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SBJ/February 25-March 3, 2013/Opinion
How disgrace insurance protects companies when scandal hits
Published February 25, 2013, Page 13
A company relying on an athlete spokesperson can suffer considerable financial losses when the athlete spokesperson suffers personal disgrace, as dozens of companies recently learned when cycling legend and popular product spokesman Lance Armstrong found himself at the center of a public doping scandal.
Over the last three months, a number of Armstrong’s sponsors and corporate backers took steps to distance themselves from him. Sunglasses manufacturer Oakley and brewer Anheuser-Busch, among others, ended long-standing marketing relationships with Armstrong late last year. Another company, nutrition food manufacturer Honey Stinger, announced that it was removing Armstrong’s image from its product packaging. Fitness center chain 24 Hour Fitness likewise announced plans to remove Armstrong’s name and image from its six Armstrong-branded fitness centers located in Texas, Oregon, and Colorado.
Given the commercial fallout that can result from an athlete spokesperson’s fall from grace, it is no surprise that an increasing number of companies are relying on disgrace insurance as an important risk management tool. Disgrace coverage protects companies against the myriad financial losses that can result when an athlete spokesperson suffers public personal disgrace.
For instance, if a company’s spokesperson is involved in a public scandal, the company may deem it necessary to modify or cancel a marketing campaign featuring the athlete. In such instances, disgrace insurance could cover the cost of hiring a substitute spokesperson, as well as the cost of reshooting or reproducing the advertising material. Disgrace insurance may also allow a company to distance itself from a disgraced former spokesperson by covering, among other things, the costs associated with removing the athlete’s image from product packaging and repackaging the product. Some disgrace insurance policies also allow the company to recoup some or all of the money paid to the disgraced former spokesperson for his or her endorsement.
Disgrace insurance can be purchased either as a stand-alone coverage or as part of a broader policy covering other advertising-related risks, such as the risk that the insured spokesperson will die or become disabled during the covered advertising campaign. The cost of purchasing disgrace coverage generally ranges from 0.5 percent to 1 percent of the policy’s limits, so companies will typically pay between $5,000 and $10,000 for every million dollars of disgrace insurance purchased. Insurers may, however, charge substantially more to cover an athlete spokesperson prone to indiscretions or scandal. In fact, a company may have to pay as much as 5 percent of policy limits to cover a marketing campaign featuring an athlete spokesperson with a history of domestic violence, substance or alcohol abuse, or criminal misconduct. An insurer may also require the athlete spokesperson to sign a warranty relating to his or her lifestyle, consumption of alcohol, or drug use.
When purchasing disgrace insurance, companies should explain their coverage needs and expectations to their insurance brokers. Disgrace insurance policies are non-standard, meaning that their terms and conditions can vary. As a result, a company needs to make certain that the policy it purchases provides the desired scope of coverage. For instance, if a company pays tens of millions of dollars to an athlete spokesperson, that company might place greater emphasis on recouping some or all of its investment in the event of a scandal. Other companies may care more about the costs associated with hiring a substitute spokesperson and reproducing the advertising material. For other companies, the cost of removing a spokesperson’s image from product packaging is of paramount importance. Because not all disgrace insurance policies will provide the same scope of coverage, a company should carefully review its policy prior to purchasing coverage to ensure that it meets its precise needs.
It is also important for companies to purchase policies that define the term “disgrace” broadly enough to capture any potential form of criminal conduct or offensive behavior. Even then, the possibility remains that a company and its insurer will not agree that a particular scandal is sufficiently “disgraceful” to constitute a covered loss. For this reason, it is critical that a company facing a scandal work closely with its insurance broker and insurer throughout the claims process.
Furthermore, a policyholder should be mindful of timing-related limitations on the right to initiate litigation or arbitration against its insurer once a claim has arisen. Disgrace insurance policies often will include contractual limitations provisions that dictate the time frame in which a policyholder must initiate litigation against its insurer. In other cases, this time frame will be set by statute or regulation. Jurisdictions have different rules regarding how contractual and statutory limitations periods are to be applied. Accordingly, policyholders must make sure to navigate these rules with care so that they preserve their right to pursue coverage.
Because other policy terms and conditions may likewise be relevant, companies should carefully review their disgrace insurance policies not only when purchasing them, but also when pursuing a claim for coverage. Doing so will help companies maximize their recovery and obtain the full benefit of their disgrace coverage.
Shaun H. Crosner (firstname.lastname@example.org), a Los Angeles-based attorney, is the leader of the Insurance Coverage Group’s Sports Practice at Dickstein Shapiro. His practice focuses on the representation of policyholders in disputes with their insurers.