Buying a Business? The Seller's Insurance Doesn't Come with It
The Seller's Insurance Does Not Come with the Business
A policy covers a named insured, not a storefront. When ownership changes, the old policy follows the old owner, and you need your own coverage in force the moment the business becomes yours.
How cleanly that happens depends on the deal structure:
| Deal type | What happens to the insurance |
|---|---|
| Asset purchase | You're a new legal entity. Nothing carries over. You need new policies effective at closing. |
| Stock or membership-interest purchase | The entity survives, so policies can continue — but most carry a change-of-control provision. Notify the carrier before closing or you risk a coverage dispute at the worst moment. |
Either way, the carrier needs to know before the deal closes, not after. An insurer that learns about an ownership change from a claim notice is an insurer looking for a reason to deny.
Three Things to Pull During Diligence
1. Five years of loss runs. Ask for them with the financials. They tell you two things: what your premium is likely to be, and what actually goes wrong in this business. A restaurant with four slip-and-falls and a coffee shop with none are different purchases at the same price.
2. The lease's insurance exhibit. Commercial leases specify limits, additional insured status for the landlord, and sometimes waiver of subrogation. If the seller was out of compliance, that becomes your problem on day one, and the required limits may cost more than you budgeted.
3. Every claims-made policy the seller carries. Professional liability, EPLI, and cyber are usually written claims-made, meaning they only cover claims reported while the policy is active. When the seller's policy ends, the coverage for everything that happened before closing ends with it.
The Gap Nobody Budgets For: Prior Acts
A claim from something the business did before you bought it can land after you own it. An unhappy customer from last spring files in the fall. The seller's claims-made policy is gone. Your new policy starts at closing and excludes prior acts.
There are two fixes, and they're negotiated as part of the purchase, not afterward:
- The seller buys a tail — an extended reporting period on their policy, covering claims reported after it ends for work done before. Cleanest option. Make it a closing condition.
- You buy prior acts coverage on your new policy, with a retroactive date going back before the purchase. More expensive, but it works when the seller won't cooperate.
Decide which one before you sign. After closing you have no leverage and the seller has no reason to spend money.
Workers' Comp: You Can Inherit the Seller's Experience Modifier
If the business has employees and carries comp, the experience modifier can follow the business through an ownership change. A modifier built on the previous owner's claims can land on your renewal.
This cuts both ways. A clean mod is an asset you just bought. A bad one is a cost nobody put in the model, and it takes three years of better claims history to work off. Ask for the mod worksheet during diligence alongside the loss runs.
In Texas, remember comp is optional for most private employers. If the seller was a non-subscriber, the notice filings and employee notifications are yours to redo under the new entity — they don't transfer either.
Sources: TDI Commissioner's Bulletin B-0024-14 (NCCI Experience Rating Plan with Texas exceptions) · Tex. Labor Code § 406.002 · TDI Division of Workers' Compensation, non-subscriber notices and Employer E-File
Timing: Bind at the Closing Hour, Not the Closing Day
The most common mistake is a coverage gap measured in hours. The seller cancels effective at closing, your policy starts the next business day, and the fire happens overnight.
- Have the binder issued before funding, effective at the moment of transfer.
- If there's a lender, they'll require evidence of property coverage with themselves as mortgagee or loss payee before they'll fund. Build that into the timeline — it's not a same-day item.
- If you're staying on as a manager during a transition, or the seller is, say so. Carriers treat that differently than a clean handoff.
Buying a Bar or Restaurant: TABC's Three Reporting Clocks
If the business holds a TABC license or permit, TABC Rule § 33.94 sets three reporting deadlines that can fall inside a sale, and each one is a duty of the license or permit holder:
- Within 30 days after: "the addition or removal of a person whose name was included on the original application or whose name would be required if a new application for an original license or permit was being submitted," under § 33.94(c)(1).
- Within 30 days after: "a change of the owner of the premises, a sublessor, a management company, or a concession company, or to the terms of any agreements with any such persons," under § 33.94(c)(3).
- Before the change: "a change in corporate control pursuant to Alcoholic Beverage Code §28.04," under § 33.94(d)(1).
