Tiger Woods’ Plight Highlights Reputation-Risk Coverage

Signing a celebrity or sports star to endorse a product always came with a price and a chance that if something went wrong, the company could find itself in a tough position on multiple fronts.

Gene Grabowski, senior vice president of Levick Strategic Communications, said in today's media-saturated world, trouble is "practically a guarantee. It's an extremely fragile business. No one is bullet proof."

Tiger Woods' admitted infidelity, which has tarnished his squeaky clean public image, has left the many companies he endorsed with difficult decisions and millions of advertising dollars on the line. Woods' earnings from his career as a professional golfer only accounted for a small percentage of about $100 million he took home in 2008. The rest was from endorsements.

After a six-year relationship, Woods has been dropped from Accenture (NYSE: ACN) ads. The global management consulting, technology services and outsourcing company said the golfer was "no longer the right representative for its advertising." Other companies that have used Woods in ads are either waiting -- or evaluating options -- or they have voiced outright support for the athlete, like Nike.

Lori L. Shaw, managing director for sports and leisure for Aon Entertainment Group, said companies have always negotiated "manuscript insurance policies," based on the specific individuals used in campaigns, with "out-clauses" in order to protect advertising investments that could get into the $5 million to $10 million range.

The risk reputation insurance policies have "broad, but limited wording" and are purchased to cover the costs and expenses to make the company whole again, Shaw said. The insurance is also called a "3D" policy, covering death, disability and disgrace. The premiums are wide-ranging, depending on the risk and policy language but, she said, "They are changing daily, I'm sure."

Grabowski said a policy is normally "quite reasonable," with a premium in the $100,000 to $150,000 range.

"Clients would be well-served to get one," said Grabowski, chairman of the crisis and litigation practice group at Levick, which includes American International Group, Crum & Forster and Marsh & McLennan as clients. "It's worth the investment to control the court of public opinion."

Policies also include crisis management. The coverage has been out, quietly marketed, but it has "been requested a lot more because there are so many crises arising because of the social media," Grabowski said. "Stories are breaking online. Everyone's a journalist. The damage can be done quickly."

Shaw said the insurance has always been a "discretionary buy," but the Woods scandal will likely "shed a light on marketing and promotional programs" as an aspect that could significantly impact a company’s balance sheet.

"They'll be scrutinized more," she said. Companies will "pay more attention now."

Long-time risk management and insurance brokerage firm DeWitt Stern hopes so. The company is introducing a new risk reputation insurance policy set to launch the first quarter of 2010 that will also cover "sudden and unexpected" decline in revenues directly attributable to a brand crisis, said LeConte Moore, a managing director at DeWitt Stern's New York office. Otherwise the coverage is similar to business interruption.

"It is a work in progress, and we are currently crafting the wording, clearly defining a brand crisis," Moore said. "But we believe this aspect of coverage has been ignored by the industry." DeWitt Stern has been developing the policy with Vorhaus Communications Inc., a crisis and reputation management advisory, and is in discussion with Lloyd's in the London market, Moore added.

Dan Weedin, an insurance and risk management consultant with Toro Consulting, Inc. said he fully expects insurers are "paying attention because there is an opportunity here for them." He likened this scandal to the Anita Hill-Clarence Thomas controversy in the early 1990s. The event tipped off companies that they too had employment practices liability and "now you'd be crazy not to have a policy," Weedin said.

"Companies will do their due diligence even more now," Weedin said. "Ultimately, they answer to shareholders who could be watching to make sure a company does all that it can to protect itself and their investments."

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)