Venture Capital (VC) firms face unique risks exposing them to lawsuits from investors, investees, and third parties. This article covers key insurance policies VCs need and how to obtain insurance for venture capital firms.
Venture Capital Insurance: What Are the Coverages You Need and Why?
The first essential policy is a combined Directors and Officers (D&O) plus Errors and Omissions (E&O) policy, known by various names like Asset Managers Protector or VCAP. This protects against wrongful management claims and professional service errors leading to financial loss or damage.
Directors and Officers (D&O) Insurance
D&O protection encompasses claims alleging mismanagement of the firm and its fund, resulting in financial losses or damages to third parties like investors. This includes allegations of breach of duty or misappropriation of company funds.
Errors and Omissions (E&O) Insurance
E&O insurance, also known as professional liability insurance, safeguards against claims that accuse errors, omissions, or failures in your professional services, leading to financial losses.
These coverages are crucial because claims frequently target individual leaders for their actions, potentially endangering personal assets.
Additional Key Coverages for VC Firms
- Cyber Insurance: The threat of cyber events grows each month, and firms that handle money are huge targets for hackers. Cyber insurance protects a firm from ransomware threats, loss of data, damage to data, wire transfer frauds, lawsuits alleging failure to protect data, and more.
- Commercial Crime Insurance: This protects money and securities from threats that exist in handling your money and the money of your investors.
- Employment Practice Liability Insurance (EPLI): EPLI covers the firm and its leaders from claims alleging wrongful employment acts like discrimination, harassment, wrongful termination, and hostile work environment. Frequently paired with EPLI is Fiduciary Liability coverage, safeguarding trustees of ERISA-based plans like 401(k)s from allegations of mismanagement.
These four policies form the crux of your protection from claims, lawsuits, and costs, which can be enormously expensive to deal with in operating a VC fund.
I recommend the D&O plus E&O policy and Cyber Insurance be purchased at the startup of a firm, adding the crime, EPLI, and Fiduciary coverage down the road if your budget is tight.
Other Conventional Forms of Insurance to Consider
- Business Owners Policy (BOP): This protects you from basic general liability and property risks.
- Workers Compensation: If you have employees, you’re required by law to have workers comp. Many startup VCs opt to utilize a Professional Employer Organization (PEO) for HR, payroll, and workers’ comp, thereby mitigating this potential issue.
Costs of Insurance for Venture Capital Firms
The cost of the various insurance policies mentioned will depend on your firm’s characteristics, such as the size of your fund, your strategy, the experience level of your leadership team, and geographic location, among other factors.
For the combined D&O and E&O policy, most newer startup VCs are looking at annual premiums in the ballpark of $10,000 to $15,000. Cyber premiums typically range from $1,500 to $3,000 for $1 million policy limits.
The costs for crime, EPLI, and other lines of coverage are highly dependent on limits and other underwriting factors, making it difficult to provide estimates without specific details.
The Bottom Line
If you’re a startup VC or an established player, you want to work with an experienced insurance professional to help you craft an insurance program that fits your needs and can grow with you over time.
The Coyle Group has extensive experience working with financial service firms and incredible reach in the market to ensure no stone is unturned in getting you the best combination of price and coverage.
If you’re looking for coverage for the first time or an alternate on your renewal, give me a call, and let’s chat. I look forward to speaking with you.
Thanks!
