Do I need tail coverage after I sell my business?

Selling a business does not close the book on what the business did before the sale. A customer, client or patient can raise a problem with earlier work after your policy has ended. Whether you need cover that responds to those later claims depends on the terms of your own policy and, for some professions, on a rule set by the regulator. This page explains why claims can arrive late and who to ask.

Why a claim can arrive after closing in Ontario

Under Ontario’s Limitations Act, 2002, unless that Act provides otherwise, a proceeding cannot be started after the second anniversary of the day the claim was discovered. A claim is discovered on the earlier of the day the person first knew that the injury, loss or damage had occurred, that an act or omission caused or contributed to it, that the act or omission was that of the person the claim is made against, and that a proceeding would be an appropriate means to seek a remedy, and the day a reasonable person with their abilities and in their circumstances first ought to have known those things. Unless the contrary is proved, the person is presumed to have known them on the day of the act or omission. The Act also sets a 15-year outer limit from the act or omission, subject to the rest of section 15, including times when the period does not run, such as wilful concealment.

The same idea in British Columbia

Under British Columbia’s Limitation Act, subject to that Act, a court proceeding must not be started more than two years after the day the claim is discovered, and a claim is discovered on the first day the person knew or reasonably ought to have known all four listed matters, apart from the special situations in sections 9 to 11. Subject to Parts 4 and 5, there is also a 15-year outer limit from the act or omission, and section 21 sets a later start day for some claims, including where the person claimed against wilfully conceals listed facts from the claimant or wilfully misleads the claimant about bringing a proceeding. If your business is in another province, ask your lawyer which rules apply.

When a regulator or insurer sets the rule

Some professions have their own requirement. CPABC states that, under its Bylaw Regulation 1301/1(5), members holding a public practice licence must ensure prior acts and omissions are covered by adequate professional liability insurance, through riders to an ongoing policy or a separate discovery policy, for a minimum of six years after ceasing to be in public practice. LAWPRO, the Ontario lawyers’ insurer, describes its own run-off coverage as available to lawyers who qualify and apply for an exemption from the annual premium for one of the reasons it lists, and it applies only to claims arising from services provided while in private practice or while the full ongoing practice coverage was kept, except as that page notes. That is LAWPRO’s policy, not a general rule.

What to ask before closing

• Ask your insurer or broker, in writing, what happens to claims about pre-closing work once your policy ends.
• Ask your regulator or professional body whether it requires cover after you stop practising.
• Ask your lawyer whether the sale agreement leaves you answerable for pre-closing matters; see what a seller remains responsible for.
• Ask your lawyer how a limitation period applies to your situation.