Insurance Coverage for Venture Capital Funds

Insurance serves as a critical risk management component for venture capital operations, protecting against claims that could otherwise threaten fund assets or GP personal liability. The appropriate coverage program addresses risks specific to investment management while meeting LP expectations and lender requirements. Working with brokers experienced in alternative investments helps navigate the specialized coverage landscape.

Core Coverage Types

Several insurance policies typically form the foundation of a VC fund's coverage program.

• Directors and Officers Liability (D&O): Covers claims against fund directors, officers, and the management company arising from alleged wrongful acts in their capacity as fund managers. This represents the primary protection against LP claims, regulatory actions, and third-party suits related to fund management.
• Errors and Omissions (E&O): Also known as professional liability, this coverage addresses claims arising from professional services, investment advice, or alleged negligence in fund management. Some policies combine D&O and E&O coverage.
• Employment Practices Liability (EPL): Protects against claims by employees alleging wrongful termination, discrimination, harassment, or other employment-related issues. Relevant for the management company as the employing entity.
• Cyber Liability: Addresses costs associated with data breaches, ransomware attacks, and other cyber incidents. Coverage typically includes breach response costs, notification expenses, and liability for compromised data.
• Crime/Fidelity: Protects against losses from employee dishonesty, theft, or fraud. May be required by LPAs or institutional LP policies.

D&O and E&O Considerations

Management liability coverage deserves particular attention given its importance to the overall risk profile. Policy structure, limits, and terms vary considerably across insurers.

Coverage triggers and exclusions require careful review. Policies may exclude claims arising from specific activities, prior acts before policy inception, or claims by certain parties. Understanding what is and is not covered prevents surprises when claims arise.

Limits adequacy depends on fund size, LP base, and risk profile. Institutional LPs often have minimum coverage requirements stated in side letters or DDQs. Subscription credit facilities may also specify coverage minimums. Benchmarking against similar funds provides context for appropriate limits.

Policy structure matters. Some policies provide separate limits for the fund and management company, while others share limits across entities. Side A coverage, which protects individual directors and officers when the fund cannot indemnify, provides important personal protection.

Cyber Insurance

Cyber risk has grown increasingly relevant for investment managers. VC funds hold sensitive information about portfolio companies, deal pipelines, and LP identities that could be valuable to threat actors. Wire fraud schemes targeting fund capital movements present particular risks.

Coverage components typically include:

• Breach response and investigation costs
• Notification expenses for affected parties
• Credit monitoring services
• Regulatory defense and penalties
• Business interruption from cyber events
• Social engineering and funds transfer fraud

Policy terms around social engineering and wire fraud vary significantly. Given the prevalence of business email compromise schemes targeting fund wire transfers, understanding exactly what coverage exists for fraudulent transfer losses is essential.

Portfolio Company Considerations

VC funds frequently have principals serving on portfolio company boards. This creates exposure that may or may not be covered by fund policies. Understanding how fund D&O coverage extends (or does not extend) to board service, and ensuring portfolio companies maintain adequate coverage, helps manage this risk.

Some fund policies exclude coverage for claims arising from portfolio company board service, while others provide limited extensions. Confirming coverage and considering personal umbrella policies for individuals with significant board exposure provides additional protection.

Key Person Coverage

Key person life and disability insurance protects against the financial impact of losing critical team members. While not universally required, LPAs sometimes include key person provisions that reference insurance coverage. The management company or fund may be named as beneficiary to provide resources for transition.

Insurance Program Management

Effective insurance management extends beyond initial placement. Annual renewals require market updates and coverage review. Claims require proper notification and management. Documentation of coverage should be readily available for LP requests and DDQ responses.

Broker selection matters. Brokers specializing in alternative investments understand the specific coverage needs and market dynamics for VC funds. They can provide benchmarking data, help structure coverage efficiently, and advocate effectively in claims situations.

Questions to Address with Insurance Advisors

• What D&O limits are appropriate given fund size, LP base composition, and subscription facility requirements?
• How does the policy address claims arising from portfolio company board service?
• What cyber coverage exists specifically for wire fraud and social engineering attacks?
• Are there coverage gaps between fund and management company policies?
• What prior acts coverage exists, and how does it interact with claims-made policy structure?
• How do policy exclusions affect coverage for common VC-related claims?

Insurance represents a meaningful expense but serves as essential protection against potentially catastrophic losses. Structuring coverage appropriately, maintaining adequate limits, and working with knowledgeable advisors helps ensure the program provides intended protection when needed.