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Venture Capital:
Everything you need to know about insurance for VC funds


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As a fund manager, you are familiar with the challenges: Out of 10 portfolio companies, 7 fail; with 2 you get your investment back "more or less" and the one positive outlier (moonshot) brings the return for the entire fund.

As risk and insurance experts for the VC sector, we understand this dynamic well: out of 10 VC companies, 7 suffer no insurance claims per year; with 2 VCs, we become aware of "issues" that end "more or less" mildly, and with one VC there is a very expensive claim, which we handle with our claims team and the insurer to protect the GPs from private liability.

The core mission of a venture capital fund company is to find "moonshot ideas" and promote them with risk capital in order to enable 50 or 100-fold success. In addition to consciously and actively taking large investment risks, it is important to assess the typical operational and liability risks of a fund company and, in some cases, to transfer them to insurance companies.

As part of our advice, we recommend discussing the following four risk areas in any case:

  • Civil law claims against the fund or the management and/or distribution company (a)
  • Civil law claims against the fund management (private liability) (b)
  • Risk from cybercrime (e.g. the redirected capital call, CEO fraud / "fake president") (c)
  • Criminal claims and regulatory investigations against employees or the fund management (d)
 

The answers to the risk discussion can be very individual. For example, one GP may know a reliable network of criminal lawyers and prefer to bear the costs of such a process himself, while the added value of criminal legal protection insurance outweighs the risk for other GPs.

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D&O / E&O insurance as a central component

The risk transfer of civil law claims from (a) and (b) is less controversial. Regardless of whether a KVG is a German GmbH & Co. KG structure or, for example, a Luxembourg SICAV, the transfer of these risks via special E&O and D&O insurance policies are particularly widespread among risk-conscious GPs. While E&O insurance essentially has the task of examining and, if necessary, defending against claims arising from errors in professional services or advice, e.g. based on marketing/contractual documents (presentations, Limited Partnership Agreement (LPA), Private Placement Memorandum (PPM)) or indemnifying against such claims in justified cases, D&O insurance has the important function of covering personal liability (including that of board members) both internally and externally. We frequently see claims against the management of funds in connection with the misuse of company funds, misrepresentation of fund assets in investor reporting, breach of fiduciary duties and non-compliance with regulatory provisions and allegations of non-compliance.
 

Venture capital firms also often require their portfolio companies to take out D&O insurance for the start-ups before investing in them (read more about D&O insurance for growth companies). The reason for this is that a representative of the VC is likely to take a position on the (advisory) board of the start-up, and this seconded person from the VC wants to be protected for this mandate. However, basic cover for these third-party mandates in the portfolio companies is also an important component of the VC company's own D&O insurance and part of the employer's (VC's) duty of care.

News: The "Whistleblower Protection Act" came into force on July 2, 2023. Regardless of the number of employees, capital management companies must set up a whistleblower system - otherwise there is a risk of severe fines. Is your D&O prepared for this? Have it checked now.

Risk Partners special concept "Moonshot Protect" for venture capital funds and fund managers

  • At Risk Partners, we see the added value of so-called "blended coverage" (= dovetailing of D&O and E&O cover in one policy) with most fund companies for complete protection against all types of civil law claims. With the professionalization of risk management, two separate policies can also make sense if, for example, a higher risk or need for cover is attributed to the D&O than to the operational E&O risk.
  • Correct recording and safeguarding of exercised mandates in portfolio companies. In cooperation with LegalTech Fides Technology, we also offer you software-supported governance and compliance tools for transparent and simple management of regulatory and fund administration. Contact us for special conditions for using the software and save on your D&O insurance premium. (Risk Partners guarantees you a premium discount on your D&O premium when using the Fides software)
  • Worldwide industrial criminal legal protection insurance (as required as partial cover for management or as stand-alone insurance for all employees), e.g. for (criminal) legal investigations by (supervisory) authorities and regulators (e.g. BaFin, CSSF) comprehensively
  • Automatic pension cover for newly launched, additional funds or co-investment vehicles ("SPV clauses") under the fund structure/holding company
  • Automatic co-insurance of third-party mandates for new portfolio companies / investments
  • Additional limit on defense costs for third-party mandates for a portfolio company with "unicorn" status
  • Comprehensive follow-up liability regulation in the event of an exit through the sale or IPO of a portfolio company/investment
  • Preparatory actions in the context of an IPO of the portfolio company are also insured for clarification purposes

What influence does the fund profile have on your insurance premium?

