Reputational Risk

Star-Studded Risk

Celebrity spokespersons can significantly elevate a brand, as long as they stay on their best behavior.
By: | October 1, 2016 • 6 min read

As the value of a celebrity or sports star’s contract with a major sponsor has increased in recent years, so it seems has the risk of them disgracing themselves in public.

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The benefits of having an A-list celebrity promote your brand can be enormous — boosting customer sales and raising your company’s profile. Many celebrities rake in multimillion dollar sums for being the face of top brands such as Nike or Coca-Cola.

However, such sponsorships are not without risk, particularly if a brand ambassador commits a disgraceful or criminal act. The consequences can be far-reaching. One small slip-up can turn into a PR disaster, ruining an entire advertising campaign and resulting in huge financial losses for the brand.

Rising NFL star Johnny Manziel, whose sponsors included Nike and McDonald’s, was dismissed halfway through his $8.2 million contract by the Cleveland Browns after breaking the NFL’s substance abuse policy, along with having the shadow of domestic violence charges hanging over him.

Earlier this year, tennis star Maria Sharapova was suspended for two years from the sport by the International Tennis Federation for taking a banned substance. Since testing positive, she has been dropped by most of her major sponsors.

Just weeks ago, Olympic swimming medalist Ryan Lochte was caught in a lie after trying to cover up bad behavior during the Olympic Games in Rio. Lochte lost four major sponsorships, including Speedo USA and Ralph Lauren.

Incidents like these are motivating more companies to seek out death, disability and disgrace insurance to protect themselves against such losses. The market, driven by Lloyd’s of London, has grown to $1 billion, according to industry estimates. Payouts are believed to range into the millions of dollars, sources said.

“There’s obviously massive benefit to using a celebrity to promote your product,” said Alan Norris, head of contingency at Talbot Underwriting. “But there’s also a huge potential downside that comes with it.”

In addition to advertisers and sponsors, financial institutions that provide loans and mortgages to sports stars are buying the coverage to mitigate losses when a player’s contract is terminated for criminal or distasteful behavior.

Public Expectations Tied to Value

The number of high-profile cases where a celebrity has become involved in a scandal or commits a disgraceful act has prompted worry among many advertisers and sponsors.

“Certainly more high-profile scenarios have grabbed the headlines in recent times,” said Mark Symons, contingency underwriter at Beazley, who has seen a 50 percent increase in business over the last five years.

On top of that, he said, social media and the ever-increasing immediacy of news tend to magnify even the smallest indiscretion, and companies have become acutely aware of that reality.

“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous.” — Nir Kossovsky, CEO, Steel City Re

“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous,” said Nir Kossovsky, CEO of Steel City Re, a provider of D&O reputation solutions.

“The attributes of that person are expected to reflect favorably upon a product or brand, so therefore the loss of value of those attributes will have a negative impact on that product,” he said.

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Kossovsky said that an individual’s reputation value was tied to six major behaviors — ethics, innovation, safety, sustainability, security and quality — and their failure to live up to public expectation would put both the sponsor’s and their own value at risk.

“In Sharapova’s case it was ethics — the drug enhancement issue,” he said. “It was the impairment of her value to her sponsor resulting from a failure to meet her public’s expectations in terms of her behavior.”

Lori Shaw, GAMES practice leader at Lockton’s Charlotte office, said that because reputation accounts for 25 percent of a company’s market value, choosing the right brand ambassador is critical.

“Companies need to be aware of what they are getting into when they take on a talent or celebrity to promote their brand, as well as protecting their balance sheet against the exposures that brings,” she said.

One of the biggest problems for insurers is determining what constitutes a disgraceful act and how to price that risk accordingly.

Broadly speaking, a death, disability and disgrace policy is triggered by “an offense against public taste or decency,” ranging from criminal acts to offensive statements.

Both Kossovsky and Symons noted that the loss of value often depended on that one individual’s expected behavior.

Celebrities with an existing reputation for being controversial are less of a risk than those with a squeaky clean image.

“Perversely, that means the most sensitive risk is often the individual with the best reputation because the impact of their actions can be felt far more disproportionately than someone who has a track record,” said Symons.

Quantifying Losses

Death, disability and disgrace insurance can be bought either as a stand-alone product or as part of a broader policy.

In addition to covering the costs associated with having to change or drop a campaign altogether, a standard policy can also be used to protect against a loss in sales linked to the death or disgrace of the individual concerned.

Alan Norris, head of contingency, Talbot Underwriting

Alan Norris, head of contingency, Talbot Underwriting

Often, however, it’s difficult to quantify the size of a potential loss in revenue or damage to the brand associated with an endorsement when things go wrong.

“With a death, disability and disgrace policy you can only really insure the actual costs associated with that campaign, but what you can’t insure against is the financial damage to the brand because it’s an intangible asset,” said Norris.

Shaw said that even before assessing the impact of a celebrity’s behavior on a company’s market value, you’ve got the upfront costs of scrapping the campaign or starting a new one.

Initial costs can include hiring a replacement spokesperson, removing a celebrity’s image from packaging, reshooting or reproducing new advertising material or reimbursing the money paid to secure the endorsement in the first place.

It can also extend to money spent on TV or radio commercials and advertising space.

Edel Ryan, partner and head of media and entertainment at JLT Specialty Ltd., said that the onus was on the policyholder to prove that the celebrity had committed a disgraceful act according to the contract.

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“The underwriter will start by looking at the morals clause within the contract and the celebrity’s past history to determine if the policy should be triggered,” said Lockton’s Shaw.

Some acts, though considered outrageous, might be excluded if they are deemed to be within the bounds of the celebrity’s normal behavior.

All things considered, the benefits of a celebrity sponsorship must be weighed against the potential pitfalls.

“It’s critical to have the right cover in place to protect against the loss of value to their product or service,” said Kossovsky. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

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For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

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“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]