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Management Company Liability to Outside Shareholders

Jan 6, 2014 1:59:24 PM ,


Most Money Management Firms purchase blended D&O and E&O Insurance Policies under the assumption that they are covered in the event an outside shareholder brings a lawsuit alleging mis-management or breach of fiduciary. While they may be right, there are a variety of policy provisions that could preclude coverage in the event of litigation.

Structure of the Management Company

If the management company is structured as a Limited Partnership or a limited liability corporation you may NOT be covered. While some insurance contracts automatically include coverage for the General Partners (GP) of the Investment Funds structured as Limited Partnerships, they don't automatically include coverage for the corporate G.P.'s and/or Managing Members of Management Company's structured as limited partnerships or limited liability corporations. It is essential that the appropriate policy definitions be amended to include coverage for the corporate GP's and Managing Members.

Whether or not the percentage ownership of the outside shareholder, partner, member is greater than 10-15%

Some D&O insurance policies exclude claims by "Major Shareholders". In most cases, by way of policy definition, claims brought by shareholders that have an interest of greater than 10-15% are excluded. Review your policy and make sure it doesn't have a Major Shareholder Exclusion!

Whether or not the outside shareholder could be deemed an insured under the policy by way of participation on an advisory board, council or directorship.

It is commonplace for outside investors to serve on an advisory council, be a member of the board of directors or serve in a similar capacity. As such, its important to note that D&O Policies preclude coverage for claims brought by or on by behalf of other insureds. This is more commonly referred to as an Insured versus Insured Exclusion. These types of claims have historically been perceived as internal squabbles and in some cases collusive in nature. There are however notable exceptions and carve backs  to this exclusionary language. It is vital to fully understand the nature of the exclusion, its intent and the specific exceptions and carve backs.

Tags: Hedge Funds, Insurance, Advisory Board Member, Breach, Directors & Officers Liability, Errors and Omissions, Fiduciary, financial institutions, hedge fund, Insurance Protection, Iron Cove Partners, Lawsuit, Liability, louis d'agostino, Management Company, Partner, Shareholder

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