Why do you need VCAP Insurance?

Complex litigation is expensive, especially in the world of financial institutions. Legal threats can come from limited partners, employees, other partners, portfolio companies, vendors, and regulators. The policy responds to these disputes by paying legal fees and judgements/settlements from lawsuits alleging failures in management or the provision of investment advisory services. Here a few claim scenarios that illustrate why insurance is important for PE and VC firms: 

Wrongful Termination

Limited partners allege that the general partners wrongfully terminated the partnership agreement and sold the assets of its flourishing business to themselves through a newly formed entity. Since there was no auction or competing offers for the assets, those assets ended up being intentionally undervalued far below market value which enabled the general partners to buy them back at a bargain price. The limited partners allege that this constituted self dealing in breach of the general partners’ fiduciary duty.

Trade Secrets & IP

One of three tech entrepreneurs who jointly developed a certain type of software which was just starting to flourish, allegedly canceled the company’s state registration without authority, shut down the existing company and started up a new one without the other two founders. The intellectual property was then moved from the old company to the new one. The two former founders filed suit against the new entity, its D&Os, and also the venture capital firms involved, for misappropriation of trade secrets, breach of fiduciary duty, aiding the breach of fiduciary duty, fraud and conspiracy

Dilution

Five founders of the company who once owned 40% of it allege that through the years a group of venture capital firms assumed management and engaged in a series of self-interested and dilutive stock offerings under terms that were grossly unfair to the common shareholders which resulted in them receiving less than $50k from an $80 million merger.

A properly structured VCAP policy not only can provide defense for certain claims but can also keep things from getting to that point by providing a funding source for a settlement that doesn’t impact the fund.

What is VCAP Insurance?

Also known as Fund Management and Professional Liability Insurance, VCAP insurance is a blend of Directors & Officers and Errors & Omissions. It is specifically designed to meet the risk exposure profile of venture capital and private equity firms. It covers the company if an act, error, or omission committed in the course of the company’s performance of investment management services is alleged to have caused a financial loss for a third party. Also covers the company and key individuals from liability related to the management of the organization, including employment practices liability

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What does VCAP Insurance cover?

You will have to consult your policy documents to confirm exactly what coverage your VCAP insurance provides but here are a few scenarios that typically would and would not be covered.

Management Liability
Management Indemnification
Outside Directorship Liability
Professional Services Liability
Crime

How much does VCAP Insurance cost?

As with most commercial insurance policies the cost of VCAP insurance depends on a number of factors. Here are some of the main points that insurance carriers will take into account when calculating your premium:

  1. Size of the fund: similar to public D&O being based off of market cap size.
  2. Type of investments: VC investing in cannabis and crypto is going to be multiples more expensive than a VC investing in SaaS.
  3. Principle’s experience and background

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Who needs VCAP Liability Insurance?

Private Equity Firms

Venture Capital Firms & Funds

How it Works

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