Businesses increasingly collaborate with social media influencers to promote their brand and connect with their online audience, but such relationships can put a company’s reputation on the line and create liability risks.

Liabilities can arise in areas such as defamation and libel, securities laws violations, copyright and trademark infringement, and around information protection and disclosure rules, experts say.

Influencer marketing can be an effective way for companies to expand their reach but can also lead to increased risks because a business is “effectively giving up some control in its advertising,” said Luma Al-Shibib, shareholder in the New York office of Anderson Kill P.C. 

Large corporations might use an influencer for the marketing function, but an influencer could also be the face of the entire business, like actor Ryan Reynolds or the Kardashians, for example, said Jade Giltrap, London-based team leader for media and entertainment at CFC Underwriting Ltd. 

Potential impacts on business from the relationships range from public relations disasters to breach of contract issues and problems with the content influencers are posting, Ms. Giltrap said.

Trying to manage this new style of interaction is a big exposure for the advertising world, said Paul Evans, a senior client advisor in Marsh LLC’s entertainment and media industry practice, based in Philadelphia. 

Some influencers may be relatively unknown on the celebrity scale despite having a wide and large following. Companies need to think about “who are you entering into a contract with, how do they work, what are they expecting,” Mr. Evans said. 

Existing insurance policies such as media liability, commercial general liability, directors and officers liability, and cyber liability may respond to brand/influencer liabilities, but there can be gray areas, experts say.

If a social media influencer makes disparaging comments about another company’s product, that might be actionable as a tort, said Benjamin Tievsky, counsel at Pillsbury Winthrop Shaw Pittman LLP in New York.

Generally, such claims would be covered under the commercial general liability policy’s personal and advertising injury section, he said.

However, “the question could arise is the social media influencer an agent of the insured, meaning an agent of the manufacturer or the brand company, or are they some type of independent entity such that the company’s commercial general liability coverage wouldn’t apply,” Mr. Tievsky said.

If an influencer used in a marketing campaign fails to disclose that they received compensation, that could trigger a government investigation, Ms. Al-Shibib said. Federal Trade Commission rules require influencers to “clearly and conspicuously” disclose when they have a “material connection” with a company whose products they are promoting.

Investigations and shareholder lawsuits could also follow if an influencer makes statements in a post that are alleged to be false and misleading in connection with a public company and that affect its share price, she said. “Those types of inquiries or potential liability could be covered under a directors and officers policy,” she said.

Social media use is coming up more in company D&O insurance discussions, especially after an incident involving Tesla Inc. CEO Elon Musk, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. 

The Securities and Exchange Commission sued Mr. Musk in 2018 after he tweeted that he was considering taking the company private. The ensuing fallout led to $20 million in SEC fines each for Mr. Musk and Tesla.

Trevor Milton, founder and former CEO of electric vehicle company Nikola Corp. has also been the subject of various government investigations, charges alleging securities fraud and investor lawsuits over claims he made on social media about the company’s products and technology. 

All else being equal, a traditional D&O policy would cover those types of claims, subject to individual policy terms and conditions, Mr. LaCroix said. 

Companies can mitigate the risks of engaging influencers by ensuring that the terms of any contract specify the influencer carries their own liability insurance, said Shraddha Nair, account executive at Founder Shield, a New York-based insurtech company that broker BRP Group Inc. acquired in July.

Scale Underwriting Services LLC, a Founder Shield company, in June launched media liability coverage for social media influencers and their agencies. Typical limits range from $250,000 to $1 million annually. For a $1 million limit, pricing is around $1,500 annually, Ms. Nair said.

The cover should be provided on a primary and non-contributory basis, so that the influencer’s policy is triggered first in the event of a claim, Mr. Tievsky said.

Brands commit to protecting reputation

Businesses need to do their due diligence to ensure the benefits of working with social media influencers outweigh the risks, experts say.

Many companies don’t have a clear methodology in place to manage reputational risks, said Richard Sheldon, Radnor, Pennsylvania-based North America head of specialty broking at Willis Towers Watson PLC. There can be a lack of reliable, credible real-time data and appropriate tools available, he said.

Some 80% of risk managers surveyed by Willis Towers Watson said there would be more of a focus on reputation risk in the next five years.

More companies, primarily in the consumer goods and retail sectors, are asking to vet influencers and their online presence because they recognize their brand is being represented, said Betsy Blumenthal, San Francisco-based senior managing director in Kroll LLC’s forensic investigations and intelligence practice. 

Organizations want to know if there is anything out there that should cause them to reconsider bringing an influencer on, Ms. Blumenthal said.

“We’re looking for lapses in judgment, comments which would be offensive,” she said.

Social media posts can be a factor in the claims recovery process, said Peter Oakes, partner at Crawford & Co. Legal Services Ltd. in the U.K. “We will use social media to try to gain intelligence in relation to suspect fraudulent claims,” he said.

Businesses working with influencers should have a comprehensive social media policy with clear parameters around acceptable usage to maintain some control in messaging and content, said Luma Al-Shibib, a shareholder in the New York office of Anderson Kill P.C.