Hedge Funds – What is D&O Insurance?

Hedge Funds – What is D&O Insurance?

D&O stands for Directors and Officers Liability Insurance.  We like to call D&O insurance, decision making insurance and personal net worth insurance. 

Here’s why – most D&O claims for privately held firms stem from allegations that decisions made by the firm’s directors, officers, managers, members, GPs, and employees have caused an adverse financial consequence to the third party bringing the suit.  And, since these suits name the directors and officers individually, their personal assets are at risk.  While your corporate by-laws may provide an indemnification to these decision makers, the question is where does the money come to provide that defense? 

A D&O policy is the most efficient means of protecting decision makers from allegations, whether real or false by providing defense (or reimbursement of defense costs)
and settlement costs from claims.  

The frequency of D&O claims for private companies continues to rise.  In Chubb’s latest Private Company Survey Report more than 1 in 4 (26%) of private companies contributing to their survey had experienced a D&O loss in the last three years, with an average claim costing almost $400,000.  Yet, only about 43% of firms surveyed currently purchase D&O insurance!

With the frequency and severity of these types of claims rising, where is the disconnect?  Why aren’t more private firms purchasing protection?

There’s a variety of reasons.  Many company executives will say things like “our company is like a family”, or they think no one would ever sue them, or they may wrongly think that other policies cover them for their decision-making risks.  Unfortunately, these are all false.

The bottom line is that D&O coverage is “sleep insurance” for decision makers, and often required by outside directors before they will accept a board seat, as well as some larger investors before they will subscribe to your fund.

Hedge Funds are no different when it comes to exposure to D&O risk, in fact the risk may be heightened due to their business model.  Commonly the policy form sold to hedge funds is a combined D&O and E&O policy which we discuss here.

A few final facts: D&O coverage is written on a claims-made basis as opposed to general liability which is typically an occurrence basis form.  D&O policies are not always “duty to defend” policies. In fact, for most hedge funds, coverage will be on a “reimbursement” basis meaning that the insurer will either reimburse you for costs incurred, or will advance them to you on a reasonable basis. Finally, defense costs are often made part of your limit of liability. This means that defense costs will erode your limit of coverage, reducing the amount left to finally settle a claim.

For more information on D&O coverage, please see our Guide To Directors & Officers Liability Insurance

Want to get started on the buying process?  If you click the button below it will take you to our initial intake form.  Once you’ve completed that our system will notify us, and we’ll email you to arrange a convenient time to chat.

Have questions or concerns you’d like to discuss?  Give me, Gordon Coyle a call or drop me an email – 845-474-2924 / gbcoyle@thecoylegroup.com.  Thanks!

 

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