There are turning points in a company's life when nobody thinks of insurance, because bigger things are happening: a sole trader sets up a Kft. (limited liability company), the owner sells their business share, two companies merge, or the company is wound up through voluntary liquidation. Meanwhile, the policies keep running and the premium keeps being paid. As a broker, I see that the problem typically comes to light a year later, in a claim: the policy still shows the old policyholder's name, the insured property already belongs to another company, or a liability claim is made in respect of the activity of a company that no longer exists. In this article I go through the four typical situations – sole trader to Kft., company sale, conversion and dissolution – and in which of them the contract transfers, in which it terminates, and where a gap remains. The company-law and tax details are questions for a lawyer and an accountant; here I describe the insurance side.
- If the policyholder changes – a sole trader becoming a Kft. (limited liability company), assets sold to another company – the insurance does not ‘pass over’ by itself: under Section 6:447 of the Hungarian Civil Code (Ptk.), when the insurable interest ceases, the contract or the corresponding part of it terminates, and the new legal entity needs its own contract.
- If the legal entity remains – a sale of the business share, or a change of company form with general legal succession under Section 3:39 of the Civil Code – the contracts continue, but changes in name, company form, owner and activity must be notified to the insurer under Section 6:452 of the Civil Code.
- The most common gap arises in liability insurance: between claims for the former entity's past activity and the new entity's first days, there may be a period for which neither contract pays – this has to be dealt with in the timetable of the changeover.
The basic rule: cessation of interest and legal succession
Two legal concepts decide what happens to the insurance. The first is insurable interest: under Section 6:440 of the Hungarian Civil Code (Ptk.), an insurance contract may be concluded by a person who has an interest in avoiding the insured event, and under Section 6:447, if the insurable interest ceases, the contract or the corresponding part of it terminates. So if an item of property passes into someone else's ownership, the old owner's contract terminates for that item – Hungarian conditions typically set this at the date of the change of ownership – and by law the contract does not pass to the buyer: the buyer takes out their own contract. The insurer may decide, case by case, to continue with the new owner as a new policyholder on the same terms, but that is an agreement, not a right. The second concept is legal succession: under Section 3:39 of the Civil Code, if a legal person converts into a different type of legal person, the converting entity ceases to exist and its rights and obligations pass to the entity created by the conversion as its general legal successor – including its contracts, and among them its insurance contracts. Once you understand these two rules, you can classify the four situations yourself: where the legal entity remains or a general legal successor takes its place, the contract continues; where the property or the activity passes to a new legal entity without legal succession, a new contract is needed. The article on policyholders and insured persons explains who is who in more detail.
From sole trader to Kft.: the policyholder changes
The Act on Sole Traders and Sole Proprietorships (Evectv.) allows a sole trader to continue their activity as a sole proprietorship (egyéni cég) or by founding a single-member Kft.; on registration, the sole-trader business ceases. From an insurance point of view, this is the case with the most gaps, because until now the policyholder was a natural person and from now on it is a legal person – and for the insurer these are two separate clients. In property insurance, the machines, the stock and the fittings of the rented premises pass into the ownership or use of the Kft.: the insurable interest under the sole trader's contract ceases, and the Kft. needs its own policy, or a change of policyholder agreed with the insurer, which the insurer may accept or refuse. In liability insurance, the insured was the sole trader; the old policy does not pay for the Kft.'s activity, and the Kft. can cause a loss from its first working day. If the profession requires compulsory liability insurance, the new legal entity must provide proof of it in its own name – the professional chamber and clients also ask for this. The past deserves special attention: by law, the Kft. and the sole trader are jointly and severally liable for the obligations of the sole-trader business, but whether claims reported after the old liability insurance has ended are covered depends on whether the conditions tie the insurer's cover to the time the damage was caused or to the time the claim is reported – this has to be checked in the conditions of the old policy, and it differs from insurer to insurer. For group and personal insurance (accident, health), transferring the policyholder role to the Kft. is typically simpler, but here too notification and the insurer's consent are required. The FAQ also covers the question of company form; I would only add here that new contracts timed for the day of the changeover and starting in parallel with the old policies leave the fewest gaps.
Selling the company: business share or assets?
