The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: D&O Insurance

  • From Vol. 10 No.3 (Jan. 19, 2017)

    Cyber Insurance Coverage, Pre-Breach Mitigation Efforts and Post-Breach Response Plans Can Reduce Harm to Fund Managers From Cyber Attacks 

    Cyber insurance policies are indispensable for investment firms operating in an age of widespread cyber attacks and data breaches costing millions of dollars in damages and liability. Investment fund manager principals need to have a nuanced grasp of what those policies cover and ensure they maximize their value. Doing so can put their firms in a good position to reduce reputational and financial harm in the event of a cyber breach or investigation of their cyber preparedness by a regulatory agency. See “Essential Tools for Hedge Fund Managers to Combat Escalating Cyber Threats” (Feb. 4, 2016). These points were explored in a panel discussion presented by Haynes and Boone. Moderated by Haynes and Boone partner Werner Powers, the panel included Ron Borys, managing director of Crystal & Company; Sandy Crystal, executive vice president of Crystal & Company; Christopher Liu, head cyber specialist for financial institutions at AIG; and Haynes and Boone partners Ricardo Davidovich and David Siegal. This article presents the key insights communicated by the panel. For additional insight from Davidovich, see “Understanding the Regulatory Regime Governing the Use of Social Media by Hedge Fund Managers and Broker-Dealers” (Dec. 13, 2012); as well as our two-part series on closing hedge funds: “How to Close a Hedge Fund in Eight Steps” (May 8, 2014); and “When and How Can Hedge Fund Managers Close Hedge Funds in a Way That Preserves Opportunity, Reputation and Investor Relationships?” (Jun. 2, 2014).

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  • From Vol. 9 No.28 (Jul. 14, 2016)

    What D&O and E&O Insurance Will and Will Not Cover, and Other Hot Topics in the Hedge Fund Insurance Market

    As hedge fund managers anticipate potential fallout from regulatory enforcement actions, it is critical to have a sophisticated understanding of the mechanics of directors and officers (D&O) and errors and omissions (E&O) insurance, as well as the types of liability covered by those policies. These issues were the subject of a recent webinar hosted by Seward & Kissel. During the discussion, Mark Hyland, a partner at Seward & Kissel, and Jason Duffy, a partner and founder of Fieldstone Insurance Group, explained how insurance can be used to anticipate and mitigate the adverse financial impact of covered acts or omissions. This article analyzes the key points from the webinar. For a comprehensive overview of D&O and E&O insurance, see “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities” (Nov. 17, 2011). For additional insight from Seward & Kissel, see “Reduced Management Fees and Narrower Liquidity Among Trends in New Hedge Funds” (Mar. 31, 2016); and our two-part coverage of the Seward & Kissel private funds forum: “Trends in Hedge Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015). 

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    How E&O and D&O Liability Insurance Can Help Hedge Fund Managers Mitigate the Consequences of Regulatory Enforcement Actions

    Responding to a regulatory inquiry can entail substantial legal and other expenses for a hedge fund manager – even if the manager is not the target of the investigation. Furthermore, private litigation often follows regulatory action. One way to mitigate such risks is through appropriately tailored errors and omissions (E&O) and directors and officers (D&O) liability insurance. A recent alternative asset manager forum sponsored by insurance advisory and brokerage firm Crystal & Company examined how and when such insurance may cover the cost of responding to regulatory inquiries; the claims process; the policy provisions a manager should focus on to ensure appropriate coverage; and the current market for such insurance. Moderated by Ron Borys, a managing director at Crystal & Company, the discussion featured Theodore A. Keyes, special counsel at Schulte Roth & Zabel; Michael Machin, a national underwriting officer at Travelers; Thomas Ruck, a managing director at CNA; and Ray Santiago, a senior vice president at XL Catlin Professional. This article highlights the key takeaways from the discussion. For coverage of a separate panel from the forum covering cyber insurance, see “Cyber Insurance Providers May Play a Key Role in Assisting Hedge Fund Managers Mitigate Cyber Incidents” (May 26, 2016). For a comprehensive overview of D&O and E&O insurance, see “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities” (Nov. 17, 2011).