When insuring venture capital, there are several important factors that insurers must take into account when calculating premiums, including:

  • Fund size: The size of your VC fund also influences the risk profile of the VC from the insurer's perspective. For example, as the size of the fund increases, the internal organizational structures change, including compliance or accounting requirements, as well as the number of investments to be managed and monitored in portfolio companies. Increasing variables flow into your investment strategies and make management more complex and therefore more prone to error.
  • Investment profile: As part of the investment profile, insurers pay particular attention to the sectors, geographies, ticket size and funding stage in which the VC is investing. For example, VCs that invest heavily in higher-risk sectors such as cannabis and cryptocurrencies or have a strong investment focus in the USA will pay more for insurance than those that invest exclusively in tech and SaaS in Europe.
  • Management profile: A decisive factor for the success of an above-average fund return is experienced fund management with strong investment teams. The experience of the management and senior teams, their professional background and track record are also important factors that insurers pay attention to as part of the underwriting process and influence the determination of premiums. This applies in particular to the first fund.

Florian was recently invited to the #VentureMate podcast with Artur Schneider and Luca Grunwald from the HHL Venture Capital Club and talked about our experiences in risk management.

Guide: How VCs and fund managers protect themselves from liability risks

Read our VC guide to find out what insurance you need as a fund manager for your personal risk management in order to avoid falling into liability traps and what else is relevant for the protection of fund assets and the VC fund company. You will also receive our anonymized evaluation from our benchmark database for more transparency and comparability with your peers on

  • Sums insured
  • Limit structure (maximization and "shared limits" vs. "separate limits")
  • Premium benchmark

We compare these parameters on the basis of fund volume, investment focus and year in which the D&O / E&O was first placed.

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Special criminal legal protection insurance for venture capital

A Criminal legal protection insurance rounds off the liability cover of the D&O / E&O insurance and is particularly needed in the case of investigations by supervisory authorities due to the criminal nature of such investigations. As a rule, partial cover under D&O insurance is not the sole panacea. As an exception, we see this insurance as less relevant if MPs have already built up significant private assets outside of the fund carry and have access to leading criminal defense lawyers.

What does special criminal legal protection insurance cover?

  • Legal costs cover: Special criminal legal protection insurance covers the costs of legal representation of your company or yourself in criminal or regulatory offense matters

  • Protection against unfounded accusations: GPs or investment managers are often involved in legal disputes that later turn out to be unfounded. This insurance protects you against financial losses in such cases, which, depending on the initial situation, a KVG may not cover.

  • Expert support: You have access to experienced lawyers who specialize in criminal law matters.

  • Early conflict resolution: The insurance can also cover the costs of alternative dispute resolution procedures such as mediation or arbitration in order to resolve conflicts early and cost-effectively.

  • Customizable policies: Insurance can be tailored to the specific needs and risks of your venture capital company, so you only pay for the protection you need. 

However, it is important to note that venture capital companies are seen as "financial institutions" in the legal protection insurance market. However, mainly thanks to the banks (Euribor, CumEx, CumCum etc.), providers are very cautious in this segment, so that a good risk story (including compliance setup) is important in order to receive any offers at all.

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Cyber insurance / crime insurance for venture capital

In recent years, protection in the context of cybercrime has rapidly gained in importance. While we have been advising every VC on this for years following spectacular cases in our customer base, the decision to take out cyber insurance combined with crime insurance unfortunately still has a lot to do with subjective experience.

In addition to risk transfer, however, operational risk management must also be taken very seriously in this context, as the PE / VC sector is one of the preferred sectors for hackers in Germany and abroad in terms of loss distribution, as relatively small organizations move large sums of money from A to B here. (e.g. the redirected capital call, CEO fraud / "fake president"). 

Crime insurance in combination with cyber insurance offers protection against financial loss from fraud, embezzlement, theft, social engineering, phishing, etc. as a result of a crime committed by external criminals, but also by your own employees and close confidants. Learn more about this real danger, the fraud scam and best practices for preventive measures to counter the risk in our webinar with the partners of Control Risks:

To get to the article, please click on the picture.

In the event of a #cyberattack, the company affected initially bears the main responsibility. However, managers can still be held liable if they do not take sufficient steps to ensure #cybersecurity.

Webinar agenda :

  • What is the basis of liability for managing directors?
  • What are the main personal liability traps for directors and officers?
  • In focus: We show you how managers can avoid liability traps in the event of cyber incidents
    Q&A: Space and time for your questions to us

Our Managing Director Florian and Reiner Wetzel (Account Manager at Control Risks) discuss this in #29 Minutes. 

Play video
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Public liability (office liability insurance)

Office liability insurance is a form of liability insurance that protects venture capital companies against financial risks that may result from third-party liability claims. In contrast to E&O insurance, however, it explicitly does not cover "genuine financial losses", but "non-genuine financial losses" (e.g. compensation for pain and suffering for the tradesman who fell in the office). Due to the lower risk, office liability insurance also costs only a fraction of E&O insurance and is recommended as cover due to the low premium.   

Added value of office liability insurance:

  1. Liability cover: Office liability insurance protects you against the financial consequences of claims for damages if you or your employees inadvertently cause damage to third parties, be it physical injury, property damage or financial loss.

