E&O: Errors & Omissions

Private Equity & Hedge Funds

There are a large number of professional managers of private equity funds and hedge funds that currently need expert insurance advice and professional liability insurance. Mercator Risk Services is an expert in professional liability insurance for investment related organizations. Click here to see our Investment Advisors and Other Investment Related Organizations page.

Exposure

Are private fund managers faced with professional liability exposure and claims? Yes, but the exposure is not well understood and the number and types of claims are not well publicized. The primary exposure is driven by unmet investor expectations, which cause disputes and litigation. Causes can include poor performance, deviation from investment guidelines, and administrative errors. In addition, misrepresentation and failure to disclose are areas getting increasing attention.

Defense costs and management time during litigation are significant additional costs to any claims and resulting litigation. For investment professionals, defense costs are a significant part of total loss costs.

Fund managers are exposed to frivolous claims as well as legitimate claims when an error occurs. Frivolous claims are always structured in the most advantageous manner to the plaintiff, and are not always totally accurate. One method used by plaintiff attorneys is to describe the activity that led to the losses as far riskier and for amounts far greater than originally represented, something that is a challenge to refute.

The frequency and severity of claims vary by the type of investment strategy, operating characteristics and investor profile. Often disputes result in a plaintiff seeking compensation from all parties involved whether the party is responsible or not. The resulting dispute can cause:

While investors are the primary source of claims, claims can arise from other sources as well, including creditors, competitors, regulators and companies in which the funds invest.

Professional Liability Insurance

Professional liability insurance, sometimes called errors and omissions or E&O insurance, is available for private funds such as private equity (venture capital) funds and hedge funds. Coverage and pricing varies greatly depending upon the type of professional operation, the specific services provided and its size, location. The key exposure base used by underwriters is typically the assets under management, but many other factors impact underwriting acceptability and pricing. These include:

Underwriting fund managers is subjective and based on the information provided through an application process. Often, a due diligence questionnaire provided to a fund of funds investor has most of the information required by a professional liability underwriter. Since private fund managers are typically not registered, there are no Form ADV for an underwriter to rely on. Underwriters may want to review the principals' background and experience, fund results, investment strategy descriptions and partnership agreements in addition to the basic operating information

Coverage is typically provided on a claims-made basis. Limits and deductibles vary with the size and type of insured. Standard limits for most small to medium sized organizations start at $10.0 million, but limits purchase run from a minimum of $1.0 million to massive limits for the largest funds. Policy forms vary significantly, but typically are claims-made forms with defense costs included within the limit and deductibles. Coverage provisions can be customized for special circumstances.

Coverage is can be provided with a combination of coverages in addition to professional liability insurance. Typically professional liability policies for private fund managers include directors & officers liability (D&O), although the primary exposure is the professional liability. Additional coverages include cyber liability and employment practices liability coverage. Bonds, including fidelity and ERISA bonds, are also necessary coverages. And general partnership liability coverage and protection outside the U.S. may also be important coverage provisions to many funds managers.

Mercator Risk Services provides coverage for a wide range of investment professionals including private equity and hedge fund managers. Please let us know your needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

Request Information

Bold items are required.

© 1999-2008 Mercator Risk Services | Legal Stuff

Designed and Maintained by ForeSite