E&O coverage through the transition — closing the gap.

Agency E&O is claims-made coverage almost universally in the retail market, which means a policy responds based on when a claim is first reported, not when the error occurred. On a sale, that creates a three-state coverage map. A pre-close error with a pre-close claim is covered by the seller's policy. A post-close error with a post-close claim is covered by the buyer's new policy. The dangerous middle state is a pre-close error with a post-close claim — the seller's policy has expired and the buyer's retroactive date excludes it. That's the gap, and it's exactly where a latent E&O exposure lands.

§ 01 · The three-state gapAnd the retroactive date.

The mechanic that creates the gap is the retroactive date — the earliest point in time a covered error could have occurred. Errors before the retroactive date aren't covered even if the claim is reported during the policy period, and continuous-coverage agencies typically carry retroactive dates years or decades back ("prior-acts coverage"). On a sale, the buyer's new policy starts with a fresh retroactive date that excludes the seller's history — which is precisely why the middle state exists and has to be closed deliberately.

§ 02 · Three solutionsTail, prior acts, hybrid.

Three solutions close the gap. The seller buys an extended reporting period (a tail endorsement) on the expiring policy, typically 3–7 years. The buyer's new policy carries a prior-acts retroactive date extending back to the seller's original continuous coverage. Or a hybrid uses a shorter seller tail (3 years) for the high-risk early window plus the buyer's prior acts for the longer tail. The tail-versus-prior-acts tradeoff is real: a tail keeps the pre-close error burden on the seller's tower and doesn't dilute the buyer's policy limits, but it doesn't renew, so claims after the tail expires are uninsured. Prior acts is simpler administratively — one policy covers everything and renews with continuous coverage — but pre-close errors then use the buyer's policy limits, may exclude known issues, and require disclosure of the seller's loss history to the buyer's insurer. The hybrid is right for larger deals because it distributes the risk and controls cost.

§ 03 · The unqualified history repAnd insurer loss runs.

Tail coverage costs 150–250% of annual E&O premium — for a $3M agency with a $20K annual premium, a six-year tail runs $30K–$50K, and the payment responsibility is negotiated, with buyers often requiring a seller-funded tail as a cost of sale. Five APA E&O drafting requirements operationalize the protection: a tail-purchase covenant if seller-funded (length, limits, retroactive date, payment, and delivery as a closing condition); a prior-acts coverage rep (the seller represents disclosure of known and foreseeable claims and complete loss runs to the buyer's insurer); a specific indemnity for known claims outside the general cap; loss-run delivery covering the five preceding years (insurer-certified, unredacted, complete); and the E&O history rep without a knowledge qualifier.

§ 04 · The dissolving-seller riskAnd the LOI timing rule.

One structural risk deserves singling out: if the seller's entity will dissolve post-close — common in small asset sales — then a seller-bought tail is the safer structure, because there's no continuing entity to stand behind a prior-acts exposure, and the buyer must confirm the tail endorsement is in force and irrevocable before closing. The timing rule wraps it together: address E&O coverage in the LOI, not at the purchase-agreement stage. The tail-versus-prior-acts decision, who pays, and the length of coverage should all be settled in the LOI to prevent a late-stage renegotiation — because by the time the purchase agreement is being drafted, the leverage to make the seller fund a tail has largely evaporated. Close the gap early, demand insurer loss runs, keep the history rep unqualified, and the claims-made mismatch stops being a post-close surprise.

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