Insuring Fund Liability Risks: A Guide to GPL Coverage for Venture Capital and Private Equity Firms

Guide to Insuring Fund Liability Risks for Venture Capital and Private Equity Firms

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In today’s business and constantly changing regulatory environment, the venture capital, private equity, and broader financial institutions sector would not be able to conduct business without a comprehensive insurance program that protects the general partners or directors and officers of these firms from allegations of negligence and/or wrongdoing that leads to a loss. An understanding of core coverage modules is critical not only to mitigating losses impacting the fund's internal rate of return (IRR) but also to the personal assets of the general partners of the funds or the management companies themselves.

Woodruff Sawyer's new Guide to Insuring Fund Liability Risks for Venture Capital and Private Equity Firms, we explore the basic coverage modules within a General Partnership Liability insurance (GPL) program. In most cases, an experienced broker will have negotiated manuscript coverage forms or specific amendatory endorsements that enhance coverage above and beyond the "basic" or "core" coverages. 

In addition to detailing each coverage module, our guide includes claim scenarios where coverage could apply. It also contains expert feedback on the new SEC rules and their potential ramifications for corresponding insurance coverage.

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Background on GPL Coverage and What It is Today

GPL is a longstanding insurance product tailored for executives acting in a different fiduciary capacity than a traditional corporation or LLC, such as on behalf of a general partner or limited partnership. 

Traditionally structured private or public D&O policies often exclude or limit coverage available to partnership entities, so a tailored solution was needed in the form of either a partnership endorsement to an existing D&O policy or a dedicated blended D&O/GPL policy. While the language is more nuanced for partnership exposures, the exposures and types of claims covered were uniform in the context of what a D&O insurance policy covers. 

GPL policies are intentionally broadened to provide comprehensive coverage for everyday business management activities, such as oversight of limited partnerships, portfolio company investment, and overall investment management.  Our guide offers an overview and examples of the following coverage elements. 

1. Side A: Non-Indemnifiable Coverage. This coverage responds to claims involving your investment professionals. Side A covers losses arising from their activities when indemnification from the firm or fund is unavailable. 

2. Side B: Indemnifiable Coverage. This coverage also responds to claims involving your investment professionals, but for loss arising from their activities when indemnification from the firm or fund is available. 

3. Side C: Entity Liability Coverage. This coverage responds to claims made against an insured entity or funds. 

4.Private Investment Activities and Errors & Omissions (E&O) Coverage. E&O coverage is arguably the most important language in a GPL policy. It is intended to cover all aspects of the everyday private investment activities and services provided by a venture capital or private equity firm.

5. Outside Directorship Liability (ODL) Coverage. ODL coverage protects individuals serving on the boards of portfolio companies. The coverage typically responds in a "double excess" capacity, meaning it will sit in excess of any other insurance (D&O) and indemnification available to the underlying portfolio company. 

6. Additional Coverage Considerations. 

  • Employment Practices Liability.Coverage is typically bolted on with limits shared with the GPL insurance. It is intended to cover claims alleging wrongful employment practices (sexual harassment, discrimination, wrongful termination) by the management company or its directors, officers, and employees.  
  • ERISA Fiduciary Liability. Thiscoverage addresses claims involving the creation, administration, operation, or termination of an employee benefits plan sponsored by the management company.  
  • Financial Institution (Fidelity) Bond. This bond protects against loss resulting from employee dishonesty, burglary, robbery, forgery, and computer fraud/funds transfer fraud.  
  • Cyber Liability.  Coverage for third-party costs related to defense and damages from a network security/privacy breach. 

An Update on the Regulatory Environment 

With the passage of sweeping new rules, 2023 represented an escalation in the government's regulatory campaign against private fund managers. After this year's election, we may wake up in a brave new regulatory world in January 2025—or just more of the same.

With good housekeeping, legal and compliance teams can mitigate regulatory risk. An insurance program tailored to your business and risk profile will help dampen the blow if you find yourself facing a government investigation. 

OurGuide to Insuring Fund Liability Risks for Venture Capital and Private Equity Firms offers the latest information on the following rules and regulations: 

  • Private Fund Adviser Rules. As discussed in our recent article, the new rules impose various meaningful new obligations on registered investment advisers (RIAs) and exempt reporting advisers (ERAs) alike. Significant provisions address preferential treatment of investors and target "restricted activities." Restrictions on charging investigative defense costs to funds underscore the importance of maintaining appropriate insurance coverage. 
  • Proposed BSA/AML Rules. BSA/AML compliance is a tricky area for investment advisers serving numerous investors, frequent transactions, and other risk factors who do not already maintain a strong voluntary program or rely on a compliant affiliate program. While the proposed rules permit reliance on outside service providers, fund managers may be held liable for vendor mistakes.   
  • Proposed Cybersecurity Rules. The SEC's new rules will create a grab bag of cybersecurity-related obligations for RIAs. However, unlike the Private Fund Adviser Rules, there seems to be a consensus that these cybersecurity-related rulemaking activities are reasonable. RIAs should prepare accordingly.   

Through the rules discussed above, the SEC is opening up several new avenues to police the activities of private fund managers. Read the Guide for more details surrounding these new rules, their implications, and how being proactive in your policies and risk controls will put you in the best position against any government scrutiny.  And since coverage needs can change depending on each firm's risk profile, we always recommend working with an experienced broker. 



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