D&O Insurance

October 22, 2019

by a searcher from Middlebury College in 212 W Springfield St, Boston, MA 02118, USA

I presume searchers need D&O insurance during the operating phase, but how about the search phase? How should I think about sizing coverage limits (during each phase if applicable) as well as cost of coverage? Who are traditional brokers or underwriters?

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Reply by a professional
from University of Missouri in San Diego, CA, USA

I work mainly in California if that matters. My understanding from purchasing D&O for many of my clients when I was a Fractional CFO. During Search Phase: Lower risk but you might decide to purchase it. If you take in Investor Funds for the Search Phase and incorporate and have a Board advising you then you and/or you Board Members have some risk that your investor(s) would sue you for miss-use of their funds that they invested. You could also be sued by a vendor for wrong doings during the search or you can be sued by a potential target for acts during the search. These could be covered by D&O. Also many D&O Policies have bolt on coverage for employer liability. If you employee a secretary, assistant, part time office worker etc and they sue you for violation of employment law your D&O coverage may also cover you in this situation. In terms of cost I think you would want a really good Insurance Broker who could make sure the underwriters understand the potentially lower risk during the search phase (maybe you can get them to agree its lower risk given less investors, your experience as an officer etc.) I have never been able to secure a D&O Policy for less than $12K per year for a $5M Policy. During the operation phase the Company you purchased should absolutely have a good D&O Policy with employment practices liability coverage and possible Side A coverage also. Many Board members would require this to join the Board. You will need a good insurance broker to make sure that all the coverage's and exclusions are appropriate for your specific business. I have always gone with at at least $5M and try to get it to $10M if the budget can take it.

Reply by a professional
from Arizona State University in San Francisco, CA, USA

Without getting too technical, Search Funds actually resemble a private equity fund during the search phase. The searcher is reviewing investments opportunities, submitting LOI’s and delivering investment prospectus to their LP’s. Private Equity firms or firms that invest money on behalf of investors or limited partners have a General Partnership liability exposure, or GPL coverage. GPL is a packaged insurance policy that covers Private Equity Professional Liability, Management Liability (D&O, EPL) and Outside Directorship Liability. The Private Equity Professional Liability coverage provides very board Errors & Omissions coverage resulting from poor due diligence, misleading offering memoranda, advisory fees or management services provided to fund, acquisition entity or consulting fees to a portfolio company. During the search phase, the Private Equity Professional Liability coverage part is most likely where any claims would fall, and the cost of GPL coverage does not make financial sense to search funds. For instance some of the Institutional search investors carry GPL coverage and they require their portfolio companies/search investments to carry D&O coverage. There are ways in which these overages overlap but generally speaking one does not protect the other. Happy to chat live.

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