A manufacturing company decides to sell its business. A typical manner of sale is for the acquiring company to purchase assets only, and not the stock of the company to be acquired, thereby theoretically avoiding future and presumably unknown liabilities of the acquired company.
What form of liability insurance should the selling company keep in force in order to avoid an uninsured future product liability claim? From the date of the transaction forward, the selling company will have no further responsibility for products owned and sold by the new company. But, what about the products sold prior to the transfer date? It is possible that products sold prior to the business transfer will cause a future injury. That remains a future liability for the company that sold the product, even though the business has been transferred.
In order to cover this exposure, the selling company will want to purchase a “Discontinued Products” policy. The limit and length of the coverage can be negotiated. The cost of this policy is usually a percentage of the last year of your product liability premium, and goes down in successive years. We negotiated one recently for one year, at 80% of the expired product liability premium. A second year has been indicated at 60% of the expired product liability premium.
This issue is often confused with the need to purchase a “Tail”, especially if the original policy was written on a “claims made” form. Beware: a “Tail” will not cover you for injuries after the expiration of the original product liability policy.
If you have products that are still in use after the date your business assets have been sold, you have the potential for future injuries from your products. A “Tail” won’t cover the future injuries–only the claims resulting from past injuries.
Remember: it’s Discontinued Products, not Tail. Don’t be left without a chair when the music stops!
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