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Protecting Key Assets:
A Guide to Hedge Fund
Management Liability Insurance
April 2015
Executive Summary
2014 was one of the more stable years for Hedge Fund Management Liability, Directors and Officers
& Professional Liability, in the past few years. Rates were relatively flat compared to 2013. Insurer
capacity increased with several new market entrants generating additional competition and there
weren’t any significant claims to push rates higher as seen in 2012 and 2013. In spite of a heightened
regulatory environment and a record number of investigation-related claims in 2014 – 755 enforcement actions up from 676 in 20131 – most were smaller in nature so the cost to the industry was lower.
In 2015, we expect to see a similar trend: a rise in the number of investigations, which comes as a
direct result of the increased number of hired SEC investigators, as well as, fewer large scale claims
due to enhanced compliance by fund managers as a result of more due diligence from investors and
the heightened awareness around regulation. Normally with more claim activity you would see insurers pulling back on coverage, raising retentions (deductibles) and increasing premiums, but that did
not happen in 2014 and we do not expect to see it in 2015. We believe rates will remain flat to slightly
down due to the excess capacity from new insurers that have entered the space in 2014 and 2015.
Coverage, Cost and Process
We sampled 50 hedge funds that have clearly de- versus Manuscript. A Base Form is a standard infined risk profiles across varying asset levels and dustry policy, which is usually more insurer censtrategies to look at the buying trends and cover- tric with set coverage, pricing and deductibles.
age choices made by those funds. The following
four fund strategies were compared: Commodity,
Credit/Distressed Debt, Long/Short Equity and
A Manuscript Form is a customizable policy that
takes into account the specifics of your individual
business and offers less exclusions providing a
Quantitative funds. The assets under manage- premium level of coverage to Insureds.
ment of these managers ranged from $50 million
to $15 billion.
Coverage Highlights
The Management Liability policy is made up of at
This white paper will address how the insurance least two, and as many as six different coverage
limits, retentions and price per million differ across parts. Directors and Officers and Professional Lieach strategy. Additionally, we will focus on the ability (Errors & Omissions) are the two coverage
key coverage provisions to consider when buy- parts that will always be on a hedge fund maning Management Liability insurance, as well as,
agement liability policy. Often Employment Prac-
discuss the process of the purchase and the two tices Liability, Crime, Fiduciary Liability and Cyber
types of policy forms offered by the market: Base Liability are added to the contract. We will focus
As sited on sec.gov
1
April 2015 | Maloy Risk Services
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on the D&O/Professional Liability and touch upon base form from the insurers and compare that to
the others and why adding them to the policy is some manuscript policy forms.
not recommended.
The Management Liability policy is comprised of
Directors and Officers &
Professional Liability
four key sections: Insuring Agreements, Defini-
of Management Liability is: why do we need this
of the policy. The Definitions section is a consid-
The most common question from a new buyer
tions, Conditions and Exclusions. The Insuring
Agreements outline what is covered and the limits
coverage if the fund indemnifies us pursuant to
erable portion of the policy that defines all of the
the fund will not indemnify directors, officers or
tions lay out the obligations of the Insured and the
employees for willful misconduct or gross negli-
Insurer within the policy. The Exclusions define
the fund documents? The answer is twofold: first, actors and actions within the policy. The Condi-
gence allegations, but the insurance will provide what is not covered.
defense costs until a final non-appealable adjudication; and second, the policy backs the indemnification of the fund if the claims are indemnifi-
For the Insuring Agreements make sure that
the policy is providing protection for the desired
able. This protects the fund assets by replacing
coverage. As we discussed earlier, many times
the fund’s indemnification obligations for defense
additional insuring agreements can be added
costs and judgments. Since the policy protects
to the policy such as: Employment Practices Li-
fund assets, a majority of the cost of the Manage-
ability, which protects against claims for sexual
ment Liability policy is treated as an expense to
harassment, wrongful termination and discrimina-
the fund. The common percentage allocation is tion claims; Crime, which is theft by employees or
80% to the fund and 20% to the manager.
