Assumed liabilities definition

According to the Institute for Mergers, Acquisitions, & Alliances, in 2018, about 807 acquisitions totalling USD 102.53 billion were reported by Canadian corporations-a 4.3% increase from the previous year.

Now, imagine acquiring a business only to find out later that you're legally responsible for past consumer lawsuits due to defective products. Without proper business insurance in place, you could face unexpected financial strain that significantly impacts your business finances and interests.

This is where assumed liabilities come into play. As a business owner, when you sign a contract with a third party or engage in mergers or acquisitions, you take on the financial and legal obligations of the other party. Without taking these potential liabilities into account beforehand, you could expose yourself to numerous losses. By understanding what assumed liabilities are, you can make better business decisions before buying the right assumed liabilities insurance for your company.

Common types of assumed liabilities

Assumed liabilities can take on many different forms and arise from various business activities you may conduct. Common types of assumed liabilities include:

Contractual agreement liabilities

These assumed liabilities arise when one party agrees to assume the responsibilities of another party. For example, if you own a construction company, your construction company may cover the work of any subcontractors they have hired to work on a specific job.

Legal liabilities

Businesses could face assumed liabilities arising from statutory laws. For example, laws regulating employee-related claims for injuries or cleaning up environmental contamination. It's important to note that in Canada, successor liabilities are not typically imposed on asset purchasers as they are not clearly defined in the law. , except when it applies to environmental and labour laws.

Acquired business liabilities

When a business is acquired by another, the purchaser may take on financial obligations, unresolved legal claims, and other liabilities. Here's a summary table of the types of business liabilities a business can assume:

Risks and challenges of assumed liabilities

If businesses fail to do their due diligence, assumed liabilities present significant financial and legal risks, which can tarnish their business reputation and lead to significant financial consequences, including:

• Unexpected costs from pending lawsuits, environmental cleanups, or warranty claims.
• Increased operational costs due to assumed tax liabilities or other employee benefit liabilities.
• Non-compliance penalties and fines.
• Unwanted lawsuits from the seller's liabilities.

If a company takes on an unknown liability when acquiring another business for a defective product, it could be in court for years. Without prior due diligence and planning with assumed liability insurance, risks could escalate into costly and lengthy legal battles.

According to Stats Canada, Canada's international liabilities reached a record $7,360.3 billion as of Q4 2023, up $324.9 billion from the previous quarters. This ultimately showcases the scale of assumed liabilities Canadian businesses encounter, which is why it's essential that, as a business owner, you purchase assumed liability insurance ahead of time. The discussion below covers challenges tied to managing assumed liabilities:/p>

Challenges with managing assumed liabilities effectively

Managing assumed liabilities doesn't come without its challenges. Without a comprehensive risk management plan in place, identifying all possible assumed liabilities can be difficult. This can later lead to a business purchasing assumed liability insurance that is inadequate for their needs, leaving them exposed to legal and financial responsibilities regardless. Additionally, with many businesses operating in several diverse sectors, overseeing liabilities across jurisdictions can also lead to vulnerabilities.

How liability insurance can mitigate assumed liabilities

Purchasing tailored business insurance plays a vital role in protecting you and your company from assumed liabilities and other risks. Let's take a closer look at the different types of liability insurance policies you may want to consider:

Contractual liability insurance

Assumed liability insurance covers all kinds of contracts. Whether the contract is signed with an individual or business, or whether it relates to services, products, property, equipment rentals, or a company you hire to perform work on your behalf, contractual liability insurance can protect you.

With contractual liability insurance, any time your business is responsible for a third party’s bodily injuries or property damage based on the contract terms, your insurance company would cover any claims brought against you.

Employee benefits liability

Employee benefits liability coverage can protect your business in the event you are held liable for claims arising from the administration of your employee benefits program. For example, if a claim is brought against your company for improperly counselling plan participants, handling records carelessly, failing to enrol or terminate employees, or improperly interpreting coverage, you can be covered thanks to employee benefits liability insurance.

Errors and omissions insurance

If a third party holds you accountable for any services you give or neglect to provide, your company is protected by errors and omissions (E&O) insurance. Additionally, it provides protection against claimed negligence, omissions of information, and deceptions.

Commercial general liability insurance

Commercial general liability protects business owners if parties suffer injuries or property damages while on the premises of your business property. Below, we provide a detailed hypothetical example related to commercial general liability insurance:

Hypothetical example

To further your understanding of assumed contracts, let's take a look at one final hypothetical example:

Let's say a large construction firm assumed liabilities for subcontractors on a major condo development in downtown Toronto. Years later, a structural defect in the condo building was discovered that put residents at risk of injuries. This later resulted in legal claims against the construction firm.

Luckily, with a contract liability insurance plan in place, all legal fees and impending settlement costs will be covered by their insurer, reducing their financial impact.

Legal considerations and due diligence

Before completing contracts, legal due diligence must be performed to discover and reduce assumed liabilities. This process helps companies in evaluating their legal and financial risks to put measures in place before disaster strikes. We'll review examples of legal considerations and due diligence, such as:

Indemnity agreement

An indemnity agreement is a legally binding statement written in a contract that transfers liability from one party to another party. Ultimately, it protects the buyer from future claims.

Successor liability assessment

This occurs when legal teams review any laws to determine if liabilities transfer to the buyer.

Checklist to evaluate assumed liabilities

When evaluating assumed liabilities, follow this checklist:

• Review all existing contracts for potential assumed liabilities.
• Identify whether any pending litigation and regulatory investigations are occurring at the time of the acquisition or merger.
• Assess any financial obligations relating to the business you're acquiring.
• Verify that you have the right insurance coverage and policy limits in place.

Purchase insurance with BrokerLink today!

Business owners take on many liability risks. The only way to be protected, both legally and finally, from the potential ramifications of these liabilities is with business insurance or commercial insurance.

At BrokerLink, we're commercial insurance experts. Whether you need to purchase assumed liability insurance, volunteer liability coverage, directors and officers liability insurance, third-party liability car insurance, or other types of coverage, our brokers will help you shop around, compare quotes, and save money on your insurance plan. Contact us directly or get a free quote using our online quote tool today!

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