General Questions

Who is covered by this policy?
The VCAP policy offers protection for the venture capital and private equity firm’s past, present, and future:

- General partners
- Private funds
- Managing members
- Private fund management entities
- Directors and officers
- Management company
- Equivalent executives of the above
- Subsidiaries
- Employees
- Investment holding companies
- Advisory board members

What is Directors & Officers Liability?
It provides coverage for your directors & officers for defense costs, settlements and judgments related to errors and/or omissions in conducting their duties for the company. It also provides coverage for the company, if it indemnifies the directors & officers, and the company itself if it is named in a suit. Claims typically arise from shareholders, employees, creditors, customers, competitors, regulators and other third parties for a range of allegations.

What is Fiduciary Liability?
This coverage is designed to protect the company and its trustees, directors and officers from claims related to the management of your company’s employee benefit plans. Coverage can be extended to your Employee Stock Ownership Plans and employees. Claims can be made for a breach of a fiduciary duty, a denial of a benefit under a plan or an ERISA Section 510 violation.

What does Professional Liability Protection Cover?
This coverage is designed to protect the company and its directors, officers and employees from claims relating to the rendering of professional services.

D&O Questions

Why Does My Business Need Directors & Officers Liability Coverage?

1. Directors and officers can be held “personally” liable for breaching their fiduciary duty.
2. Plaintiffs often cite management’s inability or unwillingness to make a decision or pursue a course of business as the reason for their actions.
3. Defense costs for such litigation can run into the millions, or tens of millions of dollars.
4. Litigation forces a company to divert capital and resources away from pursuing business activities and into defending its management.
5. Management must spend a great deal of time in depositions and other court hearings, and not focused on the needs of the organization.
6. The company is not legally allowed to indemnify certain allegations against its D&Os.
7. The company may not have the financial ability to fulfill its obligation to indemnify its D&Os.
8. Investigations by governmental and regulatory entities can create enormous legal bills – even if no wrongdoing is found.
9. Shareholders frequently sue for inadequate or inaccurate financial reports or detail in private placement documents.

Who does a Directors & Officers Liability Policy Protect?

1. 1. All past, present and future directors and officers against claims for mismanagement, misrepresentations, actions, errors, omissions, etc. (the policy is not name specific)
2. Covers the individuals, regardless of whether the allegations have any merit, and
   regardless if the company is required or able to indemnify them.
3. Coverage may extend to the Entity for certain types of claims, including:
   1. Securities Claims
   2. Employment Practices Claims
   3. Private Placement of Securities

What Does A Directors & Officers Policy Cover?

1. The policy will pay loss for Claims against the directors and officers while acting in their capacity as Directors or Officers.
2. Loss includes Defense Costs and Damages, like settlements and judgments.
3. Claims are generally for economic damages, but may include some non-monetary damages.
4. Covers the indemnification obligation of the Organization to the Individuals.

How Prevalent are D&O Lawsuits against Private Companies?
In a recent Chubb Insurance survey, 37% of executives from privately -held organizations polled believed that they would be sued by customers in the coming few years. Roughly 30% felt vendors would sue while 21% feared suits from shareholders. Statistics show that the most common suit against D&Os are employment-related claims. Coverage in these employment-related situations will depend on the coverage provided by the D&O policy.

EPL Questions

Why Does My Company Need Employment Practices Liability (EPL) Insurance?
Fast grown, long hours and a young workforce are all contributing factors to employment practices claims. Start-ups are especially vulnerable because they can’t afford a person dedicated to human resources until they reach a certain size level.

When Does My Company Have EPL Exposure?
Companies have EPL exposure at almost all times, including:

When They INTERVIEW
When They HIRE
When They DO NOT
When They EMPLOY
When They PROMOTE
When They DISCIPLINE
When They PAY
When They TERMINATE

How Frequent Do EPL Claims Occur?
In California, the likelihood of an employment practices claim being filed is quite high. In fact, it is really not a matter of “if” a clam is filed against your company, but rather a matter of “when.” Some statistics about claims against employers in the state of California include:

1. California leads the nation in the number of employment allegations leveled against employers
2. Half of all lawsuits filed against employers are employment-related
3. California has the largest number of lawyers in any state as well as the highest ratio of lawyers to citizens
4. California labor and employment laws are the broadest in the nation

Aren’t Most EPL Claims Frivolous and Thrown Out?
Currently, plaintiffs win about 70% of all employment cases in California. However, even if you end up in the minority and no award is given the plaintiff, your attorney’s costs can still run well into the hundreds of thousands – or even higher. EPL policies pay these defense costs.

What Is The Typical Cost of an EPL Claim?
The average cost of a suit is rapidly on the rise. In 1997, the median award was $75,000. By 2003, that number had risen to $173,000 – nearly a 125% increase.

What Can My Company Do To Protect Against EPL Claims?
There is no sure fire prevention method. A well-designed employee handbook that is enforced from the top down along with ongoing training for your managers in the areas of harassment, discrimination, ADA compliance, etc. are solid methods of trying to control this exposure. Purchasing an EPL policy is a nice safety net in the even your other methods fail to work.

Fiduciary Questions

What Is Fiduciary Liability?
Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries are personally liable for losses to a benefit plan incurred by reason of a breach of their duties. Although the duties of a fiduciary may vary, many face serious exposures in the course of their daily operations.

