Personal Guarantee Insurance
By Pierre Mouchette | Real Property Experts LLC
How Small Business Owners Can Protect Personal Assets
Business owners are often concerned about the loss of personal assets if their business fails to pay its bills or loans. But there is a solution to keep personal assets out of the picture in the event of business default or bankruptcy. This solution is called ‘Personal Guarantee Insurance (PGI).’
What Is Personal Guarantee Insurance?
PGI is an insurance product created to provide small-to-medium-sized business owners and commercial real estate investors protection for personal assets when they sign a personal guarantee for a commercial loan. These guarantees have been a fact of life for business owners seeking a commercial loan, but this does not lessen the risk of signing them. In doing so, the guarantor (signer) is responsible for satisfying the loan terms in the event of the business’ liquidation. This puts the guarantor’s assets (such as home, car, retirement accounts, etc.) at risk. PGI is designed to protect the guarantor’s assets in such a situation. If, after liquidating the business assets, the lender seeks personal assets to repay the loan balance, PGI will cover up to 70% of the insured’s net liability, depending on the coverage purchased and the terms of the policy. In covering the guarantor’s liability, PGI provides the insured with a safety net without eliminating the motivation to overcome difficulties and restore the business's health.
Who Pays the PGI Premium
PGI is an annual policy, with a premium based on the size of the loan and the risk characteristics of the underlying business and loan transaction? Cost starts at less than 1% of the total amount of the guarantee.
The borrower/guarantor purchases the insurance to protect their assets. The insurance is available to the business owner(s)/guarantor(s) as they have committed to a personal guarantee associated with a commercial loan. Coverage is generally only available for a limited time after the loan closing.
Who Does PGI Protect
PGI is designed to protect the borrower’s assets when signing a personal guarantee. However, coverage benefits may be assigned, and many lenders view a purchase of a PGI policy positively as it provides additional value to the guarantee and reinforces the existing collateral on the business loan.
The Limits of Personal Guarantee Insurance
Coverage amounts are between 30% and 70% of the stated value of a personal guarantee, at the discretion of the guarantor(s), up to a policy limit of $2.5 million. Coverage may be written for most commercial and industrial loans (e.g., lines of credit, demand loans, term loans, commercial real estate, term facilities, and commercial mortgages), and on a minimal basis, construction and development loans.
Loans must be secured loan transactions. Coverage may also be available for government-guaranteed loans like Small Business Administration (SBA) loans. But coverage is not written for unsecured loan transactions or highly speculative projects.
The typical company profile is a small-to-medium-sized business, generally with revenues between $5 million and $100 million, or a commercial real estate property with a value between $750,000 and $10 million. The business has a consistent performance record with a minimum of five years of operational experience and three years of credit history or principals with an equivalent track record in the industry.
How PGI Works When a Business Defaults on a Loan
In the case of a loan default, the insured(s) must notify the insurance company that issued the policy. A claims manager will be assigned to help the insured guarantors understand the circumstances, what the default means, and how to work through a claim.