third parties; or Fiduciary Liability, which covers
claims from employees for the management of
There are approximately fifteen insurers in the
their own ERISA plans like a 401K. We have even
Hedge Fund Management Liability space and seen some insurers bring a level of Cyber Liabilifor the most part the products are more homoge-
ty coverage into the policy. Beyond the Directors
neous than ever. However, significant work is be-
and Officers and Professional Liability, managers
ing done by a few insurers and brokers to create
need to purchase separate dedicated policies for
broader contracts using manuscript policy word-
the other exposures since a claim in one of these
ing instead of the basic products seen at most other coverage parts can erode the Aggregate
insurers. These manuscript contracts cost more,
Limit of the policy. Exhausting or impairing the
provide broader definitions, less exclusions and
policy limit to defend an employee matter leaves
are individually tailored to the fund. These poli-
the directors and officers without coverage for
cies are usually leveraged by large funds that em-
regulatory investigations, trade errors and any
ploy internal and external counsel to help with the
other management-related errors which is what
negotiation of coverage terms. We’ll focus on the
the policy is designed to do.
April 2015 | Maloy Risk Services
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The other policies are less expensive and will will encompass criminal, civil and regulatory decome with broader terms and lower deductibles, mands, accusations and investigations. In the
if they are removed from the Management Liabil- base forms, the greatest challenge is around regity policy. One drawback is that the Employment ulatory investigations coverage. All base forms
Practices, Fiduciary and Cyber Liability are not
require the receipt of a Wells Notice, Target Let-
generally fund expenses. However, Crime is con- ter, a Formal Order of Investigations or Subpoena
sidered a fund expense.
Usually there are about thirty Definitions within
that is tied to a Wrongful Act to trigger coverage.
In the manuscript policy, the Claim definition is
expanded to include claims made in regards to
the Management Liability policy; we will analyze sections 11, 12 and 15 of the 1933 Securities Act.
the most fundamentally important. The first set of Many times you can tie in any type of inquiry prodefinitions to focus on is: Insured, Insured Entity viding the greatest chance for informal defense
and Insured Fund. In the base forms you will see cost coverage. Similarly, sections 11 and 12 need
fairly consistent language across most insurers,
to be within the definition of Loss and Wrongful
spelling out who is an insured: the directors, offi- Act to include defense costs. These personal
cers, employees, all entities within the fund struc- profit sections of the SEC code would normally be
ture, as well as the funds which often have to be excluded unless you carved back coverage for
listed. However, in the manuscript forms you will defense costs within these sections. For Professee advisory boards, creditor committees, inde- sional Services, many of the base forms have a
pendent contractors or any type of affiliated entity fairly limited scope of coverage and they do not
and any type of fund; this removes the danger- mention Separately Managed Accounts. Manuous practice of listing funds and entities. If a fund script policy forms will have extensive wording
is not listed within the base form, a carrier might
to incorporate all aspects of a fund managers’
deny coverage. These definitions need to be services. Since this is the Professional Liability
broad enough to encompass every type of entity
coverage definition, it is important to review that
to avoid the need to list them. Be leery of policy definition in order to confirm that it captures all of
forms that only use a Named Insured and any your services.
Subsidiary definition language, this is for Corpo-
rations and not General Partnership structures so The Conditions of the base form and manuscript
all of the entities will fall outside the scope of cov- policies do not vary greatly between one another,
erage. This is a quick determining indicator that
but there are some areas you will want to focus
the policy will need significant endorsing to cover on: Automatic Fund and New Fund Coverage,
the fund and entities effectively.
The second important set of definitions is: Claim,
Defense and Settlement, Application, Warranty
and Severability.
Wrongful Act, Loss and Professional Services. Make sure to have the Automatic Fund and New
The definition of Claim is the most important and Fund Coverage threshold high enough or autoApril 2015 | Maloy Risk Services
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matic at any level. Many base form policies say
special care needs to go into reviewing the dif-
175% of the last fund raised; manuscript policies ferences. Some of the key Exclusions to focus on
will say 35% of the total AUM of all funds man- are: Insured versus Insured, Fiduciary Liability,
aged or in some cases all new funds are covered Contract, Fraud and Personal Profit.
automatically without a threshold. If a new fund
does not meet the threshold, the insurer is entitled
Insureds cannot sue insureds in a Management
to charge additional premium to incorporate it into
Liability policy, however there are circumstanc-
the policy.
es where that may be necessary and extensive
carve-backs to the exclusion are built into man-
On Defense and Settlement make sure the In- uscript policy forms to address those situations.
surer is obligated to pay on a current basis and The base forms will carve-back coverage for usuwithin 90 days. The base forms do not stipulate ally six to eight of those situations, while a mana time frame. Some manuscript policy forms will uscript policy will usually outline twelve. (For a
also provide “usual and customary” attorney fee
sample of a comparison between the two see Ap-
language, which can help in the negotiation of pendix A)
claim rates at the time of loss.