Why Does My Company Need Fiduciary Liability?
The individuals who administer employee benefit plans (fiduciaries) are subject to personal liability under ERISA, the federal law that governs employee benefit plans. Plan fiduciaries cannot protect themselves completely from personal liability under ERISA. Even with a participant directed 401(k), plan fiduciaries can be held liable for a variety of reasons including the selection of plan investment options, monitoring those investments, and educating employees on those options.

What’s The Difference Between Fiduciary Liability And An ERISA/Fidelity Bond?
ERISA/Fidelity bonds are required by law. ERISA requires a minimum bond of 10% of the assets in the Plan(s) be in place during the term of the Plan. This is a form of insurance for dishonesty situations. When dishonest administrators or trustees have financially harmed an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan's beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims and is thus completely distinct from fiduciary liability insurance.

Doesn’t My Employee Benefits Liability (EBL) Coverage Include Fiduciary Liability?
EBL insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits. EBL insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds and others highlighted in this section.

Professional Liability Protection

Portfolio Management
Your company enters into an agreement with a pension fund. After several years of double-digit returns the account performs significantly below the benchmark. The trustee of the pension fund sues the company and the portfolio manager for making numerous investments in companies that are not socially conscious, an alleged violation of the investment guidelines.

Funds Withdrawal
A client of your company makes a request to liquidate his account effective immediately. One week later the client calls to check on the status of the liquidation and the client representative finds no record of the request. During that week the market value of the account dropped by 20 percent. The client sues, alleging the company was negligent and, as a result, the client was unable to close on a real estate property due to insufficient funds.

Stock Purchase
A portfolio manager employed by your company buys a block of stock and distributes it evenly among your clients’ accounts. Although the stock is traded on the New York Stock Exchange, the issuer is Canadian-based. Six months after the stock is issued, it drops in value by 30 percent. One of your clients sues, alleging a breach of investment guidelines and mismanagement of funds. The client claims he specifically requested that his money not be invested in stocks of foreign-based issuers.

Directors & Officers Liability Protection

Selling the Company
Your board of directors has entered into an agreement to sell the company. A group of shareholders is unhappy with the decision and brings action against the board, alleging that the board breached its fiduciary duties by not making enough of an effort or investigation to determine if the selling price was adequate.

Majority Shareholder Fiduciary Duties
Your company is controlled by a majority shareholder who is a director of the company. Minority shareholders, who are not directors or officers, believe their interests are not being represented and bring an action on behalf of the company, alleging the majority shareholder director has breached his fiduciary duty to the minority shareholders, committed acts of mismanagement and wasted company assets.

Investors Filing Suit
Your company raises capital through a private placement of equity securities. After the private placement, the company’s financial condition and performance decline, lowering its value and, thereby, the value of its securities. The investors bring an action against your directors and officers, alleging negligent misrepresentation of your company’s business, earnings, expansion plans and future business prospects. and Optional Bond Coverage.

Employment Practices Liability Protection

Executive Termination
Your company’s vice president is terminated. The former vice president sues, alleging that his termination was in retaliation for failing to support a proposed acquisition of a company owned by a majority shareholder. The vice president’s objection to the proposed acquisition was based on a questionable valuation of the company and the majority shareholder’s potential conflict of interest.

Sex Discrimination
A 43-year-old female security analyst of your company brings suit against your company, alleging that, despite excellent job performance
evaluations, the company negligently failed to promote her for 17 years. She further contends that the company retaliated against her after she filed a complaint with the human resources department and that she has suffered emotional distress and sexual discrimination.

Age Discrimination
An employee alleges that he was repeatedly denied promotions while younger employees outside his department were promoted. The employee points to a memorandum by the company’s chairman and CEO, which was geared toward hiring, identifying and developing “young people” for future management positions.

Fiduciary Liability Protection

Profit Sharing and Savings Plans
Your company sponsors a profit sharing and savings plan. The value of the plan assets deteriorates to the point where benefits are adversely affected. Plan participants bring suit, alleging that the plan wrongfully invested plan funds in high-risk investments in violation of the terms of the plan.

401(k) Plans
Your company establishes a 401(k) plan that has a limited number of investment options. Plan participants allege that the plan’s investment
options were under performing and that your company breached its fiduciary duty because it did not offer investment options with higher returns.

Wrongful Denial of Disability Benefits
A former employee sues your company and the plan administrator under ERISA, seeking review of a denial of long- and short-term disability benefits stemming from a disability.

Mutual Fund Professional Liability and Directors & Officers Liability Protection

Independent Directors
The independent directors of the mutual fund vote to let their investment adviser’s contract expire and hire a new adviser due to poor performance and violations of investment restrictions. The adviser, who is also the sponsor of the mutual fund, sues the independent directors for breach of fiduciary duty and wrongful termination of the contract.

Valuation
The share price of a bond fund plummets 30 percent in one day. The fund announced that the reason for the drop was because the value of the bonds in its portfolio had to be drastically reduced to reflect their current market value. A class action suit is brought against the fund’s board of directors, alleging negligent oversight and breach of fiduciary duty. The claim alleges the fund directors failed to ensure that proper procedures were in place to value its holdings.

Investment Restriction
A mutual fund’s performance for the year was 20 percent below that of its peer group. Shareholders of the fund file a class action lawsuit, alleging the board of directors breached its fiduciary duties by allowing the investment adviser to violate an investment restriction stated in the Statement of Additional Information (“SAI”). The shareholders claim that more than 5 percent of fund assets were invested in one issuer, whose poor performance materially affected the fund’s overall return. The shareholders also claim the board of directors should have been aware of the investment restriction and failed to take action to ensure the fund was in compliance.