Acquiring another insurance agency or book of business can be an excellent way to grow, but the transaction may also expose the buyer to errors made long before the acquisition. Because insurance agents E&O policies are generally written on a claims-made basis, buyers and sellers need to determine before closing which policy will respond if a claim later arises from work performed by the selling agency.
An acquiring agency may have the option to assume the seller’s prior-acts exposure. However, that decision means accepting potential liability for services performed before the buyer became involved. If the selling agency has experienced E&O claims within the past five years, that claim history may also follow the acquiring agency and could affect its loss experience, claim experience credit and future E&O pricing. For these reasons, a buyer should carefully evaluate the seller’s E&O history rather than viewing the assumption of prior acts as a routine part of the transaction.
In most situations, the preferred approach is for the buyer to require the seller to purchase an Extended Reporting Period, commonly referred to as tail coverage. Subject to its terms, an ERP allows the seller to report claims after its policy ends when those claims arise from covered work performed before the sale. This provides continued protection for the seller while helping prevent the buyer from assuming unknown liabilities created by the seller’s past work. The purchase agreement should also clearly identify who will be responsible for prior acts, future claims and any deductibles that may apply. Although indemnification language can provide additional contractual protection, it should not be treated as a substitute for appropriate E&O coverage.
The E&O decision should be part of a broader due-diligence process. In addition to reviewing the agency’s financial performance, the buyer should obtain the seller’s E&O loss history, inspect account files and documentation practices, identify policies renewing near the closing date and review any open service items or pending change requests. The parties should also determine who will monitor the seller’s email accounts, transfer client records and verify information moved into the buyer’s agency-management system. Missed renewals, unanswered client requests and incomplete data conversions are common sources of E&O claims following an acquisition.
Even a small agency or book transfer can create meaningful E&O exposure, so buyers should involve their E&O carrier early in the process. If you are considering an acquisition, please contact our underwriting team during the letter-of-intent or due-diligence stage, before making a final decision about the seller’s prior acts or completing the transaction. We can help you understand the available E&O options, the underwriting information that will be required and how the acquisition could affect your agency’s coverage.
This information is provided for general risk-management purposes and is not legal advice. Coverage is subject to the terms, conditions and exclusions of the applicable policy. Agencies should consult qualified legal and accounting professionals before completing an acquisition.
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