ELITE ADVISOR BEST PRACTICES

Ever Heard of Disgrace Insurance?

If you have celebrity clients or clients who run companies that hire high-profile spokespersons, get familiar with it ASAP

By Frank Zuccarello

Key Takeaways:

  • The decision to sever ties with a spokesperson can be expensive, and by the time a scandal hits, many companies have already sunk millions of dollars into commercials and print advertisements that may not even air.
  • Disgrace insurance has become increasingly popular over the past few years for the financial flexibility it gives companies to protect their most valuable assets: name and reputation.
  • Disgrace insurance can be purchased either as 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 advertising campaign.

If you think there’s been a deluge of bad-behaving athletes, entertainers and other high-profile celebrities lately, you’re not alone. In today’s world of smartphones, social media and 24/7 news feeds, it’s hard to stay out of the limelight. And if you believe the old saying that bad news travels a lot faster than good news, then you know why the marquee names—and the companies that attach their brands to those elite names—are sweating it out as much as the coaches and general managers who employ them.

It’s hard to follow professional football this season without constantly seeing reports of elite players behaving badly. Most recently, Nike confirmed that it has ended its endorsement contract with Ray Rice, the Baltimore Ravens running back who has been indefinitely suspended from the NFL (sardonically referred to as the “Not For Long” league) for a widely publicized domestic violence incident that was caught on a hotel elevator security camera and went viral. Rice joins cyclist Lance Armstrong, track star Justin Gatlin and quarterback Michael Vick in Nike’s hall of shame. Armstrong and Gatlin lost their deals over performance-enhancing drugs. Vick was released after he admitted to bankrolling a dogfighting operation. Nike has also recently suspended the contract of Paralympic sprinter Oscar Pistorius, who will be serving prison time for the murder of his girlfriend.

Nike was not the only endorsement company to cut ties with Rice; EA Sports removed him from Madden NFL 15's roster, and he has been removed by VertiMax sports training equipment and BodyArmor sports drink. There's no doubt that these companies will suffer due to the unwanted baggage now sporting their products. Even after the ties have been cut, their bottom line still suffers. These companies, if left unprotected, could see millions lost from their investments in Ray Rice.

Companies like Nike, which offer million-dollar endorsement deals, will protect themselves in the event of the death or disability of a spokesperson. However, “disgrace coverage” is often forgotten and left uninsured, leaving a company exposed. That’s why our firm provides Death, Disability and Disgrace coverage, all bound under a single policy to protect companies from possible loss.

The important question here isn’t so much who or why, but what the collateral damage is when a celebrity suddenly implodes. For hundreds of global companies, that damage comes in the form of unwanted baggage now adorning their footwear, starring in their ads and smiling from their cereal boxes in every supermarket.

Companies use celebrity endorsements and multimillion-dollar advertising campaigns to raise their profiles and increase sales, but there is risk involved. When cycling legend Lance Armstrong found himself at the center of a steroid scandal, his sponsors and corporate backers—including Nike, Anheuser-Busch, RadioShack and bicycle manufacturer Trek—were forced to cut ties with him or face public backlash. Even after the damage is done, companies still have to do more work to protect the bottom line. The decision to sever ties with a spokesperson can be expensive, and by the time a scandal hits, many companies have already sunk millions of dollars into commercials and print advertisements that may not even air. How can companies protect themselves?

How companies protect themselves

Some companies elect to go the traditional route and sue the celebrity, but that only further magnifies an already ugly situation. As an alternative, disgrace insurance has become increasingly popular over the past few years for the financial flexibility it gives companies to protect their most valuable assets: name and reputation.

Disgrace coverage includes protection from unlawful acts and offensive statements by a contracted spokesperson whose image has been licensed on consumer items, and insurance for a commercial campaign that fails due to a disgraceful act. In short, it protects against the exposure of a celebrity spokesperson who might behave in a disgraceful manner.

This insurance entitles companies to reimbursement for money paid to secure the disgraced celebrity’s endorsement, hire a substitute spokesperson, reshoot or reproduce the advertising material, and remove the spokesperson’s image from product packaging.

