Background:
In connection with the COVID-19 epidemic, the U.S. Congress passed the CARES Act in order to provide financial support and relief to businesses and individual citizens. As part of the CARES Act, the Paycheck Protection Program (‘PPP’) was put in place to provide potentially forgivable loans to small businesses (under 500 employees) who were struggling financially due to the economic uncertainty of the pandemic. The PPP loans were administered by local, regional and national banks and the program is overseen by the Small Business Administration (‘SBA’).
The Risk:
Applicants for PPP loans needed to demonstrate that the loan request was necessary to support the ongoing operations of the business. In addition, in order for the loan to ultimately be forgiven, various certifications are required including that 60% of the loan proceeds were used for payroll expenses and the other 40% for mortgage interest, rent and/or other specific business interest items.
The SBA intends to audit all loans that exceed $2M and has the right to audit those that are smaller. These audits may take years to accomplish. Because the PPP loans are through the Federal Government, all the documentation, representations and certifications could be subject to a False Claims Act (‘FCA’) violation which can lead to treble damages. Furthermore, claims alleging misrepresentation, making knowingly false certifications in the PPP application, common law fraud and deceptive trade practices could be alleged.
The Insurance:
Coverage is being provided in the market on a somewhat limited basis through traditional Transactional Risk insurers. Such coverage will generally provide defense and indemnity coverage for the risks outlined above subject to the following parameters:
- 5 year policy term
- $1-$10M target PPP loan size
- $200,000 minimum retention/deductible
- One-time premiums of 3-4% of the limit purchased
- $25-50k non-refundable underwriting due diligence fee after non-binding indication is accepted by Insured
- Coverage trigger upon final adverse SBA determination or final FCA adjudication
Note that there may be some existing coverage under an Insured’s Private Company D&O insurance policy at least as respects the individual liability of directors and officers. However corporate entity coverage may be limited by standard exclusions for deceptive or unfair business practices, contractual liability and exclusions related to disgorgement or return of ill-gotten gain. Accordingly, it is important to have your Specialty Risk expert assist in policy coordination and analysis.