The last clock is the one that can't be fixed after closing. Under § 28.04(a), a mixed beverage permit held by a corporation "may not be renewed" if "legal or beneficial ownership of over 50 percent of the stock of the corporation has changed since the time the original permit was issued." One exception in § 28.04(d) applies when the permittee notifies the commission "on completed forms and attachments prescribed by the commission, of the proposed transfer prior to the date the transfer is to become effective" and the commission finds no grounds to deny renewal; notice sent after the transfer has missed that exception. A corporation barred from renewing "may file an application for an original permit" under § 28.04(c).
The permit stays with the holder throughout. A license or permit is "a purely personal privilege" under § 6.01(b). Under § 109.53, every permittee "shall have and maintain exclusive occupancy and control of the entire licensed premises in every phase of the storage, distribution, possession, and transportation and sale of all alcoholic beverages," and "any device, scheme or plan which surrenders control of the employees, premises or business of the permittee to persons other than the permittee shall be unlawful." TABC's successor-in-interest process, which lets someone else operate the business for the rest of the license term, covers a partnership dissolution, bankruptcy, receivership, or the holder's death; a sale isn't on the list.
TABC's change form, L-IU, asks: "Are you operating under any concession, service or management agreement(s) that contain terms for services or management beyond property rental?" A yes means filing Form L-SL and attaching a copy of the agreement.
A new license or permit takes time to issue. TABC's estimate: "It can take 30-35 days from the date TABC receives a complete application to issue a new license," and the time "can vary depending on the type of license or permit you applied for."
These duties belong to the license or permit holder. Which of them applies to a particular sale depends on how the transaction is structured, and that's a question for your lawyer.
Nothing in the code, the rule, or TABC's forms addresses insurance while a permit is changing hands, or who the named insured should be. How named insured, additional insured, and liquor liability coverage are arranged between seller and buyer in that window is underwriting judgment, not law. Bring the purchase agreement and any agreement about who runs the business before closing to your agent early.
Sources: 16 Tex. Admin. Code § 33.94 · Tex. Alco. Bev. Code § 28.04 · Tex. Alco. Bev. Code § 6.01 · Tex. Alco. Bev. Code § 109.53 · TABC, Report a Successor in Interest · TABC, Manage and Report Changes to an Existing License · TABC Form L-IU · TABC, New TABC Licenses and Permits · TABC, License and Permit FAQs
What to Bring Your Agent
Start this at least three weeks before closing:
- The purchase agreement, or at minimum the structure and closing date
- The lease, including the insurance exhibit
- Five years of loss runs and the comp mod worksheet
- Current payroll by role, and whether you're keeping the staff
- A schedule of equipment, inventory, and tenant improvements with values
- Trailing twelve months of revenue, plus your projections — business interruption is rated on what the business will do under you, not what it did under them
Questions People Ask
Does the seller's insurance transfer when I buy the business?
No. A policy covers a named insured, and in an asset purchase you're a new legal entity. Even in a stock purchase, where the entity survives, most policies carry a change-of-control provision that requires notifying the carrier.
Do I need insurance before closing or after?
Before. The binder should be effective at the moment of transfer, and if there's a lender, they'll want evidence of property coverage before they fund.
What is a tail policy and who pays for it?
It's an extended reporting period on a claims-made policy, covering claims reported after the policy ends for things that happened while it was active. Who pays is negotiated in the purchase agreement, which is why it has to come up before closing.
Can I inherit the seller's workers' comp experience modifier?
Yes. Experience rating can follow the business through an ownership change, and a modifier built on the previous owner's claims takes about three years of better history to work off.
When do I have to tell TABC about a change in corporate control?
Before the change, under TABC Rule § 33.94(d)(1). For a mixed beverage permit held by a corporation, § 28.04 bars renewal after more than 50 percent of the stock changes hands unless an exception applies, and one exception requires notice before the transfer takes effect. Whether it applies to your deal is a question for your lawyer.
What does my lender require?
Usually evidence of property coverage naming them as mortgagee or loss payee, sometimes business interruption, and occasionally life coverage on the buyer. Ask early — it's not a same-day item.