Planning for ISC / How to structure indemnity when selling or buying accounts / plans for ISC schedule February 25, 2025
KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Planning for ISC / How to structure indemnity when selling or buying accounts / plans for ISC schedule
February 25, 2025
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plans for ISC schedule
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K&K will be formulating plans for its ISC schedule in next week or so. There are a few promotional opportunities available that I am considering.
Contact me or my office [Kathleen 516 747 6700 x 319] if you want to participate in any of the opportunities below:
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Pre- ISC: Webinars - schedule closes out tomorrow
I’d like to schedule Webinars by Central Stations. Plan would be for central station to focus on its unique qualities and evolving changes over the last year. Each webinar would be one hour, including some Q&A time. March 17 to March 28. Introduce yourself and encourage dealers to meet with you at your ISC booth.
Call Kathleen to schedule: 516 747 6700 x 319.
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Another schedule of Webinars by Insurance brokers or business brokers; also one hour including Q&A, between March 10 and March 19.
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If there is interest we will also promote webinars for Software Providers; same format between March 10 and March 21.
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At ISC:
K&K will be scheduling Group meetings with Ken Kirschenbaum and others who want to lead a group meeting on topics to be announced, and private meetings [yes, free] with Ken at ISC, time permitting. Contact Kathleen to express interest and reserve your spots.
Time is limited so call Kathleen asap to express interest and book time slot. 516 747 6700 x 319.
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How to structure indemnity when selling or buying accounts
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If there is a “most contentious” issue in the buy-sell agreement it’s the indemnity provision. The bottom line is, who is going to be responsible for claims when the claim is asserted or brought against one or both parties, buyer or seller. It’s a complicated issue. So complicated I haven’t been able to explain it to the “transactional” attorneys who get involved in alarm account sale transactions.
I think the problem with lawyers understanding the indemnity issue is that the transactional lawyers are not litigators and they don’t understand what the claims look like, how they are handled and how the insurance plays a role.
The buy-sell agreement can contribute to the confusion, and it shouldn’t. Should the seller represent and warrant that all installations were done according to all manufacturer, AHJ and contract specifications? Should the seller also agree to be responsible for any claim where the alleged “negligence” was committed pre-closing, either during installation or a subsequent service call?
While that may sound reasonable, it’s not. To understand why you need to understand how the claim is made and how the insurance in this industry works. Understand that and you’ll leave your “lawyer” and probably your “broker” in the dust. When the claim comes in the Plaintiff often doesn’t know why the loss was suffered, only that it happened and the alarm either didn’t work as best it could or didn’t work at all; the loss occurred and therefore the alarm company must have done something wrong. The root of this is of course the difference in expectation, deterrence or prevention. So the claim comes in and alleges defect design, installation, service, monitoring, whatever. Whose responsibility will it be to undertake the defense [which is usually included in the indemnity obligation]. Well we don’t know, because the “negligence” complained about is not precise, perhaps occurring before or after the closing. Both seller and buyer have E&O coverage, at least for the period when they owned the account. The reality is that neither insurance carrier will accept responsibility for indemnity because fault hasn’t been established. In fact, the carriers may not even be able to figure out who should lead the defense.
Here is how it works – if I am involved as attorney – in the transaction. And here’s why. E&O insurance in the alarm industry is occurrence based. That means the date of the loss, not the date that a mistake was supposedly made that caused the loss. Therefore a loss will occur either before or after the closing. Responsibility to defend the claim and indemnify the other party should follow the insurance coverage. Drafting indemnity provisions in a sales agreement that ignores the insurance coverage leaves one of the parties exposed to risk, liability, defense costs, whether it has insurance or not. A seller who is no longer in business will have little interest in continuing to pay for E&O insurance, or any insurance for that matter. What idiot continues to pay for car insurance once he sells the car? Or homeowner insurance once he sells the house. If the insurance is occurrence based then the policy will cover claims that occur – meaning a loss sustained – during the policy period, but not after.
Lawyers have trouble with this because they carry malpractice insurance, and that is claims made basis. That means that the lawyer who commits malpractice in 2023 but doesn’t get sued until 2024 can look only to the policy in effect on the date he gets sued, when the claim is made. The carrier who had the policy when the lawyer committed malpractice is off the hook if the claim is made after the policy expires. Example: Lawyer doesn’t show up at trial on April 1, 2023 and judge dismisses the case. Lawyer has 6 months to seek to restore, up to October 2023, but never does despite assuring the client he’s working on it. The lawyer’s 2023 malpractice policy expires December 2023. Even if the carrier knows about the malpractice – say the lawyer notified the carrier of possible claim – the client, who has 3 years to sue, doesn’t bring a malpractice claim until 2025. By this time the lawyer 1) may have the same carrier, 2) may have a different carrier or 3) may no longer have malpractice insurance because he retired, can’t afford it or doesn’t care because he’s broke anyway. The carrier he had in 2023 is not going to accept coverage because it’s a claims made policy and the claim came in in 2025. The 2025 carrier will accept coverage because the claim is made in 2025, unless the 2025 carrier excluded from its policy “prior acts” [that is prior to the policy date] in exchange for a substantial premium discount.
Now consider the alarm company. Same dates, same negligence, same claim date. In 2023 the alarm company did a faulty installation. No loss occurs however until 2024. No claim is made until 2025. The alarm company had E&O insurance in 2023 when it did the faulty installation. Continues the insurance until April 2024 when it sells all its accounts and de facto if not de jure dissolves. Loss happens in October 2024. Claim is brought in 2025. Note that the buyer owned the account at the time of the loss and when the lawsuit is brought. Buyer has insurance and its E&O carrier accepts coverage and will defend because the loss – the burglary, the fire, whatever – happened – occurred – during the policy period. Unless the buyer has added the seller as an additional insured the seller will not have insurance. If the Plaintiff brings the seller into the action the seller will not have insurance coverage. Seller may not be out of business; maybe just out of the alarm business; might have plenty of money and can’t hide from the lawsuit. Maybe the seller closed the deal, paid all its debts, taxes, etc, and distributes the millions of dollars left to the owner, who by the way worked his ass off for 50 or more years building the business.
Well this seller didn’t use K&K on the sale and K&K wasn’t representing the buyer either. By the way, add as many zeros you want to the sale price and then figure the higher priced lawyers on the deal; the “transactional lawyers”. So guess what’s in the sales agreement. Seller and its owner agreed to the representations regarding the installations and prior work. Now the buyer’s insurance carrier – or the buyer itself if the claim is big enough so that there is chance the insurance won’t cover it- brings in the seller and the seller’s owner. This is years after the closing of the deal; seller no longer has insurance. And carrying insurance for a few years may not solve the problem because Seller and owner could be brought into the case or sued after the case on the indemnity provision in the sale contract and that could be many years after the closing; so seller keeping the insurance for 1, 3, 5 or more years may not be enough. Even if it does I don’t see how the carrier accepts coverage because seller doesn’t own the account at time of loss.
Here’s my position, and I have to butt heads on almost every deal: Seller should keep insurance only until the sale. Buyer should name seller as additional insured on its E&O policy. On the issue of indemnity, follow the occurrence made policy. Whoever owns the account at the time of the loss is responsible for the claim and must indemnify the other party. If you can’t get this in your deal, get a new lawyer or walk from the deal.
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