Firms Step Up Focus on Insurance

Large credit-crisis settlements and the Supreme Court’s Janus decision have heightened fund firms’ focus on their insurance coverage, says Dechert’s Matthew Larrabee. An in-depth discussion of industry insurance is part of a new book that Larrabee co-authored with David Kotler, also a partner at Dechert, and Eric Barber and Timothy Burns, partners at Perkins Coie.

Ignites: “We’re talking a bit about some of the recent trends in fund litigation. Matt has just written a book about fund litigation and insurance coverage. Your book also deals with insurance issues for the industry. Can you tell us about some of those right now?”

Larrabee: “In the last several years, the industry has placed a lot more emphasis on understanding their insurance programs. I think a number of things have happened that have really heightened the focus on insurance issues. For example, some of the settlements — even the settlements in the credit crisis cases — were very large, hundreds of millions of dollars. That level of expenditure, that level of cost, really does make anybody focus on whether the source of funds are available, and insurance is definitely one of those.”

“I think the other thing that happened, oddly enough, was the Janus decision by the Supreme Court, which really was focused on 10b-5 liability and raised the question about who really is responsible for disclosure-related violations. Ultimately, when the Supreme Court ruled in Janus that an advisor to a fund complex probably is not liable because they did not make the statements at issue because at least as a legal matter, they did not control those statements, raised the question who should be liable. Who is going to be liable?”

“One of the outgrowths of that is if we focus on other possible parties who could be liable, where are their protections? So, a lot of boards, a lot of independent trustees were asking the question from Janus, ‘Who is going to be responsible? What are our processes? Who really is going to protect us if it turns out that we are among those parties that are responsible?’ Insurance is definitely one of those.”

Ignites: “Does that mean a much longer process for reviewing a policy, or ....”

Larrabee: “I think it means a heightened awareness about what the issues are and a heightened need to understand. Part of the reason we wrote the book in the way that we did was to try and say to people, ‘Look, we’ve learned a lot about the risks the industry faces over the last 10 years. We now know a lot about the sources of protection to mitigate those risks. You should be aware that there is D&O insurance, Directors and Officers liability insurance. There’s E&O insurance, Errors and Omissions insurance.”

“There are even fidelity bonds that can be applicable and just try and lay out the basic issues about what may or may not be covered with the idea that not all insurance is created equal. Not all insurers are created equal, so you really should pay attention to not just the amount of the insurance, although I will say in my line of work, I have yet to have a client call me up and say, ‘Really, we have too much insurance.’ That doesn’t happen by the time I get called. They’re kind of happy to have what ever they have. But trying to understand what the sources of coverage are and what carriers and what policies they want and what they can negotiate for.”