Companies derive significant financial benefit from celebrity and influencer endorsements, spokespersons and brand ambassadors. This financial benefit continues to grow as technology, especially social media platforms, expands the scope and breadth of the targeted audience.
Yet, the same actors, politicians, reporters, athletes, models, Instagram influencers and business moguls that increase a company’s brand awareness and value can commit acts that disgrace the very companies they represent. The disgraceful acts of a company’s spokesperson can result in financial loss and brand reputation damage. As a result, companies should be aware of a line of insurance coverage designed specifically to protect against this unique risk—disgrace insurance.
Disgrace insurance protects against financial loss when a company spokesperson “disgraces” him or herself or is otherwise embroiled in a scandal. This type of coverage has recently increased in popularity because the use of celebrities and athletes in promotional or advertising campaigns is increasingly lucrative—along with high-profile indiscretions and disgrace. Companies are more concerned about this risk because in the age of social media word of bad behavior spreads instantaneously, often causing immediate damage to the brands they represent. Further, the type of companies looking for this coverage has diversified with the proliferation of social media exposure and the power of image and branding.
If a spokesperson disgraces him or herself, then the advertising campaign may have to be canceled or changed at a significant cost to the company. Disgrace insurance can mitigate this risk by covering the direct costs associated with replacing a disgraced spokesperson, reimbursing the money paid to secure the endorsement, the performer fee and the direct costs associated with transforming the marketing campaign due to the disgrace. Coverage for revenue lost because of the negative impact on brand recognition and overall reputation may also be available.
Disgrace policies can be stand-alone policies or part of a packaged policy that typically includes death, disgrace and disability coverage. The cost of insuring disgrace risk depends in large part on the reputation of the spokesperson. Insurers will charge a higher premium for individuals with a history of indiscretions and may require the spokesperson to sign warranties relating to his or her lifestyle, consumption of alcohol and drug use. Interestingly, a spokesperson with a squeaky-clean image may be harder to price than those with a checkered past because the risk is unknown. Generally, the premiums for a disgrace policy range from 0.5 to 1 percent of the designated payout but rates as high as 4.5 percent have been quoted for a particularly risky spokesperson.
Disgrace policies will often exclude actions that are arguably typical of certain individuals. For example, the standard Lloyd’s wording excludes “any action of the insured person that is consistent with the known public persona or behavior of that person which gives rise the offense, insult and the like.”
Further, a sticking point with disgrace coverage may be what constitutes the “disgrace” itself. Disgrace is a subjective concept. A typical disgrace policy provides coverage in the event of “any criminal act or any offence against public taste or decency committed by the insured person, or any situation or occurrence directly involving the insured person which degrades or brings that person into disrepute or provokes insult or shock to the community and reflects unfavorably upon the insured campaign or the insured, their principal(s) or product(s).” Therefore, it often becomes a discussion between insured, insurer and possibly loss adjuster to determine if there was a “disgrace” for purposes of coverage. There is no case law on the interpretation of disgrace in disgrace policies.
Given the subjective aspect of an individual’s “known public persona” and the meaning of “disgrace,” disgrace policies should be carefully tailored and discussed with the broker before purchase. And when pursuing coverage, remember that the basic tenets of insurance law demand that any ambiguities in the meaning of “disgrace” should be interpreted against the insurer and in favor of coverage.
With the recent highly publicized spokesperson disgraces and the distinct possibility of similar scandals in the future, now is the time for companies to examine their insurance policies and evaluate the need for disgrace coverage.
Mikaela Whitman, a partner at Pasich, represents insureds in all phases of insurance recovery. She is an editor and co-author of the New Appleman Sports and Entertainment Insurance Law and Practice Guide.