Discontinued Products and Operations Coverage
Coverage After a Business Ceases Operations
Discontinued products and operations coverage protects you against lawsuits that arise after your company has gone out of business. This coverage is important if your company manufactures a product or performs work for others. Defects in your products or completed work could injure someone after your company has ceased operations. If the injured party files a lawsuit against you, the suit won't be covered by the liability policies that covered your company while it was in business.
Why won't your previous liability policies cover injuries that occur after your business is discontinued? A typical general liability policy is an occurrence policy. It covers claims or suits alleging bodily injury or property damage if the bodily injury or property damage occurs during the policy period. Claims alleging injury or damage that occur after the policy has expired are not covered.
When a business ceases operations, the owner often lets the liability coverage lapse. After all, why should he or she pay premiums to insure a business that no longer exists? Unfortunately, the owner may remain liable for third-party injuries that take place after the company has ceased operating.
If your company is a manufacturer, products you make may remain in the marketplace and be used by buyers after your business has ceased operations. Consider the following example.
Frank owns Fancy Furniture, a company that makes home furnishings. Frank decides to retire, and his company ceases operations on December 31, 2016. Fancy Furniture's general liability policy expires on that date. On June 1, 2017 Frank is notified of a lawsuit. The plaintiff (Steve) purchased a table at a retail store the previous January.
The table was manufactured by Fancy Furniture. On March 1, 2017 the table collapsed, injuring Steve. Steve is demanding $50,000 in compensatory damages.
Steve's injury occurred after the expiration date of Fancy Furniture's last general liability policy. Thus, the policy won't cover Steve's claim.
Completed Work or Operations
Lawsuits can also arise from work your firm completed before it went out of business. For example, Mike owns Miraculous Masonry, a masonry contracting company. Miraculous is hired by A-1 Apartments to construct a wall. Miraculous completes the wall in October of 2016. Mike retires and dissolves his masonry firm on December 31, 2016. The liability policy covering Mike's firm expires on that date.
In March of 2017 the wall collapses and injures Jane, an apartment resident. Jane sues Mike, the owner of Miraculous Masonry, for bodily injury. Jane claims that the wall collapsed as a result of Miraculous' poor workmanship.
Mike has no coverage for the claim under his firm's most recent liability policy. Jane's injury took place after the policy expired.
Discontinued Products or Operations Coverage
If you are thinking about closing your business, you should discuss discontinued products and operations coverage with your insurance agent or broker before your company ceases operations.
This coverage is similar to the products-completed operations insurance that is provided under a general liability policy. It covers claims for bodily injury or property damage arising out of your product or completed work, if the injury or damage occurs during the policy period.
The insurance afforded for discontinued products or operations does not provide any coverage for a business premises or ongoing operations. These coverages aren't needed when a company is no longer in business.
Once a business is no longer operating, the risk of claims drops and then continues to decline. The premium charged for discontinued products and operations coverage falls over time as well. The premium is typically a percentage of the premium charged for an ongoing business. This percentage declines from one policy period to the next.
For example, suppose that the products-completed operations premium for an ongoing business like yours is $30,000. For the first year of discontinued products and operations coverage, your insurer might charge, say 25% of $30,000 or $7,500. The premium for the following year should be a smaller percentage.
Many states have laws that protect building contractors against lawsuits. These laws typically bar suits that are filed after a certain time period has elapsed, such as ten years after a building has been completed. When a building contractor goes out of business, the owner will need discontinued operations coverage only for the time period during which suits are permitted by state law. If you are a building contractor, ask your attorney to explain how the law applies in your state.
Not Tail Coverage
Don't confuse discontinued products and operations coverage with an extended reporting period (ERP). Often called "tail" coverage, an ERP is a provision found in many claims-made policies. It provides additional time to report claims. Discontinued products and operations coverage normally applies on an occurrence basis, so tail coverage is not relevant.
Article edited by Marianne Bonner