Private equity insurance encompasses commercial insurance products and risk mitigation services packaged to fit your firm’s unique needs. The policies cover an extensive range of risks that could lead to losses and litigation. However, putting together the right private equity insurance combination can be tricky. So, we’re here to make getting the best insurance easy!
By the end of this discussion, you’ll have a wealth of knowledge on private equity insurance and a foolproof way of getting the policy package your firm requires.
General Management and Professional Liability Insurance
You, your firm and its managers face litigation threats every single day. Discontented investors, portfolio stakeholders, investigators, employees, and other third parties could file a lawsuit against you at any moment.
You must remain vigilant to this ever-growing litigious environment by taking out the correct general management and professional liability insurance coverages. While there are many types available on the market, we’ll introduce you to the most common kinds below:
#1 Management Liability (Directors and Officers Insurance)
Otherwise known as directors and officers insurance or D&O, management liability covers the personal assets of your directors and officers against actual or alleged wrongful acts. Third parties such as your firm’s employees, vendors, investors, customers, and competitors can personally sue one of your directors, risking their assets.
Alongside keeping your directors’ finances and belongings safe, the policy protects your firm by covering settlements, legal fees, and other costs.
Directors and officers are sued for handfuls of reasons related to carrying out their company duties, including but not limited to:
- Misuse of company money
- Fraud
- Breach of fiduciary duty causing financial loss or bankruptcy
- Misrepresentation of company assets
- Failure to comply with workplace regulations and codes of conduct
- Lack of corporate governance
- Theft of IP (intellectual property)
- Poaching competitor’s customers
How Much Does Directors and Officers Insurance Cost?
The current directors and officers insurance market for private equity firms is unpredictable. In recent years, providers have suffered extreme losses, and therefore, they’re increasing their D&O rates by 10% to 35%. Plus, policy limits are decreasing, meaning underwriters are going from issuing $10 million to $15 million policies down to $5 million.
With that in mind, it’s hard to say how much you should expect to pay as a PE firm in Canada. But, we suggest keeping the following best practices in mind to ensure you get the best coverage deal:
- Be prepared for premiums to increase — No matter your PE firm’s risk type, premium rates are set to increase. You should tweak your insurance budget accordingly to negate any annual financial shocks. If you’ve previously negotiated bulk D;O policies to cover your entire portfolio, you’ll have the option of renewing these despite the market shift.
- Spend more time talking to the underwriters — Inspire confidence in your underwriters by getting senior management staff involved. But don’t worry; we’ll connect you with providers well-versed in offering D;O policies to firms like yours.
- Be ahead of your renewal — Previously, being 60 to 90 days ahead of your renewal was best practice, but now, 120 days ahead is the benchmark. Why? Because underwriters are asking more prequalifying questions than ever before.
- Stay updated on regulatory requirements — Always ensure you’re following the current guidelines at both your portfolio company and your firm’s oversight level.
- Talk about failed investments and highlight your successes — Clearly state any corrective measures you’ve implemented to sort out past failures. If your firm is currently succession planning, be ready to talk about that too.
Outside Directorship Liability
Outside directorship liability is often included in the main directors and officers insurance policy. It insures the board of directors outside of your firm. However, it’s typically only included automatically for nonprofit companies. If your private equity firm requires it, you may need to request it as coverage endorsement (i.e., an extra “add-on”).
Alternatively, you can purchase outside directorship liability as a standalone policy. Large corporations, law firms, and accounting firms tend to choose this option. We can help you decide which route is best for your business.
#2 Professional Services Liability (Errors and Omissions Insurance)
Professional services liability insurance or errors and omissions insurance offers enhanced protection to your firm and its managers against lawsuits claiming negligence, omissions, errors, or failure to deliver services as promised.
Usually, the policy covers the legal costs and damages associated with the areas below:
- Professional services — Coverage for alleged negligence, errors, and omissions.
- Media and advertising — Coverage for media services that caused your client to get sued for libel, slander, or defamation.
- Products — Coverage for product failure or physical injury due to a product.
