The celebrity athlete endorsement can do wonders for a brand.
Consider that this month, Morgan Stanley said basketball phenomenon Steph Curry could single-handedly save Under Armour Inc.'s overvalued shares from decline, thanks to an endorsement deal it estimates could be worth an astounding $14-billion (U.S.).
But what if the superstar you've hired to front your campaign tests positive for a banned substance, such as Maria Sharapova, or is caught shacking up with a cocktail waitress, such as Tiger Woods, or is captured on video knocking out his fiancée and dragging her out of an elevator, such as Ray Rice?
It turns out there's insurance for that.
Given recent infamous celebrity ignominies, a rapidly growing number of companies are purchasing "disgrace insurance" to protect themselves in case their brand ambassadors – swinging their tennis rackets, sporting their watches or smiling on their video-game covers – turn out to be more embarrassment than endorsement.
According to Edel Ryan, a partner at insurance broker JLT Specialty, the market for what was once an obscure product has been growing in lockstep with the size of endorsement contracts and is now mushrooming. "Demand has easily more than doubled just within the past 12 months," she said.
Lloyd's of London, the world's largest insurance market, is driving the appetite for this coverage. While the market size for disgrace insurance is not measured, it falls under contingency insurance, which Ms. Ryan estimates is a $1-billion market.
A subsidiary of insurance giant American International Group Inc. began offering disgrace insurance back in 1994, describing it as an extension of the entertainment insurance coverage the company had long been writing – mainly insuring bands appeared at their concerts.
Now, insurers and brokers such as Aon, Talbot Underwriting Risk Services, Lockton Companies Inc., Beazley Group, Munich Re, Swiss Re Group, Lexington Insurance, JLT Specialty and Marsh & McLennan Companies, Inc. sell or underwrite the coverage.
The insurance compensates companies for the loss of irretrievable production costs or the expenses of altering a promotional campaign due to an unforeseen disgraceful act. This could include costs related to hiring a substitute spokesperson, removing a celebrity's image from packaging or reimbursing the company for money paid to secure the endorsement.
But Alan Norris, the head of contingency at Talbot Underwriting Services, says he's now receiving inquiries from a broader spectrum of clients.
"We've been getting lots of inquiries from financial institutions that are lending money to American sports stars in the NFL and NBA," he said. "They're looking to protect certain loans and mortgages in case a player's contract is terminated due to a disgrace issue."
Occasionally, damage to the brand and the potential loss of sales linked to a disgraced celebrity might also be covered, but this poses a challenge for insurers because the loss is not always easily quantifiable.
And even more contentious is what exactly constitutes disgrace and how to price risk. Surprisingly, celebrities with squeaky-clean images, such as tennis star Roger Federer, might be more risky to insure than those with noted checkered pasts, such as boxer Floyd Mayweather.
"If a clean celebrity does something out of character, that could create more of a media storm and greater damage," said Paul Evans, an entertainment and events practice leader with Marsh & McLennan. "The negative fallout could be worse than would be the case with someone who has a history of saying embarrassing things when he or she has had one too many to drink."
Brokers say premiums tend to start at 0.25 per cent of the sum insured, but can be as high as 2.5 per cent. Payouts also fluctuate, but are generally catastrophic, ranging into the millions of dollars.
Insurers are reluctant to disclose the identities of clients who have purchased disgrace insurance. The Lloyd's of London website provides the example of an unnamed beverage company that was protected when it dropped a former footballer from a campaign after an air-rage incident because it had purchased the coverage.
Vinnie Jones, a retired footballer, was cut from a Bacardi campaign in 2003 following an air-rage assault. Bacardi declined to comment on whether it purchased disgrace insurance in connection with that endorsement deal.
Insurers say that a press more willing and able to pounce on stars caught with their pants down and a celebrity culture more forcefully intertwined with business is fuelling interest in disgrace insurance.
"When I first started in the industry in the late '80s, stories about disgraced celebrities in the U.K. came out of one or two of the tabloid newspapers," Mr. Norris says. "Now, anything a star does is instantly on the Internet and spread through social media, so a lot of companies are more concerned."
Is anyone too risky to underwrite?
Yes, says Mr. Norris.
"This afternoon, I had an inquiry from a Canadian company looking for coverage with respect to an individual who has had a few incidents in the past that might have triggered a claim under a disgrace policy," he said.
He's thinking about it.