Insurance Can Step In When Celebrity Marketing Campaigns Go Up in Smoke

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March 3, 2009 Tuesday 10:19 AM EST

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Insurance Can Step In When Celebrity Marketing Campaigns Go Up in Smoke

Meg Green

OLDWICK, N.J.

Superstar scandals may make companies think twice before hiring a celebrity spokesperson, but insurance policies could help mitigate the risk.

"Any time a company uses a celebrity spokesperson to help their marketing campaign, they expose themselves to a couple of different issues that can have a financial impact on their marketing budgets and reputation risk. Some risks are more insurable than others," said Lori Shaw, practice leader for Aon Entertainment Group's sports and leisure division.

Company marketing execs who might be cringing at recent headlines include:

-- Kellogg Co., which decided not to extend a contract with Olympic gold medal-winning swimmer Michael Phelps after he was photographed apparently smoking marijuana;

-- Wm. Wrigley Jr. Co. which suspended ads featuring R&B singer Chris Brown after he was charged in connection with allegedly beating up his girlfriend Rihanna, also a pop star; and

-- Nike Inc., which issued an anti-drug statement after New York Yankees player Alex "A-Rod" Rodriguez, who's endorsed Nike products for years, admitted he had used steroids.

Companies can spend millions of dollars to shoot commercials and produce print media campaigns around a celebrity, and should that celebrity become disabled, die or suffer a reputation risk, "you'd have financial damages if you had to shelve any of your marketing campaign," Shaw said.

She said insurance can cover "the three D's: death, disability and disgrace."

Death and disability coverage is by far the most common, said Bill Hubbard, chairman of HCC Specialty Underwriters, a wholly owned subsidiary of HCC Insurance Co.

The policies can either cover the celebrity himself -- say a baseball player with a year left in his contract, looking to become a free agent next year -- or a venue or event sponsor who is counting on the celebrity to make an appearance.

"Disability or death policies are our bread and butter," Hubbard said.

These disability policies are different from standard policies. "It's a high-limit disability policy. We write this for a set period of time, and the limits are massive compared to the traditional disability market," he said.

If the policy was for a third party, "We also would look at protecting sunk costs [money the venue or organization has already spent in connection with the celebrity] as well as lost opportunity costs," Hubbard said.

The death and disability policies can be either medically underwritten -- the insurer gets the celebrity's permission to do a medical exam -- or on a confidential basis, meaning the organization hiring the celebrity can purchase the policy without the celebrity knowing.

"If the celebrity doesn't know, the underwriters aren't privy to specific information, so it can carry a higher rate," Shaw said.

The third "D"--"disgrace," is the hardest to insure, experts said.

HCC offers an "Image Protection" policy that is extremely difficult to write, Hubbard said.

"Lloyd's has always marketed a product called Moral Turpitude in its contingency book of business. We rebranded it 'Image Protection.' I've been doing this for 20 years, and don't think we've done more than six policies in 20 years," he said.

The few times HCC has written the policy was for a specific product launch defined over a specific period of time. "For XYZ marketer launching a new product with a celebrity spokesperson attached to it, if something happened pre-launch, they could pull the campaign and we'd indemnify them for their costs as well as make money available to go to Plan B, whatever that might be," Hubbard said.

It's a difficult product to underwrite because "there are a lot of unknowns," Hubbard said. "And it's expensive. It doesn't take much to cause an issue. In this day and age, with YouTube, and Facebook and blogs and cell phone cameras and TMZ all vying for the scoop, it's very difficult. And when something happens, it spreads very quickly so it's almost impossible to contain it."

Susan Combs, president of Combs & Co., a brokerage, said in addition to Lloyd's, excess and surplus lines writers North American Specialty and One Beacon writes this type of coverage.

"When it comes to insurance, you can insure anything. You just have to be willing to pay for it," Combs said. When companies look at insuring celebrity risks, they would consider the individual and his or her history, the ad agency, the limits required and request a copy of the contract.

"You can't ballpark the premium because they write the custom policy for you and look into the work that goes into that as well as the risk," Combs said.

While image protection insurance is not a popular product, it is a good to discuss it with clients, Hubbard said.

"We talk about it with insureds and brokers, but it usually leads to something else," he said.

For instance, many companies handle the exposure through the contract with the celebrity. "They can always severe the relationship. They don't need protection for that," Hubbard said.

Shaw of Aon said companies can insert a provision into the contract that if the celebrity commits a criminal act, an act of moral turpitude or violate the rules of their specific sport, the sponsor has the right to get out of the contract and recoup some of their expenses from the celebrity.

"But there are all sorts of gray issues," Shaw said. "In Michael Phelps case, he's admitted to use of the drug, but he's not being convicted or even charged. It would go back to how the contract was worded as to what kinds of action would allow the sponsor to recover any of its expenses."

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Companies will often ask about image protection insurance after their spokesperson gets in hot water.

"And then they are not going to find underwriters willing to subject themselves to similar incidents," Shaw said. "Many times it is an uninsurable risk."

(By Meg Green, senior associate editor, BestWeek: [email protected])

March 4, 2009