Properly structuring insurance agents/brokers E&O (errors & omissions) insurance coverage is critical when buying or selling an agency. There is no one best E&O coverage structure when an agency transaction takes place, but comprehensive tail coverage is an important consideration in the process. Rather than automatically exercising the extended reporting period (ERP) provision in the E&O policy, a Standalone Tail policy should be considered. A Standalone Tail provides flexibility in terms that is generally not available from an ERP (see our prior post on Tail coverage).
Ensuring you are properly covered by your Errors & Omissions (E&O) insurance after an agency sale transaction can be tricky, and both the buyer and the seller will want to ensure there is adequate protection.
Most insurance agency sales are asset sales, not sales of the entity. And many buyers will want to ensure that there is ongoing coverage for claims made after the sale closes on errors occurring prior to the sale of the business. This is commonly known as tail coverage, and can be provided through a tail option on an existing policy called an extended reporting period, or ERP (see here). Tail coverage can also be provided by a separate policy called Standalone Tail coverage from a number of specialty markets. The process can be complex, and an expert should be used to ensure appropriate coverage and the best terms.
- There is a tremendous lack of consistency among all E&O carriers on the [ERP] options available and the process that must be followed.
- The traditional approach is to have your E&O policy endorsed to provide coverage for the new agency [going forward].
- If you are on the verge of selling your business, put your E&O carrier on notice of any potential claims that may arise.
- E&O policies are not assignable.
As noted, most insurance agent transactions are structured as asset sales. In an asset sale, the standard approach (but not the only approach), is to notify the buyer’s E&O insurer of the transaction and for the seller to purchase tail coverage for 3-5 years on the selling entity through a Standalone Tail or ERP. The complexity comes from understanding the terms of the sale and ensuring that the changes and additions to both the buyer’s and the seller’s E&O policies are consistent and that coverage is adequate.
Tennant Risk Services is a specialty wholesale broker and underwriting manager, and delivers expertise, markets and exemplary services to our retail insurance agent clients in the placement of professional liability insurance (E&O, D&O, EPL, Cyber). We excel at hard to place accounts, including special situations such as Standalone Tail and Insurance Agents/Brokers E&O Insurance coverage.