Eight Commercial Insurance Considerations to Make When Buying a Business
- Todd Hanzelka
- Apr 15
- 2 min read
The journey to buying and selling a business can’t be described unless you’ve gone through it
and once you have, you’d likely change a majority of the things you did when buying the next
one. There are countless things to consider: financials, reputation, operations, systems in place,
key employees, market conditions, the list can go on and on. Once you think you’ve got it all
figured out, you quickly realize that the phrase “there’s always something” is an understatement.
One item that is consistently overlooked is the insurance program of the business you’re
interested in buying. As a risk management professional, the insurance program isn’t as easy to
solve as you think. Every insurance carrier is different, and every carrier’s coverage contract is
different and relying on a Certificate of Insurance is like ordering a salad without looking at the
ingredients…there’s too many options.
Here are often-overlooked commercial insurance realities that surface in real transactions,
especially during buyer due diligence, and can materially impact valuation, deal structure, or
post-closing risk.
Tail Coverage Isn’t Optional (But Often Missing)
If your business uses claims-made policies (common for Professional Liability, Directors &
Officers, Employment Practices Liability Insurance), coverage only applies if the claim is made
while the policy is active and once the policy is canceled post-sale, past acts may no longer be
covered.
What gets overlooked:
Sellers assume past work is still insured after closing—it usually isn’t.
Why it matters:
Buyers often require tail (extended reporting period) coverage, which can cost 1.5X – 3X the
annual premium.
Action:
Price tail coverage before negotiations—it often becomes a purchase price adjustment.
Representations & Warranties (R&W) Insurance Doesn’t
Replace Bad Coverage
Reps & Warranties insurance typically covers losses from inaccuracies in seller representations,
such as financial statement errors, tax issues, or undisclosed liabilities and usually excludes
known risks, purchase price adjustments, and fraud by the insureds.
What gets overlooked:
Owners think Reps & Warranties insurance “fills all holes.” It doesn’t.
Why it matters:
If diligence finds missing or inadequate insurance, buyers may escrow funds, lower the offer
price or add indemnities
Action:
Treat Reps & Warranties as a backstop, not a substitute for proper insurance hygiene.
Prior Acts Coverage Can Break the Deal
For certain liability policies, the retroactive date determines how far back coverage applies. If a
claim arises from an event that happened several years ago, the buyer needs to make sure that
retroactive dates aren’t realigned to the date they purchased the business.
What gets overlooked:
Switching insurers can reset or limit prior acts coverage and gaps in continuity can leave earlier
operations uninsured
Why it matters:
Buyers should scrutinize whether long-tail risks (e.g., construction defects, professional errors)
are still covered.
Action:
Confirm retroactive dates are intact and continuous across policy history.
4. “Additional Insured” and Contractual Risk Transfer Gaps
Many businesses rely on vendors, subcontractors, or partners and many of them require an
Additional Insured status on their insurance program.
What gets overlooked:
Missing or improperly documented additional insured status leaving vendors without adequate
coverage limits. Contracts that don’t align with insurance requirements can impact a relationship
and a claims settlement.
Why it matters:
Risks that should have been transferred may fall back on the company.
Action:
Audit certificates of insurance (COIs) and underlying endorsements, not just the paperwork,
prior to closing.
Cyber Insurance Is Often Misunderstood
We are a connected world and in today’s market, even small businesses should carry Cyber
Liability coverage. Know the vulnerability of the IT/Cyber protocol .
What gets overlooked:
Current insurance policies may exclude social engineering fraud or limit ransomware payouts or
even exclude 1st party coverage. Make sure there is alignment between policy requirements and
actual IT practices.
Why it matters:
During diligence, buyers often bring in IT/security experts who compare what your policy
covers. Know what your IT systems actually do because any mismatch can equal a denied claim.
Action:
Run a basic cyber controls audit (MFA, backups, endpoint protection) against your policy terms
and fix the gaps.
Workers’ Comp and Experience Mods Affect Valuation
An Experience Modification Rate (EMR) is a numerical score, usually centered around 1.0, used
by insurance companies to measure a business’s past workers' compensation claims and predict
future risk. A lower EMR (under 1.0) reduces insurance premiums, while an EMR over 1.0
indicates higher risk, leading to increased costs. Safety matters, not only for the employees but
for your financials.
What gets overlooked:
An insufficient safety program and a poor claims history can inflate your EMR. Determine what
needs to happen to lower the EMR after you close on the business. Note, any open claims can
follow the business post-sale, so you’ll want a history of the event and a plan to get the claim
closed.
Why it matters:
Buyers model future insurance costs and a high EMR = lower EBITDA.
Action:
Close out old claims and implement safety programs before going to market.
Policy Limits Haven’t Kept Up with Growth
Good businesses grow and great businesses scale. Unfortunately, the insurance programs often
don’t. Determine if the current coverage is adequate for the size of the business and work on
implementing a program that will accommodate the growth post-sale.
What gets overlooked:
Revenue doubles, but liability limits stay flat, and if you aren’t setting limits of liability (General
Liability, Business Income), you may be underinsured in the event of a claim. If there is no
umbrella/excess coverage in place, add one immediately.
Why it matters:
Buyers see underinsured exposure relative to company size and risk profile. This finding during
due diligence indicates that the buyer, upon taking ownership, could be immediately responsible
for paying out-of-pocket for significant claims, legal liabilities, or damages that should have
been covered by insurance.
Action:
Benchmark limits against peers in your industry.
Claims History Tells a Story Buyers Trust More Than Financials
Insurance loss runs are a core diligence item and reviewing them before buying a business is
critical for assessing risk and financial health. These reports reveal historical accident trends,
potential hidden liability costs, and directly influence future insurance premiums, often acting as
an insurance "credit report" to predict future safety issues and operating costs.
What gets overlooked:
Patterns (not just totals) in claims. Frequency equals severity and repeated small claims signal a
systemic issue.
Why it matters:
Buyers interpret claims data as a proxy for operational discipline, safety culture, and legal
exposure
Action:
Prepare a narrative explaining claims and what will change once you take ownership of the
business.
Bottom Line
Commercial insurance isn’t just a compliance checkbox; it’s a financial and risk signal that
sophisticated buyers analyze closely. The biggest mistake sellers make is assuming: “If we’ve
never had a major claim, we’re fine.”
Buyers think differently:
“If a claim happens tomorrow, how exposed are we?”
How do you get a handle on all of this when you’re juggling a million other things?
Find a competent, qualified, and knowledgeable insurance advisor to guide you
through this process. Insurance is a complicated and complex world, having someone navigate it
with you is priceless.
About Todd Hanzelka
Todd Hanzelka is an Executive Vice President and Commercial Insurance Advisor with Higginbotham, helping the C-Suite and business owners navigate the complex world of insurance and risk management. Based in Austin, TX, Todd serves clients throughout Texas and is licensed in multiple states.
About Higginbotham
Higginbotham is based in Fort Worth, TX with offices in 18 states providing for customized insurance, HR and financial solutions to protect your home, car, health, business, and employees. Employee-owned, Higginbotham is family to our employees, accountable to our clients, teammates to our carriers and generous to our communities.
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