The risk of a business failing has historically been a coverage insurance carriers have assiduously avoided. Other than trade-credit insurance and limited credit-enhancement policies, the risk of default of a business is typically borne by the business owner.

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

This is obviously an extremely angst-inducing, emotionally charged decision which, if incorrect, can cause significant hardship—including loss of the family home.

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

Taking The Upper Hand

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

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

Despite our great efforts, bankers destroy much of our good work through one stroke of the pen through these personal-guarantee requirements, which have the effect of taking down the walls we have so diligently erected, allowing for the unthinkable. A personal guarantee is essentially a signed blank check without an expiration date, giving the banker access to personal assets (often including a spouse's) if a business loan is in default.

As an attorney and longtime insurance underwriter and broker, I hate 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 impact of the required guarantee. It puts back the wall between the business and personal assets by covering a substantial portion of the liability of the personal guarantor in the event the loan guarantee is ever called.

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

As a benefit to bankers, one provision of the PGI policy is that the proceeds can be assigned to the lender, thereby improving the collateral position of the bank. Now, the bank has an even better position—it has the business as collateral and a signed personal guarantee which is backed by an insurance policy to which it is a beneficiary.

policy features

Some features of the new insurance are:

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

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

• It can typically be underwritten based on the same information 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 are ever called into play.

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

As we undertake to manage risks for our clients, review of the personal guarantee should be included in exposure-review checklists, just like we review employment practices, environmental or cyber-liability exposures.

Special Reports /

Protection For When Business Risks Are Personal

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