Insurance and risk management may remain after your business is sold.
Selling a business or discontinuing a product line can play a key role in a company’s competitive strategy. At the same time, such major transitions pose a number of challenges, including a variety of insurance and risk management issues.
When you discontinue a product or exit a business, you do not necessarily free your business from subsequent liability. As long as your product remains in use, it holds the potential to cause bodily injury or property damage. This issue is of particular concern for long life-span products such as machinery.
If you stop buying insurance after you sell or close a business, you will not be protected against defense or indemnity costs resulting from events after that date, even if those events are caused by products manufactured or sold under your ownership.
Even when you remain in business, products you stop manufacturing, distributing or selling could negatively affect your insurance program moving forward. For instance, if your company formerly made a product that has generated a number of claims, your insurer may want to change the terms or increase the costs of your policy upon renewal.
Fortunately, many of the product liability risks involved in selling a business or discontinuing a product can be managed by taking steps such as those below.
Familiarize yourself with legal requirements and industry standards. Before you exit a business, investigate how laws require you to handle that task. The notices you must give creditors, including product liability claimants, vary by jurisdiction. Such obligations are determined by your legal domicile or where you have been doing business. Be aware that many jurisdictions allow a claimant to bring suit against the manufacturer of a product many years after the actual delivery of the product, despite the sale or dissolution of the manufacturing company. While such laws are important, your ultimate responsibilities are more likely to be grounded in judicial or case law, which deals with the doctrines of “reasonable person” and “reasonable conduct.” The best way to meet these standards is to take the perspective of your customers and business partners. If you were the consumer of a defective product or a frustrated business partner, how would you expect the former owner of a discontinued business to respond to your complaints or claims?
|Before you exit a business, investigate how laws require you to handle your exit.|
Create a run-off infrastructure if you are exiting a business or discontinuing a product line. One of the purposes of a run-off infrastructure is to handle future claims resulting from activities or products sold before a business is closed or a product line is discontinued. It’s important to make a reasonable effort to leave sufficient resources for problems that may emerge after you leave the business. Not only are such plans often required by law, but they are also important to mitigate possible damages in a lawsuit. In its essence, the post-deal risk management infrastructure is a way for injured parties and others to find you—and their remedies—after you leave the business. If it is difficult for claimants to find you, the perceived evasion of your responsibilities could be viewed as bad faith conduct and result in punitive damages on top of the compensation owed to injured parties. Communication is key. In addition to letting the public know how to find you, you should explain why you went out of business and show that you are handling the transaction fairly. Let consumers know what their rights are and how to pursue those rights.
Base the infrastructure design on your needs. The design of the infrastructure will be influenced by the mode of cessation, whether you immediately stop doing business or enter into run-off mode. Businesses in highly regulated industries, such as auto parts, drugs or food, may have further obligations (for instance, for the recall of defective products or for warranty claims). The infrastructure design may need to accommodate the potential for losses years after you leave the business. Durable goods and pharmaceuticals, for example, have the potential to cause injury or damage well into the future. If you plan to run off the business gradually, you may choose to own or subcontract the infrastructure. Subcontracting may be easier, but it also may be more expensive. Even if you own the infrastructure, consider retaining consultants who can provide the expertise or support services required to handle future claims. You might need to hire loss adjusters, attorneys, product liability experts and other consultants for such purposes. The costs associated with establishing such infrastructure, not to mention the future claims activity, can be significant. Unfortunately, these expenses are often overlooked or underestimated.
Tap into internal and external expertise. The people who handle your run-off responsibilities must have the proper legal, risk management and commercial experience and perspectives. You must provide them with a well-documented profile of your business at the time your deal closes. They will need to utilize such a profile when handling future claims.
|Even when you remain in business, products you stop manufacturing, distributing or selling could negatively affect your insurance program moving forward.|
Maintain comprehensive business records. Poor recordkeeping can adversely affect defensibility against claims. Recordkeeping protocols should include documenting when and where products were manufactured, as well as to whom and when those products were sold. At the time of loss, you should be able to identify and quantify your product and distinguish it from similar products that may be in the chain of commerce. Product development details, including quality control and testing procedures, should be well documented. It is also important to keep accurate customer, supplier and vendor lists. Are you able to readily identify who supplied component parts or ingredients that went into your products? How would you notify consumers about a latent defect discovered after you go out of business? Maintaining customer and vendor lists is critical for such purposes. If products are defective, do you have an effective and efficient way of locating and recalling the products? Is your product recall plan complete and accessible? If you have sold your business or product line, you should retain all records of the transaction.
Keep your insurance policies. It’s also critical that you keep insurance policies for years; they may be needed long after they expire. If you have claims-made insurance, be aware that it pays for covered claims submitted while the policy is in effect. If no claim is made during the policy period, then the policy does not apply. For protection against future claims arising out of prior occurrences, you may need to exercise the policy’s extended reporting/discovery provisions. You should develop an inventory of all the claims that may have been reported under your policies.
Develop early warning and problem resolution systems. Consumer hotlines, evaluations of letters from consumers and incident and complaint reports are all important feedback systems. Also, analyzing returned products and warranty claims can help predict and negate emerging defect trends. Do you have good systems to decide how and when to fix a problem, send out safety notices, improve or update product manuals, and, in the worst case, to recall or retrofit? The necessity for a recall should be based on the evaluation of credible data.
Insurance for Discontinued/Isolated Products
Product liability risks can be managed but not eliminated. Some product liability risk can be transferred via specialized discontinued products liability insurance, which should be written for a specified time period based on the likely residual life span of your products. Such insurance can help protect owners from claims due to future bodily injury and property damage caused by products manufactured, sold or distributed before the business is sold or closed. It can also help avoid the impact certain product lines or operations might have on current and future insurance placement and costs. With this protection, businesses can focus more on the future and worry less about the past.
(This article was provided by the Chubb Group of Insurance Companies and is used with permission.)
|Meet the Author
John Cavanaugh is the vice president in the casualty practice of Chubb Commercial Insurance, located in Warren, New Jersey, and on the Web at www.chubb.com.