Imagine you’re a client who calls your broker to talk about renewing a policy, only to find they’ve sold the business and moved to Florida.
It’s hardly an elegant retirement notification. A client would much rather be told about the sale, who the new owner is, how to reach them, and get assurances they’ll still have their insurance needs met.
This hypothetical scenario highlights an important legal obligation. By law, insurance brokers and agents must see to it their clients’ insurance matters are well-managed. Canadian courts have consistently upheld this ‘duty-of-care’ principle.
That’s because clients rely on their brokers to communicate with insurers, and renewals and claims become highly complex if a broker is no longer available and hasn’t made alternate arrangements. The problem gets worse if a claim requires urgent attention, since delays caused by miscommunications could add to any damages incurred by the insured.
From a strictly legal perspective, a business is sold either as an asset sale or share sale.
In an asset sale, a corporation or a sole proprietor who did not incorporate has the right to sell the business assets to a purchaser, including any client relationships or contracts.
But if there are written contracts with clients, the sale may require the ‘novation’ of the contract to the purchaser. In other words, the previous brokerage owner in the two-party contract agreement between the brokerage and the client is replaced with a third party (the new owner of the brokerage).
Depending on the contracts’ terms, this may require client consent. If there is no written contract, at minimum clients should be told about the change to avoid confusion post-sale.
Brokers also have licensing obligations.
Provincial codes require agents to provide conscientious, diligent and efficient service, and to make their best efforts to ensure clients’ insurance needs are adequately managed after they withdraw services. Notifying clients about the sale of a business is a part of that conscientious service.
In a share sale, shareholders of an incorporated business can sell their shares to a purchaser. In theory, the shares of the company could be sold without notifying the clients. After the sale, the client would still have a relationship with the company, but the owners of the company would be different.
In such instances, clients would often have no idea there’d even been a sale.
The approach might be appropriate in some situations, such as if one shareholder sold its shares to another. In such cases, business operations generally continue seamlessly, and the change is unlikely to affect the client.
However, if something like a name or staff change happens at the acquired brokerage as part of the transaction, it is preferable for the parties to notify clients of any changes.
It’s also possible a brokerage has contracts obliging it to get consent from contracting parties before a sale.
Written contracts should be reviewed as part of that sale transaction to ensure they don’t require a consent to ‘change of control,’ such as a sale of the business. Such clauses are not uncommon in contracts with insurers.
Maintaining client relationships after closing helps preserve the value of the business being sold. It is good practice to advise clients of the sale to provide them with any alternate service arrangements.
And, since every transaction is different, business sellers should always seek legal advice.
Michael Carey is a corporate commercial lawyer in Toronto. He can be reached at: mcarey@macdonaldsager.com. This article is excerpted from one that appeared in the October 2022 edition of Canadian Underwriter. Feature image by iStock.com/sesame