Fiduciary duties of the directors and officers for
For the Application make sure it is limited to
the management of the fund are covered, how-
twelve months of information. Often the base form ever certain base forms will have an exclusion for
will say any and all applications submitted to insur- Fiduciary Liability claims relating to ERISA. It is
ers. On Severability and Warranty make sure the
important to make sure the exclusion only applies
puted to another Insured (Severability) and that
not the funds they manage. A manuscript policy
acts and knowledge of one Insured cannot be im- to the management company’s own ERISA plans,
statements made on the application (Warranties) provides the proper wording to provide for ERIwill not void coverage if they are false. Most base
SA claims for everything other than a fund’s own
forms will have a list of officers that if they were ERISA plans such as a 401K plan, a Pension or a
aware of a misleading fact the entity and that in- Profit Sharing Plan. A separate Fiduciary Liability
dividual(s) will not have coverage. On manuscript policy would be necessary to cover claims from
policies you can limit the number of officers listed. employees or regulators stemming from mismanAlso make sure the policy is non-rescindable for
agement of the fund manager’s own plans and
any reason. When completing renewal Applica- why it is excluded from the Directors and Officers
tions never answer Warranty questions, which
Liability policy.
from year to year.
Often the Contract Exclusions are very broad in
can potentially break continuity of the coverage
the base form and should be extensively modified
The Exclusions you find in a base versus a man- to keep the insurer from using this clause to deny
uscript form can be significantly different and investment management claims. The manuscript
April 2015 | Maloy Risk Services
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policy forms will narrow the scope of the exclu- Trade Errors. It is usually $500K and up.
sion and make sure it is clear that the exclusion
does not apply to the following fund documents:
the limited partnership agreements, investment
Base forms do not have Cost of Corrections
Coverage built into their policies. It must be add-
management agreements, sub-advisory agree- ed by endorsement and not all insurers in the
ments and managed account agreements. (For space will offer this coverage. Many that do offer
a sample of base form versus manuscript form Cost of Corrections have limiting language and
wording see Appendix B)
they place heavy restrictions on the definition of
a Trade Error and often written Insurer approval
The Fraud and Personal Profit Exclusion re- needs to be received to accept it as a Trade Error.
moves coverage for willful misconduct. Make sure
In manuscript policies there are no such caveats;
that the defense is provided until a final non-ap- an error triggers coverage and the definitions of
pealable adjudication. Some of the base forms a Trade Error are much broader. (For a sample
will not cover appeals, so this language is im- of the base versus manuscript form comparisons
portant. Many of the manuscript forms go beyond
simple non-appealable language and remove the
see Appendix C)
exclusion completely surrounding claims relating Investors, particularly seeder platforms, are keento sections 11, 12, and 15 of the 33 Act.
Professional Liability and Trade Errors
All Professional Liability policies cover Trade
ly interested in how Trade Errors are handled by
a manager. Depending on the terms outlined in
the fund documents, the manager may be responsible for all Trade Errors, but often the fund
Errors. A mistake made by management in the has to absorb the cost. By providing the Cost of
execution of a trade does not trigger the policy Corrections Coverage, both the manager and
without litigation by investors or other third par- fund can benefit from having this added protecties. The claim trigger is the suit not the error. The tion.
