Jonathan Legge

In a three-post series, Jonathan Legge, a Senior Vice President at RT ProExec, is taking a look at the key insurance issues relating to Private Capital Investment. In the first of the three articles in the series (here), Jon examined the issues involved with getting the insurance for private equity-backed portfolio companies’ right. In the second post in the series (here), Jon discussed transactional risk insurance, and in particular, contingent liability insurance. In today’s post, the third and final post in the series, John takes a look at the evolving insurance solutions for Private Capital investors’ changing needs. I would like to thank Jon for allowing me to publish his series of articles as guest posts on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Jon’s article.


In our initial post we described the increasing importance of Private Capital to the global economy and the need to make sure that Private Capital backed companies have the right insurance to protect their investments and the assets of the Private Capital investors and their management teams. Ensuring that a portfolio company maintains coverage that is broad enough to properly respond to D&O, Employment Practices and Fiduciary liability claims is crucial, but even the best coverage for a portfolio company will not completely protect the Private Capital investor.

Until the late 1990’s if a Private Capital investor purchased coverage, it was generally a General Partners’ Liability policy that protected the General Partner against suits by Limited Partners (investors). While this coverage was certainly needed, it was hardly ever called into use because Limited Partners very rarely sued the General Partner. The majority of claims against the Private Capital investor arise from (1) employment issues at the Private Capital level, (2) M&A related claims when an investor is buying or selling a portfolio company and (3) stakeholder claims when a portfolio company is in financial distress.

Over the past 20 years, Private Capital liability coverage has expanded to better meet the unique needs of these investors. For example, most Private Capital investors are unable to distinguish their professional liability risk from their management liability risk because they simultaneously act as investors in their portfolio companies and as operators of their investment funds. For this reason, the General Partners’ Liability policies of the past have evolved into Fund Liability policies which include coverage for professional liability exposures stemming from the operation of investment funds and the services provided to portfolio companies in addition to more traditional management liability exposures. Similarly, Private Capital investors routinely sit on the boards of their Portfolio Companies, so the Private Capital Liability policy also needs to contain a broad Outside Directors’ Liability coverage grant to insure the investors as they serve as board members, advisors and observers.

While the marketplace has generally favorably addressed these high level structural coverage issues, careful attention needs to be paid to the nuances within each coverage. Language that is not normally questioned in traditional management liability policies can cause meaningful problems for Private Capital investors. For example, most D&O policies contain an ERISA exclusion. In the context of a traditional D&O policy, the purpose of this exclusion is to clarify that the D&O policy does not cover the ERISA exposures of the ERISA plan fiduciaries-that coverage is found under the Fiduciary policy.  With regard to Private Capital liability, however, the ERSIA exclusion can be particularly troublesome because the pension funds that invest in Private Capital Funds are often subject to ERISA.  As such, the Private Capital liability policy needs to be amended to make it clear that the exclusion applies only to the Private Capital Investor’s own employee benefit programs; and not to claims arising out of any ERISA issues stemming from Limited Partners or other investors in the funds.

While coverage for traditional Private Capital companies has become very strong, Private Capital companies continue to change, and this change requires fresh thinking from an insurance perspective.  In the past, the Private Capital universe was essentially limited to Private Equity and Venture Capital firms, and the Fund Liability policies generally provided coverage for their unique exposures.  Over the last 10 years these fund structures have expanded to include Family Offices, Real Estate (not new, but growing), Private Debt Funds, Direct Investment from Pensions, Sovereign Wealth Investors, Fundless Sponsors and Search Funds.

The insurance industry is again evolving to address the nuances of these different structures. An actively managed Family Office may have the normal investor exposure of a Private Equity or Venture Capital Fund, but they will also be exposed to risk from their family office activities. These could involve oversight of a foundation, responsibility for trusts for various family members or even the management of household staff.

Real Estate investors are basically private equity investors focused on real estate. They face the same risks as a traditional private equity investor with added vicarious liability exposures related to property management, general contracting and appraisals.

The point is that when it comes to insurance, the world of Private Capital has evolved dramatically over the past decade and will likely continue to expand. The old General Partners’ Liability policies gave way to Fund Liability policies for Private Equity and Venture Capital firms. The trend to greater specialization and unique structures is continuing in the Private Capital universe, which means that insurance professionals will be required to continue driving Private Capital Liability policies to address these and future coverage needs.