When you sell, manufacture, or distribute products or perform work, there’s always a possibility that your product or work could cause property damage or bodily injury years after your work is completed—even if you no longer run the company or have stopped selling the problem product in the meantime. Discontinued Products and Operations Coverage can step in to financially protect you from lawsuits related to your products or completed operations.

What is Discontinued Products and Operations Coverage?

Discontinued Products and Operations Coverage is a type of liability insurance that protects your company from incidents of bodily injury or property damage to a third party, like a customer or vendor, that happen when your business is no longer operating. This coverage also applies if you stop manufacturing or selling an item, and products you already sold later cause harm. 

Most companies have commercial general liability insurance (CGL) that includes products and completed operations coverage. This coverage will step in if someone is injured or property is damaged as a result of your product or work. However, CGL policies are typically written on an occurrence basis, which means that they only provide coverage while the policy is active. If you sell or close your business and cancel your CGL policy, you no longer have coverage. 

While it doesn’t make sense to continue paying for a CGL policy when your business is closed or operations have ceased, it may be necessary to retain some protections against liability for property damage or bodily injury. Discontinued Products and Operations Coverage can provide this type of protection.

Example:

• Your carpentry business builds and installs a deck for a client. A year later, you retire and close the business, terminating the business’s CGL policy. Several months after the business’s closing, the deck collapses, causing injuries to the clients. The clients sue your business. Since the CGL policy was terminated, it will not cover the lawsuit. Luckily, you had purchased Discontinued Products and Operations Coverage, which will cover the lawsuit and any resulting settlement. 

Who needs Discontinued Products and Operations Coverage?

Discontinued Products and Operations Coverage is necessary when companies cease operations, merge with another company, are sold, or discontinue products. Even though the company is no longer operating, liability exposures still exist because items you sold or projects you completed in the past still have the potential to cause damage or injuries. 

Example:

• Your company manufactures floor waxing machines and equipment. You sell your company to another company, but the buyer does not accept liability for your previous operations. Six months after the sale, a line of floor waxers is found to have a defect that causes damage to flooring, and you are sued. Your Discontinued Products and Operations coverage would provide coverage for the lawsuit and any resulting settlement.

This coverage is commonly needed by construction and maintenance companies, manufacturers, retailers, and distributors—all businesses that could still be held liable for damages even when they are no longer operating. 

Some situations in which businesses commonly need Discontinued Products and Operations Coverage include:

• You decide to close your business and cease operations, canceling your CGL policy. 
• You sell your business, but the acquiring company is buying your assets only and does not take on liability for previous work or products. 
• You move your business to another state and purchase a new policy to cover your operations in the new state. Your policy in the previous state is no longer active and will no longer provide coverage for any incidents related to your products or operations in that state. 
• You buy another company and need coverage for its previous activities before you owned it.
• You’ve changed the structuring of your company (for example, from a sole proprietorship to a partnership or a partnership to a corporation), and your new insurance policy does not name the previous iteration of your business as a named insured. 

What is covered by Discontinued Products and Operations Coverage?

Discontinued Products and Operations Coverage covers essentially the same type of claims as the products and completed operations coverage found in commercial general liability policies; however, it covers incidents that occur when your business is no longer operating. This coverage will pay for claims that property damage or bodily injury was caused by your products or completed operations. Coverage only applies to damages to third parties, such as customers, vendors, or clients. 

If your products or work causes harm after your business is no longer operating, Discontinued Products and Operations Coverage can step in to cover your legal fees and any resulting settlements. This can protect you from unexpected losses after you believe you have already concluded your business operations.

Example:

• Your roofing company performs repairs to a roof. It’s one of your last jobs—a few months later, you decide to close your business. Soon after, it’s discovered that a problem in the roofing project has caused a severe leak that damaged the client’s property. The client sues. Your Discontinued Products and Operations Coverage will cover the lawsuit and any resulting settlement. 

What are the key exclusions for Discontinued Products and Operations Coverage?

Discontinued Products and Operations Coverage typically has the same exclusions as products and completed operations coverage. These include:

• Products or operations that do not result in bodily injury or property damage. If a product or completed work fails but does not cause any third-party damage, this would not be covered. 
• Damage to your own work or product. If your own work or product is damaged by defects, this would not be covered. Only third-party property damage is covered. 
• Damage to “impaired” property. This exclusion applies to situations where your product is used as a component in another product. If a fault in your component product causes the item to stop working, but the item would be restored to functionality if your product was removed, the damage is not covered. 
• Product recalls. If it’s necessary to remove your product from the market, Discontinued Products and Operations Coverage will not cover the associated costs. 
• Damage done intentionally. Any injury or damage caused by intentional actions is not covered. 

How is Discontinued Products and Operations Coverage priced? 

Pricing can vary depending on the insurer, but Discontinued Products and Operations Coverage premiums are generally a percentage of the cost for the business’s CGL premium. Pricing often decreases over time as the likelihood of claims decreases. 

How long do you need Discontinued Products and Operations Coverage for? 

The length of time your business would need Discontinued Products and Operations Coverage depends on the type of work or product produced and your business’s individual risk exposures, as some operations present an ongoing risk for a longer period than others. 

Many states have a statute of limitations after which lawsuits can no longer be filed; however, it’s important to understand that in many states, the time period starts when the injury is discovered, which means that you cannot predict when you can no longer be held liable for damage caused by your products or operations. Also, some states have a statute of limitations for lawsuits against corporations or LLCs that have been dissolved. This period varies by state, but three years is a common threshold.

Some states have a statute of repose, which puts limits on the timeframe during which a product liability claim can be filed. For example, if your state has a statute of repose of 10 years, it would no longer be possible for you to be sued 10 years after your last product was sold, so you would no longer need Discontinued Products and Operations Coverage after this time period. 

Final Word

When you make arrangements to sell or close your business or discontinue a line of products, it’s important to understand that your liability does not end there. Although the likelihood of claims may lessen over time, a personal injury or property damage lawsuit caused by your products or completed works could arise many years later. It’s sensible to prepare yourself for this possibility by purchasing Discontinued Products and Operations Coverage.