When a company is sold, the first question is what is being sold. If it is the business share (or, in a company limited by shares, the shares), the company remains the same legal entity and only its owner changes: the insurance contracts continue, as the insurable interest has not ceased. What needs to be done in this case: notifying the change of owner and managing director, a new registered office or any change in activity, in accordance with Section 6:452(2) of the Civil Code and the conditions; reviewing the beneficiary and assignment clauses if the financier changes; and checking the directors' and officers' liability insurance: some conditions automatically extend to whoever the current directors are, while under others the new managing director has to be notified – this differs from insurer to insurer. On the buyer's side, reviewing the policies is part of due diligence: what is in force, until when, and with what claims history – the portfolio inventory template is a good starting point for this. If, on the other hand, the assets are sold (machines, stock, real estate to another company), the rule on cessation of interest applies: the seller's contract terminates for the assets sold, and the buyer takes out its own cover, ideally from the day possession is handed over. The seller company's general liability insurance covers its own past according to the conditions; the buyer takes out new liability insurance for the activity it carries on. If a change of ownership is not notified, under Section 6:452(3) the insurer's obligation to pay does not arise, unless the company proves that the circumstance did not contribute to the loss – the article on notifying changes explains this in detail.
Conversion, merger, demerger: the legal successor inherits the policy
If a Bt. (limited partnership) converts into a Kft., or a Kft. into a Zrt. (private company limited by shares), the insurance contracts also pass over as a result of general legal succession under Section 3:39 of the Civil Code: no new policy needs to be taken out, but the policyholder's name, company form, tax number and company registration number change; this must be notified in accordance with the conditions, and the policy must be amended. In a merger, the legal successor inherits the contracts of both companies – this is the moment to look for overlaps: two property insurance policies for the same site, two liability policies with different limits. In a demerger, the demerger plan (demerger agreement) allocates the contracts to the individual successors; the insurer must be informed which successor is the policyholder, and the sums insured, sites and activities must be adjusted to the divided assets. For the insurer, the conversion may be a material circumstance – a different company size, a different scope of activity – so after notification it may propose an amendment; it is worth being prepared for this.
Dissolution: voluntary liquidation, insolvent liquidation
In voluntary liquidation, the company itself decides on its dissolution and sells its assets or distributes them to the members; as assets leave the company, the cover on them ends through cessation of interest, while the remaining assets must stay insured throughout the liquidation. Contracts that are no longer needed are terminated or ended in writing by the liquidator; under the insurance chapter of the Civil Code, the insurer is entitled to the premium up to the end of its cover and must refund any premium paid beyond that. Before ending the liability insurance, it is worth considering whether a claim arising from the company's past activity may still come in: if the conditions tie the cover to the time the claim is reported, the terminated contract will not pay for a claim reported later. In insolvent liquidation, the liquidator decides on the contracts; here too, insurance is a means of protecting the assets for as long as they belong to the company.
What should the company do before the change?
Draw up a list of every contract in force (policyholder, insured, insured location, renewal date, financier's clause), and classify each one according to the two rules above: what stays, what terminates, and what needs a new policyholder or a new policy. Time the start of cover under the new contracts for the day the legal entity changes, and only then end the old ones – the article on when cover starts explains why it is not the date of signature that counts. Notify every insurer of the change in writing and ask for confirmation. Agree the sequence of company-law steps with your lawyer, and the accounting for the transfer of assets with your accountant. If you let me know before the change, I help where I can with compiling the list, classifying the contracts and the paperwork for the new policies; the notification and signing the terminations remain the policyholder's duty. The insurer pays only for what is an insured event under your contract – and only to whoever is named in the contract as policyholder and insured.
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Sources
- Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:440 (insurable interest), Section 6:447 (termination of the contract on cessation of insurable interest), Section 6:452 (duty of disclosure and duty to notify changes), Section 3:39 (conversion – general legal succession)
- Evectv. – Act CXV of 2009 on Sole Traders and Sole Proprietorships (continuing a sole trader's activity as a sole proprietorship or a single-member Kft.)
- 5percAdó – Munkácsi Márta: Options for continuing a sole trader business: sole proprietorship and single-member Kft. (legal succession, joint and several liability, deregistration of the sole trader business)