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  • From Vol. 8 No.23 (Jun. 11, 2015)

    Costs and Structures of Hedge Fund Management Liability Insurance Policies

    Hedge fund managers’ demand for management liability insurance is rising in response to increasing regulatory scrutiny, market volatility and fiduciary responsibilities of hedge fund managers and directors.  The good news is that insurance prices are falling, thanks to heated competition among insurance carriers.  In a recent interview with The Hedge Fund Law Report, Richard A. Maloy, Jr., Chairman and Chief Executive Officer of Maloy Risk Services, shared his expertise on the hedge fund management liability insurance market, including the types of management liability insurance purchased by hedge fund managers, the costs of such coverage, common practices with respect to negotiating insurance policies and the interaction of insurance with fund indemnification policies.  For more on hedge fund management liability insurance, see “Hedge Fund Insurance Benchmarking Survey Reveals Trends and Views Concerning Insurance Purchasing, Pricing, Coverage Limits, Frequency of Claims and Quality of Claims Service,” The Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012); and “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 7 No.34 (Sep. 11, 2014)

    Federal Appellate Court Determines That “Officer” Is Not a Self-Effectuating Term in Corporate Bylaws, with Implications for Hedge Fund Manager Indemnification Provisions and D&O Insurance Policies

    In connection with an ongoing dispute involving alleged trade secret theft, a federal appellate court recently construed the meaning of the term “officer” in the bylaws of a notable financial holding company.  See “How Can Hedge Fund Managers Protect Themselves Against Trade Secrets Claims?,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).  The bylaws provided for indemnification and advancement of attorney fees for officers of the company and certain of its subsidiaries.  See “Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents,” The Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  Thus, if the alleged trade secret thief was an “officer,” he would be entitled to indemnification and advancement of attorney fees, to the extent permitted by relevant law.  If he was not an officer, he – rather than his former employer – would bear the cost of litigation and remedies.  The appellate court’s opinion is notable in at least two respects, both discussed in this article.  See also “How Can Hedge Fund Managers ‘Manuscript’ D&O and E&O Insurance Policies to Broaden Coverage without Increasing Cost?,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

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  • From Vol. 7 No.29 (Aug. 1, 2014)

    Settlement by Harbinger’s Former COO Calls into Question the Utility for Hedge Fund Manager Executives of Indemnification Provisions in Fund Documents and D&O Insurance Policies

    On July 28, 2014, the SEC settled charges against Peter A. Jenson, former COO at Harbinger Capital Partners LLC (Harbinger), stemming from a group of enforcement actions initiated in 2012.  In those actions, the SEC alleged that Phillip A. Falcone, Harbinger and related entities and individuals misappropriated client assets, created an illegal short squeeze to manipulate bond prices and had control person liability relating to the short squeeze.  See “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” The Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).  Under the consent and proposed final consent judgment, for at least two years, Jenson cannot work in the securities industry or as an accountant on behalf of any entity regulated by the SEC.  The U.S. District Court for the Southern District of New York must approve the settlement.  This article describes the background of the settlement and the proposed settlement terms, and discusses an underappreciated risk issue highlighted by the settlement.

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  • From Vol. 7 No.26 (Jul. 11, 2014)

    Hedge Fund Industry Experts Discuss Presence Examinations Priorities, SEC Investigations and How an Admission in an SEC Settlement May Affect Insurance Coverage

    Since enactment of the Dodd-Frank Act, the SEC has been shining a bright light on newly registered investment advisers, particularly through its presence exam initiative.  See “A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Private fund managers need to be prepared to respond appropriately and effectively when the SEC comes calling, whether through a routine examination or a formal investigation.  In that regard, a recent program highlighted the areas on which the SEC has focused in its presence exam initiative, the mechanics of an SEC investigation and how admissions of liability may affect the availability of insurance coverage.  The speakers included Mary O’Connor, Global Head of the Financial Institutions Group at Willis Group Holdings; Richard Magrann-Wells, Senior Vice President at Willis; Christopher Lombardy, partner at Kinetic Partners US LLP; Robert J. Herm, Vice President at Axis Insurance; Gary Stein, partner at Schulte Roth & Zabel LLP; and Theodore A. Keyes, special counsel at Schulte.  This article provides a long-form recitation of the material points made during the program.

