There is a lot of ambiguity around the Paycheck Protection Program (PPP) including who is considered eligible, if the loan amount was calculated correctly, or if the borrower is entitled to loan forgiveness. The insurance industry has come up with solutions to address this problem. This article briefly describes the basic terms and conditions of this new type of insurance product.
The primary coverage afforded is tied to the PPP Certification Process. If the insured undergoes an SBA audit and it’s determined that the insured did not qualify for the loan, the SBA will require repayment of the loan plus interest. The policy will cover costs to appeal this decision and it may cover the settlement of the loan (pending underwriter approval). The coverage can also apply to fines or penalties if the insured has allegedly violated any federal acts.
The insurance company will ask for information in order to price the coverage. Items that may be requested include: PPP application and supporting materials, proof of CV19 impact on business, actions taken to explore alternative funding, audited financials, organizational structure and loan amount, among other items.
Premiums and Deductibles
As of now, premiums are ranging from 3%-5% of limits purchased. There could also be a minimum premium of $100k for smaller loans. In addition to premium collected, there is a “due diligence fee” charged by the carrier for underwriting efforts. This fee is falling between $25k-$50k. Deductibles start at $200k-$250k. Policy term varies but 5yrs seems to be standard.
Premiums and deductibles are high, but a company’s liabilities around the PPP may warrant purchase of this product. This is a new coverage and needs to be thoroughly evaluated before purchase. If you would like to discuss further please let us know.