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New Insurance Product Covering Exposure for the Paycheck Protection Program

October 6, 2020

Over 5,212,128 businesses received forgivable loans through the Paycheck Protection Program (“PPP”) according to a recent report issued by the U.S. Small Business Administration (“SBA”). At the time of people applying for the loans, there were a lot of unanswered questions and uncertainty surrounding the requirements. Many insureds asked whether an investigation around the loan would trigger coverage under their directors and officers policy. As Kevin LaCroix opined in a May 2020 D&O Diary post:

“The reality is that under many D&O insurance policies, the availability of coverage for costs incurred in connection with many of these types of governmental investigations may be an awkward fit. To be sure, there are policy forms, for example, in the healthcare space that expressly provide regulatory expense coverage, often on a sub-limited basis, affording protection for costs incurred in connection with certain types of regulatory investigations. But outside the healthcare arena, this type of express regulatory expense coverage is not as common. Of course, whether coverage is available in any particular situation will depend on the precise circumstances involved and all of the relevant policy terms and conditions.”

As a result of the likely event that the D&O policy may not respond, a new product has emerged in the insurance marketplace. Concord Specialty Risk (”Concord”), serving as a managing general underwriter and/or underwriting agent for a number of insurance companies, announced it is now offering a new product for certain eligibility protection with respect to loans granted under the Paycheck Protection Program.

How is coverage triggered?

  • The SBA denies forgiveness for the PPP loan at any time after the loan is granted based on a determination that the borrower/insured lacked an adequate basis to make a “covered certification” in its loan application.
  • If the False Claims Act (FCA) coverage option is chosen, a resulting final, non-appealable judgment that a “covered certification” was knowingly false (i.e., there was reckless disregard for the truth).

What does the policy potentially pay?

  • The amount that would have been forgiven if the borrower/insured had an adequate basis to make a “covered certification.”
  • Costs incurred in the pursuit of an appeal of an adverse SBA determination. Costs shall not be subject to the retention but shall be subject to a sublimit (generally, 10% of the loan amount, which erodes the limit). The election to pursue such an appeal shall be at the insurer’s sole discretion.
  • If the False Claims Act coverage option is chosen, civil penalties, damages, and costs awarded in the FCA final, non-appealable judgment. No defense cost coverage for FCA claims.

The underwriting process is similar to the process of Reps and Warranties coverage. First, the applicant must submit a variety of information, including copies of the PPP loan and attachment and information regarding their financial performance, affiliations and how COVID-19 has impacted their business. Second, the underwriters will review the material. If the underwriter finds the risk initially acceptable, then the underwriters will provide an indication for coverage, which will include pricing, terms and conditions, and any specific coverage issues. Third, if the indication is accepted by the insured, the indication will be followed by a list of diligence documentation that is needed for underwriting. Underwriting will begin following payment of a due diligence fee.

As this product is new and evolving, feel free to contact your representative at Conner Strong & Buckelew for more information.


Risk Management