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  • From Vol. 6 No.44 (Nov. 14, 2013)

    Federal Court Orders Goldman Sachs to Advance Attorneys’ Fees to Ex-Employee Charged with Theft of Trade Secrets

    On October 22, 2013, the United States District Court for the District Court of New Jersey ruled that Goldman Sachs Group, Inc., the parent company of Goldman Sachs & Co., must advance the legal fees and related costs that its former employee, Sergey Aleynikov, incurred and will incur in defending against New York State criminal charges that he stole confidential computer code from the company to benefit his new employer.  The Court’s decision regarding advancement turned on whether Aleynikov was deemed to be an “officer” as defined in Goldman’s by-laws, which permit advancement of legal defense expenses for officers.  The Court’s decision underscores the imperative for hedge fund managers to carefully define the scope of firm personnel who will be afforded the benefit of advancement and indemnification of legal expenses incurred in defending civil and criminal cases.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  This article summarizes the factual background and Court’s legal analysis, as well as lessons for hedge fund managers arising out of the decision.

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  • From Vol. 6 No.33 (Aug. 22, 2013)

    How Can Hedge Fund Managers “Manuscript” D&O and E&O Insurance Policies to Broaden Coverage without Increasing Cost?

    Unbeknownst to an alarmingly high proportion of hedge fund managers, directors and officers (D&O) and errors and omissions (E&O) insurance contracts are not adhesion contracts.  Rather, from the perspective of insurers, such contracts are up for negotiation – or “manuscripting,” in insurance industry lingo.  Hedge fund managers accordingly have the ability – and arguably in light of their fiduciary duties, the obligation – to negotiate for the best D&O and E&O policy language possible.  (This presumes that managers have such types of insurance in the first instance, which they almost invariably should.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).)  In a guest article, Mark Dellecave and Ray Santiago, both experienced insurance professionals at Willis, identify some of the key D&O and E&O policy terms that managers should endeavor to manuscript, and offer guidance on negotiating and manuscripting those terms.  Having gone through the manuscripting process with hedge fund industry participants, Dellecave and Santiago know the pressure points, and the preferences of insurers; and this article embodies their market color.  In addition, the authors provide guidance on selecting the most appropriate D&O and E&O carriers, and the right categories of coverage.

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    Are Disgorgement Payments to the SEC an Insurable Loss under New York Law?

    A recent ruling by New York’s highest court involving an insured broker-dealer’s market timing settlement with the SEC may impact hedge fund managers evaluating SEC settlements requiring disgorgement payments where fund investors, rather than the manager, benefited from manager misconduct.  This article summarizes the factual allegations and legal arguments underpinning the court’s decision in this case.  Managers in such circumstances would also be well-advised to determine whether disgorgement payments would be covered by their directors and officers and errors and omissions insurance policies.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 6 No.21 (May 23, 2013)

    How Can Hedge Fund Managers Prepare for an SEC Investigation and Maximize the Odds of Obtaining Insurance Coverage? (Part Two of Two)

    On May 2, 2013, a panel of experts from K&L Gates, Jamison & Co. L.L.C. and ACA Compliance Group hosted a webinar entitled, “Issues Arising from SEC Investigations of Private Fund Managers: How to Prepare for an Investigation and How to Maximize the Odds of Obtaining Insurance Coverage.”  This article, the second in a two-part series covering the webinar, addresses insurance coverage for hedge fund managers, including: an overview of directors and officers and errors and omissions policies; the state of the market for insurance coverage for hedge funds and managers; the risk of relying on fund indemnification without obtaining insurance; judicial decisions providing guidance on the scope of coverage, including with respect to SEC investigations; steps that funds and managers can take to maximize insurance coverage for SEC investigations; the SEC’s enforcement push; steps managers can take to formulate a plan for handling an SEC investigation; common mistakes managers make during investigations; and measures that managers can take to minimize enforcement risk.  See also “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 6 No.20 (May 16, 2013)

