What insurance can a seller require while a vendor take-back is outstanding?

A vendor take-back is a loan from the seller, so insurance is a term of that loan. It is not added automatically. Whatever the seller wants has to be written into the note, the security agreement or a separate assignment signed by the right people. This page covers three kinds of cover a seller can ask about. It uses Ontario’s Insurance Act as its example, so check the rules where the policy is issued.

Cover on the secured assets

If the seller holds security over equipment, inventory or property, the seller can ask the buyer to insure those assets and to have the seller shown as a person to whom loss is payable. In Ontario, the fire insurance part of the Insurance Act says that where loss under a contract has, with the insurer’s consent, been made payable to someone other than the insured, the insurer shall not cancel or alter the policy to that person’s prejudice without notice to that person (s.147(1)). That part applies to insurance against loss or damage from fire, subject to the exclusions in s.143, such as automobile, boiler and machinery, and theft insurance. Ask for a copy of the policy or a certificate, and ask how the buyer will prove each renewal. If a senior lender is involved, ask what insurance it requires. The Canada Small Business Financing Program guidelines include a checklist lenders may find useful in assessing a CSBF term loan or line of credit’s eligibility, and it lists that insurance, if required, is held over the assets given as security. That checklist is about CSBF loans, not a seller’s take-back, but it shows one question those guidelines suggest a lender check.

Life insurance assigned to the seller

A seller can also ask for a life policy on the buyer to be assigned as security. Under Ontario’s Insurance Act, an assignee who gives written notice of the assignment to the insurer at its head or principal office in Canada has priority of interest over any assignee other than one who gave notice earlier in the same way, and over a beneficiary other than one designated irrevocably under s.191 before the assignee gave that notice (s.200(1)). Where a beneficiary is designated irrevocably, a person acquiring an interest in the contract takes it subject to that beneficiary’s rights, subject to the terms of the beneficiary’s consent or a court order (s.197(3)). Where a contract is assigned as security, a beneficiary’s rights are affected only as far as needed to give effect to the assignee’s rights (s.200(2)). A contract may also provide that the rights or interests of the insured are not assignable (s.200(4)), so ask the insurer before relying on the idea. The Financial Services Regulatory Authority of Ontario is the regulator of Ontario’s life and health insurance sector.

Cover on the buyer’s company

If the business depends on one person, ask whether the buyer’s company holds key-person cover and whether the seller can be named to receive payment. That is a term to negotiate. The insurer’s rules and the policy wording decide whether it can be done.

Questions to ask

• Who pays the premiums, and what happens to the note if a premium is missed?
• Will the insurer confirm the assignment or the loss-payee wording in writing?
• Does the senior lender’s agreement leave room for the seller’s claim on any payout?
• Who is the borrower, and who is the insured: a person or the corporation?

Ask an accountant about the tax side. CRA’s archived bulletin IT-309R2 deals with premiums on life insurance assigned to a restricted financial institution as collateral for a loan. Whether it says anything useful for a seller who lent the money is a question for the accountant. For the rest of the security package, see how to secure a vendor take-back loan.