When Hedge, Private Equity and Venture Capital funds wind down, fund managers and boards are often concerned about liabilities that may not arise until after the fund is closed. Wind downs are not always ideal situations and prior litigation with portfolio companies or issues with liquidity for hedge funds can lead to increased concerns about potential litigation. Additionally, fund directors and fund managers may have conflicting interests. If the funds have professional liability coverage, they can negotiate and purchase the appropriate runoff coverage to get the protection for the statute of limitations. If they don’t have professional liability insurance in place, it is not too late to purchase runoff coverage (also referred to as runoff coverage and tail coverage).
Wind down/Runoff coverage can offer the following benefits:
- Affords the managers and directors protection should claims arise after the fund closes for wrongful acts related to managing the fund and the dissolution.
- Coverage runs to the statute of limitations.
- Investors know they will not be the first line of defense should claims arise after the fact.
- Allows the fund to reduce the escrow.
- The policies can be specially written (manuscript) to provide coverage for claims made prior to, during and after the fund closes.
Examples of Runoff Coverage utilized for Hedge, Private Equity, or Venture Capital Firms:
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Private Equity funds had an opportunity to sell one remaining portfolio company and close the fund. The portfolio company management, while onboard for the sale, had previously sued the PE Firm, so Private Equity management was concerned about possible future litigation. No professional liability coverage had previously been purchased. The purchase of the Runoff coverage allowed the Private Equity firm to reduce the escrow and distribute funds to investors while protecting themselves with indemnification for further litigation. Investors were not the first line of defense should litigation arise. Limits: $5M
- Hedge Fund portfolio manager was winding down a fund. We were asked to step in and assist the hedge fund because they were concerned their current broker lacked the expertise to negotiate broad terms and conditions. The coverage allowed the fund manager to distribute more of fund assets to investors and have the peace of mind that indemnification would be readily available for any future litigation. Limits: $10M.
What is the cost of Runoff Insurance coverage for Hedge, Private Equity, or Venture Capital Funds?
The cost of the coverage varies. If professional liability coverage is in place the cost tends to be 1.5 to 2.5 times the annual premium for 6 to 7 years. If professional liability coverage has not been purchased the cost tends to be higher. The cost of runoff coverage when the fund is distressed also tends to be higher.
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