    How Can Hedge Fund Managers Prepare for an SEC Investigation and Maximize the Odds of Obtaining Insurance Coverage? (Part One of Two)

    On May 2, 2013, a panel of experts from K&L Gates, Jamison & Co. L.L.C. and ACA Compliance Group hosted a webinar entitled, “Issues Arising from SEC Investigations of Private Fund Managers: How to Prepare for an Investigation and How to Maximize the Odds of Obtaining Insurance Coverage.”  This article, the first in a two-part series covering the webinar, addresses the SEC’s enforcement push against hedge fund managers; steps managers can take to formulate a plan for handling an SEC investigation; common mistakes managers make during investigations; and measures that managers can take to minimize enforcement risk.  For our coverage of current SEC enforcement priorities, see “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” The Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).

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  • From Vol. 6 No.12 (Mar. 21, 2013)

    How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors? (Part Three of Three)

    Trade errors can cause substantial harm to hedge fund managers and their investors.  Such errors can, among other adverse consequences, undermine investors’ confidence in a manager’s trade execution capability; cause a manager to miss investment opportunities; and divert investment and operating resources in the course of correcting errors.  As such, managers, investors and regulators are theoretically aligned in their shared interest in avoiding trade errors.  As a practical matter, however, there is no regulatory roadmap to best practices for trade error prevention, detection and remediation.  SEC guidance has been sparse on this topic; and industry practice has largely filled the vacuum left by the dearth of authority.  Accordingly, in the area of trade errors (as in other areas, such as principal transactions), hedge fund managers are left to divine industry practice – and, further, to conform relevant practice to the specifics of their businesses.  How can hedge fund managers do this?  To begin to answer this hard and multifaceted question, The Hedge Fund Law Report has been publishing a three-part series on preventing, detecting, resolving and documenting trade errors.  This third installment in the series discusses the allocation of losses and gains resulting from trade errors among a manager and its clients; limitations on the allocation of trade error losses; documentation of trade errors; whether managers can obtain insurance to cover losses resulting from trade errors; and common mistakes managers make in handling trade errors.  The first article in the series discussed the challenge of defining a trade error; a manager’s legal obligations relating to the handling of trade errors; and the policies and procedures that managers should consider to prevent, detect, resolve and document trade errors.  See “How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors? (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).  The second article in the series outlined various measures to prevent trade errors; detect trade errors after execution; report trade errors once identified; resolve trade errors; and calculate losses resulting from trade errors.  See “How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors? (Part Two of Three),” The Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013).

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  • From Vol. 5 No.36 (Sep. 20, 2012)

    Bankruptcy Trustee of Banyon Hedge Funds Sues Crime Insurance Carriers and Broker Over Refusal to Pay on Crime Insurance Claim With Respect to Scott Rothstein/RRA Ponzi Scheme

    Hedge fund managers typically procure various categories of insurance coverage with respect to their activities, including directors and officers (D&O) insurance, errors and omissions insurance and crime insurance coverage.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  However, as in many categories of insurance, insurers sometimes resist paying claims made by hedge fund managers.  A defense to payment of claims typically asserted by insurers is that the insured, e.g., the hedge fund manager, made misrepresentations on the insurance application.  An example of this type of dispute is the recent litigation between Level Global, L.P. and XL Special Insurance Company.  See “New York District Court Orders Insurer XL to Advance Defense Costs to Level Global Under D&O Policy,” The Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012).  Another dispute of this type was recently initiated when eight insurers refused to pay out on a claim for $70 million in crime insurance procured by a group of hedge fund managers.

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  • From Vol. 5 No.33 (Aug. 23, 2012)

    How Can Hedge Fund Managers Capture the Upside of ERISA Investments While Mitigating Costs Related to Potential ERISA Liability?

