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Frequently Asked Questions

Question: Why should we buy professional liability (E&O and D&O) coverage?

Answer: Here are some of the key reasons to consider purchasing professional liability coverage (a.k.a  "E&O"and "D&O" or Errors & Omissions and Directors & Officers Liability):

  • The policy covers the adviser entity against claims alleging a wrongful act, error, omission, misstatement, misleading statement, or breach of duty in providing or failing to provide professional services as an adviser to the fund(s).
  • The policy covers the directors and officers of the fund(s) and the adviser entity (and general partners and members) against claims alleging a wrongful act, error, omission, or breach of fiduciary duty.
  • Typical claims include allegations by investors of fraud or misrepresentations in the PPM, or claims arising out of the inability of investors to withdraw funds.
  • Policy coverage may also be triggered by an investigation commenced by a regulator, such as the SEC, or a state attorney general.
  • The policy covers defense costs, as well as any judgment or settlement. Most of our clients purchase a policy because of the defense cost coverage. Defense expenses in claims against hedge funds can escalate rapidly because of the complex nature of hedge fund litigation and the very high hourly fees charged by experienced securities litigation counsel. In most cases, once the policy retention (deductible) is satisfied, the insurer will advance defense costs - obviating the need to liquidate positions or borrow to fund the defense.
  • The frequency of claims against hedge fund managers is increasing.
  • The SEC has ramped up its investigation and enforcement actions against hedge funds.
  • States attorneys general have also increased their scrutiny of hedge funds.
  • Increased capital from public employee pension funds and other institutional investors may result in more claim activity as these investors may be quicker to sue when things go wrong than private investors.
  • The increasing difficulty of valuing certain securities and the disappearance of markets for the trading of some securities may lead to claims against hedge funds as these market developments may: (a) cause some funds to limit or halt redemptions; (b) cause some funds to misstate performance numbers; and (c) cause some funds to report losses due to the need to mark to market problem securities.
  • Many hedge funds have moved beyond traditional passive investments and now hold majority stakes in companies and have board representation. Fund managers face additional liabilities when they serve on outside boards. The policy can be extended to cover these Outside Directorship exposures
  • The policy can also be extended to cover Employment Practices Liability. This important coverage protects the firm against employee claims for wrongful termination, discrimination, and sexual harassment. We have seen a big increase in these types of claims over the past five years.
  • Finally, more hedge funds are purchasing the coverage because their clients are demanding it. And some firms use it as a selling point as it gives investors another layer of protection in the event of a problem with their investment.

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Copyright © 2009 Frenkel & Co., Inc.

Hedge Fund Insurance
a division of Frenkel & Co., Inc.
350 Hudson Street, 4th Floor, New York, NY 10014
Phone: 212-488-0270  Fax: 212-488-0432