Do I need a specialist insurance broker for a venture fund?
It depends on how much your coverage turns on details. A generalist can serve a straightforward business that needs standard coverage. A venture firm is usually several legal entities, its partners sit on portfolio company boards, and its investors ask about insurance in diligence. The policies that answer for all that are written on forms that vary by insurer, so the details decide what is covered. A broker who asks about those details before you buy is the one you want, whatever their size. If your current broker already does, you may not need to switch.
What a venture firm needs its broker to get right
A venture firm can face claims from three directions: from investors in its funds, from the companies whose boards its partners sit on, and from regulators. Different parts of an insurance program respond to each, even when the same partner is involved in all three. The policies that do this work are D&O (directors and officers liability, for claims about how the firm and its funds are run) and E&O (errors and omissions, for claims about the investment work itself). They are written on forms that vary by insurer, and the details decide what is covered.
Whoever you choose has to get four things right:
- Every fund, entity and vehicle named. A policy covers only the entities and people it defines as insured. Seeing the firm’s name on the first page doesn’t mean every fund is included, and a new fund should be added before it starts investing.
- Partner board seats, from both sides. A portfolio company’s D&O covers your partner as its director, and may not cover what the partner did on behalf of your fund. Your own policy has to answer for that. The Goggin case below turned on that kind of exclusion.
- What the package really includes. Venture policies are often sold as general partners liability (GPL) or venture capital asset protection (VCAP). Those are package names, not coverages. Two packages with the same name and a similar price can protect you very differently.
- Your investors’ requirement, read as a floor. Investors often ask for insurance in diligence. Their requirement is the minimum they want to see, not a sign that the policy fits how your firm works.
Specialist or generalist?
If your business is simple, your coverage is mostly standard, and your broker answers your questions promptly, a generalist can serve you well. Management liability for investment firms is different. The coverage turns on which entities are named, which roles count, whether coverages share a limit, and what happens when ownership changes. A specialist broker knows which of those details matter for a firm like yours and asks about them before you buy.
Size matters less than whether the person handling your account knows the risks a venture firm actually has. Whoever handles the fund’s D&O and E&O should also see the rest of the program, so someone can tell how the policies fit together.
Questions to ask before you choose
Most of these can be answered from your entity chart and your current policies, so a broker who asks for those first is a good sign. Ask:
- Which of our funds, general partners, management company and vehicles would be named on the policy, and how do you add a fund we raise next year?
- How does the policy treat partners who sit on portfolio company boards, and who pays first when a claim involves one?
- Do D&O and E&O share one limit or each have their own, and do legal fees count against that limit?
- At what stage does a regulator’s inquiry count as a claim?
- Will you set the quotes side by side, including the fine print, rather than send the cheapest one?
- Will you read our investors’ insurance requirement and show us where our coverage measures up and where it doesn’t?
How Cilantro works with venture firms
Send us your entity chart, your current policies with all endorsements, and any insurance requirement from your investors. We read the policies, tell you in plain English what you have and what’s missing, and then go to insurers for terms that fit. We set the quotes side by side, including the fine print, so you can decide with a broker’s advice. We also handle the rest of the firm’s insurance: the management company is a small business with employees, bank accounts and data, so we look at cyber, crime and employment practices coverage alongside the investment liability.
If you’re choosing an insurance broker for a VC fund that already has one, changing brokers doesn’t mean changing policies. A new broker can usually review your current program now and take it over at renewal, and your coverage stays in place in the meantime.
What happens when the coverage doesn’t fit
Having insurance doesn’t settle what it covers. The public court record below involves other firms, not Cilantro clients, and each outcome depended on its own facts, policy language, and governing law.
Goggin v. National Union Fire Insurance
Two directors of U.S. Coal also managed separate investment entities. When claims were made about what they did in those overlapping roles, they asked for coverage under a D&O policy.
In November 2018, the Delaware Superior Court ruled that an exclusion for acts in an outside capacity applied to the claims tied to the investment entities. The ruling was about that one policy. It was not a finding of misconduct, and it did not say the directors had no insurance anywhere.
What we check for you: Every role your people hold, including board seats and other vehicles, and which policy covers each one.
Delaware Superior Court opinion, November 30, 2018