Protecting Your Venture Capital Fund: A Comprehensive Guide to GPL Insurance
Explore the importance of GPL insurance, its components, and how it can help protect your fund from risks.
What is General Partnership Liability, and why is it important?
There is no doubt that VC’s are facing uncertain times. Big funds are in the news every day, both for their successful investments in the world’s next unicorn companies, but also for lawsuits, SEC investigations, and allegations of mismanagement. Given the high amounts of capital and risky nature of VC investing, litigation in the space is time-consuming and expensive. That’s where insurance coverages like General Partnership Liability (GPL) comes in.
A GPL policy, also known as Venture Capital Asset Protection (VCAP), provides protection from liability related to managing the firm and covers general partners for lawsuits alleging a breach of duty, neglect, error / omission or misstatement.
When should a fund look for coverage?
As an emerging manager, you may already know that you will need coverage in place, but you’re not sure when GPL becomes a vital part of your fund’s operations. Some of the most common insurance trigger-points for a VC include:
- Raising a fund. A higher AUM will typically mean more, or larger investments, which increases your fund’s risk exposures to potential claims. We typically see funds that have raised over $20M in capital start to seriously consider GPL coverage.
- LP Requirements. When raising a fund with backing from institutional LP’s involved, oftentimes, you will face specific insurance requirements to make sure the fund (and LP’s) are protected.
- Taking board seats. Partners take on additional risk when advising a portfolio company - GPL policies can protect the firm, even when the company has an underlying D&O policy as well.
- Hiring additional employees. VC firms, especially emerging funds, are often small and scrappy. Hiring, especially before having a dedicated HR team, can cause additional risk exposures for your firm.
- Investing in regulated industries. Firms that invest in highly regulated industries like health and life sciences or fintech may also be at a higher risk for potential claims.
Most of the time, timing on purchasing insurance will come down to individual risk appetite. Having knowledge of your potential exposures is the best way to start thinking through when you need to have a policy in place.
What are the main risk exposures for a VC?
Claims for a fund can come from a variety of sources. The most common claims scenarios come from the following risk exposures:
- Portfolio company risks - when working with a company, taking a board seat, or giving them advice, you increase your exposure to portfolio related litigation.
- Limited Partner (LP) risks - by accepting an LP’s money, this opens you up to potential liability as a fiduciary.
- Operational risks - these are the risks that come with running any business, such as hiring, which open the firm up to risk of an employment practices claim from an employee, or even a founder, alleging discrimination, harassment, or wrongful termination.
- Regulatory Risks - any fund has some regulatory risk, from breaches of securities law to allegations of unfair business practices. Looking toward the future, there are also potential changes that could make VCs more susceptible to regulatory claims. The SEC is working on a rule that would make it easier for investors to sue venture capitalists.
What does a GPL policy cover, and how does it protect my fund?
General Partnership Liability is a package policy with 4 main components:
- Directors and Officers (D&O) Insurance - protection for the firm and personal assets of its executives.
- Errors and Omissions (E&O) Insurance - protection for when a mistake in your service causes financial loss to a portfolio company or limited partner.
- Outside Directorship Liability (ODL) - Protection for partners when they sit on the boards of portfolio companies.
- Employment Practices Liability (EPL) - Protection from allegations of wrongdoing by and between managers and employees. This can sometimes be left off of GPL policies, so it is always worth checking with your broker.
GPL is written as a package policy in order to adequately cover your fund in the event of a claim. Many claims will trigger multiple parts lines of coverage, so having all in place is a great way to make sure you will be protected.
A GPL policy can help cover the costs a VC fund might face, including legal defense costs, settlements, or judgements.
We can consider the following scenarios:
- A claim gets brought by a portfolio company: The founder of an underperforming fintech company in your portfolio sues for alleged conflict of interest, claiming that you shared confidential information regarding their product with another fintech company in your portfolio. In this scenario, the D&O and E&O coverages within the GPL policy would cover legal fees and settlements, saving the fund and you from personal financial burden.
- A claim brought by LPs: An LP sues a fund for holding an investment for an improper period of time, causing financial harm, despite representations made about the strategies for managing and divesting from investments. The GPL policy's E&O coverage covered legal fees and settlements.
- A claim is brought by regulators: A state securities regulator launches an investigation into a VC firm for allegedly collecting excessive management fees without proper disclosure to their LPs. The GPL policy's D&O coverage covered legal fees related to the regulatory investigation, protecting the VC firm from personal financial burden and allowing them to focus on resolving the issue.
- A claim resulting from an underinsured portfolio company: A company in your portfolio is sued, and partners from your firm who sit on the company’s board are named in the lawsuit. The company either does not have D&O, or has coverage with low limits that do not adequately cover the cost of legal fees and settlements. In this case, your GPL’s Outside Directorship Liability policy will cover the amount in excess of the portfolio company’s limits.
These are just a few common scenarios in which a GPL protects your fund. Usually, claims against a VC like this are low in frequency, but very high in severity. These claims can be frustrating and expensive, which is why it’s important to find a trustworthy insurance provider to partner with and make sure that you have appropriate coverage in place.
What other coverages should a fund consider?
There are a few additional coverages that VC funds can consider when purchasing insurance, including:
- General Liability - foundational protection for the basic risks of running a VC firm or having an office space. General Liability protects firms from a wide range of claims including bodily injury (slip and fall on your premises) or personal injury (libel or slander).
- Cyber - Protection for the cost of data breaches caused by mistakes, hacking, and social engineering. With more companies relying on technology and online platforms to conduct business, cyber attacks have become more frequent and sophisticated. A cyber policy provides coverage in the event of a Ransomware attack, where a hacker gets into systems and threatens to release sensitive information.
- Crime - Coverage for employee theft and issues with transfer of funds. VC’s are increasingly looking to purchase Fidelity Bond insurance to protect their firms from social engineering threats. In this scenario, a malicious third party impersonates a founder, LP, or vendor, and uses fraudulent payment instructions to dupe an employee of the fund into sending them money. A single incident of this nature can have devastating consequences for a venture capital firm. Insurance policies that cover cyber liability can provide much-needed protection against these risks.
As you put together a risk management plan for your fund, it is absolutely worth considering these risks, and speaking with your insurance provider about how to best protect yourself, your firm, and your partners.
What does fund insurance cost?
Pricing of a GPL policy depends on both the insurance market, as well as a variety of factors about your specific fund, including:
- Investment thesis
- Board positions
- LP base
- Firm Structure
Pricing will also depend on the limits and retention, or deductible, for your policy. As a general rule of thumb, funds should consider purchasing roughly $1 million in limits for any fund up to $100M in AUM, and add an additional $1 million in coverage for every additional $100 million in funds. Insurance policies are often a fund expense.
The best way to figure out accurate pricing for your fund is to speak with an insurance advisor and get a quote.
How to get started on fund insurance.
If you have questions about your firm’s risk exposures, want to learn more about what a personalized coverage plan looks like for your fund, or if you want to get started on getting a quote, Vouch can help.
Vouch is the modern insurer trusted by top Venture firms. With Vouch, there are never any added or hidden fees to add cost without delivering value. You and your fund will have access to designated account managers and insurance veterans with a deep knowledge of VC fund structures and investment types, so you can get the right coverages and limits in place based on your risk profile.
To learn more about General Partnership liability, or to set up a free consultation to assess your risk exposures and get started on a quote, visit vouch.us/gpl.