What should you do when buying, selling, and merging an agency?
One of the most significant decisions of your professional insurance carrier comes when you decide to either sell the agency you’ve worked long and hard to create, or to buy another agency that someone else has worked long and hard to create. You've met with the owners of the agency, looked at the book of business, agreed on a price, contacted your attorney to help you draft the buy/sell agreement, and you're a few short days away from closing the deal when suddenly someone asks: what about the E & O coverage? Who's doing what? Are you going to pick up the prior acts, or am I? Can we transfer the E&O policy to the new owners? What kind of losses have you had? All of these questions should be asked at the beginning of the talks regarding the sale/purchase, but unfortunately, they usually aren't discussed until the last minute, and they can have a big impact on the deal.
Think about this: when you buy a new car or are selling your current one, you should contact your insurance provider first. It's no different when you are buying or selling an insurance agency. It also applies when you are only buying or selling a book of business. In most, if not all, your E&O policy states that you must notify your E&O provider within 90 days of a merger or acquisition (check your policy for verification of the time limits.) Failure to notify your carrier on time could result in a gap in coverage.
So let’s go through the steps you should follow when you are making a life and business changing decision regarding your agency.
Buying an agency
You've been talking with a fellow agent about buying their agency, and now you've both decided that the time is right. There are many details to consider, and the first of which is to do your due diligence to review the other agency's operations, the book of business, finances, and E&O Policy. At this point, it is advisable to retain an attorney to help you through the process.
Remember, an attorney can only represent one party, not both. You and the seller should each seek separate counsel. It is a good idea to have a confidentiality agreement with the seller so that you can freely review all of the documents necessary to begin the change of ownership.
After you have completed your due diligence, and you and the seller are comfortable with all aspects of the agency, the attorneys will draft the buy/sell agreement. Included will be such things as the timing of the sale, the assets to be transferred, the price, and of particular importance is who is responsible for the liabilities of the selling agency. The cleanest way to do this is for each party to retain its liabilities. Regarding the seller's E&O policy, they will purchase tail coverage, and the buyer will add the new agency's book of business to their current E&O policy.
This is the cleanest way to make the change because the seller will have the peace of mind of knowing that if a claim arises after the sale for acts while they owned the agency, their E&O policy will provide coverage for them. The buyer understands that they will not be responsible for any actions that may have occurred before the agency's purchase. This is true whether the selling agent will continue as a separate entity or location for the buying agency. In most cases, even if the buyer maintains the new agency as a separate entity or location, it can be included in their current E&O policy for errors and omissions that are made after the sale.
Another option, while not the best way to transfer the ownership, is for the purchasing agency to agree to accept responsibility for prior acts. This is accomplished by adding the selling agency to the buying agency's E&O Policy. However, please remember that the E&O carrier must approve this before the sale is completed. You must contact your E&O agent as soon as you begin the buy/sell process. You will be required to provide a loss history of the seller. The carrier may require an application giving information about the business mix, gross annual premium, commissions, staff, etc. In some cases, the carrier may not agree to provide prior acts due to claims history, nature of the book of business, etc. In that case, the seller should purchase tail coverage from their current E&O carrier.
One thing to keep in mind is that the cost of tail coverage or additional premium expense if the buyer provides the prior acts, can, and should, be considered in determining the sale price of the agency.
Selling an agency
As a seller of an agency, you may feel that it is important to maintain your agency's legacy. If it is important to you, be sure to discuss this with your attorney so that it is appropriately addressed in the agreement. If you have valued employees that you wish to provide for, you should include how they will be taken care of in the agreement. This may be a source of negotiation as the buyer may not wish to add any permanent staff, so make sure this is brought up in your discussions with the buyer.
An important aspect, mentioned previously, is protection for you if a claim should arise after the sale. As stated before, the best way to ensure this is to purchase tail coverage from your current E&O carrier. While you may not want to add the expense of tail coverage and you believe you are protected because of your agreement with the buyer that they will provide coverage for prior acts and maintain an E&O policy, you have no guarantees that it will be done. It is not unheard of after an agency sale for the buying agency to either go out of business, sell their agency to another party who will not agree to provide prior acts, or have their E&O policy terminate either voluntarily or involuntary. In each of these cases, you could be left without coverage.
Should your agency be added as an additional insured on the buyers' policy, you'll need to consider that any claims will be subject to the policy limit of the buyers' policy - regardless of whether multiple claims are resulting from either agency. In other words, are you comfortable that the policy limits of the buyer's E&O policy are sufficient to cover both your and their claims? Also, it should be made clear who will be responsible for any deductible payment.
If you are merging with another agency to form a new agency or continue one of the two, there are a couple of different ways to handle your E&O coverage. One way is to have a new E&O policy for the newly created entity. A new policy ensures a clean slate for all involved. If a new policy is created, each of the former agencies can purchase tail coverage, or they can be added as additional insureds on the new entity policy. Again, keep in mind that any claims will be subject to the limits of the remaining policy. Remember that the E&O provider must approve this before the completion of the agreement to ensure that the carrier can comply with your wishes. Another way to handle a merger is to terminate one policy and have that agency added as an additional insured to the "surviving" agency's policy. The agency that is terminating its policy can purchase tail coverage or be added as an additional insured upon approval by the E&O provider.
Often, an owner has a key agency employee who they believe is qualified to take over the agency. Everything that has been stated before applies just the same in these situations. There should be due diligence by both parties, attorneys should be retained, agreements drafted and entered into, and all other aspects of the change of ownership should be carefully contemplated and resolved.
Transfer of a book of business
Remember, even if all you are doing is transferring a book of business, all of the previously mentioned apply. While you might think that a transfer of only a small book of business should be uncomplicated, as soon as a claim is made, it can become very complicated.
Key points to remember
- Consult your attorney and have a formal written agreement outlining all of the parties' duties and responsibilities.
- Contact your E&O provider as soon as you can to ensure that coverage can be provided as you intend and that there are no gaps in
- Giving timely notice to your E&O provider is of utmost importance as many carriers may be unable to comply with your intent after the transaction has already been
You spent your professional insurance career building a business that has provided you with a livelihood and personal fulfillment. If you are growing or selling your agency, you want the peace of mind of knowing that you have adequately protected yourself.
Ronald S. Kettner, CPCU is a Vice President and Senior Underwriter of Swiss Re/ Westport underwriting insurance agents errors and omissions coverage. He has over 30 years of experience in the insurance industry, underwriting personal and commercial lines insurance, and professional liability insurance during his career.
Richard F. Lund, J.D., is a Vice President and Senior Underwriter of Swiss Re/Westport, underwriting insurance agents errors and omissions coverage. He has also been an insurance agents E&O claims counsel and has written and presented numerous E&O risk management/ loss control seminars, mock trials, and articles nationwide since 1992.
Disclaimer: This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and expressly disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute it should not be considered legal, accounting, or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group ("Swiss Re") and/or its subsidiaries and/or management and/or shareholders.