D&O Insurance for PE Portcos

What Does D&O Insurance Cover?

D&O Insurance protects the leaders of a privately owned company from claims which can arise alleging any number of “wrongful acts” in managing the company.

Lawsuits may come from investors, competitors, employees, regulators, and others and often name the firm’s decision-makers personally for their acts, putting your directors, executives, and other leaders’ personal assets at risk.

Unique Elements for Private Equity Firms

For private equity firms, there are three unique elements to D&O that need to be clarified:

1. Board Representation: The PE firm will have one or more of its partners or employees on the board of their portfolio firm, so making sure they are properly protected for their actions is important.
2. Investment Protection: The PE firm also wants to protect its investment in the portfolio company’s balance sheet. While the primary point of D&O is to protect the individual leaders, it also protects the entity, thereby providing peace of mind to their sponsor.
3. Recruitment Assurance: D&O insurance provides peace of mind to any talented individuals you want to recruit to the portfolio company’s board. Often, independent directors will not sit on a portfolio’s board unless they have sufficient D&O insurance.

Why Should Sponsors Be Involved?

From the sponsor’s perspective, being involved in your investee companies’ D&O insurance is crucial. You don’t want to leave it up to chance and find out too late that your portfolio company has no D&O coverage or inappropriate protection.

There’s too much at risk for you, your partners, and your investments. Your first line of defense is solid protection at the portfolio level.

How to Purchase D&O Insurance for PE Portcos as a Sponsor

Several years ago, Master Insurance Programs were popular. Under a master program, the PE firm would negotiate a single policy to protect all the investee companies. However, this option is less popular today for several reasons:

• One portfolio company may be more difficult or expensive to insure than others in the portfolio.
• Allocation of premium costs is challenging.
• Aggregating isn’t always cost-effective.
• CFOs at the portfolio company level often feel they can “do better” on their own.
• The addition and subtraction of firms during the hold life cycle is disruptive.

Now, a more popular idea is to work with a single broker and possibly one insurer to insure all the portfolio companies on separate policies but with preferential pricing and a standard broadening endorsement.

This method gives each portfolio:

• Their own policy
• Their own limits
• Their own discounted premiums

Managing Diverse Portfolios

When a portfolio includes very diverse companies with divergent underwriting characteristics, working with one broker who can negotiate with multiple insurers becomes more effective. This approach allows each insurer to provide a standardized broadening endorsement and preferential pricing for each portfolio company.

Solutions for Smaller PE Firms

Smaller PE firms that don’t exert as much control over their investee companies might find it effective to work with a skilled broker, like The Coyle Group, as a “preferred provider” to their portfolio companies to provide them one-off solutions that fit their needs.

Conclusion

Arranging solid D&O protection for your investee companies is critically important. If you’re looking for a partner who can give you the personal attention you deserve and the expertise to create a program or provide one-off policies and advice, we’re here to help support you and your portfolio.

Give me a call or drop me an email – I’d love to hear from you and see how we can help. Thanks!