    Generally, if a “benefit plan investor” owns 25 percent or more of any class of equity interests issued by a hedge fund, the fund and its manager will become subject to certain provisions of the Employee Retirement Income Security Act of 1974 (ERISA).  See “Hedge Fund Industry Practice for Defining ‘Class of Equity Interests’ for Purposes of the 25 Percent Test under ERISA,” The Hedge Fund Law Report, Vol. 3, No. 29 (Jul. 23, 2010).  For hedge fund managers, there are benefits and burdens to accepting an investment that will subject them to ERISA.  The chief benefits are that ERISA investors tend to be sizable, serious, long-term investors.  The chief burden is the complex regulatory regime with which ERISA managers must contend, and the consequent expansion of potential liability and administrative and other costs.  See “Applicability of New Disclosure Obligations under ERISA to Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  Hedge fund managers soliciting benefit plan investors therefore seek to capture the upside of ERISA investments while mitigating the potential liability and related costs.  One of the more effective ways in which savvy managers do so is by purchasing fiduciary liability insurance.  But fiduciary liability insurance is a complex product, and structuring an appropriate policy requires an involved legal and business analysis.  The intent of this article is to provide hedge fund managers with a checklist of issues to consider when evaluating the purchase of fiduciary liability insurance and when actually purchasing and structuring such insurance.  In particular, this article details: what fiduciary liability insurance is; the rationale for purchasing such insurance; how such insurance is typically structured; what types of claims and costs are typically covered; the distinction between fiduciary liability insurance and errors and omissions (E&O) coverage; typical premium pricing; the allocation of premiums among management entities and funds; notable fiduciary liability insurance carriers; and the interaction between such insurance and indemnification provisions in manager and fund governing documents.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    New York District Court Orders Insurer XL to Advance Defense Costs to Level Global Under D&O Policy

    In the current environment of heightened regulatory scrutiny and vigorous criminal and civil enforcement of insider trading and other securities laws, hedge fund managers are increasingly invoking D&O liability policies to cover defense costs.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  Insurers, meanwhile, are closely analyzing whether insureds have breached terms or falsified applications.  A recent case points to the types of disputes that arise between insurers and hedge fund manager insureds.  In the case, insurance carrier XL Specialty Insurance Company (XL) sued Level Global Investors, L.P. (Level Global), seeking, among other things, a declaration that it was not obligated to pay defense costs to Level Global and its officers and directors, who are facing criminal and civil actions, because of alleged misrepresentations made by the insureds in their insurance application.  See “Insurer Initiates Action to Recover Defense Costs Advanced to Hedge Fund Manager Level Global, Claiming Level Global Made False Statements in its D&O/E&O Liability Insurance Application,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  On June 13, 2012, the United States District Court for the Southern District of New York (Court) ordered XL to advance defense costs to Level Global and its officers and directors pending the adjudication of XL’s request for a declaratory judgment of no coverage under the D&O insurance policy.  The Court’s holding in this case is a significant victory for hedge fund managers in that it appears to reaffirm the legal maxim that ambiguous insurance contracts are construed against the insurer, in this instance by mandating that insurers must advance payments for defense expenses while a court adjudicates a claim of exclusion from coverage.  This article summarizes the factual background of the case and the legal analysis the Court undertook in reaching its decision.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    Hedge Fund Insurance Benchmarking Survey Reveals Trends and Views Concerning Insurance Purchasing, Pricing, Coverage Limits, Frequency of Claims and Quality of Claims Service

    As the risks of doing business for hedge fund managers have increased, many have carefully evaluated various types of liability insurance, with a particular focus on the coverage and pricing of such products.  To assist hedge fund managers in understanding trends in the market for such insurance, enhancing risk management and discussing insurance coverage with fund investors, London-based insurance consultant and broker, Baronsmead, has released the results of its second annual hedge fund insurance benchmarking survey (survey).  The survey asked hedge fund managers and insurers to answer questions concerning: purchasing decisions related to directors and officers insurance and professional indemnity insurance, often known as errors and omissions insurance; insurance premiums, frequency of claims and quality of claims service; and risks of doing business as a hedge fund manager.  This article summarizes the key findings in the survey.