When considering a disgrace insurance policy, there are a few important items to keep in mind. First, if your spokesperson has a history of “issues,” it does not necessarily mean you will pay more. A disgrace policy usually does not include coverage for an insured person acting within his or her public persona, so personalities who are known to live on the edge are usually acceptable risks. It is the clean and wholesome images that actually pose more risk. For example, if Justin Bieber is caught doing or saying something crazy, no one is surprised. When “clean, wholesome family man” Tiger Woods’ social life was revealed, however, that was a sudden shock to the community at large.

The policy’s definition of “disgrace” should also cover a wide swath—but in practice, it falls into a shadowy world where things aren’t always clear. What are considered disgraceful antics by Alec Baldwin may not be the same as disgraceful antics by, say, Dennis Rodman. Policyholders should make sure they define terms broadly enough to indicate any misconduct that would adversely affect the company’s reputation. A policy should have flexibility to match the morals clause in the advertising campaign contract.

Policyholders also need to be conscious of time limitations. Disgrace policies only cover the period of time related to an actual contract between the policyholder and the insured person. Celebrity images on products can have a very long shelf life, so if a company invests in a person, it should be comfortable with that figure’s persona. This is especially true as television ads featuring now-disgraced celebrities live on forever thanks to YouTube. Hertz executives no doubt wish they had a time machine to take out some disgrace insurance on O.J. Simpson.

It is also important to note that not every disgraceful act is a blank check for a company to try and recoup losses. If a celebrity spokesperson does something outrageous but within his public persona, the company may have to live with it. For example, if you pay flamboyant ex-NBA star Dennis Rodman a bundle to hawk your product, you can’t turn around and try to repair your image when he walks down 34th Street in Manhattan wearing a prom gown and juggling several live kittens. That is just “Dennis being Dennis.” It may be deemed distasteful, but it’s not necessarily disgraceful—at least, in the insurer’s eyes. But there are limits, even for Rodman. If he lights the kittens on fire and throws them at a passing cab causing it to crash, then it is probably time to dig out that policy.

Even nice Flo from Progressive and Jan from Toyota are at risk

Sometimes the person portrayed in ads is more important than the individual who plays that person. Everyone knows Flo from Progressive Insurance, but very few know the name of the actress who portrays her (for the record, it’s Stephanie Courtney). If Ms. Courtney were to be involved in criminal activity, would it taint the character she depicts in the ad spots? Is disgrace insurance coverage needed for this relatively unknown spokesperson? The answer is yes. Progressive has put a lot of time, energy and resources into its campaign, and the character of “Flo” would be hard to replace. The same holds true for spokespeople like Allstate’s Mayhem Man (Dean Winters) or Jan from Toyota (Laurel Coppock).

Disgrace insurance can be purchased as 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 advertising campaign. Disgrace coverage generally costs about 1 percent of the policy’s limits, so companies typically pay around $10,000 for every million dollars of insurance purchased. For a person known to live on the edge, an insurer may require extra premium or that the insured person sign a warranty relating to his or her lifestyle, consumption of alcohol or drug use.

It seems like every day a celebrity gets caught up in a scandal. And odds are some corporation has invested millions of dollars to put his or her face on a billboard, television spot or set of cookware. That investment needs protection. Without it, our only celebrity endorsements will have to come from ducks, geckos and giant peanuts wearing monocles and top hats. And what kind of fun would that be?

Reprinted with permission from Risk Management. Copyright 2014 Risk and Insurance Management Society, Inc. All Rights Reserved. www.rmmagazine.com


About the Author

Frank Zuccarello is the Executive Vice President of Exceptional Risk Advisors in Mahwah, NJ. His responsibilities include managing field underwriting, sales and operations for the Accident and Health division of Exceptional Risk Advisors. Frank also develops and maintains relationships with new and existing clients of Exceptional Risk Advisors. Frank has over 15 years of experience in the insurance industry. He is one of the very few people in the United States who has Binding Authority from Lloyds of London exceeding $70 million in Accident & Health. In his spare time, Frank is a professional singer and guitarist.