity, buys assets, leaves seller's entity (and most liabilities) behind. Insurance generally does not follow — buyer needs new policies effective at closing.
   • Stock purchase: Buyer acquires the entity, including all assets AND all liabilities. Insurance generally does follow — but the renewing carrier may re-underwrite based on the new ownership.

   Most small-business acquisitions are asset purchases. But a few exceptions matter — certain licensing (state contractor license, liquor license) may require stock purchase to maintain. Confirm with the deal attorney.

   💡 Tip: Even on asset purchases, predecessor liability for environmental, employment, and product-related claims can transfer via common-law doctrines. Insurance due-diligence applies regardless of structure.
2. 2

   Request 5 years of loss runs from every active and recently-cancelled carrier

   Demand from seller:

   • Loss runs for GL, Auto, WC, Property, Umbrella, Crime, Cyber, EPLI — all coverage lines, all carriers
   • Last 5 years (some industries require 10 — environmental, healthcare, transportation)
   • Open claims status, reserve amounts, paid amounts, dates of loss
   • Any claims denied for late notice or other procedural issues (red flag)
   • Workers Comp experience modifier history (NCCI mod sheet for last 5 years)

   If seller can't produce loss runs (carrier won't release to seller, or seller never asked) — that's a flag. The buyer's insurance broker can sometimes pull from industry sources, but the seller refusing/inability is itself diagnostic.

   💡 Tip: Compare loss-run severity to the predecessor's revenue scale. High frequency or severity relative to revenue → systemic risk in the operations the buyer is inheriting.
3. 3

   Map all active insurance contracts and check assignability

   List every insurance contract the seller's business has:

   • Primary GL, Auto, WC, Property, Umbrella policies
   • Surety bonds (if contractor — these typically DO NOT transfer)
   • Cyber, EPLI, D&O, Crime, Professional Liability standalone policies
   • Active Certificates of Insurance issued to customers/landlords
   • Hold-harmless / indemnification agreements with vendors, customers
   • Lease insurance requirements at owned/leased premises

   For each, determine if it can transfer to buyer, requires re-underwriting, or must be replaced. Most carriers require notice of change of control 30-60 days before close.

4. 4

   Verify claims-made coverage tail / ERP requirements

   If seller carries claims-made policies (Pro Liab, E&O, D&O, EPLI, Cyber), the deal MUST address tail coverage:

   • Extended Reporting Period (ERP) endorsement: usually 1-7 years, sometimes unlimited. Cost = 100-200% of last annual premium
   • Who buys the tail — seller, buyer, or shared? Memorialize in the purchase agreement
   • Tail is usually purchased FROM the same carrier (other carriers won't sell tail for a competitor's policy)
   • Without tail, any claims from pre-closing acts that surface post-closing have NO COVERAGE — seller's policy is canceled, buyer's new policy excludes prior acts

   This is the single most-missed insurance-due-diligence item. Tail can cost $20K-$200K depending on the coverages; allocate during deal negotiation.

   💡 Tip: Tail-coverage cost is a real number that should be on the buyer's or seller's side of the closing statement. Don't let it become a post-closing surprise.
5. 5

   Workers Comp experience modifier migration plan

   If WC policies are involved (which they are in any business with employees):

   • Stock purchase: experience mod follows the entity automatically. Buyer inherits the predecessor's loss history good or bad.
   • Asset purchase: the new entity starts at 1.00 mod (unless NCCI rules trigger an "experience-rating combinability" rule that links new entity to predecessor for first 3 years)
   • NCCI combinability test: same ownership, same operations, same geography → predecessor mod transfers

   Buyer engaging a WC carrier MUST disclose the asset-purchase relationship if combinability applies. Failure to disclose can void the new policy.

6. 6

   Review historical claim trends + reserve adequacy

   For open claims on the loss runs:

   • Confirm reserves are realistic — under-reserved claims can deteriorate post-closing and impact buyer's renewals
   • Verify all open claims are being defended by the carrier; any in dispute with the carrier?
   • For WC: review return-to-work programs and modified-duty programs in place — these directly impact future mods
   • For property: any open claims for buildings/equipment that will transfer?
   • For Pro Liab/E&O: any open complaints with state DOI or industry boards?
7. 7

   Plan buyer's day-one insurance program

   Working backward from closing date:

   • 30-60 days before close: buyer's broker writes initial quotes for new entity's GL/BOP, WC, Auto, Umbrella based on projected operations
   • 14 days before close: final coverage selections, bind effective at midnight of closing
   • Day of close: confirm binders are in effect, COIs issued to landlords/lenders/customers, seller's policies terminated effective same date
   • Post-close week 1: claim-history letters from prior carriers, formal underwriting for renewal cycle

   Coverage gaps at closing are the highest risk. Buyer's policies must be effective at midnight before seller's are cancelled.

   💡 Tip: Best practice: overlap day. Buyer's coverage starts at 11:59 PM the day before closing; seller's cancels at midnight the day after. Costs ~1 day premium each side but eliminates gap risk.
8. 8

   Memorialize insurance terms in the purchase agreement

   The acquisition agreement should explicitly address:

   • Who buys claims-made tail coverage + cost allocation
   • Allocation of pre-closing claim defense and indemnification
   • Cooperation in claim defense for cross-period claims
   • WC experience-modifier disclosure obligations
   • Required minimum insurance levels for survival of seller's reps & warranties
   • R&W insurance policy (separate from operational insurance — covers seller's representation breaches)

   This is attorney + insurance-broker collaboration territory. Get both in the room before closing — not after.