By Peter de Boisblanc
Take-away: In order to receive 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.
Medical practices that accepted a Paycheck Protection Program (PPP) loan to provide relief to doctors and staff during the first few months of the coronavirus pandemic could now face liability and fines if U.S. Small Business Administration (SBA) audits determine they failed to meet loan requirements.
More than 4.4 million businesses received loans from the SBA in both rounds of the PPP program. The SBA created a safe harbor with respect to the necessity certification for 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.”
If your medical practice falls into the latter category, the U.S. SBA will look to confirm that your business meets the required “necessity certification,” and considered alternative sources of liquidity prior to applying for a PPP loan.
Severe consequences for submitting false or misleading certifications to the U.S. government could apply to businesses who don’t meet these criteria but received a PPP loan, including being required to return the PPP funds, 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.
PPP Loan Insurance Can Protect Your Practice if Deemed Ineligible
A few insurers are now offering a policy designed to cover business that are subsequently deemed ineligible to receive a PPP loan at the time it was granted. A PPP loan insurance policy will cover:
- Losses arising out of the lack of eligibility, including the amount of the PPP funds received (if required to be repaid), defense costs, fines, penalties and treble damages.
- 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.
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, medical practices 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 your medical practice received a PPP loan, and after reading the above criteria, you are uncertain you’d pass a SBA audit, consider PPP loan insurance as a way to off-set any potential liability.
Peter de Boisblanc leads HUB’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. Prior to joining AIG, Peter practiced law for 11 years, most recently at Ropes & Gray, LLP, where he advised private equity clients with respect to the placement and negotiation of RWI policies for both domestic and international transactions. Peter graduated, cum laude, from Fordham Law School in 2004 and from the University of Chicago in 1999.