Discontinuing Operations – What Your Organization Needs to Know

Posted March 04, 2015

When companies sell part of their business or discontinue a product line, they are faced with several hurdles, many of which pose insurance and risk management challenges. This is due, in part, to the fact that a discontinued product or plant closing does not free the organization from liability in the future. Ultimately, if your goods are still used after you exit the market, they can still pose a danger to the public or cause property damage.

When choosing to discontinue operations, many organizations make the mistake of not purchasing insurance coverage to protect against defense and indemnity expenses that accrue after the business closed. As a result, they are left vulnerable to a potential lawsuit.

Organizations that discontinue operations and consequently lay off employees also face personnel issues and legal hurdles. To avoid complex legal headaches, business owners must be knowledgeable of their compliance obligations.

Product Concerns

Once a product becomes available to the public, its makers become liable, even when the company is sold, merges with another organization or when the product is no longer produced.

Examples of instances of liability:

Case #1: A boat trailer company received an offer to sell their company as an “assets only” transaction. The company was not dissolved during the transaction and a year after the sale of the organization, a customer filed a claim for damages due to product defects on his trailer. The claim reverted back to the original company because the trailers were made before the sale. Without insurance, the original owners are liable.
Case #2: A remodeling company moves their operations to another state after being in business in their home state for 10 years. Even though the company is no longer in business in that particular state, the owners are still liable for problems occurring in relation to the jobs completed while they were in business there. To protect against liabilities, the organization purchased insurance coverage with a premium covering major structural concerns for two years after the last day that the business existed in their home state.
Case #3: A masonry business owner built a wall 10 years ago. The owner retired a year after the wall was built and terminated his Commercial General Liability Insurance (CGL) policy. Due to a mixing mistake, the mortar weakens and the wall collapses two years later. This accident causes property damage and personal injuries. When the owner is sued, his former CGL insurance company has no obligation to defend him because the policy had been terminated before the wall collapsed. Thus, the owner has no coverage.

Purchasing an insurance policy that protects against risks when discontinuing business operations is a must, as CGL policies do not cover injuries or damage that occurs after the business is sold or closed.

Mitigating Risks

As demonstrated from these case studies, liability is a huge issue when closing your doors or discontinuing a product line. Business owners must take the necessary precautions to protect themselves by purchasing a Discontinued Operations Insurance policy and by adhering to the following recommendations:

Get to know industry standards and applicable legal requirements. Before leaving your business or ceasing operations, determine how you must legally do so. You must give notice to creditors, the specifics of which vary by jurisdiction.
Devise a run-off business infrastructure. By doing so, you can handle future claims that result from incidents that occurred before the business closed. It is wise to devise risk management solutions in anticipation of a problem; you will already have remedies in place. Also, if defendants have difficulty locating you, this may be seen as an evasion of responsibility and could result in punitive damage for bad faith conduct. A run-off plan will mitigate those risks. It is also smart to let customers know why you are closing your doors or discontinuing a product line.
Create an infrastructure based on your needs. The creation and design of your company’s infrastructure will depend on how the business is shut down. Also, companies operating in highly regulated fields will have more obligations and the structure must accommodate losses far beyond when the business is closed. While creating an infrastructure, consider hiring a consultant who can provide guidance concerning future claims. You may also benefit from the expertise of loss auditors, legal counsel and product liability experts.
Provide guidance to those who remain. If you are only closing part of your business or discontinuing a product line, run-off your responsibilities before doing so. Provide legal advice, risk management and commercial guidance.
Maintain solid business records. Document when and where products were manufactured and to whom and when these products were sold. Your organization should also document the product development process, quality control measures, testing procedures, vendor lists and supplier lists. If you sell your business, keep all of the records from that transaction.
Create problem resolution systems. This may include consumer hotlines, complaint reporting procedures, incident forms, etc. Also determine why merchandise was returned to your company to potentially identify any potential product defects.

Personnel Concerns

In addition to the concerns about product and consumer liability, there are also employee liability issues that must addressed when discontinuing operations, specifically with regard to layoffs and terminations. While this may be a trying time for your organization, it will be significantly worse if a terminated employee files a lawsuit against the company, so it is best to be prepared.

The following are safeguards to consider when conducting layoffs in conjunction with discontinuing operations at your business:

When employees are let go, ask them to sign a waiver promising not to sue (known as a separation agreement). Be mindful of the Older Workers Benefit Protection Act of 1990 (OWBPA), which mandates that workers over age 40 have a minimum of 21 days to sign the release and another seven days to change their decision after they do so. If you pressure workers to sign before this time, you are at risk of a lawsuit. Under OWBPA, you must also provide 45 days to sign a waiver for multiple workers being laid off at the same time.
Consider the Worker Adjustment and Retraining Notification (WARN) Act, which requires companies to give employees notice before a layoff. More information is available at www.doleta.gov/layoff/warn.cfm.
Offer severance packages based on the employees’ titles and lengths of service, as opposed to offering a universal package for all employees being laid off.
Do not blame employees for things that they did not do or make false accusations as a way to justify a layoff.
Conduct layoffs within a short period of time.
If you must discontinue operations for financial reasons, high-ranking employees should also take some cuts as well. This shows remaining employees that everyone is making sacrifices for the company.
Provide job counseling, resume writing guidance and job searching assistance to employees being let go.

Discontinuing your business’s operations presents may liability issues with regard to your products, services and employees. To learn more about the insurance solutions designed to mitigate those risks, contact Horst Insurance.

This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.