VC Errors & Omissions incl. Cyber

What Is It?

Errors & omissions insurance is often called professional liability or professional indemnity insurance. If investors, clients, or partners accuse your venture capital or private equity firm of professional negligence, misrepresentation, mismanagement of funds, or any other wrongdoing related to its professional services, an E&O policy will respond to protect your business financially.

The coverage will pay for defense costs, as well as cover any settlements, damages, and fines you are required to pay. Given how expensive professional liability lawsuits can be to defend, settle or lose, adding an errors and omissions policy to your VC risk management plan is a wise decision.

Cyber liability insurance is often coupled with errors & omissions as a complementary coverage for VC firms. Venture capital is intrinsically reliant on technology and deals with a lot of sensitive data. This technology focus makes cyber insurance a crucial part of their risk management strategy. The policy will protect VC firms from third-party lawsuits related to data breaches and other cybercrimes but can also protect them from fines handed out by regulatory bodies.

Who Is It For?

Companies involved with venture capital or private equity have a unique professional risk profile. Lawsuits alleging failures in management or bad advice can come flying in from all sides – brought forward by partners, members of the portfolio, regulators, and company employees. And often, the company won’t be the only entity targeted by these lawsuits. Key members of the firm can face lawsuits if third parties allege that they were personally involved in causing them damages.

Embroker’s VC E&O coverage was built to provide coverage for both the company, and directors, officers, and board members of VC firms that purchase interests in other private companies or portfolio companies. It will provide protection for:

• Private equity firms
• Venture capital firms
• Angel investors
• Hedge funds
• VC-backed companies

Furthermore, VCs and private equity firms are commonly targeted by hackers and cybercriminals simply because the industry is associated most with investments of fairly large sums of money. If your VC firm relies on technology heavily and stores the sensitive information of portfolio companies and partners on its servers or anywhere else where hackers might be able to gain access to the information, having cyber liability insurance is also essential.

Why Do You Need It?

VC firms and their executives and partners mainly provide professional services, such as consulting, advising, and fund management to other companies, investors, and business leaders. This makes them susceptible to E&O claims.

For instance, the companies in their portfolio could allege that the VC’s advice caused them damages and led to a loss in profit or opportunity. Or the investors trusting them with their funds could claim that the money was mismanaged or invested poorly if the portfolio underperforms, even though the VC is not at fault.

Additionally, VCs face a considerable amount of risk due to the nature of the industries they serve. Venture capital firms tend to work primarily with companies in cutting-edge industries that offer services and products, pushing the envelope and exploring new territory. This focus on innovation and getting ahead of the market leaves both the portfolio companies and the VCs open to more risk than other, more traditional businesses face.

Naturally, claims arise more often in industries pushing the envelope and taking risks to innovate. Such claims are often complex and can cost a fortune to resolve – it can be challenging to prove who’s at fault and to what degree if a business relationship turns ugly. This is why most investment professionals should consider investing in the proper risk management program coverage that protects the assets of their management and the firm in general.

What Does It Cover?

Errors & omissions insurance provides coverage for a variety of errors made while providing professional services to your clients. In typical businesses, this would include issues such as mistakes and oversights made in one’s work, failing to deliver services and goods as was agreed upon, breach of contract, professional negligence, failure to meet deadlines, providing bad advice, and so on.

When we are talking about venture capital firms, professional services often refer to the services performed by directors and other board members who work closely with portfolio companies. VCs and private equity companies often see claims related to corporate governance issues, mismanagement of funds, lack of due diligence, negligence, and even exits from investments can lead to claims.

Cyber liability covers the same risks for venture capital firms that it would for any other business, including privacy issues, data breaches, social engineering attacks, computer fraud, and more. A good cyber policy will cover the costs of notifying any third parties that have been affected by a cyber crime that occurred in your organization. It would also cover the costs of investigating the issue and rectifying it.

If your venture capital firm has claims filed against it by a third-company related to a cyber breach, your policy should also pay these legal costs, including defense costs and possible settlements.

What’s Not Covered?

When putting together your professional liability policy, it is important to be aware of some of the most common exclusions so that your VC firm can plan accordingly and purchase coverage that will be able to fill these gaps in coverage.

Intentional criminal and illegal acts are not covered by your E&O policy, nor are acts that pollute or financial insolvency. It’s also important to name all of the entities that need coverage in your policy in order to guarantee coverage for everyone your firm wants to protect.

If you need copyright infringement and libel covered by your professional liability policy, talk to your brokers to see if these coverages can be included or if it is in the best interest of your VC firm to purchase separate coverage for these exposures.

Cyber insurance typically will not cover things such as the devaluation or theft of intellectual property as the result of a cyberattack and potential and future lost profits related to cybercrimes. Be sure to check with your broker to see what potential gaps in your cyber liability coverage can be filled by other policies.

What Does It Cost?

The factors that determine how much your venture capital firm will pay for errors & omissions and cyber liability insurance are similar to the ones that insurers look at for any other type of business.

Revenue

The more money your VC makes annually, the more it will pay for insurance.

Portfolio Size

The more businesses your VC invests in, the greater your liabilities are and the more you will pay for insurance.

Location

Companies located in metropolitan hubs (New York, Los Angeles, San Francisco, etc.) will have to pay more than those located in less populated areas.

Industries of Interest

Venture capital firms that invest heavily in companies that work in high-risk industries such as biotech or cannabis will pay more for insurance than those who stick to safer industries such as software as a service (SaaS).

Claims history

If your venture capital firm has a history of E&O claims, your insurer will expect you to pay more for coverage.

Limits

Quite simply – the higher the limit, the higher the premium will be. Given how expensive and damaging E&O claims can be, it’s better to get a higher limit than might be needed than to be left without coverage mid an expensive lawsuit.

Amount of Deductible

Your deductible is how much you will have to pay from your own funds before the policy payout kicks in. A high deductible means lower premiums. As policy limits get higher, insurers will typically demand that this increase should be followed with a higher deductible.