How Much Does Errors and Omissions Insurance Cost?
The cost of errors and omissions insurance varies wildly depending on a myriad of factors, including:
- Firm size — With more employees comes higher risks. Small businesses usually benefit from lower rates.
- Training and experience — If you and your managers have a wealth of experience under your belt, you’ll often qualify for more attractive E;O premiums.
- Revenue — Normally, the more profitable your business, the more likely you’ll face lawsuits. Plus, if your clients know your revenue can take a large hit, they’ll often request more compensation.
- Industry — Certain industries carry more risks than others. As a private equity or venture capital firm, you’re working in a riskier field than somebody running a small grocery store, for example.
- Contracts — The wording of your contracts between your firm and its clients impacts the rate of your E;O insurance premium.
- Location — Some provinces have a higher minimum requirement for errors and omissions coverage. But we consider this before connecting you with an insurer.
- Claims history — You’ll pay more for errors and omissions insurance if you have a long list of claims behind you.
- Coverage limit — As we’re sure you know, the higher the limit, the more you must pay for the insurance policy.
In general, you should expect to pay between $500 and $1,000 per employee per year for professional liability insurance. But as we mentioned, it varies massively from firm to firm.
#3 Employment Practices Liability (EPL)
Employment practices liability (or EPL) coverage protects you against written contract disputes between your firm, managers and employees. These disputes come in many forms, and the coverage pays damage and defence costs for employment-related claims, including:
- Retaliation
- Deprivation of a career opportunity
- Wrongful termination
- Breach of employment contract
- Invasion of privacy
- Hostile work environment
- Constructive dismissal (i.e., when an employee is forced to leave their job against their will due to the employer’s conduct)
- Allegations of humiliation, slander, or libel
- Failure to enforce consistent corporate policies
- Misrepresentation during employment negotiation
- Discrimination
- Harassment (including sexual harassment)
How Much Does Employment Practices Liability Insurance Coverage Cost?
The average cost of employment practices liability insurance is between $800 and $3,000 per year for companies employing five to 20 people. However, if you’re a large private equity firm, you may have to pay several thousands of dollars every year.
Alongside the number of employees, your province and turnover can affect the rate. A highly profitable firm has more at stake during a lawsuit than newer or less profitable organizations.
We know it seems like a lot of money. However, in the event of a claim, it can usually pay for itself immediately. Data shows the average cost for an EPL settlement is roughly $75,000, while a court-ordered charge is around $217,000! So, just one lawsuit makes the policy more than worthwhile.
Transactional Insurance Solutions for Mergers and Acquisitions (M&A)
Once your general management areas are covered, you need to turn your attention to the financial risks associated with the purchase, merger, or sale of companies. The policies inside this umbrella benefit both parties involved in the transaction.
As you can imagine, the topic of transactional insurance solutions for mergers and acquisitions is highly extensive. Therefore, we encourage you to speak to one of our expert team members to receive an in-depth analysis of your insurance needs. But in the meantime, you can familiarize yourself with the most widely requested mergers and acquisitions-related coverages:
#1 Representations and Warranties Insurance (R&W)
Representations and warranties insurance provides protection against monetary loss due to misrepresentation or warranties made on the company’s behalf. It includes undisclosed liabilities, misrepresentations on financial statements, and loss of customers.
It’s available for the buyer and the seller in the transaction to facilitate the merger and acquisition.
Let’s take a look at the benefits of purchasing an R;W policy from both sides of the coin:
- The Advantages of a Buyer-Side R;W Policy
- Offers extra coverage beyond the indemnity cap in the purchase agreement
- Ensures the seller a clean exit by decreasing or removing escrows or purchase price holdbacks
- The seller can reduce the funds held back in escrow, allowing them to enhance their return on their capital in a low-interest-rate environment
- Ensures buyer protection against the solvency risk of an unsecured indemnity offered by the seller, such as a foreign seller or multiple sellers
- Provides another form of recourse to shareholders involved in public to private mergers and acquisitions
- Mitigates the need for buyers to chase claims against management sellers
- The Advantages of a Seller-Side R;W Policy
- Protects passive or minority sellers associated with several or joint liability for indemnifying the buyer
- Gives added peace of mind for family or individual sellers
- Backstops indemnity requirements — of most use to PE or VC funds when they reach the end of their life cycle
How Much Does Representations and Warranties Insurance Coverage Cost?
