PPP Loan Insurance: Compliance With SBA Loan Rules
Avoiding non-compliance liabilities
Posted on 08-26-2020, Read Time: - Min
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If your business received a PPP loan, you were required to meet the “necessity certification” requirement and have considered alternative sources of liquidity prior to submitting a loan application. PPP loan insurance coverage is a new solution to avoiding liability if found non-compliant.
Businesses that accepted Paycheck Protection Program (PPP) loans to keep their doors open during the coronavirus pandemic could now face liability if the U.S. Small Business Administration (SBA) determines, during their 6 year audit window, that they failed to meet loan requirements.
U.S. SBA audits will look to confirm that businesses met the required “necessity certification,” and considered alternative sources of liquidity prior to applying for a PPP loan, as well as met other requirements relating to their size and the size of their affiliated businesses.
More than 4.4 million businesses received loans from the SBA in both rounds of the PPP program.[1] The SBA created a safe harbor with respect to the necessity certification for certain recipients of loans of less than $2 million, but has advised that all PPP loans of $2 million or more are “subject to review by SBA for compliance with program requirements.”
Severe consequences for submitting false or misleading certifications to the U.S. government could apply to businesses that don’t meet the eligibility criteria but applied for and received a PPP loan, including fines and treble (i.e. triple) damages.
Necessity Certification and Affiliation Rules for PPP loans
The Coronavirus Aid, Relief and Economic Security Act and subsequent legislation, which allocated more than $510 billion in relief to small businesses in the U.S., made PPP loans available for those that, at the time of application:
- Have 500 or fewer employees, taking into account any and all affiliates. Certain businesses, including portfolio companies of private equity funds, may be at risk that the SBA will interpret their affiliation rules more conservatively than expected.
- Certified that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,” otherwise known as the “necessity certification.”
- Considered access to alternative sources of liquidity “sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” prior to applying for the PPP loan.
What You Need to Know About PPP Loan Insurance
A few insurers are now offering a policy designed to cover businesses that are subsequently deemed ineligible to receive a PPP loan at the time it was granted. These policies are primarily designed for businesses that received PPP loans of $2 million or more. A PPP loan insurance policy will cover:
- Risk that the “necessity certification” was inaccurate when made, as well as the risk of inaccuracy of additional certifications made at the time of the loan application, including employee counts, taking into account the affiliation rules.
- Losses arising out of the lack of eligibility, including the amount of the loan (if required to be repaid), defense costs, fines, penalties and treble damages.
While the terms and conditions of this coverage are quickly evolving, some policies will not cover the government’s denial of loan forgiveness unless the denial is due to the company’s lack of eligibility at the time it applied for the loan. For example, if the business did not use the PPP loan proceeds according to the SBA requirements, then the policy would not provide coverage. PPP loan policies may also contain exclusions for reputational damages relating to the improper receipt of a PPP loan.
To obtain PPP loan insurance, applicants must submit:
- Information about relevant affiliates
- Analysis of how the affiliation rules apply to the business
- Payroll calculations made in connection with the loan application
- Analysis conducted to determine the business could make the “necessity certification”
- Analysis of alternative sources of liquidity
- Data surrounding the impact of COVID-19 on the business
- All other materials submitted to the SBA in connection with the PPP loan application
If you are currently considering applying for a PPP loan, or were already granted a loan, consider PPP loan insurance as a way to off-set any potential liability that could surface.
Author Bio
| Peter de Boisblanc Leads HUB International’s transactional risk practice in the United States, advising purchasers and sellers in M&A transactions (including private equity funds and strategic buyers) on risk allocation solutions, with a focus on brokering representations and warranties insurance (RWI) policies and related insurance products. As a broker, Peter draws on his extensive prior experience as an underwriter on AIG’s M&A insurance team, where he underwrote more than 150 RWI policies. Visit www.hubinternational.com Connect Peter de Boisblanc |
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