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November 11, 2015 at 4:14 am #993266
Hi and thankyou for taking the time to read this.
I’m currently undertaking due diligence for a small online business supplying childrens products. I will be taking out product liability insurance to ensure I’m covered if a product is faulty and someone harmed, however, what happens if the product is sold prior to my taking over the company. I.E. a product supplied last year is found to have caused harm? Am I liable for this? My new insurance policy would not cover it. Or, are my legal obligations only enacted from the day I take over the business? I’ve googled but cant find any information on this topic and wondering what others have found out.
ThanksNovember 11, 2015 at 4:30 am #1190705GuestMemberMember
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Hmm, not a legal expert but can share anecdotally that my insurance as a psychologist stated that I was covered for x amount of time after ceasing trading. I looked specifically for that and they didn’t all do it. So it may be on the previous owner’s insurance. Not sure what would happen if doubly insured either.November 11, 2015 at 7:07 am #1190706AnonymousGuest
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Hi aj40, and welcome,
We have some very experienced insurance brokers around here, and I hope one of them will be able to advise you.
In the meantime, welcome to the forum and thanks for joining us
JayneNovember 11, 2015 at 11:06 am #1190707
Thanks Paul and Jayne for your help. It would be great if an insurance broker could give their advice….November 12, 2015 at 8:40 am #1190708alliedibMember
- Total posts: 453
When you say ‘taking over the company’ do you mean buying the business and running under a new entity (ie it used to be John Smith t/as Kids products and it will now be AJ t/as Kids products) or will you be buying the shares of the company which runs the business (so it will be John Smith Pty Ltd but instead of John Smith owning the shares they are owned by AJ)?
I think I know the answer but know not to assume anything….
If you let me know this I can give you a general idea of what happens.
PS – Paul’s example is ‘run-off’ cover which is generally required for those with professional indemnity policies as they are almost always written on a ‘Claims Made’ basis(there needs to be a policy in place at the time a claim is made against you – this may be after you cease trading). It is a similar concept but not really (same same but different you might say).November 12, 2015 at 8:42 am #1190709GuestMemberMember
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Thanks for that Mark, that was it.November 12, 2015 at 11:02 am #1190710
thanks for taking the time to respond. Yes, your first example was correct, I would be buying the business (currently partnership) and running under new entity (sole prop). Would be great to hear your ideas on this.
thanks againNovember 12, 2015 at 12:12 pm #1190711Warren CottisMember
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Then aj40, all previous liabilities stick with the partnership selling out.
But if you think this product has even the slightest risk associated with it, you need to at least trade through a company structure and not trade as a sole proprietor.November 12, 2015 at 10:25 pm #1190712alliedibMember
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I will try to keep this as short as possible but sometimes that can’t happen (and it might also benefit someone else in the same situation) – it is only general advice and not specific to your circumstances however…
As there are two completely separate entities, then:
– the products sold by Entity 1 (previous owner) would normally be their responsibility; and
– the products sold by Entity 2 (you) are your responsibility.
Each insurer has their own Wording with different terms and conditions, but generally speaking Products Liability is generally written on an ‘Occurrence’ Wording (this means that the policy responds to personal injury or property damage that occurs during the policy period) Entity 1 may still have exposures for the products they have sold – as such they ‘should’ extend their Products Liability cover past the sale date for ‘run-off’ cover (and this run-off should be for as long as the product’s useful life).
In saying that, many people sell a business and cancel their policy – they are exposed as follows in this example:
– Insurance Policy is 10 November 2014 to 10 November 2015.
– Entity 1 sells the product on 1st October 2015 to Person A.
– Entity 1 ceases trading on 2nd November 2015. Lets Liability policy run to 10th November but doesn’t renew it.
– Person A gives the Product as a Christmas gift (25th December 2015). Child is injured that day as part of the product broke.
In this example, Entity 1 does not have an insurance policy that will cover them because, even though they had cover in place when the product was sold, they didn’t have cover in place when the injury occurs (Occurrence Wording).
Your responsibility would be to organise your own liability insurance from the date you take over the business or the date you assume responsibility (the earlier of). It is not your responsibility to ensure that Entity 1 continues their cover – that is up to them. In saying that, however, some business sales contracts have clauses inserted that state Entity 2 will assume all Liability for products sold by Entity 1. If this occurs, I would speak to your solicitor about having this struck out (for the following reasons):
– you don’t want to be assuming liability for any past products that Entity 1 had; and
– any assumption of liability may void your insurance cover (unless the insurer agrees to it – very rarely will this occur) as you are basically placing your insurer in the position of having to respond to a claim (by contract).
A couple of other points that you should look at:
– you will need to be looking for a policy that covers Public and Products Liability, not specifically Products Liability by itself (a standalone Products Liability cover is generally for larger businesses – SMEs purchase a combined policy generally as part of a business package or combined liability policy); and
– do your own due diligence with the insurance covers and don’t rely on merely copying what Entity 1 has. The reason I say this is that I have a number of clients come to me and say ‘I am buying a business and Entity 1 has their insurance with XYZ – can you give me the same?’ The problem being is that from my experience XYZ doesn’t cover that type of business so either Entity 1 either didn’t fully disclose ALL aspects of their business, or the insurer didn’t understand what they were insuring (this sometimes occurs).
– if the products are imported, bear in mind that there is a very narrow market for liability insurance for imported children’s products (as you become the deemed manufacturer and effectively the end of the line for liability claims). That’s not to say that you can’t obtain cover, just that the premium usually is commensurate with the risk the insurer is taking on.
Once again sorry about the length of this – I wish insurance could be condensed sometimes (don’t know who is to blame )… if you have any other questions or need me to clarify anything please let me know – I have worked with a number of kid’s product retailers previously so I have a fair grasp of this market and it’s requirements….
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