A new type of insurance called personal guarantee insurance (PGI) from Burns & Wilcox and Asterisk Financial will provide some peace of mind for business owners who have to put up personal assets, such as their home, in order to get a loan.
Dan Rossen, vice president of Burns & Wilcox Brokerage in Chicago, Ill. says with banks tightening up in recent years, it has become the norm for them to require business loan applicants to use their own assets as collateral in order to get approved. This can lead to major financial hardship for business owners if for some reason they have to sell their business for less than the payoff of the loan.
“In today’s lending environment, business owners have to sign personally to be responsible if for some reason a loan goes bad,” says Rossen “The bank will come after personal assets to backstop insufficiencies and this insurance satisfies those deficiencies.”
The coverage, says Rossen, allows for some of the risk to be transferred to the insurance company, as it covers between 30 percent and 70 percent of the net liability (depending on the coverage purchased).
“Our customer base of agents and brokers have many clients who have the need for this kind of insurance coverage,” he says. “People need to understand the gravity and severity of taking on a personal guarantee.”
Burns & Wilcox will work with most businesses, depending on the collateral of the loan and the business assets but the most common would be real estate and commercial industrial loans. Clients are eligible for PGI insurance within six months of the loan being materialized so the insurance underwriters can use the same recent information the banks used. Burns & Wilcox is targeting loans that are between $500,000 and $5 million.
The premium amount takes into consideration many underwriting characteristics, but is typically one to two percent of the loan, and the limits are the same as the amount of the loan. The policy can only be cancelled through fraud and nonpayment, and the insured has the right to renew as long the business still has the personal guarantee.
The coverage is insured through AmTrust Financial and is available in about 24 states right now, with 40 states expected by the end of the year.
Rossen says the coverage is different than surety because it does not have to be paid back if there is a loss; it is real risk transfer. He says the coverage is so new that it will require a lot of education, which the company plans to spend the first half of the year on, including going to banks and making them aware of the product if that is requested by its agents.
Agents should learn about this product and if it falls under the parameters of what their customer may need, says Rossen
“Once a coverage like this is available, agents have some obligation to point that out to their customers,” he says. “We want agents to look at if clients sign a personal guarantee on their loans because here is an insurance option if the business falls on hard times.”