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Hedge Fund Investment Adviser Insurance

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E&O or D&O Insurance For Registered Investment Advisers

Yesterday I had the opportunity to talk with an insurance broker whose business focuses on providing insurance to registered investment advisers and hedge fund managers.  This article is based on that conversation.

Insurance Premiums for Small Funds

For smaller funds (say less than $100 million in AUM) with no operational history, the minimum premium amount is likely to be in the $10,000 to $15,000 range for about $1 million in coverage.  Usually premiums will stay around those levels as the AUM grows, but at around $200 million in AUM the premiums may start to increase.  For those types of premiums you are usually looking at deductibles in the $25,000 range, which is going to be pretty standard for smaller groups.  Depending on the exact nature of the group’s business the deductible may end up being as high as $50,000 or $75,000.  Of course these are only ranges and the final premium and deductible amounts will be established based on the unique circumstance of the manager.

Hedge Fund Insurance Underwriters

While the insurance brokers are able to place policies for smaller managers at some of the major carriers like Chubb, many times they will need to have scripted policies which require the insurance carriers (groups like Lloyds) to write a policy specifically for the management company.  In these cases the premiums are likely to be on the higher end of the ranges  discussed above.

What does Insurance Cover?

The central reason that hedge fund investment advisers will buy insurance is to protect against potential claims by the limited partners.  Generally the insurance can be purchased as Errors & Omissions/Directors & Officers Liability (E&O/D&O).  While each policy will cover different acts, generally the insurance will cover the negligent acts of all past and present employees, offices and directors.  Independent contractors (such as sub-advisers and potentially, in certain circumstances hedge fund service providers) may or may not be covered under the policy.

If a lawsuit is initiated against the manager, after the deductible the insurance company will pick up all costs associated with the lawsuit up to the coverage maximum (in the case quoted above, this would be $1 million).  Because of the costly nature of litigation and because any litigation will likely be based on significant losses, it might be the case that the liability in the case exceeds the insurance coverage in which case the managers or employees may be liable for the remainder of the judgment or legal costs (see How Much E&O Should I Buy).  Many hedge funds will have exculpation and indemnification provisions which will protect officers and employees of the management company for acts done in good faith.

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.