The risk of a business failing has historically been a coverageinsurance carriers have assiduously avoided. Other thantrade-credit insurance and limited credit-enhancement policies, therisk of default of a business is typically borne by the businessowner.

And in today's lendingenvironment, as banks look to mitigate their own exposures to risk,nearly all small and midsize business owners must sign a personalguarantee to secure financing. The result is that if the businessfails, the business owner's personal assets are used to cover theloss.

This is obviously an extremely angst-inducing, emotionallycharged decision which, if incorrect, can cause significanthardship—including loss of the family home.

But with the introduction of personal-guarantee insurance, a newcategory of coverage is now available to help business ownersmanage the personal risks—and sleep better at night.

Taking The Upper Hand

As practitioners of insurance, we are the guardians of ourclients' assets, both personal and professional. We manage,mitigate, isolate, insure and have contingency plans if bad thingshappen.

We work with lawyers to create barriers to limit liabilitythrough corporations, LLPs, LLCs and trusts. For remainingliability exposures, we have general liability, auto liability,professional liability and a host of other coverage types, all inthe name of protecting assets. For property exposures, we negotiateall-risk coverage for our clients.

Despite our great efforts, bankers destroy much of our good workthrough one stroke of the pen through these personal-guaranteerequirements, which have the effect of taking down the walls wehave so diligently erected, allowing for the unthinkable. Apersonal guarantee is essentially a signed blank check without anexpiration date, giving the banker access to personal assets (oftenincluding a spouse's) if a business loan is in default.

As an attorney and longtime insurance underwriter and broker, Ihate to admit defeat to other professions, especially bankers, but,in this case, they have had the upper hand—until now.

Personal-guarantee insurance (PGI) helps neutralize the impactof the required guarantee. It puts back the wall between thebusiness and personal assets by covering a substantial portion ofthe liability of the personal guarantor in the event the loanguarantee is ever called.

With this policy, everyone can be satisfied: the bank receivesthe personal guarantee to complete the loan, while the client'spersonal assets are protected by the insurance policy.

As a benefit to bankers, one provision of the PGI policy is thatthe proceeds can be assigned to the lender, thereby improving thecollateral position of the bank. Now, the bank has an even betterposition—it has the business as collateral and a signed personalguarantee which is backed by an insurance policy to which it is abeneficiary.

policy features

Some features of the new insurance are:

• PGI is typically issued within six months of a loanorigination or material modification.

• It can be designed to pay up to 70 percent of adeficiency judgment in the event of a loan default.

• It can typically be underwritten based on the sameinformation the bank uses when making the business loan.

• While it adds cost to the overall loan transaction,it provides a tremendous backstop in the event personal assets areever called into play.

• Since the bank is likely in a better position if theproceeds are assigned to the lender, it may be able to offer a moreattractive interest rate on the loan once the coverage is put intoplace to help offset the cost of the insurance.

As we undertake to manage risks for our clients, review of thepersonal guarantee should be included in exposure-reviewchecklists, just like we review employment practices, environmentalor cyber-liability exposures.