One of the Federal Government’s main responses to the economic devastation wrought by the COVID-19 pandemic, the Paycheck Protection Program (“PPP Program” or the “Program”), has provided billions of dollars to companies in need in the form of forgivable loans (“PPP Loans”). However, the Program’s swift passage in the early days of the pandemic produced issues in implementation, with the Small Business Association (“SBA”) and various other government entities issuing contradictory guidance on PPP Program eligibility. This uncertainty has been magnified by the SBA’s stated intention to audit all PPP loans above $2 million, leaving many companies worried that they will be forced to repay their PPP Loans—or worse. To help guard against this, the insurance industry has developed a new product: PPP Loan Insurance. But with millions of dollars at stake, potential policyholders should evaluate PPP Loan Insurance Policies before they bind.
Understand the Coverage Offered by PPP Loan Insurance Policies
PPP Loan Insurance is a relatively niche product that has yet to receive standardized language across the insurance industry. Thus far, most policies focus on insuring repayment of the PPP Loan due to the SBA’s determination that the policyholder was ineligible for the PPP Loan due to errors or misstatements in the initial certifications made by a policyholder. These “necessity” and “size” certifications refer back to the policyholder’s initial PPP Loan application which contained questions regarding the purpose of the loan, the monthly payroll for the company, and the number of “jobs” at the company.
PPP Loan Insurance Policies are typically “claims made and reported” policies, with the policy term set at 6 years to reflect the 6-year window afforded the SBA to review and challenge the issuance of a PPP Loan.
Pay Close Attention to Certain Exclusions in PPP Loan Insurance Policies
As is true with all types of coverage, there are a number of potential exclusions that could impact how useful a PPP Loan Insurance policy will be for a policyholder’s particular situation. The following are two of the most common.
First, many PPP Loan Insurance Policies have exclusions for fraud and/or intentional misconduct. While not in-and-of itself concerning, there are meaningful variations on the language for this exclusion and a policyholder should ensure it has the most advantageous version for its policy. For example, any fraud exclusion should include a qualifier that the allegations have been “finally adjudicated” or “finally determined by a trier of fact.” This avoids the situation where mere allegations of fraud defeat coverage, instead requiring that the allegations be proven true in a court of competent jurisdiction before coverage is excluded under the policy. Given the potential that the SBA or another related government entity could assert fraud when seeking PPP Program loan repayment, this is an especially important distinction.
Second, some PPP Loan Insurance Policies have exclusions for claims alleging violations of the False Claims Act (“FCA”). Generally, the FCA attaches liability to any individual or organization that knowingly presents or conspires to present a false or fraudulent claim for payment to the government or uses a false record or statement that is material to such claim. Such an exclusion is especially problematic in the PPP Loan Insurance context because the FCA appears to be one of the most likely avenues for the federal government to pursue a PPP Program loan borrower. And it’s not just the Federal Government who could cause trouble for a policyholder; the FCA permits third parties, so-called qui tam realtors, to bring claims and receive a substantial bounty should those claims succeed. This, along with the potential for treble damages, greatly expands the scope of potential liability. Policyholders should attempt to remove FCA exclusions from PPP Loan Insurance Policies.
Be Aware of Potential Coverage Gaps and Problematic Conditions in PPP Loan Insurance Policies
Despite their seemingly straightforward purpose, PPP Loan Insurance Policies can harbor a number of coverage gaps and problematic conditions. Below are three such areas a policyholder should scrutinize when considering a PPP Loan Insurance policy.
First, although PPP Loan Insurance Policies cover PPP Loan repayment, they typically do not cover repayment for all reasons. As outlined above, coverage is typically afforded for repayment arising from an SBA determination that a policyholder was not eligible for the PPP Loan at the time it submitted its PPP Loan application. But the SBA can require repayment for other reasons, such as if it determines that the policyholder has not used the PPP Loan as required by the rules of the Program, e.g. a sufficient percentage of the PPP Loan was used for payroll. Policyholders should consider whether they want to add coverage for potential allegations that they have misused PPP Loans.
Second, the limits of liability for PPP Loan Insurance Policies are usually set according to the principal amount of the PPP Loan. This mirrors the stated purpose of the insurance to provide coverage for repayment of the PPP loan. However, in practice this may not be enough. Policyholders should be aware that the SBA has stated it will charge interest on the PPP Loan at 1% per annum if repayment is ultimately sought. Furthermore, there could also be additional penalties and other costs depending on what the SBA or other related government entity imposes in addition to repayment. Policyholders should consider insisting any limit of liability takes these potential costs into account. Otherwise, even if repayment of the PPP Loan is covered by the policy, it could still result in hundreds of thousands of dollars of additional cost to the policyholder.
Third, like many types of policies, PPP Loan Insurance Policies often contain a provision requiring policyholders obtain the consent of the insurer before settling claims. However, this provision could create significant conflict given the limited scope of PPP Loan Insurance Policies. As these policies exist to safeguard against the cost of repayment of the PPP Loan, their utility is greatly reduced if an insurer can force a policyholder to fight the SBA (or other government entity) on whether repayment is proper. Such a fight could incur significant legal costs, potentially eroding policy limits and embroiling the policyholder in litigation for months or years. Policyholders should insist that any settlement provision involving insurer consent contain language that consent “not be unreasonably withheld” to ensure the policyholder’s interests are protected. With the continued evolution of the PPP Program, including newly approved funding for additional PPP Loans, PPP Loan Insurance has the capability to address a critical vulnerability for companies still struggling through the COVID-19 pandemic. However, understanding PPP Loan Insurance and its permutations is essential. Experienced coverage counsel are best able to assist a policyholder in evaluating the risks and benefits of PPP Loan Insurance Policies.
This article was also published in Law360.
 Lauren Hirsch, Small business loans above $2 million will get full audit to make sure they’re valid, Mnuchin says, CNBC.com (April 28, 2020), available at https://www.cnbc.com/2020/04/28/small-business-loans-above-2-million-will-get-full-audit-to-make-sure-theyre-valid-mnuchin-says.html (last accessed January 5, 2021)
 31 U.S.C. §§ 3729 et seq.
 31 U.S.C. §§ 3729(a)(1)(A, B, C).
E.g.,Janene Marasciullo, For the Unwary, Paycheck Protection Program May Create False Claims Act Liability, Nat’l L. Rev. (June 1, 2020), available at https://www.natlawreview.com/article/unwary-paycheck-protection-program-may-create-false-claims-act-liability (last accessed January 5, 2021); Holly Drumheller Butler, How The Gov’t Is Cracking Down On PPP Fraud, Law360 (June 9, 2020), available at https://www.law360.com/articles/1281065/how-the-gov-t-is-cracking-down-on-ppp-fraud?copied=1 (last accessed January 5, 2021).
Paycheck Protection Program, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#:~:text=The%20Paycheck%20Protection%20Program%20is,an%20interest%20rate%20of%201%25. (last accessed January 5, 2021)