As we continue to navigate the COVID-19 pandemic, many companies accepted the Paycheck Protection Program (PPP) loan to keep their doors opened and employees employed. These companies may now be faced with an audit by the U.S. Small Business Administration (SBA) to determine if their business is able to meet the “necessity certification” of the loan or should they have considered other liquidity measures.
The SBA has built in some protection for those companies that secured a loan less than $2 million. For those companies that secured a loan in excess of $2 million, the SBA audit window is six years and subject to review for compliance with the program requirements.
There are still no hard and fast rules from the SBA regarding liquidity, however, on Oct. 30, 2020, the SBA did release two additional loan necessity questionnaires that concern PPP borrows with loans over $2 million. The two primary focuses of the questionnaires are the Business Activity Assessment and the Liquidity Assessment. This might give companies an idea on the sort of facts the SBA will be reviewing with respect to its liquidity analysis.
Given the uncertainty and ambiguity within the PPP program, the insurance marketplace has responded. There are a few insurers offering a policy designed to cover businesses who accepted the loan and then later find out the SBA deemed them ineligible to have received the PPP loan. The policy is not going to cover a company that made deliberate misrepresentations. But if in good faith you took a loan, there could be some potential recourse in the event of adverse loan eligibility.
The typical terms are the loan amount, plus legal fees and applicable interest, fines, and penalties (to the extent insurable). The minimum retention is $200,000 with a minimum premium of $100,000 and usually 3-5 percent of the limit of insurance. In addition to these costs, there is an underwriting fee of $30,000 for your application to be reviewed.
This product is different and more limited than your traditional insurance products since the rules of the PPP program are influx. With any new insurance product, the terms and conditions of the coverage are evolving, and careful consideration should be given when reviewing the insurance.
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