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  • From Vol. 5 No.13 (Mar. 29, 2012)

    Insurer Initiates Action to Recover Defense Costs Advanced to Hedge Fund Manager Level Global, Claiming Level Global Made False Statements in its D&O/E&O Liability Insurance Application

    Hedge fund liability insurance in the form of errors and omissions (E&O) professional liability insurance and directors and officers (D&O) insurance can afford protection to hedge fund managers and their hedge funds as well as their respective officers, directors and employees, against claims for alleged errors, omissions, negligent acts, misstatements, misrepresentations and breaches of duties.  For an overview of D&O policies as they relate to hedge funds, see “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  However, with increasing regulatory scrutiny resulting in heightened criminal prosecutions and enforcement activity affecting hedge fund managers and their employees, insurers are raising premiums with respect to such liability coverage and carefully examining policies to determine whether hedge fund manager insureds have breached terms or misrepresented facts.  Identified breaches or misrepresentations, in turn, may allow insurers to claw back defense costs previously advanced, or avoid or reduce payouts.  Historically, insurers have been reluctant to bring such breach of contract suits against their insureds for fear of alienating existing customers and diminishing new business.  However, a recent declaratory judgment action initiated by insurer XL Specialty Insurance Company (XL) – a well-known underwriter in the hedge fund D&O space – may portend a trend towards more aggressive litigation by insurers.  The litigation is also a timely reminder that D&O insurance agreements are not adhesion contracts.  Underwriters are typically amenable to negotiating at least certain provisions, and managers are well advised to negotiate because form agreements often reflect the experience of underwriters in avoiding or excluding claims.  See “Regulatory Compliance Association Hosts Program on Increased Risk for Hedge Fund Directors and Officers in the New Era of Heightened Regulation and Enforcement,” The Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).  This article summarizes XL’s Complaint and highlights the relevant provisions from the insurance application and policy.

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  • From Vol. 5 No.11 (Mar. 16, 2012)

    Two Delaware Chancery Court Decisions Help Define the Scope of Liability for Private Fund Portfolio Company Directors

    Hedge and private equity fund managers whose employees serve as directors of portfolio companies should understand the scope of potential liability with respect to their service as a company director and how they can shield themselves from such liability.  The Delaware Chancery Court has, within the past two years, issued two separate decisions in a single case that will help define company director liability.  This article details these two decisions.

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Corporate Governance Best Practices for Cayman Islands Hedge Funds

    With the financial crisis of 2008 and 2009, corporate governance practices in the global alternative investment funds industry came under the microscope.  While investor views on how fund directors performed during the crisis vary, what is clear a few years on is that investors, hedge fund managers and service providers have a much better understanding of the role of an independent non-executive director of an alternative investment fund and that a best practice framework has started to become a topic for active discussion in the industry.  As a result, hedge fund investors – particularly institutional investors – are increasingly scrutinizing a fund’s corporate governance structure to ensure that the directors are diligently and skillfully performing their duties in the best interest of the hedge funds on whose boards they serve.  With the global hedge fund industry having its largest presence in the Cayman Islands, this guest article looks at some of the issues relating to corporate governance from the Cayman fund perspective.  The authors of this guest article are Tim Frawley, a Partner in the Investment Funds practice of Maples and Calder, and Peter Huber, Global Co-Head of Maples Fiduciary Services.  Frawley and Huber begin with a historical accounting of Cayman company fund governance.  The authors then explain the various duties owed and roles performed by fund directors.  Next, the authors discuss the findings and implications from the Weavering Macro Fixed Income Fund Limited (In Liquidation) decision handed down last year.  The authors then move to a survey of some current hot-button issues related to fund governance, and conclude with a discussion of anticipated fund governance challenges facing hedge fund managers.

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Disgorgement Payments to the SEC are Not an Insurable Loss Under New York Law

    On December 14, 2011, the New York State Appellate Division, First Department dismissed an attempt by Bear Stearns & Co. and Bear Stearns Securities Corporation (together, Bear Stearns) to claim disgorgement payments to the Securities and Exchange Commission (SEC) as an insurable loss.  See generally “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 4 No.42 (Nov. 23, 2011)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds

    On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA).  This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.

