Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities

Directors and officers (D&O) liability insurance can be an expensive proposition for hedge fund managers, particularly given the growing costs of doing business.  However, a number of factors make purchasing such coverage increasingly compelling for hedge fund managers.  Such factors include enhanced market volatility, heightened regulatory scrutiny of fund managers, more demands for such coverage from fund investors and greater competition among insurance carriers which has resulted in moderate price reductions for D&O insurance.  To assist hedge fund managers in evaluating whether to purchase D&O insurance, how much, at what cost and under what structure, this article starts by identifying nine discrete reasons why hedge fund managers may consider purchasing D&O insurance.  The article then discusses: what D&O insurance is; what related categories of insurance hedge fund managers typically purchase; who is covered under a D&O policy; what types of claims are covered under a D&O policy; what types of claims are typically excluded; applicable legal standards; situations in which costs may be advanced and clawed back; the market for retentions or deductibles; “hammer” clauses; the differences among Side A, Side B and Side C coverage; and the current market for pricing of D&O insurance, including pricing of the primary layer of coverage and additional layers in the “tower.”  This article concludes with a discussion of how hedge fund managers are allocating the cost of premiums among management entities and funds, and the interaction between D&O policies and indemnification provisions in fund or management company documents.

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