Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News November 15, 2004 Issue

More on E&O and D&O Insurance

Last week, IM Insight spoke with P. Noble Powell Jr., vice president of insurance broker HRH of Baltimore. Powell had a few additional thoughts on the topic of insurance for advisers (see the November 8, 2004 IM Insight article on E&O and D&O insurance for the basics).

Defense Costs. Powell noted that there are two ways that an adviserís E&O policy might cover the cost of defending against regulatory charges: either in a "cost of investigations" endorsement or by defining "claim" to include formal regulatory investigations.

However, he pointed out that whether defense costs are covered also will depend on the nature of the claim. If an advisory firm is sued for fraud, by either a regulator or a private litigant, and the other side wins, the firmís insurance typically will not cover defense costs (and the adviser will owe money back to the insurer). In contrast, if the charge is negligence, the adviserís defense costs typically will be covered, even if the adviser loses or settles.

And what if an adviser settles a fraud charge? Powell said that in such a scenario, whether or not an insurance company will pay the defense costs will likely depend on the nature of the claim. For example, an insurance company may not pay defense costs relating to the settlement of fraud allegations by NY attorney Eliot Spitzer, but they may be willing to cover defense costs relating to the settlement of fraud allegations by a private investor plaintiff.

Incidentally, Powell said heís not familiar with any E&O policy that will pay for regulatory fines and penalties ó "period." And Powell, like other insurance experts that IM Insight has spoken with, said heís never heard of a compliance officer being sued by a private plaintiff in connection with alleged negligence in the performance of the compliance function.

D&O. Powell thought the estimate of the cost of D&O insurance mentioned in last weekís article might be a bit high (the estimate was 10 to 15 percent of the cost of the E&O annual policy premium). He said that his firm has canvassed underwriters and found that most will provide D&O coverage with a $1 million limit as an endorsement to the E&O policy for a flat $3,000 to $5,000 premium. Powell said that one of his clients had an E&O policy where the premium was $130,000 and the carrier had proposed to charge 10 percent of that for D&O. He said he was able to negotiate the proposed $13,000 down to $5,000.

If your E&O is provided by the Hartford, you might already have D&O coverage. Powell said that that particular company typically "throws D&O coverage into their standard E&O for advisory firms," and provides a separate a D&O exclusion for advisers that donít want to pay extra for D&O.

When naming the firmís CCO as an officer for D&O purposes, Powell said to make sure the firm has named the CCO position as the officer, not a specific individual. "The D&O policy covers past, present, and future ĎDsí and ĎOsí," said Powell.

Indemnification. If the firmís bylaws donít have an indemnification provision, Powell suggested that CCOs ask their CEO to have legal counsel draft an indemnification to the bylaws. D&O, he noted, serves as the funding mechanism for the indemnification.

Funds and Advisers. Should a fund and its adviser be covered by the same insurance policy? Yes, said Powell. If a fund and adviser are involved in a dispute, and there are different insurance carriers for each (say, Company A for the fund and Company B for the adviser), "legal counsel for the insurance carriers may argue about who is the primary insurer for the loss."

If the adviser is large relative to the fund, the fund could be covered under the adviserís policy, he said. Or, if the fund is large relative to the adviser, the adviser could be covered under the fundís policy. And, he added, the adviser always could be insured with respect to its advice to non-investment company accounts by a separate insurance company.

Advisers and Fund Independent Directors. If the fund and the fundís adviser are covered under the same policy, to protect against the event that a fundís independent directors sue the fundís adviser, the adviser should make sure that it has a "manuscript modification" to provide coverage for itself under the "insured vs. insured carve back endorsement."

Powell explained that a straight insured vs. insured carve back endorsement only protects the independent directors, whereas to provide protection to the adviser, the filed endorsement has to be modified by the underwriter to add additional language covering the adviser.