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  • From Vol. 4 No.41 (Nov. 17, 2011)

    Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities

    Directors and officers (D&O) liability insurance can be an expensive proposition for hedge fund managers, particularly given the growing costs of doing business.  However, a number of factors make purchasing such coverage increasingly compelling for hedge fund managers.  Such factors include enhanced market volatility, heightened regulatory scrutiny of fund managers, more demands for such coverage from fund investors and greater competition among insurance carriers which has resulted in moderate price reductions for D&O insurance.  To assist hedge fund managers in evaluating whether to purchase D&O insurance, how much, at what cost and under what structure, this article starts by identifying nine discrete reasons why hedge fund managers may consider purchasing D&O insurance.  The article then discusses: what D&O insurance is; what related categories of insurance hedge fund managers typically purchase; who is covered under a D&O policy; what types of claims are covered under a D&O policy; what types of claims are typically excluded; applicable legal standards; situations in which costs may be advanced and clawed back; the market for retentions or deductibles; “hammer” clauses; the differences among Side A, Side B and Side C coverage; and the current market for pricing of D&O insurance, including pricing of the primary layer of coverage and additional layers in the “tower.”  This article concludes with a discussion of how hedge fund managers are allocating the cost of premiums among management entities and funds, and the interaction between D&O policies and indemnification provisions in fund or management company documents.

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Does a Hedge Fund Manager Have Standing to Pursue Claims on Behalf of a Hedge Fund?

    A recent decision by the United States District Court for the Eastern District of California addressed whether the typical legal arrangements between a hedge fund of funds manager and a fund under its management confer standing on the manager to bring claims on behalf of the fund against an underlying manager and other entities.  The decision is relevant for hedge fund and fund of funds managers in identifying the appropriate party to serve as a plaintiff in litigation, and for evaluating their D&O insurance and indemnification arrangements.  See “Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  This article explains the relevant factual background, the constitutional requirements to establish standing in federal court and the primary lessons of the decision for hedge fund managers.

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  • From Vol. 4 No.12 (Apr. 11, 2011)

    New York Appellate Court Requires Insurers to Indemnify Hedge Fund-Controlled Company for Attorneys’ Fee Award against Company in a Shareholder Derivative Action

    Plaintiffs in shareholder derivative actions often seek, and courts are empowered to award, a variety of remedies – including an award of attorneys’ fees to a prevailing plaintiff.  In a recent decision, the New York Appellate Division, First Department, reaffirmed insurance protection to a corporate policyholder, in which private investment funds had invested, facing the threat of paying attorneys’ fees in a derivative suit.  The Appellate Division held that – notwithstanding the fact that no other damages were awarded in the underlying derivative suit – the derivative plaintiffs’ attorneys’ fees constituted a “Loss” for which the policyholder was entitled to reimbursement from its insurers.  The decision is an important win for policyholders because it represents the first time a New York appellate court has recognized that an underlying plaintiff’s attorneys’ fees awarded in a securities or derivative action are indemnifiable under the terms of the insured defendant’s insurance policy.  In so doing, the Appellate Division placed New York law in line with decisions that are favorable to policyholders on this issue in jurisdictions across the country.  In a guest article, Jared Zola and Andrew N. Bourne, Partner and Associate, respectively, at Dickstein Shapiro LLP, describe the facts and holding of the decision and its implications for hedge funds involved on either side of a derivative suit.

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  • From Vol. 2 No.50 (Dec. 17, 2009)

    Regulatory Compliance Association Hosts Program on Increased Risk for Hedge Fund Directors and Officers in the New Era of Heightened Regulation and Enforcement

