The risk of a Ryan Lochte – how your client could sink on celebrity scandal

The risk of a Ryan Lochte – how your client could sink on celebrity scandal | Insurance Business America

The risk of a Ryan Lochte – how your client could sink on celebrity scandal
Just a few days ago, much of the world knew Ryan Lochte as the lovable-if-rakish holder of 12 Olympic medals, four world records and numerous titles in men’s swimming. The 32-year-old had also scored a series of top sponsorships worth about $1 million, including endorsement deals with Speedo and Ralph Lauren.

As of Monday, however, he had lost almost all of it.

Speedo, Ralph Lauren, Gentle Hair Removal and Japanese mattress-maker Airwave all dumped the Olympian in short order after he admitted to exaggerating much of his story of being robbed at gunpoint during the Rio Olympics.

Lochte originally told NBC that he and three Team USA teammates were pulled over in a cab and robbed early Saturday morning by men posing as Brazilian police. Officials, however, soon discovered that Lochte and others vandalized a gas station, urinated on the premises and then paid for the damages when confronted by armed guards. Lochte then recounted the experience to reporters while drunk.

Though he has since apologized for the incident, Lochte lost many of his top sponsorships and provided a timely lesson to insurance professionals of the risk inherent in celebrity endorsements.

Partnering with a well-known athlete like Lochte or another celebrity spokesperson can seem like a godsend to companies looking for greater exposure. The association increases brand recognition, improves company image and can generate tremendous financial gain. However, it can also expose the company to equally great loss should the spokesperson be involved in what insurers term “scandal,” “disgrace” and “an unexpected fall from grace.”

As with Speedo and Ralph Lauren, the sudden rupture with a sponsor often results in the cancelation of high-priced contracts, the removal of advertising and even the recall of certain products – millions of dollars down the drain in just a few days.

“In this age of social media and instant news, reports of indiscretions by celebrities or high-profile athletes can spread worldwide instantly with swift, adverse implications for products or brands associated with the individual,” said Jeremy Johnson, chief executive with Lexington Insurance.

Lexington last year introduced Celebrity Product RecallResponse to deal with the fallout. The standalone policy is triggered by “significant media coverage” of the endorser’s actual or alleged criminal act, or other conduct deemed “distasteful.” With limits of up to $5 million, it covers the costs of removing promotion and marketing materials as well as the recall of products bearing the endorser’s name or image.

It is one of several policies addressing the risk surrounding celebrity endorsements. Typically, these products are priced depending on the spokesperson’s past actions and physical health, and cover much of the same costs outlined in the Lexington policy. Not all carriers define and address key risk elements similarly, however, and producers should communicate coverage expectations clearly to underwriters.

“The concept of ‘disgrace’ is somewhat subjective, and an insurer may not always agree with its insured that a particular scandal is sufficiently ‘disgraceful’ to constitute a covered loss,” said Shaun Crosner and Fiona Chaney of law firm Dickstein Shapiro. “To reduce the chance of a coverage dispute, purchase a policy that defines the term ‘disgrace’ broadly enough to capture any conduct that your company might find contrary to its image or advertising campaign.”

Crosner and Chaney also advise producers to review “morals clauses” in a client’s endorsement contract in order to match it with appropriate coverage in the marketplace. Broad morals clauses can prohibit the use of illegal drugs or alcohol abuse, and proper insurance coverage protects the client from expensive and potentially damaging litigation against the disgraced spokesperson.

 “Such litigation can be costly and unpredictable, and it may have the undesired effect of further highlighting [the] company’s relationship with the disgraced individual,” Crosner and Chaney said. “Death and disgrace insurance, on the other hand, can allow a company to quickly and quietly distance itself from a disgraced spokesperson – without needing to resort to litigation against the individual.”

Related stories:
Leading sponsors ditch US gold medal winner after Rio incident
Insurer introduces new celebrity scandal insurance policy