industry created an endorsement to eliminate
the need for litigation, called Cost of Correc-
The following charts and graphs illustrate the
tions Coverage, allowing managers to access various price points for the four different fund
insurance coverage for the error. The insurance strategies: Long/Short, Credit/Distressed Debt,
industry does not want investors to bring litiga- Commodity and Quantitative. The primary layer of
tion against funds to recoup Trade Errors, which
coverage for most funds starts with a $5MM or
could lead to a complete erosion of policy limits if
$10MM limit from the first insurer. Additional lay-
defense costs and allegations of negligence are ers of coverage will increase by $5MM or $10MM
added on top of the Trade Error loss. The Cost of
depending upon the starting point of the tower of
Corrections response is to help the insurer protect
coverage, but all terms and conditions within the
policy limits. To offset this wide grant of coverage,
program are based on the primary layer’s policy
the insurer will raise the retention of the policy for wording. Everything above that layer is simply ad
April 2015 | Maloy Risk Services
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COST
There are several factors that set the pricing of policies, but are not necessarily limited to the following:
By1)providing
thethe
Cst
of Correction Coverage, both the5)
manager
fund can benefit
Strategy of
Fund
Numberand
of insurance
marketsfrom
for having
the riskthis
–
certain strategies have fewer willing markets to
added protection.
2) Management experience
provide competition for pricing and coverage
By providing the Cost of Correction Coverage, both the manager and fund can benefit from having this
added
protection.
3) Fund
AUM and the length of time in operation
(Note: The longer and larger the fund operation
the more costly investigative discovery becomes
due to larger amounts of data than would be requested for a smaller and newer fund.)
4) Insurance market conditions – number and frequency of claims and the relative costs of those
claims
6) Base Form policy language vs. Manuscript
Form policy language
7) Limits purchased
8) Retentions or deductibles
9) The number Insuring Agreements selected for
coverage
-ditional coverage that follows the underlying for the underwriting community. The other three
terms. As illustrated in the Price Per Million chart,
categories - Credit/Distressed Debt, Commodity
the Long/Short strategy is typically the least ex- and Quantitative strategies - are considered to be
pensive and the most desirable class of business the most expensive.
Average Total Limit Purchased $14,000,000 Limit Purchased $12,000,000 $10,000,000 Manuscript $8,000,000 Base $6,000,000 $4,000,000 $2,000,000 $-­‐ Long/Short Equity Commodity Credit/Distressed Quant Strategy Type April 2015 | Maloy Risk Services
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Average Price Per Million $25,000 Price Per Million $20,000 $15,000 Manuscript Base $10,000 $5,000 $-­‐ Long/Short Equity Commodity Credit/Distressed Quant Strategy Type The lack of underwriting capacity is the primary due to the litigious nature and board positions
reason the Quant and Commodity strategies have involved with these funds. Shareholder class achigher costs, not all insurers will cover them. One tions, forced bankruptcy and proxy battles can
caveat on Long/Short strategies: Activist Funds lead to litigation backlash against the drivers of
are the highest price per million of any strategy change.
Average Reten%on $600,000 $500,000 Reten%on $400,000 Manuscript $300,000 Base $200,000 $100,000 $-­‐ Long/Short Equity Commodity Credit/Distressed Quant Strategy Type April 2015 | Maloy Risk Services
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APPLICATION ITEMS
ment. If you select multiple brokers then split the
market among the selected brokers. Request a
The
following
data
items
are
needed
to
obtain
the Cost of Correction Coverage, both the manager list from each broker with their top insurance marquotes from the market:
and fund can benefit from having this added pro- kets in order of preference and then allocate the
tection.
1) Offering Memorandums for all funds
insurers to each broker in the process allowing
Bpoviding the Cost of Correction Coverage, both them to only send a submission to their assigned
2) Limited Partnership Agreements for all funds
the manager and fund can benefit from having this insurers.
3) Latest
audited financial statements for all funds
added
protection.
4) Historical performance on all funds
5) Most recent investor letters (usually the ones
issued during the policy term)
6) Latest Due Diligence Questionnaire
7) ADV I and II
8) Entity Structure Chart
9) Application
10) If the fund is a new launch 3, 4 and 5 will not
be required, but a pitch book will be requested in
lieu of the others.
During the submission process, it may be advisable or requested by the competing insurers to
have meetings or conference calls to ask more
specific questions about the fund and management company operations. The more complex the
fund the more likely the insurers will follow-up with
questions. Often a conference call will be arrange
with the insurers to provide additional details.