    On December 9, 2009, The Regulatory Compliance Association (RCA) hosted a teleconference titled “Director and Officer Liability Escalate in the New Era of Heightened Regulation,” as part of its CCO University Outreach Series.  Walter Zebrowski, CIO and COO for Hedgemony Partners and Chairman of the RCA, explained in his introductory remarks that the “aftermath of the financial collapse coupled with the new era of heightened regulation shall significantly intensify the scrutiny and liability for directors and officers.”  The event was moderated by Richard Maloy, CIC, CRM, Chairman and CEO of Maloy Risk Services.  The panelists included Peter Welsh, a Partner at Ropes & Gray LLP; Ingrid Pierce, a Partner at Walkers Global; and Michael Pereira, Publisher of The Hedge Fund Law Report.  The panelists discussed issues including: the increased effectiveness on the part of regulators, especially the SEC; pending legislation relating to registration of hedge fund managers, and the practical burdens that registration would (and would not) entail; liquidity and regulation of the insurance industry; demands from institutional investors and insurance underwriters for transparency from hedge funds and managers; the role of independent directors; claims trends, including insider trading (and 12 specific strategies that may be used to avoid insider trading allegations); the institutionalization of the hedge fund industry; and the changing directors and officers (D&O) insurance landscape.  This article summarizes the speakers’ insights on the foregoing issues, and highlights the salient points raised by the speakers on related topics.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    Madoff Feeder Funds Sue Casualty Insurers for Breach of Contract and Seek to Recoup Costs of Defending Against Liability Suits

    In the continuing fallout from the Bernard Madoff Ponzi scheme, certain funds affiliated with MassMutual Life Insurance Company (the Feeder Funds or the Funds) that invested client money with Madoff and his fraudulent investment management operation, are being sued by their clients for various alleged breaches of duty.  In response, the Feeder Funds decided to seek indemnity and defense from their insurers under their primary and excess fidelity bonds and director and officer liability insurance policies.  Because the primary fidelity bond carriers refused to contribute to the cost of defending some of the lawsuits, the Funds filed suit against the primary fidelity bond carriers for breach of contract in the Delaware Chancery Court.  Specifically, the Funds claim that the insurers that provided the Funds with surety bonds and executive and officers coverage have failed to meet their obligations to cover the legal cost of defending against the lawsuits.  The Funds are seeking an apportionment of defense costs among them and a declaration of their respective rights and obligations under the policies.  We discuss the factual background of the case, the court’s legal analysis and the implications for hedge fund D&O insurance arrangements.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    New York Court Denies Recovery of Hedge Fund Defense Costs Under D&O Liability Policy Because Settlement Resulting in Disgorgement of Profits Was Excluded From Coverage

    On March 9, 2009, the New York State Supreme Court for New York County dismissed an action brought by hedge fund Millennium Partners, L.P. (Millennium) against Select Insurance Company (Select) for breach of its directors and officers liability policy.  Millennium initially sought to recover defense costs incurred in settling federal and state securities fraud charges.  Select moved for summary judgment dismissing Millennium’s complaint; the court granted summary judgment to Select and dismissed Millennium’s complaint.  The underlying fraud charges resulted in disgorgement of “improperly acquired funds” by Millennium, which did not constitute a “loss” under the Select policy; because the loss itself fell under a policy exclusion, Millennium could not recover the cost of defending against the charges that led up to the loss.  Our discussion of the case offers insight into questions at the heart of hedge fund manager D&O policies: when will insurers challenge claims for coverage, and how will courts respond to such challenges?

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  • From Vol. 2 No.4 (Jan. 28, 2009)

    Insurance Coverage For Subprime Claims Against Hedge Funds: Will Your Insurer Pay?

    More than 600 lawsuits are pending against various entities caught in the fallout of the subprime mortgage meltdown and global credit crisis, with additional litigation a near certainty.  A prime target is hedge funds and their advisers and general partners.  In addition to the losses already suffered as the value of their securities plummeted, hedge funds now face the costs of the resulting litigation.  With the litigation swirling, it is time for hedge fund managers to review their Errors & Omissions and Directors & Officers liability policies.  In a guest article, Matthew J. Schlesinger and Jan A. Larson, partner and associate, respectively, in Reed Smith LLP’s Insurance Recovery Group, examine the purpose and operation of E&O and D&O insurance, common coverage exclusions of which hedge fund managers should be aware and practical tips for hedge funds that currently face, or believe they are likely to face, claims or even litigation.

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