Hedge Funds – What is E&O Insurance?

Hedge Funds – What is E&O Insurance?
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E&O stands for Errors & Omissions insurance.....

which is also known as Professional Liability.  Hedge funds commonly purchase E&O protection as part of a combined D&O / E&O policy.  Because a hedge fund's exposure to loss can be very similar between the two policy types, it's advantageous to purchase this as a combined policy.  For more info on that policy can be found here .

The three terms: E&O, Errors & Omissions and Professional Liability are often used interchangeably and mean essentially the same thing.    E&O insurance covers the insured for claims alleging mistakes, errors, omissions, and other “wrongful acts” in the performance of their “professional services”.  Professional services is defined and stated in the policy so special attention should be paid as to how that is characterized for accuracy.  A mistake here can vacate coverage quickly.

The allegations commonly made against hedge funds under the E&O policy or E&O section of a combined policy include:

  • Failure to follow your stated investment strategy;
  • Perceived under-performance of the fund;
  • Lack of diligence prior to investing;
  • Failure to control risk internally; and
  • Incorrect/errors made in trades.

Similar to the D&O policy, the hedge fund E&O policy is written on a claims-made basis.    The policy is not always a “duty to defend” policy, in fact, it's often written as a reimbursement policy.  Understanding the difference is important as it's not like your general policy where the insurer comes in and assumes your defense.  In a reimbursement policy, you'll need to undertake defense, hire the right attorney and be reimbursed for expenses you layout.  In most cases, your insurer will advance defense costs to you.

Finally, like all management liability policies, careful attention needs to be taken during the application process to assure that all answers to questions are fully truthful and information is properly disclosed.

What is not covered under the E&O policy?

  • Intentional wrongdoing,
  • dishonest/fraudulent acts;
  • criminal acts;
  • willful violations of statute;
  • bodily injury & property damage (covered by general liability); and more.

Want to learn more?  Contact me, Gordon Coyle for a no-obligation conversation to get started.  If you're ready to start our process, you can click the button below to be taken to our hedge fund client intake page.


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