PGI is for the small to medium business owners and commercial real estate investors. Business owners seeking a commercial loan have to give a personal guarantee, but this does not lessen the risk associated with signing them. Om liquidation of business becomes the responsibility of the guarantor or signer to satisfy the terms of the loan. This puts a risk on the guarantor’s assets for example property, vehicle, retirement accounts, college accounts, etc. The guarantor’s assets get protection in PGI. PGI covers 70% of the insured’s net liability in case the lender seeks personal assets to repay the balance loan amount after liquidating the business assets, also depending on the coverage purchased and the terms of the policy.
Who pays the PGI Premium:
The premium is completely base on the size of the loan and the risk characteristics of the underlying business. To protect the assets the borrower/guarantor has to purchase the insurance. The availability of the insurance is for the owner
(s)/guarantor(s) of the business as they have committed to personal guarantee associated with their commercial loan. In general, coverage is available for a limited time only after closing the loan. PGI is an annual policy. The risk characteristics of the underlying business, loan transactions, and the size of the loan guarantee is the deciding factor of the premium of the insurance. Minimum 1% of the total amount of the guarantee is the starting cost of the premium.
Who PGI Protects:
The protection of the borrower’s assets when signing a personal guarantee is the main aim of PGI. As it provides additional value to the guarantee many lenders purchase PGI policy positively. It also reinforces the existing collateral on the business loan.
The Limits of Personal Guarantee Insurance:
Minimum 30% to a maximum 70% amount of the stated value of the personal guarantee is been covered. Secured loan transactions is a must for PGI. Some of the government-guaranteed loans like Small Business Administration (SBA)also give coverage. But unsecured loan transactions or highly speculative projects do not give any coverage in PGI. A consistent performance record of the business with a minimum of 5 years of operating experience and at least 3 years of credit history or principals with an equivalent track record in the industry is a must for PGI.
PGI when a business defaults on a loan:
The insurance company which issued the policy has to be notified in case of loan default. The PGI company then appoints a manager to help understand the circumstances and how to work through the claim.