Managing A Claim
During the past 18 months, the benchmarked
funds have experienced three SEC regulatory examinations compared to five in the previous 12
years. The claims from the past 12 years predominately stemmed from the 2008/2009 financial cri-
The Insurance Process
sis. The increase in claims activity coincides with
the amount of regulatory scrutiny being launched
When approaching the Directors and Officers by the past two SEC chairpersons. The current
and Professional Liability market, you will need to
three regulatory matters have cost the insurers
behooves the fund manager to select a specialty
costs just to respond to an SEC’s Request for
the coverage wording and experience in dealing
beyond discovery and head to depositions and
access the insurers using an insurance broker. It on average roughly $1.2 million in legal defense
brokerage for placement due to the complexity of Information. If any of these investigations move
with investigation-related claims. Once a broker
testimony, the costs – based on legal counsels’
approaches the insurers, it will block any other litigation summaries – are estimate to climb well
broker from approaching the market. Broker in- beyond most policy limits. The litigation costs are
terviews ahead of the submission process are the impacted by: the time each fund has been in busibest way to ensure the broker selected has expe
ness; the fund structure’s complexity; the number
rience in hedge fund management liability place- of employees (both current and previous) and the
April 2015 | Maloy Risk Services
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allegations being brought against a firm. A man- ry they will provide a claim estimation letter to the
ager that employs many people and/or has been insurer outlining a projected cost and the team’s
in business for a long period will have higher dis- rates by class of attorney. You, as the insured, will
covery costs than a smaller firm and/or newer pay the retention and then the insurer will pay the
firm; a direct result of having to sort through more attorneys’ fees upon agreement. They can pay
data, records, trades, e-mails and texts.
the attorneys directly or you can pay the attorney
and get reimbursed by the insurer. It is import-
There are many ways in which a regulator, like ant to have itemized billing from your attorneys
the SEC, will notify a manager about an inquiry: to ensure timely payment because the insurer will
informal request for information, subpoena, wells
review each bill before payment is made. They
notice, target letter, or formal order are the most
will look to make sure that all billable items relate
common. It is critical for the manager to notify to the claim, which can take time. The key to suctheir insurer about any of these matters and pro- cessful claims management is consistent commuvide as much detail as possible about the inqui- nication with the insurer and your insurance brory. Unfortunately if a manager receives a formal ker to make sure the process is moving forward to
order of investigation, the SEC will not allow that
your satisfaction.
formal order to be shown to anyone other than the
manager and the manager’s attorneys. This con- Summary
cealment is an issue when trying to trigger your
The hedge fund management liability placement
insurance policy since the insurer will not be able is highly specialized: from the specific insurers;
to see the Order to determine if it is alleging a
to the specialty brokers; as well as the legal and
Wrongful Act against the manager. This is where
financial considerations that go into the decision
comes very important. Usually you can simply
tions, definitions, and exclusions that are custom-
Claim and Wrongful Act definition language be- making process. Focus on contract terms, conditrigger the policy with the formal order provision izable and be sure to include internal and external
of the Claim definition, but many are tied specif- counsel to make the best decisions for both the
ically to the Wrongful Act and therefore give the fund and the management company. The market
insurer a reason to try to deny coverage since they is ever changing, so constant monitoring of the
cannot see the allegations of the Order. Work with market, policy forms and litigation trends are esyour counsel to describe the nature of the order
sential to understand how much insurance to buy,
and be prepared to push the insurers to accept it which terms to negotiate and which insurers are
as a claim.
providing the best protection and at what price.
Work with specialized providers to make sure you
Once your coverage is established, it is neces- are getting the best coverage for the fund and
sary for the insurer and the legal team managing management company.
