The ongoing financial crisis has claimed many victims over the past few years, but while banks and their depositors have been largely protected by taxpayer bailouts, the investment fund community, and the hedge fund industry in particular, has had to fend for itself to the tune of billions of dollars in investment losses. In response, Willis Group Holdings has designed an insurance program specifically to protect the liability of fund directors, including in the event of a collapse which exposes them to significant financial costs.
The Fund Protect product comes on the heels of a landmark judgement by the Grand Court of the Cayman Islands, which found two independent directors of a failed fund guilty of “willful neglect” and facing USD $111 million in damages. The case against the directors of Weavering Macro Fixed Income Fund Ltd., which collapsed in 2009 and had been listed on the Irish Stock Exchange, highlighted directors’ exposures to liabilities, according to Willis.
Ever since the start of the financial crisis, corporate governance has risen up boardroom and regulatory agendas, precipitating tighter controls across the banking and investment industry. Many institutions and firms now spend a great deal of time identifying potential exposures and implementing a controls framework, including training, monitoring and oversight, to minimize the risk of events that could give rise to liability.
Insurance is an important backstop in this regard should controls fail and a legal liability arise. However, as the Weavering verdict demonstrated, such controls do not always work and, in the event of a crisis, a firm’s existing insurance coverage may fall short of protecting the personal liability of a fund’s directors.
The Fund Protect policy is structured to offer the following:
- An additional non-executive director limit above existing liability policy terms.
- Emergency costs of up to 20 percent of the limit of liability.
- High limits of additional public relations cover.
- Simplified language with several common exclusions removed and a “difference in conditions clause” to ensure there are no gaps within the current coverage.
- Cover for the director arising out of the acts of any service company appointed by the fund.
- Retired directors’ lifetime run-off cover.
- An application process that allows Willis to provide coverage in less than 24 hours, if required.
- No conflict between the insurance requirements of the investment manager and protection of the fund directors, particularly the non-executive director’s.
- Premium savings of up to 60 percent compared to current cost.
The Fund Protect program can also protect against the backdrop of the European Commission’s proposed Alternative Investment Fund Manager Directive (AIFMD). The regulation aims to police the activities of hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds, among others, which combined account for €2 trillion in assets under management within the EU.
AIFMD marks the first attempt in any jurisdiction to directly regulate and supervise the alternative fund industry. The EC proposal, which is now being considered by the European Parliament and Council, has triggered an industry-wide examination of hedge fund practices and a call for greater disclosure of fund directors’ qualifications and duties.
Paul Richards, Executive Director, FINEX National, the financial and professional risk services arm of Willis, said: “The ongoing crisis bedevilling the financial services sector, combined with new stricter regulatory regimes, highlights the important role of insurance as a safety net for when operational and governance controls fail. The Weavering case has caused independent directors to reflect on their functions at board level and what is required to fulfil them. It is a reminder that personal liabilities may be incurred.”
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