Many private equity firms are concerned about their liabilities, including exposure to lawsuits for breach of fiduciary duty, claims for wrongful acts or omissions, and regulatory or securities investigations. One of the best ways to minimize and protect against these liabilities is general partnership liability (“GPL”) insurance. In this article, we identify some key questions a private equity firm thinking about purchasing GPL insurance should consider.
Why Get Coverage?
One of the leading reasons for getting GPL insurance is to insure the indemnification obligations of the funds and protect fund assets. The typical fund indemnity covers the fund manager and general partner and their respective officers, directors, employees, partners, and agents. This indemnity is usually funded by the liquid assets of the fund, or by calling capital contributions or a return of distributions through clawback obligations. Limited partner clawback obligations are often subject to limitations on the amount that can be clawed back and/or the time during which the clawback can be required. When a claim or investigation occurs requiring payment, carefully drafted GPL insurance, designed to cover such indemnification obligations, can reduce or eliminate the need for such capital calls or limited partner clawbacks. Also, there is often a gap between the scope of liability and the scope of indemnification. Fund indemnification does not usually occur to the extent the loss arises from the gross negligence, recklessness, or willful malfeasance of the indemnitee. GPL insurance (which usually needs to be modified to specifically address this issue) can help close coverage gaps in indemnification arrangements, and protect the fund manager, general partner, and other entities or individuals from non-indemnifiable loss.
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