Lance Armstrong’s doping scandal which culminated in his admission of guilt, has reminded companies of the potential importance of disgrace insurance as a risk management tool. He lost eight sponsors within a day. Some sponsors took immediate action and some chose to let current deals expire. Nike which had been an Armstrong supporter since 1996 was the first to announce it would be ending its sponsorship. According to CNBC, one of the smallest sponsors to cut ties with Armstrong was Honey Stinger, a Colorado-based maker of honey-based nutrition food. Other companies who cut ties with Armstrong was bicycle-maker Trek, Easton-Bell Sports, 24 Hour Fitness, operator of a national chain of health clubs, Anheuser-Busch, RadioShack and Oakley.
A corporate response to Armstrong’s scandal is hardly unprecedented. Companies must be zealous about protecting their public image, and in some cases that objective leads companies to part ways with a disgraced athlete or celebrity spokesperson. But, the decision to cut ties with a spokesperson can come with significant financial consequences. In some cases, a company will have paid millions of dollars for an endorsement from the disgraced spokesperson, and the company might already have sunk significant sums into shooting commercials or print advertisements that will never see the light of day. And, although sponsors may seek to recoup these losses through lawsuits against the disgraced spokesperson, such litigation is costly and may have the undesired effect of further highlighting the sponsor’s relationship with the spokesperson.
Oscar Pistorius, one of the world’s most in-demand sports personalities for marketers who couldn’t get enough of his inspirational back-story, athletic success and boyish good looks was estimated to receive endorsements worth more than $2 million a year.
Since news broke of the shooting of Reeva Steenkamp, Oakley has cancelled its contract and Nike has “no further plans” to use him in advertisements. His endorsements stretched well beyond the footwear giant, taking in British Telecom firm BT and French designed Thierry Mugler. The Icelandic company Ossur, that manufactured Oscar’s running blades has cut all ties with the first double amputee to run at the Olympics.
Whether an actor, athlete or other type of celebrity, anyone of lofty status can fall on hard times after taking a major PR hit. Think Tiger Woods, Alex Rodriquez, Paula Deen and Oscar Pistorius one day they are riding the crest of fame and the next day they come crashing back to earth.
The important question here isn’t so much who or why but what is the collateral damage when a celebrity suddenly implodes? For hundreds of companies across the world, that damage comes in the form of unwanted baggage now adorning their footwear, starring them in ads and smiling from their cereal boxes in every supermarket.
Disgrace coverage includes protection from unlawful acts and offensive statements by a contracted spokesperson whose image has been licensed on consumer items, and insurance for a commercial campaign that fails due to a disgraceful act. This insurance entitles companies to reimbursement for money paid to secure the disgraced celebrity’s endorsement, hire a substitute spokesperson, reshoot or reproduce the advertising material, and remove the spokesperson’s image from product packaging.
When considering a disgrace insurance policy, there are a few important items to keep in mind. First, if your spokesperson has a history of “issues” it does not necessarily mean you will pay more. A disgrace policy usually does not include coverage for an insured person acting within their public persona, so personalities who are known to live on the edge are usually acceptable risks.
It is the clear and wholesome images that actually pose more risk. For example, if Justin Bieber is caught doing or saying something crazy, no one is surprised. When “clean, wholesome family man” Tiger Woods’ social life was revealed, however, that was a sudden shock to the community at large.
The policy’s definition of “disgrace” should also cover a wide swath – in practice it falls into a shadowy world where things are not always clear
Policyholders should make sure they clearly define terms broadly enough to indicate any misconduct that would adversely affect the company’s reputation. A policy should have flexibility to match the morals clause in the advertising contract. Policyholders also need to be conscious of time limitations. Disgrace policies only cover the period of time related to an actual contract between the policyholder and the insured person. Celebrity images on products can have a very long shelf-life, so if a company invests in a person, they should be comfortable with that figure’s persona.
This is especially true as television ads featuring now-disgraced celebrities live on forever, thanks to YouTube. Hertz executives no doubt wish they had a time machine to take out some disgrace insurance on O. J. Simpson. He was paid a reported $550,000 per year for the endorsement. British supermodel Kate Moss was photographed snorting what appeared to be cocaine. Chanel decided not to renew its expiring contract with Moss. H & M halted its 2005 fall catalogue deal with the model, worth as much as $6.5 million a year.
It is one thing to have to end an endorsement deal prematurely, but its quite another when things get so bad you actually have to pay to get out of the deal, Such was the case for the Houston Astros in 2002 when Enron, a major sponsor (the home stadium was previously named Enron Field), became embroiled in the worst financial scandal of all time. In 2000, the Astros entered a 30 year, $100 million agreement with energy giant Enron to name its park after the company. When Enron collapsed in 2001, the major league club had to pay Enron’s creditors $2.1 million to get out from under the bankrupt firm’s shadow. The ballpark was temporarily named “Astros Field” before Coca-Cola came on as a sponsor later in 2002.
Disgrace insurance can be purchased either as stand-alone coverage or as part of a broader policy covering other advertising-related risks, such as the risk that the insured spokesperson will die or become disabled during the advertising campaign. Purchasing disgrace coverage generally costs about 1% of the policy’s limits, so companies typically pay around $10, 000 for every million dollars of insurance purchased. For a person known to live on the edge, an insurer may require extra premium, or that the insured person sign a warranty relating to his or her lifestyle, consumption of alcohol, or drug use.
The multi-million dollar investments that corporations make to put a celebrity’s face on a billboard, television spot or set of cookware needs protection such as that provided by Disgrace Insurance. Source: Exceptional Risk Advisors