The `Contingency Insurance’ safety net

Whether a special event is disrupted or cancelled, a key individual does not appear, a $1 million prize could be won or an advertising campaign must be guaranteed of the health and/or morals of a visible spokesperson, marketing and advertising executives...

Whether a special event is disrupted or cancelled, a key individual does not appear, a $1 million prize could be won or an advertising campaign must be guaranteed of the health and/or morals of a visible spokesperson, marketing and advertising executives have had to resort to what has been coined ‘Contingency Insurance.’

It arose out of the need to indemnify sponsors or promoters for the losses sustained as a result of events occurring (contingencies) clearly beyond their control.

While many types of contingency insurance have been common practice for more than 20 years, one segment of this specialized field has seen unprecedented growth over the last few years, in response to the phenomenal increase in games, contests and sweepstakes.

Prize Indemnity enables the sponsor to promote one grand prize for a manageable and certain cost.

Typically, the promotion will consist of multiple layers of prizes offered to create excitement and hype. Several layers of smaller prizes (usually provided by sponsors) are given away, but there remains only a slim chance at the grand prize (which is insured).

Some of the most appealing promotions are the ones which offer a large schedule of valuable prizes, but in which, statistically, odds are that only a percentage of the prize schedule will be awarded.

The sponsor then arranges for a prize indemnity policy that will fund the additional prizes if the odds turn against the promotion.

Generally speaking, the insurance premium will be influenced by the amount of the prize, the odds or the likelihood of the winning event occurring and the number of attempts at winning.

If the possibilities can be statistically established and the rules and regulations are soundly designed, it is likely that the risk of a substantial award can be insured at a reasonable cost.

Contrary to most forms of insurance, the risk here is willfully created by the sponsor, and while we all hope we will never have to claim for a car accident or our homes being vandalized, in this case, sponsors are hoping they will have a loss and that prizes will be awarded.

Just as an insurer will assess the premium on the basis of the risk created by the odds, there is much thought given to the risk of security breaches and fraud.

It appears that, just as coupons attract their fair share of fraud, some of the sweepstakes and games with substantial payout schedules often reveal individuals with creative printing talent.

Several conditions form part of a standard policy whose object is to limit selection against the insurer: for one, the coverage warrants that all efforts will be made not to disclose the existence of insurance to cover the prize.

The policy also excludes any error or omission of the various providers such as art preparation, printer, etc.

This has resulted in a variety of security measures both at the printing stage as well as the critical ‘seeding’ stage at which winning tickets or game pieces are mixed at random.

The industry has also responded with sophisticated anti-counterfeiting devices such as the use of u.v. readable ink, microdots, specific inks, codings, etc.

Marketing and advertising executives can also protect their special events from a host of perils that can cause the event to be cancelled or interrupted.

A few examples include: loss of equipment in transit; failure to arrive at site; outbreak of contagious disease; strikes, power failures, floods; fires; earthquake; riots; adverse weather conditions, or the non-appearance of key individuals.

Most events

This type of policy can be purchased for most events; trade shows, exhibitions, concerts, tours and theatrical productions are the most common events insured.

While an organizer or event planner usually spends more than 50% of the budget before the opening of an event, expenses such as hotel and catering deposits, advertising or salaries would unlikely be recovered if the event were cancelled.

This broad form of coverage will protect not only the pre-paid expenses incurred before the cancellation, but also any additional expenses incurred resulting from the interruption or cancellation. Ascertainable revenue can also be covered.

The premium charged for each event is based on the total expense budget (or total ascertainable revenue, if requested.)

There is, typically, no deductible under this type of policy, except perhaps for a tour or theatrical policy in which there are multiple performances.

Unpredictable

Since the policy covers perils ‘beyond the control of the insured,’ insurers cover the unpredictable. In addition to the more obvious perils mentioned above, sometimes the nature or subject of the event itself can make it sensitive to a specific peril.

Imagine a conference/exhibition glorifying the National Aeronautical Space Administration’s successes was supposed to open the day after the shuttle blew up, or an attempt was made to assassinate the president of the u.s. the day before the inaugural ceremonies. How could these events not be cancelled?

Let’s take a look at the contingencies surrounding other situations: huge sums of money are often committed to associate a product/service with the positive image of a celebrity.

What happens to an advertising campaign when its professional race car driver spokesperson is maimed in an automobile accident and it becomes unbearable for the family to constantly see the driver in the media?

What if the company has entrusted its reputation to a celebrity publicly perceived to meet broad societal lifestyle standards but six months down the road the individual’s past reveals a substantial history of sexual abuse?

This coverage can provide indemnification for the net ascertainable loss incurred after cancellation or withdrawal of the advertising campaign as a result of death or disability of the covered individual, the covered individual committing a criminal act or any act against public interest or being involved in situations of bad public taste leading to public contempt.

Although none of these thoughts have much appeal in any promotional project, some comfort can at least be found in that specialized insurance coverages can take care of their financial impact.

Louis Gosselin is the founder of L.J. Gosselin & Associates, a wholesale insurance firm specializing in contingency insurance with offices in Toronto Vancouver. Susan Szyiko is the Canadian zone manager for the Chubb Custom Market Department at Toronto-based Chubb Insurance Co. of Canada.