From the October 2012 issue of Investment Advisor • Subscribe!

Nothing Personal: Insurance for Protecting Your Assets

New coverage offers the opportunity to lower personal risk for small business owners

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Small business owners lay it on the line when seeking business funding. Putting personal assets up as collateral to a lender can boost the stress of running a small business and even drive a wedge between the business owner and his family and partners.

Enter personal guarantee insurance (PGI) from Asterisk Financial Inc. This coverage, which was first offered in 2010, provides business owners the opportunity to protect a percentage of personal assets even if they are signing a personal guarantee for a business loan. The product, now offered in all 50 states and the District of Columbia, covers 30% to 70% of the guarantor’s net personal liability if the underlying business fails to repay the covered loan.

According to CEO Mark Ricciardelli of Asterisk, PGI arose out of the experience of one of the firm’s cofounders. After being in a position to lose his house because of a struggling business, Casper Zublin was able to turn the business around and sell. As Zublin relates on the company website, however, the experience gave rise to the notion of insurance to cover personal guarantees so that business owners—and their families—were no longer so much at risk.

In 2009, when no such product was available, says Ricciardelli, Asterisk began to develop the concept. A research firm hired by the company found that 75% of small and midsize businesses failed to calculate what would happen should the guarantee be called, and with the aid of a regulatory firm Asterisk developed the policy. By 2010, it began to gain approval from state insurance departments, and in 2012, it has seen a 300% increase in gross written premiums.

Individuals signing a personal guarantee for a loan often fail to realize that a called guarantee could end up costing them their homes, bank accounts and other assets, even if they have business partners. The type of business—sole proprietor, corporation or partnership—doesn’t protect against a personal guarantee, either, since by signing such an agreement, the guarantor signs away any protections that might have been provided by the structure of the business.

Leaving the business doesn’t protect a guarantor from liability, either. A personal guarantee continues despite an individual’s departure unless the other guarantors sign a revised agreement with the lender. In standard joint-and-several agreements, all partners are liable—and a single partner or group of partners could be the target of any action by the lender.

According to Ricciardelli, PGI pricing is risk-based, running as low as 80 basis points for “a fairly secure loan, such as unoccupied real estate,” or as high as 250 bps “for something more volatile, like construction and development, or new companies.” The policy has a 180-day eligibility window, which also applies on renewal.

Ricciardelli says the policy provides two additional advantages. The first is the ability to use the policy proceeds as a negotiating tool. “Many of our guarantors look at the policy as giving them an option and the ability to negotiate with the bank,” he says.

He explains how such a policy would work for, say, a small machine shop that needs to buy new equipment to compete. If the business takes a $2 million loan and purchases a 50/50 policy, then  is forced into a liquidation, the owner might get, say, 50 cents on the dollar for the machinery he purchased. That gives him $1 million in cash to satisfy a debt of $2 million.

“If the bank is calling in a personal guarantee, we will write out a check for $500,000,” says Ricciardelli. The business owner can then negotiate with the bank and try to settle for that $500,000. If negotiation is successful, “that inures to the guarantor’s position. It doesn’t come back to the company because we’re a true indemnity product.”

The second advantage is that as long as a policyholder notifies the company that the business is in trouble and has a plan for attacking the problem, says Ricciardelli, the policy will be renewed. There may be a surcharge, which has been subject to state approval, but the policy will continue “as long as you’re making progress.” The only reasons an account can be terminated, he says, are nonpayment of premiums and fraud.   

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