Louis D’Agostino Partner, SVP

(516) 267-6179 louisd@ironcoveins.com

Twitter: @FINsure360

Required and Elective Lines of Insurance for: Start-up Investment Advisors & Hedge Funds

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It really depends on the size of the funds’ or the Investment Advisory firm at the launch. That said, we usually break it down into two (2) main categories, Required Insurance and Elective Insurance. Funds’ launching with more than $250,000,000 typically have a bit more staff, infrastructure and hence additional legal liability. As such they lean more towards procuring the elective lines of coverage. Start-ups in the $50,000,000 to $100,000,000 AUM Range typically opt onlyto procure the Required lines of coverage. Below please find a breakout of Required/Mandatory Lines of Insurance Protection as well as the elective lines of coverage typically purchased by larger and more established firms.

REQUIRED/MANDATORY LINES OF COVERAGE (a) Employee Health & Medical Benefits The first order of business for most emerging managers is set-up the medical insurance plan for the group. While rates for groups under 50 lives are set by the state, there is creativity in plan design and administrative assistance that can be provided by your broker. (b) Property & Casualty Package Policy Package policy inclusive of Property & General Liability Coverage typically mandated by the landlord, select vendors and customers. Coverage’s include Business Interruption and Extra Expense as well as non-owned and hired auto liability. (c) Umbrella Policy An umbrella policy is only necessary if underlying Package limits are inadequate to meet contractual obligations. Coverage is typically written on a follow-form basis consistent with the terms and conditions of the primary Package Policy.

What lines of Insurance Protection Should I carry?

Iron Cove Partners is a Whitmore Group, Ltd. Company

REQUIRED/MANDATORY LINES OF COVERAGE (d) ERISA Fidelity Bond (1st Party) ERISA is designed to protect plan beneficiaries and participants from problems and abuses by a fiduciary. An ERISA plan is required to comply with the ERISA requirement for bonding for a limit equal to 10% of the asset value of the plan subject to a $1,000 minimum limit up to a $500,000 maximum per plan. The coverage protects the benefit plan investors’ assets from dishonest or fraudulent acts committed by any officer or employee of the fiduciary as required by the ERISA Act of 1974. This coverage only applies to the extent the Investment Manager has created a defined benefit (401(k)/Profit Sharing) plan for the employees. (e) Workers Compensation Workers Compensation coverage is designed to cover employee injuries occurring in the United States in the course of business activities and the rates are generally promulgated by the individual States.  An injured employee would be reimbursed for a portion of their salary along with all medical expenses in accordance with the Workers Compensation guidelines of that State.  Employers Liability is included under this policy, and provides coverage for law suits against the employer where the employee injury resulted from the employer’s negligence. Coverage premium is predicated on estimated payroll of the insured entity. (f) State Disability

New York State disability benefits insurance provides temporary cash benefits paid to an eligible wage earner when he/she is disabled by an OFF THE JOB illness or injury, and for disabilities arising from pregnancies. Employers with one or more employees are subject to the provisions of the New York State Disability Benefits Law. Coverage can be purchased directly from the State or can be procured from the standard property & casualty insurance markets.

Iron Cove Partners is a Whitmore Group, Ltd. Company

ELECTIVE LINES OF COVERAGE (a) Management Liability (Directors and Officers Liability, General Partnership Liability, Managing Member Liability, etc.) The structure of the firm will dictate whether it is run and operated by a Board of Directors, a General Partner or a Corporate Managing Member (or any combination thereof). As such, the Management Liability Insuring Agreement provides coverage for the individual directors, officers, partners, members of the Investment Advisor/Manager and the Investment Fund for any actual or alleged mis-management, breach of fiduciary, lack of supervision and/or compliance as respects the day-to-day management of the firm. This coverage is typically part of a master Management and Professional Liability Insurance program. (b) Professional Liability Also known as Errors and Omissions coverage, Professional Liability provides coverage for the Investment Advisor and/or other affiliated service providers in the rendering or failing to render professional services to an Investment Fund or Separately Managed Accounts. As stated above, this coverage is typically part of a master Management and Professional Liability Insurance program. Costs for a comprehensive insurance program with an A Rated Carrier could range anywhere from $17,000 to $30,000 in annual premium per million of coverage.

(c) Employment Practices Liability Protects the Investment Manager and/or Investment Fund from claims made by employees or third-parties alleging wrongful employment acts. Wrongful termination, failure to promote, discrimination and sexual harassment to name a few. Coverage can be purchased on a stand-alone basis but is often included as an add-on to the Management & Professional Liability Insurance Program.

Iron Cove Partners is a Whitmore Group, Ltd. Company

ELECTIVE LINES OF COVERAGE (CONT’D) (d) Fiduciary Liability Often confused with Investment Advisor Errors and Omissions coverage due to the fact that many Registered Investment Advisors are deemed “Fiduciaries” by ERISA when they have discretion over 3rd Party Pension Plans or Retirement Accounts. Fiduciary Liability coverage is designed to protect plan sponsors or trustees against claims brought by employees or their families alleging mis-management of the in-house defined benefit plan as governed by ERISA. Claims can also be brought by the department of labor alleging certain violations of labor law. (e) Cyber & Privacy Liability Firms often assume that any privacy/security breach would be covered by its standard insurance (i.e. Errors and Omissions, Fidelity Crime Bond, etc.). While some protection may be afforded in certain circumstances, two key factors should be kept in mind. Traditional E&O policies will not cover “first party losses” such as notification/credit monitoring expenses, public relations expenses, crisis management, business interruption, forensic investigation costs, data restoration expenses and costs associated with extortion demands. And while Fidelity Crime Bonds do provide protection for 1st Party losses, it’s typically only in the event of the loss of covered property, money, securities, certificates of deposit, etc. and excludes the loss of confidential information, material or data. Both of these forms of insurance protection also will not typically defend state or federal regulatory actions, including payment of any civil fines or penalties that might be levied for a violation of a privacy law and/or failure to notify. Cyber Security insurance coverage fills in the gaps in both traditional first-party and third-party liability policies by protecting a company from losses associated with unauthorized access to or theft of data or e-business activities, computer viruses, denial of service attacks, as well as alleged unauthorized e-commerce transactions.

Iron Cove Partners is a Whitmore Group, Ltd. Company

ELECTIVE LINES OF COVERAGE (CONT’D) (f) Fidelity Crime Bonds

The basic fidelity bond covers loss of money, securities or other property owned by the insured, held by the insured, or for which the insured is legally liable, when such loss is due to the dishonesty of the insured’s employees. The Bond is a first party contract, which in the case of a covered loss would make the Insured whole, subject to the deductible.  The bond includes coverage for Employee Dishonesty, Premise Losses, Transit Losses, Forgery Losses and Computer Fraud for covered property. Types of Fidelity Crime Bonds include: ERISA, Securities Dealer’s Blanket Bonds, Registered Management Investment Company Bonds (Mutual Funds) & Joint Insured Financial Institution Form 14 Bonds (g) Executive Benefits & Private Client Services Our Executive Benefit team has assisted some of the world's wealthiest families and leading corporate executives in addressing:

–  Long and Short-term Disability needs; –  Key-Person Life Insurance; –  Long-Term Care needs; –  Life Insurance Planning; –  Deferred Compensation Plans; & –  Personal Insurance Reviews

Iron Cove Partners is a Whitmore Group, Ltd. Company