Every day, athletes and celebrities are seen endorsing different products in magazines, on billboards or even by simply wearing branded apparel. All too often, we see those same celebrities at the center of the latest scandal. But what isn’t visible is the cost of those scandals.

In 2009, the Wall Street Journal reported that Tiger Woods’ scandal cost his corporate sponsors $12 billion in stock value. Most recently, scandals involving Jared Fogle and Bill Cosby remind us that these scandals not only implicate the celebrity, but they also affect the brand and reputation of the companies with whom they affiliate. Companies endorsed by these celebrities quickly experience guilt by association resulting in damage to brand reputation and a loss of consumer esteem.

When a celebrity endorser is caught engaging in bad behavior, the companies they endorse are faced with the expense of removing advertisements, marketing materials, and any products bearing the celebrity’s name or image from the marketplace. Sometimes such scandals can force a company into scrapping an entire marketing campaign.

While this risk is well known, the emergence of Celebrity Product Recall Response (CPRR) is a new solution. Scandal insurance, launched by Lexington Insurance Company in 2015, is designed to help the subscribing company mitigate the costs of responding to celebrity scandals. CPRR helps companies protect their brand by giving them the flexibility to respond immediately and efficiently when a scandal erupts. In this age of social media and twenty-four/seven coverage, an instantaneous response is critical to preserving a brand’s image and reputation. Companies need to distance themselves from the tarnished endorser quickly and quietly by eliminating all visible marketing materials.

What does CPRR Cover?

CPRR reimburses the insured’s “product recall expenses” and “product advertising expenses.” This includes reasonable and necessary costs to complete any of the following activities:

  • Removal and/or transport of marketing materials or product, including handling charges;
  • Disposal or destruction of marketing materials or product;
  • Notification of others regarding the scandal such as radio, internet or television announcements; and
  • Storage of the product.

CPRR also includes reimbursement of overtime for employees, and the cost to engage non-employee personnel devoted to responding to the scandal.

What Qualifies as a Scandal?

CPRR is triggered by a covered incident. The policy definition requires that the incident be reported by significant local, regional, or national news media, and that the incident have an adverse effect on the insured’s product(s). To be a covered incident, the celebrity endorser’s behavior must fall into one of the following categories:

  • Actual or alleged criminal act or offense;
  • Conduct against public taste or decency; or
  • Any situation or occurrence directly involving the celebrity endorser that results in public hatred, contempt, or scorn directed at the celebrity endorser.

The death of a celebrity endorser is also covered by CPRR.

What Else is there to Cover: Exclusions?

While CPRR appears to cover it all, buyers beware: CPRR is a specialty policy filled with exclusions. This specialized policy is not a comprehensive product that will cover all of your post scandal needs. It does not help the company recoup any money paid to secure the endorsement. Nor does it cover the costs of hiring a substitute spokesperson.

This policy does not provide direct costs for reputational damage. Furthermore, researchers from the brand-strategy firm BAV Consulting found that brands immediately lose consumer esteem - no matter how they respond to a scandal. CPRR does not provide coverage for lost profits or a decrease in sales due to the scandal. Any dismantling of your product that requires a professional contractor is also excluded.

Lexington’s scandal insurance is a product that covers a very narrow risk. Just as its name suggests, Celebrity Product Recall Response serves only to cover those costs associated with recalling your product and marketing materials. It will not cover the costs associated with preparing and launching a new marketing campaign.

As with any risk management plan, companies must be thorough and carefully evaluate their specific risks and associated costs. In order to have a more comprehensive insurance strategy, companies soliciting a celebrity endorsement should do their due diligence on both the celebrity and their insurance coverage. Even with a general liability policy and CPRR, there may still be gaps in coverage. Companies who want to protect themselves from guilt by association should also consider products such as death, disability and disgrace insurance or reputational risk insurance.