Paycheck Protection Program Loan Insurance: What You Need to Know
Business owners who accepted a forgivable Paycheck Protection Program (PPP) loan from the Small Business Administration (SBA) in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act may be at risk. A new product, paycheck protection program loan insurance, could help cover that risk.
On April 28, 2020, Treasury Secretary Mnuchin announced that any business that received $2,000,000 or more in PPP loans would be audited to verify the business’ eligibility for the loan.
If the SBA determines that the PPP loan recipient was ineligible, consequences include partial or full repayment of the loan, penalties, fines, and treble (triple) damages.
PPP Loan eligibility may be denied by the SBA because the recipient did not have a reasonable basis regarding:
- the recipient’s certification of the necessity of the loan; or
- the recipient’s certification regarding eligibility related to the number of employees among the recipient’s affiliated group.
In response to these uncertainties, contingent liability markets have released products designed to protect against a detrimental PPP loan ineligibility decision by the SBA.
Paycheck protection program loan insurance will cover the risk that the recipient was ineligible to receive the PPP loan if any of the recipient’s certifications were inaccurate at the time of the loan application. However, it will not provide coverage if the loan is required to be paid back because the proceeds were not used according to SBA requirements.
Although these policies are rapidly evolving, a PPP Loan Insurance policy may cover:
- the amount of the PPP loan if it is required to be paid back;
- defense costs;
- fines and penalties; and
- treble (triple) damages if the recipient violated the False Claims Act (FCA) by knowingly making false statements at the time of the loan application.
If you’re interested in purchasing PPP loan insurance, or are wondering if you may be eligible for coverage, contact David Beine for more information.