Typically, the insurance policy costs between 2% and 4% of the coverage amount you buy. For example, if you select a coverage limit of $5 million, you should expect to pay anywhere from $100,000 to $200,000.
Deductibles normally sit between 1% and 3% of the transaction’s value. But that changes depending on these variables:
- The type of business you’re acquiring
- The scope and nature of the representations and warranties
- The due diligence
#2 Contingent Liability Insurance
Contingent liability insurance covers the risks related to identified contingent liabilities that neither party in the transaction wishes to stand behind. It can include exposures like:
- Impending lawsuits
- Regulatory investigations
- Shareholder disputes
- Intellectual property infringement claims
- Transfer of Undertakings (Protection of Employment)
- Vulnerabilitiess associated with past accounting methods
- Litigation exposures
- Environmental exposures
- Other regulatory exposures
- Complex title risks
- Successor liability or liquidation insurance
The policy is tailored to your private equity firm’s unique needs. With LiabilityCover, we quickly analyze your insurance requirements and connect you seamlessly with a specialist broker. So, there’s no need to worry about how you should customize your policy — we do the hard work for you!
#3 Tax Liability Insurance
Tax liability insurance puts the responsibility for all known or identified tax contingencies onto the insurer rather than the insured. By doing that, it reduces the tension between buyers and sellers during a mergers and acquisitions transaction. Essentially, it allows both sides of the coin to move forward quickly without uncertainty.
You can purchase policies for mergers and acquisitions transactions either before or after the transaction. Alternatively, you can buy it alone as part of a pre-initial public offering reorganization.
Specifically, the policy covers:
- Interest
- Fines
- Penalties
- Any additional tax due to the Canada Revenue Agency
- Defence or contest costs
The Benefits of Tax Liability Insurance
Obtaining a tax liability insurance policy has several benefits, specifically:
- It preserves or improves the value of the asset or business.
- It offers certainty.
- It manages negative financial impacts by turning possible tax liabilities into a measured insurance cost, meaning the problem can be accurately accounted for.
- It gives you a solution when parties involved in the transaction don’t want to acquire clearance from tax agencies beforehand.
Mergers and Acquisitions Diligence and Strategic Insurance Advice
By allowing us to connect you to an experienced broker, you can spend more time doing what you do best instead of focusing on the whirlwind of insurance terms. Our working relationships with Canada’s best PE insurance providers guarantee you partner with a competent risk manager who will:
- support target acquisitions.
- ensure enhance protection by formulating catch-all policies.
- evaluate and manage your aggregation strategies throughout your portfolio.
- enable easy exits through transparent, transferable coverages.
- guarantee predictable pricing.
- encourage policy flexibility to allow for endorsements and growth.
Why Choose LiabilityCover?
We don’t take our job lightly. When business times get tough, your private equity insurance package is your only security blanket. So, we guarantee to connect you to the best licensed insurance brokers in the country.
With LiabilityCover, you can rest easy. You’re in safe, well-versed hands here. Just complete our secure quote form, and our expert team members will analyze your insurance requirements. Then, we’ll connect you to the perfect broker with specialist experience delivering private equity insurance.
Let us take the insurance reigns — running a PE or VC firm is hard enough without any extra stress.
Frequently Asked Questions
Why Is Private Equity Insurance So Important?
As a PE firm, you understand that building new business opportunities brings risks with rewards. Unfortunately, these risks often come with large financial losses and litigations. To combat that problem, you must purchase a comprehensive insurance package that anticipates and covers the risks associated with running a private equity firm.
Horrors can occur at any phase of your business cycle. Whether it’s during start-up, throughout the buy-out procedure, or while making crucial decisions, the risks are complex and impact your board of directors as well as your business. Thus, PE insurance is vital to the longevity of your firm and its leaders.
