What happens when the owner of a business decides to retire or the business closes its doors and a claim against the business is made after the business closes? Most commercial general liability (CGL) policies are occurrence policies. This means that injuries or damage that occur during a covered policy period are covered by the CGL policy in place during that period. When a business closes or the owner retires, CGL coverage is typically dropped. The owner, understandably, sees no reason to continue to pay expensive premiums on a policy to insure a closed business.
Any claims against the business for damages that occurred during a covered policy period would be covered. But what happens if the damage (and subsequent claim) occurs after the last policy period when no coverage is in place? This often happens with contractors or manufacturers.
For example, a masonry contractor completes a wall in 2004. At the time the wall is built the contractor is insured by a standard occurrence CGL policy. The contractor retires at the end of 2004 and terminates his policy at the end of 2004. Because of mixing error the mortar in the wall becomes weak and fails in 2006 collapsing and causing injuries and property damage. Note in this example the occurrence and injury occurs after the policy was canceled at the end of 2004. The contractor is sued. The CGL insurer from the last policy period has no obligation to defend or insure the loss. The contractor has no coverage.
Some business owners believe that coverage would exist because the wall was built during a period when the contractor had insurance. But this is not accurate. The CGL policy is only applicable if the occurrence and injury occurred during the policy period and not merely because that work was completed in the policy period.
Discontinued operations and products coverage is insurance coverage that covers occurrences and damage occurring after the end of CGL coverage when the business ceases operations. It can be critical coverage for certain businesses such as specialty manufacturers and building contractors where occurrences, damage and injury can and often do happen well after the business is no longer and active business.
The coverage is typically offered on a declining percentage of annual CGL premium. So, as an example, in the first year the coverage may cost the same as the CGL policy, 10-25% less in the second year, less in the next year and so on. The coverage is often tailored to state law limitations periods such as repose statutes or statutes of limitations. If the state law is that a builder cannot be sued ten years after completion of a building, than discontinued operations insurance would be tailored to a ten year period.
If you are a business owner and considering retiring or closing your business, than it is a good idea to discuss this coverage with your insurance professional. Many owners are mistakenly advised by non-insurance professionals to purchase "tail" coverage or that any work performed in a covered period is insured forever. A qualified insurance professional can explain what is covered and what is not and point out specific policy language. "Tail" coverage cannot be purchased for an occurrence policy is meant for a claims-made policy typically in the context of a professional liability policy. And, as noted above, losses and damage occurring outside of the policy period, regardless of whether the work was performed during the policy period, are not covered.