- Standard due diligence on a business purchase includes a review of the target's insurance, alongside contracts, financial statements, and corporate records.
- - Coverage that hasn't kept pace with the business.
It's easy to treat a target business's insurance as a settled fact — a line item confirming coverage exists, rather than something worth reading closely. That's a mistake. A policy can be in force, paid up, and still leave meaningful gaps between what the business actually does and what the insurer has agreed to pay for. Buyers who skip this step sometimes find out about the gap only after something goes wrong, when it's too late to negotiate for it.
Reviewing insurance is a small part of overall due diligence, but it's one of the more overlooked ones, precisely because a certificate of insurance looks reassuring at a glance.
Why a Buyer Reviews Insurance at All
Standard due diligence on a business purchase includes a review of the target's insurance, alongside contracts, financial statements, and corporate records. The goal isn't just confirming coverage exists — it's confirming that coverage actually matches the business's real operations, that claims history doesn't reveal a pattern worth pricing into the deal, and that the policies will actually be there for you after closing.
Policies Worth Reviewing
| Policy Type | What It's Meant to Cover | Why It Matters to a Buyer |
|---|---|---|
| Commercial general liability | Third-party injury or property damage claims | The core policy most businesses rely on day to day |
| Property insurance | Buildings, equipment, and inventory | Confirms coverage limits reflect current replacement value, not an outdated figure |
| Business interruption | Lost income after a covered event | Often overlooked, but important if the business depends on a single location |
| Professional liability / errors & omissions | Claims arising from advice or professional services provided | Relevant to service-based businesses, not just product sellers |
| Cyber and data breach coverage | Costs from a data breach or cyber incident | Increasingly relevant wherever customer or payment data is held |
| Product liability | Claims from a defective product the business sold or made | Central for manufacturers, distributors, and retailers |
Common Gaps Buyers Find
- Coverage that hasn't kept pace with the business. A business that has grown, added a new service line, or started handling more customer data may still be insured against the smaller, simpler business it used to be.
- Claims-made policies without "tail" coverage. Some professional liability and cyber policies only respond to claims made while the policy is active — if coverage lapses or changes hands without extended reporting protection, past exposure can go uninsured.
- Underinsured property. Coverage limits set years ago against an outdated valuation can leave a real shortfall if equipment or premises need to be replaced.
- Exclusions that match the business's actual risk. A general liability policy may carry exclusions that happen to apply directly to what the business does — something only visible from reading the policy itself, not the certificate.
- A quiet claims history. A pattern of prior claims, even small ones, can signal an operational risk worth investigating further, and can also affect how easily — and how affordably — the business can be insured going forward.
Policies Don't Automatically Follow the Business
Whether existing insurance simply continues after closing depends heavily on deal structure:
- Share purchase. Because the same corporation continues to exist, its policies can sometimes continue in force, though insurers typically need to be notified of the change in ownership, and some policies include their own change-of-control provisions.
- Asset purchase. The buyer is generally acquiring assets, not the seller's corporate insurance policies, and needs to arrange its own coverage to be in place at closing — there is no assumption that the seller's policy simply transfers over.
Either way, a gap in coverage on closing day — even for an hour — is a risk no buyer should accept without checking first.
Building Insurance Into the Purchase Process
- [ ] Request copies of the actual policies, not just certificates of insurance, and read the exclusions.
- [ ] Ask for a claims history covering several years, not just the most recent renewal.
- [ ] Confirm whether policies are claims-made or occurrence-based, and whether tail coverage is available or needed.
- [ ] Check that property and equipment coverage limits reflect current replacement values.
- [ ] Arrange your own coverage to be effective exactly at closing in an asset purchase — never assume there's a gap-free handoff.
- [ ] Ask your insurance broker to review the target's coverage against the business's actual operations, not just its industry classification.
Frequently asked questions
Can I just keep the seller's existing insurance policies after buying the business?
It depends on the structure. In a share purchase, the corporation's policies may be able to continue, subject to insurer notification and any change-of-control terms in the policy. In an asset purchase, you're generally arranging your own new coverage rather than inheriting the seller's policy.
What's the risk of a "claims-made" policy specifically?
A claims-made policy only responds to claims made while it's active (or during an extended reporting period). If the seller's policy lapses after closing without tail coverage, a claim arising from something that happened before you owned the business might go uninsured entirely — worth flagging with a broker before closing.
Should my lawyer or my insurance broker handle this review?
Both play a role. Your lawyer builds insurance-related representations, warranties, and closing conditions into the purchase agreement, while an insurance broker is best placed to assess whether the actual coverage — limits, exclusions, and claims history — matches the business's real risk.
What if the target business turns out to be underinsured?
That's a factor to raise in negotiations — it can affect price, or lead to a closing condition requiring updated coverage to be in place before the deal completes. It's better to find this before closing than after a loss occurs.
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