Regardless of why you may be closing your business, you must take certain steps to protect your financial and legal interests as well as your reputation. After all, you may go into business again. Just as you want people to remember how you ran your company, you also want to be known for the professional manner you demonstrated when closing your business.
Presumably, you were careful to take out insurance policies that would see you through certain inevitable situations. Now you must take the same care to cancel these policies. This is especially important when it comes to protecting your personal assets.
Once you’ve made the final decision to close shop, you’ll need to notify the people with whom you’ve been doing business. In addition to notifying the bankers and suppliers, for instance, you’ll need to contact your service providers, which include insurers. Like the others, insurers will want to know your final day for doing business. Insurers will also want to know about any possible liabilities that could arise once you’re no longer in business. Don’t gloss over this too quickly; you’ll want to provide an honest and comprehensive response. For example, if you’re aware of any pending legal threats or problems, you’ll want to disclose that information (but only under the guidance of an attorney). If you’re not forthcoming, you could risk being denied coverage at a later date — perhaps when you launch a new company. And remember, news travels fast in the business community. Once your reputation is tainted it’s hard to get it back.
Generally speaking, you can cancel your insurance policy at any time, but it’s important to give the companies you’ve been working with some notice. You may need to return the original policy or sign a “policy release” or “lost policy release.” But, again, consult with your attorney before signing anything. Note, too, that you will be responsible for paying any unearned premium. Sometimes policyholders incur financial penalties for canceling their policies, so it’s wise to examine your contract before stopping coverage.
You may also opt to simply not renew the policy when it expires. In this scenario, you would time the closing of your business with the expiration date of your policies. Be careful though: you don’t ever want to leave yourself unprotected. One disaster could wipe you out.
When a policy is canceled, some insurance companies may issue a “short rate” penalty, which refers to the amount of a premium that the company keeps. Let’s say you’ve taken out a one-year policy and you want to cancel six months into the year. The “short rate” penalty would enable the insurance company to keep half of the yearly premium.
You’ll also want to examine your policy to determine if you are subject to “surrender charges,” another type of cancellation policy. If the policy does not mention such a charge, you should not be penalized. But, again, you’ll want to consult with your attorney on this matter.
As you cancel the various policies you’ve purchased, it might be a good time to reevaluate what you could do the next time. In the process of closing your business, you’ll no doubt learn what you could have done differently. Your insurance policies, for example, may look different if you launch a new business. Also, affordable insurance is becoming increasingly difficult to find because of high costs, industry consolidations, and other market factors. Still, the next time you’ll want to shop around and look as carefully at the insurance companies as they are looking at you.