Closing Your Business? Your Liability May Not End When Your Operations Do

When a business closes its doors, stops offering a service, or discontinues a product, it may seem logical to cancel the insurance policies associated with those operations.

Unfortunately, closing a business doesn’t always mean its liability exposure disappears.

A product you sold years ago could cause an injury. Work your company completed could later result in property damage. A former customer could file a lawsuit long after you’ve stopped operating.

This is where discontinued operations coverage can become important.

What Are Discontinued Operations?

Discontinued operations are business activities that have stopped but can still create liability in the future.

This is especially important for businesses whose work or products remain in use after the business has closed.

Consider a roofing contractor.

The contractor installs a roof in 2025 and retires in 2026. In 2027, the roof fails and rainwater causes significant damage to the building.

Even though the contractor is no longer in business, the building owner may still pursue the contractor for the damage.

The contractor’s operations ended in 2026.

The contractor’s liability exposure did not necessarily end with them.

Doesn’t My Old Insurance Policy Cover the Work?

This is where things can get confusing.

Many commercial general liability (CGL) policies are written on an occurrence basis. With this type of policy, when the bodily injury or property damage actually occurs can be extremely important in determining which policy may respond.

For example:

• A contractor completes a deck in 2025.
• The contractor closes the business in 2026.
• The deck collapses in 2027 and someone is injured.

A common misconception is that the contractor’s 2025 insurance policy would automatically cover the claim because that was when the deck was built.

That isn’t necessarily the case.

If the bodily injury occurred in 2027, after the contractor’s regular liability insurance had ended, the contractor could potentially have a significant coverage gap.

What About Completed Operations Coverage?

Completed operations coverage and discontinued operations coverage are related, but they address different situations.

Completed operations coverage generally deals with bodily injury or property damage arising from work that has already been completed while the business continues to maintain applicable liability coverage.

For example, an electrician completes a job in January. An electrical fire allegedly resulting from that work occurs in June while the electrician’s CGL policy is still active. The resulting claim may fall within the policy’s products-completed operations coverage, depending on the circumstances and policy terms.

Discontinued operations become a concern when the electrician retires, closes the business, or otherwise stops maintaining normal ongoing coverage—but the work completed over previous years continues to create potential liability.

Who Should Be Concerned About Discontinued Operations?

This issue can affect many types of businesses, but it can be particularly important for:

Contractors and construction companies – Roofing, plumbing, electrical, HVAC, concrete, carpentry and other completed work can potentially cause injuries or property damage years later.

Manufacturers – Products can remain in customers’ homes and businesses long after production has stopped.

Distributors and wholesalers – Products previously distributed can continue creating liability exposure after operations cease.

Business owners preparing for retirement – Selling equipment and closing the office doesn’t necessarily eliminate liability from years of previous operations.

Businesses selling or discontinuing a division – A company may stop performing one type of work while continuing other operations, leaving historical exposure associated with the discontinued division.

Discontinued Operations Coverage vs. “Tail” Coverage

You may also hear the term tail coverage, but the two concepts shouldn’t automatically be treated as the same thing.

Tail coverage is commonly associated with claims-made policies, which can include certain professional liability, directors and officers liability, employment practices liability and other specialized policies.

An extended reporting period, commonly called a “tail,” generally gives an insured additional time to report qualifying claims involving past acts, subject to the policy’s terms.

Discontinued operations protection for an occurrence-based liability exposure can work differently. Its purpose is generally to address continuing exposure from products or operations after those activities have stopped.

The appropriate solution depends heavily on the type of business and the insurance policies involved.

Before You Cancel Your Business Insurance

If you’re retiring, selling your company, closing a business, discontinuing a product or eliminating a major part of your operations, don’t assume your liability ends on your final day of business.

Before canceling coverage, talk with your insurance agent about questions such as:

• Could our previous work cause injuries or property damage in the future?
• Are our current policies occurrence-based or claims-made?
• How does our completed operations coverage work?
• Do we need discontinued operations or runoff protection?
• Do any claims-made policies require an extended reporting period?
• How long could liability from our previous operations realistically remain?

There isn’t one answer that works for every business. A contractor, manufacturer and professional services firm can each have very different exposures after operations end.

Closing the Business Doesn’t Always Close the Risk

You’ve spent years building your business and protecting it with insurance. When it’s time to retire, sell or close, making sure historical liabilities are properly addressed can be just as important as maintaining insurance while you’re actively operating.

Before canceling your commercial insurance, review your previous operations and remaining exposures with your insurance agent.

A simple coverage review can help identify liabilities that may continue long after the “Closed” sign goes up.