Insurance programs for private credit fund managers address risks that arise from both general investment management activities and the specific exposures created by lending operations. While core coverage types parallel those of other alternative asset managers, private credit managers face additional considerations related to lender liability, borrower relationships, and the operational complexities of loan servicing. A well-designed insurance program protects the firm, its personnel, and indirectly the fund's investors against significant loss scenarios.
Core Insurance Coverage Types
Private credit managers typically maintain several foundational insurance policies that address common risks in investment management. These coverages form the base of most insurance programs regardless of specific investment strategy.
- Directors and Officers (D&O) Liability: Protects the firm's directors and officers against claims alleging wrongful acts in their management capacity. This coverage is essential for attracting and retaining qualified leadership.
- Errors and Omissions (E&O) / Professional Liability: Covers claims arising from alleged negligence, errors, or omissions in providing investment management services. For private credit managers, this may include claims related to investment selection, portfolio monitoring, or investor communication.
- Employment Practices Liability (EPL): Protects against claims from employees alleging wrongful employment practices such as discrimination, harassment, or wrongful termination.
- Cyber Liability: Addresses losses arising from data breaches, system failures, and other cyber incidents. Given the sensitive borrower and investor information handled by credit managers, this coverage has become increasingly important.
- Crime / Fidelity: Protects against losses from employee dishonesty, theft, or fraud. Coverage typically includes both first-party losses and third-party claims.
Credit-Specific Insurance Considerations
Private credit managers face exposures that may not arise for equity-focused investment managers. These credit-specific risks warrant attention when designing insurance programs:
Lender Liability Risk: Borrowers or other parties may bring claims alleging the fund acted improperly in its capacity as a lender. Common theories include claims that the lender exercised undue control over the borrower, breached implied covenants of good faith, or improperly accelerated or called loans. While professional liability policies may respond to some of these claims, coverage terms and exclusions require careful review.
Workout and Restructuring Exposure: When funds take active roles in borrower workouts, including serving on creditor committees or influencing borrower operations, the potential for claims increases. Insurance coverage should address these activities, though some policies may contain exclusions or limitations.
Loan Servicing Activities: Funds that perform loan servicing functions, whether in-house or through affiliated servicers, create additional exposure related to payment processing, escrow management, and borrower communications. Operational failures in servicing can generate both direct losses and third-party claims.
Policy Structure Considerations
Insurance programs for private credit managers involve structural decisions that affect coverage effectiveness:
- Fund vs. Manager Coverage: Some policies cover only the management company, while others extend coverage to the fund entities themselves. Understanding what entities are insured helps identify potential gaps.
- Limits and Retentions: Appropriate coverage limits depend on assets under management, investor requirements, and risk tolerance. Retention (deductible) levels involve trade-offs between premium cost and out-of-pocket exposure.
- Coverage Territory: Funds with international lending activities should verify that coverage extends to claims arising from foreign operations.
- Prior Acts Coverage: When changing insurers, maintaining coverage for claims arising from past activities helps avoid gaps in protection.
Investor Requirements
Institutional investors often have specific insurance requirements for managers in which they invest. Common requirements include minimum coverage limits for professional liability and crime coverage, with some investors requesting to be named as additional insureds or loss payees on certain policies.
During fundraising, managers should understand investor insurance requirements and either obtain compliant coverage or negotiate alternative arrangements. Addressing insurance requirements proactively avoids delays in closing investor commitments.
Claims Scenarios
Understanding common claim scenarios helps managers evaluate coverage adequacy:
- Investment Performance Claims: Investors allege the manager made misrepresentations about strategy, risk, or expected returns. Professional liability coverage typically responds.
- Borrower Claims: Borrowers allege improper lender conduct, such as wrongful acceleration or breach of commitment. Coverage response depends on policy terms and claim specifics.
- Regulatory Proceedings: SEC examinations or enforcement actions create defense costs even when no wrongdoing is found. D&O and professional liability policies often cover regulatory defense.
- Data Breaches: Unauthorized access to borrower financial information or investor data triggers notification obligations and potential liability. Cyber coverage addresses these incidents.
Insurance Program Management
- Annual Review: Insurance programs should be reviewed annually to ensure coverage keeps pace with business growth and evolving risks.
- Claims Reporting: Establishing clear procedures for identifying and reporting potential claims helps preserve coverage rights.
- Broker Selection: Working with brokers experienced in alternative asset manager insurance helps identify appropriate coverage and competitive pricing.
Questions to Ask When Establishing Insurance Coverage
- Does professional liability coverage address lender liability exposures, including workout and restructuring activities?
- What entities are covered under each policy, and are fund-level entities included where appropriate?
- How do coverage limits compare to industry benchmarks and investor requirements?
- What exclusions might limit coverage for credit-specific activities?
- How will coverage respond if the fund takes an active role in borrower operations during a workout?
- What is the claims reporting process, and what triggers reporting obligations?