Insurance due diligence when buying a business

Insurance due diligence answers three questions before you close: what losses and liabilities come with the business, whether the target's policies protect them (and you) after the deal, and what program you need on day one. Start with five years of loss runs and the policy forms, then check how the deal structure affects who owns the coverage. Do this in the diligence window, not after signing, because some fixes (tail coverage, notice to carriers, representations in the purchase agreement) have deadlines at closing.

Start with the structure of the deal

How you buy decides what you inherit.

• Stock or equity purchase. You buy the entity, with its history. Known and unknown liabilities stay inside it, and so do its insurance policies, which may have change-in-control provisions.
• Asset purchase. You pick up assets and defined liabilities in a new or existing entity. The seller's policies generally do not transfer, and policy rights to past occurrences stay with the seller unless the sale agreement and the policy assign them. Successor liability doctrines can still reach a buyer in some situations, and state law differs. Your attorney should address this.
• Merger. Depends on the agreement and state law, but the surviving entity usually inherits obligations.

Insurance coverage for pre-closing occurrences under occurrence-based liability policies stays with the policyholder. If you buy assets, ask counsel whether the seller can assign rights to past occurrence policies. Many policies prohibit assignment without insurer consent after a loss, and courts in different states have reached different results, so do not assume. Do not rely on a summary: get the policies.

What to request from the seller

Make a written request list. A broker can organize it, and the What business insurance do I need? helps you spot lines you did not ask for.

1. All policies for the last five to ten years (liability policies for longer), not only certificates, including endorsements and forms lists.
2. Currently valued loss runs for all lines, at least five years, from each carrier, ideally dated within 60 days. See loss runs: what they are and how to request them.
3. A list of open claims with reserves, litigation status and defense counsel, plus claims that were reported but not paid.
4. Reservation of rights or denial letters from any carrier.
5. Experience rating worksheets for workers' compensation and the current experience mod. See The experience modification rate (EMR) explained.
6. Premium audit results for the last three years and any disputes.
7. Contract insurance requirements: leases, customer agreements, government contracts and indemnities the target has signed.
8. Safety and compliance records: OSHA logs, DOT audits, environmental reports, product recalls.
9. Insurer reports: loss control surveys and recommendations, open items.
10. Surety bonds, letters of credit and collateral held by carriers.

Read the loss runs like an underwriter

Total incurred losses by year and line is the first view, not the only one. Look for:

• Frequency versus severity. Many small claims suggest a process problem; a few large ones suggest a different kind of risk.
• Open reserves that look stale. Old open claims can develop.
• Pattern by location, product or job type. One source of losses may disappear if a location closes.
• Gaps. A year without a loss run may mean a different carrier, a self-insured period or a hidden claim.
• Claims reported late or not at all. Ask management to confirm there are no unreported incidents or known circumstances. Under claims-made policies, known circumstances reported in a prior period matter.

Experience that looks good because the business has lower exposure than its financials suggest (for example, payroll misreported) is a warning, not a feature.

Claims-made coverages: tails, retroactive dates and run-off

Professional liability, D&O, EPLI, cyber and some medical and pollution policies are typically claims-made. They respond to claims made during the policy period (or an extended reporting period) for acts after the retroactive date. This is where acquisitions go wrong.

• If the seller's policy is cancelled at closing, claims about the target's past acts may have no policy to respond unless an extended reporting period ("tail") is purchased. Who buys it and who pays should be in the purchase agreement. See tail coverage and extended reporting periods and estimate cost with the tail coverage cost calculator.
• A change in control often converts a D&O policy to run-off, covering only wrongful acts before the transaction. Buyers commonly require a six-year D&O tail for the target's directors and officers; that is a negotiated term, not a rule.
• If the target's professional liability will fold into your policy, ask the new carrier to grant prior acts coverage back to the target's retroactive date. Without that, past work is uninsured. See prior acts coverage and retroactive dates.

Workers' compensation, auto and the experience mod

In workers' compensation, experience usually follows the business. NCCI's ERM-14 ownership form reports changes in ownership, mergers and combinations, and per NCCI's ABCs of Experience Rating the employer must notify its carrier in writing within 90 days of the change. NCCI may then issue, retract or revise the current mod and up to two preceding mods, and businesses with more than 50% common ownership are combined into one mod. The effect can be favorable or costly, so ask your broker to check it before closing. Independent state bureaus (California, New York, Pennsylvania and others) have their own rules, and Texas uses a different form version for Texas-only changes.

For commercial auto, confirm driver lists, motor vehicle records and whether the fleet belongs to the entity you are buying. Registered owners, titles and named insureds should match.

Environmental, product and contingent liabilities

Real property purchases need Phase I environmental assessments, and an environmental policy may be worth pricing. See environmental site liability and contractors pollution coverage. For product businesses, understand the products-completed operations tail: injuries from products sold years ago can arise after you close. If you buy assets, an occurrence policy of the seller may be the best source of coverage for past sales, so understand its status and any exhaustion by other claims.

R&W insurance and tax insurance

Representations and warranties insurance covers breaches of the seller's representations in the purchase agreement. Aon's 2026 R&W claims study reported more than $440 million of recoveries in 2025, with roughly 18% of 2019 to 2023 policies having had a claim notification, and Gallagher's 2026 data put limits near 10% of enterprise value at a rate on line of about 3%. These are market-wide figures; your quote depends on the deal. Policies exclude known issues, and underwriters will do their own diligence, so thin diligence leads to broad exclusions. See Representations and warranties insurance in M&A deals and representations and warranties insurance. Transaction-specific risks such as tax positions can be covered separately; see tax insurance in deals: what transactional tax policies cover.

Build your post-closing program

Before closing, ask your broker to build a day-one program for the combined business:

• Add the target as a named insured, or bind separate policies, effective at closing.
• Review limits; the combined revenue may call for higher limits or an umbrella.
• Confirm all contract insurance requirements are met on day one. Landlords and customers will need new certificates.
• Notify carriers of the acquisition within policy deadlines. Many policies address newly acquired organizations automatically only for a limited period or with a size limit.
• Order a post-close insurance review at 90 days.

A short hypothetical

A buyer of a 30-person engineering firm learns from diligence that the firm's professional liability policy is claims-made with a retroactive date three years ago, and a project dispute is in the file. The buyer asks for a notice of circumstances filed with the seller's carrier before closing, a six-year tail purchased as a closing cost, and a retroactive date match under the buyer's new policy. Those are negotiated terms; the point is to find the gap before closing.

Key takeaways

• Deal structure decides whether policies and liabilities transfer; get counsel's view before relying on the seller's coverage.
• Request currently valued loss runs, open-claim detail and the policies themselves, not only certificates.
• Claims-made lines need tails or matched retroactive dates, or past acts can go uninsured.
• Check the workers' comp mod and ownership change rules before closing.
• Have your own program ready for the closing date.