your case to agree on the proposed rates. Once
your attorneys understand the scope of the inquiApril 2015 | Maloy Risk Services
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Insured Vs. Insured Base Form:
APPENDIX A
in connection with any Claim by or on behalf of any Insured, provided that this exclusion shall not
apply to a Claim:
1) that is a Derivative Suit;
2) by an Insured Person for contribution or indemnification if such Claim directly results from a Claim
that is otherwise covered under this Policy;
3) by any Employee who is not a past or present Executive if such Claim is made without the assistance, participation or solicitation of any Executive;
4) that is an Employment Claim;
5) by a former Executive who has not served as an Executive for at least two years prior to such Claim
being made, provided that such Claim is made without the assistance, participation or solicitation of
any current Executive or any former Executive who has served as an Executive during the two years
prior to such Claim being made;
6) by any bankruptcy or insolvency trustee, examiner, receiver, creditors committee or similar officials
for any Insured Organization or any assignee of such trustee, examiner, receiver, creditors committee
or similar officials;
7) made in a jurisdiction outside the United States of America, Canada or Australia by an Insured Person of an Insured Organization organized in such jurisdiction; or
8) by any Fund if, prior to such Claim being made, the Fund is advised in a written opinion by independent legal counsel selected by the Fund with the consent of the Insurer, such consent not to be
unreasonably withheld, that failure to make such Claim would be a breach of fiduciary duty owed by
an Insured to such Fund or to investors in such Fund,
9) provided that assistance, participation, or solicitation shall not include Whistleblowing;
Insured Vs. Insured Manuscript Form:
The Insurer shall not pay Loss for that part of any Claim against an Insured: by or on behalf of any
Insured, provided that this exclusion shall not apply to any Claim:
1) that is a Derivative Action;
2) for contribution or indemnification if such Claim directly results from a Claim that is otherwise covered under this Policy;
3) by an Insured making the Claim where failure to make such Claim would result in liability upon the
Insured for failure to do so;
April 2015 | Maloy Risk Services
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4) that is a bona-fide, non-collusive Claim brought or maintained by an Insured against an Independent Director or against an Investment Fund that is a codefendant in a Claim with such Independent Director;
5) by any former Insured Executive who has not served as an Insured Executive for at least 1 year prior
to such Claim being made, provided that such Claim is made without the assistance, participation, or
solicitation of any current Insured Executive or former Insured Executive who has served as an Insured
Executive during the 1 year prior to such Claim being made;
6) against an Insured Executive brought by an Insured Person who is not an Insured Executive;
7) against an Investment Advisor and its Insured Persons brought by or on behalf of an employee, other than an Insured Executive, acting in their capacity as a customer or client of an Investment Advisor;
8) made by or on behalf of a bankruptcy or insolvency trustee, liquidator, administrator, conservator,
examiner, receiver or similar official for any Insured Entity, or by any Insured Entity as a Debtor-in-Possession, or by or on behalf of any assignee of such trustee, liquidator, administrator, conservator,
examiner, receiver or similar official or Debtor-in-Possession;
9) made in a non-common law jurisdiction by an Insured Person of an Insured Entity organized in such
jurisdiction;
10) brought by, on behalf of or with the solicitation, assistance or participation of an advisory board
member (or any limited partner, member, shareholder or investor whom such member represents);
11) for Whistleblower Conduct by an Insured Person, other than a director of the Insured Entity (where
Whistleblower Conduct is any of the activity set forth in 18 U.S.C. Section 1514A, Section 806 of the
Sarbanes-Oxley Act of 2002, Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or any other similar whistleblower statute); or
12) brought by, on behalf of or with the assistance, cooperation or participation of any Independent
Director, so long as such Claim is made without the assistance, cooperation or participation of any
other Insured Person.
April 2015 | Maloy Risk Services
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Base Form Contract Exclusion Wording
APPENDIX B
Contractual Liability based upon or arising out of:
a.) an Insured’s alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees; or
b.) the liability of others an Insured assumes under any oral or written contract or agreement. However, this exclusion shall not apply to:
i.) an Insured’s liability that exists in the absence of such contract or agreement; or
ii.) any Claim against an Insured by a client or customer of the Insured, if and to the extent that the Claim alleges a breach of contractual obligations in the rendering of or failure to render Professional Services;
Manuscript Contract Exclusion Wording
Solely with respect to Insuring Agreement (C) Entity Coverage, for any actual or alleged liability of an
Insured Entity under any express written contract or agreement (other than the organizational, management, monitoring or advisory documents of any Insured Entity, including but not limited to any
partnership agreement, limited partnership agreement, operating agreement, limited liability company agreement, investment management agreement, sub-­‐adviser agreement, subscription agreement, side letter or other organizational, advisory, monitoring, investment, management or subscription agreement); provided however, that this exclusion will not apply to: (i) any Claim arising out of,
based upon or related to Investment Activities; (ii) liability which would attach to an Insured even in
the absence of a contract or agreement; or (iii) any Claim based upon, arising out of or relating to
any contract or agreement with any Investment Fund or investor or client in any separately managed
account. With respect to this exclusion, an “express written contract or agreement” is defined as an
actual written agreement of the parties, the terms of which are openly set forth or declared at the time
of making in clear or distinct language.