What Exposures Do Venture Capital and Private Equity Firms Face?
In today’s marketplace, PE and VC firms face a wealth of challenges, including but not limited to:
- Investigations by the Canadian Securities Administrators (CSA) and provincial Securities Commission offices
- Conflicts of interest between you (the PE or VC firm) and the portfolio companies
- Accusations of mismanagement
- Accusations of neglect
- Inadequate due diligence
- Bankruptcy
- Employment practices
- Backing out of investment deals
- Limited partners starting lawsuits due to mismanaging funds or misleading documents
- Corporate governance problems in either the firm or the portfolio company
- Regulations passed by the Financial Consumer Agency of Canada (or the FCAC)
- Administrative errors and omissions
- Vulnerable information and intellectual property
- Issues appearing from minority shareholders during the exit stage
- Indemnification provisions in portfolio businesses
What Types of Claims Affect Private Equity and Venture Capital Firms?
No two VC or PE firms or cases are the same. But to give you an idea of the complex risks faced by firms like yours, take a look at the examples below:
Example One: Breach of Fiduciary Duty
Your private equity firm gets a portfolio company, securing the right to positions on the company’s board of directors.
The assigned individuals help improve the business’ economic environment. Because of that success, you’re entitled to receive payments. However, the company is forced to file for bankruptcy protection due to unforeseen circumstances.
The portfolio company’s trustee takes action against the directors for breach of fiduciary duty associated with the decisions that caused the bankruptcy. They sue your firm directly for misappropriation and fraud, totalling $30 million in alleged damages.
Your firm has considerable defence costs and settlements to pay totally over $10 million. Thankfully, you previously purchased a comprehensive private equity insurance policy package that covered the costs, allowing your firm to recover quickly.
Example Two: Misappropriate of Fund Assets
Limited partners of a real estate account sue their fund manager for improper fee distribution and fraud. The case leads to restitution and civil litigation.
The fund manager faced a sizeable civil penalty and fraud determination following an investigation. The defence costs were over $2.5 million, but the manager’s fund’s insurance covered it.
Example Three: Trade Error Reimbursement
You are a private fund investment manager who caused your client to lose $600,000 after a trade error.
You gave an order to sell two kinds of liquid securities. You were supposed to send the trade files to the custodian beforehand, but they ended up in the wrong place. Eventually, they were sent to the correct custodian. However, you missed the deadline and thus, failed to close the trade.
The error meant the broker received the securities late and sent you an invoice to pay.
A few days later, you successfully submitted a claim on your errors and omissions insurance policy that covered the total loss.
What Other Types of Insurance Might Private Equity, Investment, and Venture Capital Firms Need?
As you now know, private equity insurance is vital for your firm to stay afloat during losses and litigations. However, despite the comprehensive nature of the package, it doesn’t cover everything.
To ensure you’re completely protected, you should think about acquiring the policies below (depending on your business):
- Cyber insurance coverage — It protects your company against virtual crimes and the financial issues following ransomware, data breaches, thefts, malware, employees’ malicious acts, and other similar events. The policy also covers cyber events that damage your computer systems or corrupt your data. No matter what type of business you run, you need this policy. After all, everything is digital these days.
- Commercial property insurance coverage — It covers your building, stock, equipment, and other assets. Depending on your firm, it could be one of the most important policies you ever purchase! The coverage sometimes includes business interruption clauses that compensate for any income you lose due to an unforeseen, unavoidable temporary closure.
- Commercial auto insurance coverage — If you use a car, truck, van, or another automobile for business purposes, you must take out a commercial auto insurance policy. The coverage is akin to personal auto policies. Just be warned that any vehicular accidents that occur while driving a work vehicle will not be covered by your personal policy.
- Global insurance for multinational business coverage — If you’re conducting business across borders, you must guarantee protection. After all, the likelihood of coming face to face with risks when working internationally is much higher. The coverage is not limited to a particular business size, but it’s most commonly used by medium and large companies.
