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E&O Issues when selling your company


There seems to be another rush on acquisitions in 2010.  There are many issues relating to your E&O insurance policy that need to be considered. I have highlighted a few areas where you could run into problems relating to your errors and omissions insurance policy.

Change in Control Provisions

When a change in control of a company occurs (typically the sale of more than 50% of the voting stock), certain triggers occur in your E&O policy. These vary by carrier, but can include some of the following:

1.     The policy terminates and does not cover any claims for services provided subsequent to the acquisition date.

2.    The policy stays in force, however still does not cover any claims for services subsequent to the date of the change in control.

3.    The policy becomes fully paid up. This means that there will be no returned premium in the event of cancellation of the policy.

4.    The policy may only allow an insured to purchase an extended reporting endorsement if the carrier cancels or non-renews. This means it is possible that an insured may not have the ability to purchase an extended reporting endorsement.

5.     You typically have a certain period of time to report the matter to the carrier and to pay premiums relating to any extended reporting endorsement. If you fail to report the sale/merger to your carrier and pass the time period allotted (typically 30 days), then you may not have the ability to purchase an extended reporting endorsement.

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Extended Reporting Options

Most E&O policies will provide the ability to purchase an extended reporting endorsement. This allows an insured to report covered claims in the future for wrongful acts that occurred subsequent to the retroactive date in the policy and prior to the date of the acquisition for some period. This additional period is often purchased in 12 month increments ranging from 12 to 60 months for an average premium of 100% of expiring premium to 300% of expiring premium for the 12 and 60 month options, respectively. The most common options are either 12 or 36 months.

Mike W Smith, Principal

Axis Insurance Services LLC

www.axisins.com

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Blogged on: May 6, 2011 by Mike Smith
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