April 2015 | Maloy Risk Services
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APPENDIX C
Base Form Cost of Correction Wording (partial endorsement)
A. Subject to all of this Policy’s terms and conditions, the Insurer shall reimburse the Insured for
amounts paid to the Insured in connection with a Claim for Costs of Correction but only if:
1. the Insurer is notified in writing within four (4) business days of the discovery of the Trade Error and such notification is received within 60 days from the date during the Policy Period that the Trader Error occurred but in no event later than 30 days after the Policy’s expiration date;
2. such Trade Error arose in the ordinary course of the Insured’s operations and occurred
during the Policy Period;
3. if not corrected, the Trade Error would reasonably be the basis for a Claim against the In
sureds for quantifiable Loss which would be payable and not otherwise excluded under this Policy;
4. the Insured requests prior written approval from the Insurer to incur and Costs of Correc
tion, such approval shall not be unreasonably withheld; and
5. the Inured reasonably establishes to the satisfaction of the Insurer that a Trade Error has in fact taken place and that payments constituting Costs of Corrections were paid an in what amount they were paid.
The Insureds and the Insurer agree that it is their intention that such reimbursement operates to reduce or avoid in an expedition and economic fashion monetary liability from a Claim which would have
been made against the Insureds and that such reimbursement does not afford coverage to the extent
that any sum paid by the Insured constitutes an ex-gratia settlement or a commercial settlement to
support the Insured’s reputation or business relationships.
Manuscript Form Cost of Correction Wording (partial endorsement)
(D) Trade Error Loss
The Insurer shall reimburse Trade Error Loss incurred by the Insured as a result of a Trade Error
provided that:
(1) Such Trade Error occurs during the Policy Period and in the ordinary course of the In
sured’s operations or business; and
(2) If not corrected, such Trade Error would result in a loss to an Investment Fund, separately managed account or other customer, client or a shareholder of an Insured Entity and could provide a basis to such customer, client, or shareholder to make a Claim which would re
sult in covered Loss under this policy; and
April 2015 | Maloy Risk Services
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APPENDIX C (continued)
(3) The liability of Insurers for Trade Error Loss shall not exceed the amount that would have resulted in covered Loss under this Policy had such Claim been made; and
(4) The Insured is in compliance with Clause (30) Notice of Trade Error Loss.
(5) Any reimbursement of Trade Error Loss shall be in accordance with Clause (7) Defense and Settlement.
This policy is amended by the addition of the following:
(30) NOTICE OF TRADE ERROR LOSS
(A) The Insured shall, as a condition precedent to the obligations of the Insurer under this policy, provide:
1. As soon as practicable, but no later than three (3) business days from the discovery of the Trade Error, notice of the potential Trade Error Loss via electronic mail (“E‐mail”) to the Insurers Representative at the address specified in the Declarations;
2. No later than seven (7) business days from the discovery of the Trade Error, a written proof of loss (Proof of Loss) setting forth all the circumstances of the Trade Error Loss and why the Insured believes it is entitled to coverage under Insuring Agreement (D); and
3. At the request of the Insurer, the opportunity for the Insurer to interview all Insured Persons in connection with the submission of the Proof of Loss.
(B) The date of the E-­mail in item (A)1. above shall constitute the date that the notice of Trade Error was given to the Insurer. If mailed, the date of the mailing shall constitute the date that the Proof of Loss was provided to the Insurer.
(C) The giving of notice by an Insured of a Trade Error shall be deemed to be notice of a Claim made against an Insured at the time notice of the Trade Error is given to
the Insurer.
April 2015 | Maloy Risk Services
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ABOUT US
Claudia J. Ramone, CLCS
Vice President of Sales
Maloy Risk Services, Inc.
Founded in 1872, Maloy Risk Services, Inc. is a specialty insurance broker that caters
to hedge funds. As an industry-leading broker, the firm has created its own Manuscript
Management Liability policy underwritten by Lloyd’s of London.
To learn more about Maloy Risk Services and their Hedge Fund Practice Group contact
Claudia Ramone at [email protected] or visit our website at www.maloyrs.com
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