  2. Personal injury and property damage: Office liability insurance also protects against the financial consequences of personal injury and property damage. This means that damage to persons (e.g. bodily injury) or property (e.g. damaged property) is covered if it is caused by third parties during your professional activity.

  3. Damage to rented property: This point is particularly relevant if you rent office space. Office liability insurance can also cover damage to rented premises if this is caused in your office. For example, if a fire breaks out or water leaks occur and damage is caused to the rented property.
Our services

A holistic approach to risk management

We place identified and insurable risks on the global insurance markets for you in the best possible way. We know that this does not always solve all your challenges. Strong growth can lead to bottlenecks in the insurance department and/or a professionalization of risk management may be necessary. We can help you with this.

For startups, scaleups & life sciences companies

Risk management as a service

It is particularly important for start-ups and pre-IPO companies to develop simple and less complex (risk management) concepts. These must identify, evaluate and transfer the key risks in order to avoid the insolvency of the business model in the worst case scenario.
-> see the Watchmaster case, for example.

From a risk management perspective, it is essential to create a shared risk awareness in the first step, which is largely supported by the risk strategy. Convince your investors in the due diligence process of your next financing round with a risk report and a deep understanding of your risks and hedge against risks that could threaten your company's existence.

On the basis of sound risk and insurance management, we develop a decision-making basis for your company. You decide what to insure and what not to insure. Because not every risk is worth insuring. Here is our basic approach:

  • Risk identification in joint risk workshops, coupled with our experience in industry-typical risks for life sciences, FinTech, tech companies and venture capital firms
  • Risk analysis and assessment (software-supported on request)
  • Development of a joint risk management strategy (Which risks can be accepted, avoided, reduced or transferred?)
  • Determination of your company's risk-bearing capacity and risk acceptance and impact analysis on KPIs in your balance sheet (how much risk can you afford or do you want to take?)
  • Creation of an insurance strategy (what risk should be borne by the company, what should be insured? Goal: Minimization of risk premiums)
  • Implementation and placement of risk and insurance strategies on the insurance market

Your added value through active risk and insurance management:

  • Sustainably increase the security level for your company
  • Value-oriented risk management will lift your valuation in the next financing round
  • Significantly reduce the cost of your insurance
  • Manage and process claims more efficiently
  • CONSCIOUSLY take risks and promote growth!

The Silicon Valley Bank case, which was identified as part of a risk management process and - if necessary - would have led to an adjustment of the banking / treasury strategy, also demonstrated the importance for young growth companies.

For listed corporations and SMEs

Rent-an-Insurance-Manager

We place identified and insurable risks on the global insurance markets for you in the best possible way. We know that this does not always solve all your challenges. Strong growth can lead to bottlenecks in the insurance department and/or a professionalization of risk management may be necessary. We can help you with this.

On the other hand, many companies do not (yet) have an insurance department with their own staff or cannot find suitable personnel. Above a certain size, your industrial risk and insurance issues require professional support to ensure that your investments and strategies are adequately protected. This is where we can provide you with support tailored to your needs.

Building up your own staff to deal with your internal insurance issues is time-consuming and cost-intensive. This work is often carried out by the head of finance or legal, for example, but not by professionally trained insurance staff.

Our solution for your company: Rent-an-Insurance-Manager

  • Hire your "own" insurance department for a certain period of the year
  • Simply outsource the management and administration of insurance contracts
  • Reduce costs - increase security

With our "Rent-an-Insurance-Manager" concept, you can hire core competencies in the insurance sector for a limited period of time and tailored to your needs, just as if you had your own staff in place.

As an outsourced insurance department, the Risk Partners manage and take care of your company's insurance work, e.g. as an in-house contact for insurance issues, interface to your insurance broker or to your insurers.

Your added value through Rent-an-Insurance-Manager:

  • Efficient use of personnel and costs. Existing processes are optimized while at the same time freeing up your internal resources in their specialist areas (legal/finance)
  • "Bookable on a temporary basis", for example if you have staff shortages during peak periods such as renewals or annual financial statements and need support at short notice
  • Saves time: freed-up capacity can be used in other core areas of your company
  • "Professional sparring" relieves and supports your existing team with a second opinion
  • Professional support for your insurance issues through the use of qualified insurance expertise
  • By increasing the quality of work, you also reduce risks for your management's liability
Table of contents

Blog / News

Finance Day 2024

Growth capital for biotechnology and life sciences - Finance Day 2024 A few days ago, Jutta and Florian from our team attended Finance Day 2024 at the analytica trade fair in Munich. The event once again offered exciting expert panels on current financing and capital market issues for life sciences companies. As the panels focused on three of our key consulting areas, namely life sciences, venture capital and IPOs, a visit was of course a must for us as a specialist insurance broker. Our team has

Read more "
April 19, 2024

We provide information on liability risks for VC funds in the VC Magazine

In December, we were asked by VC-Magazin whether we could provide insights into liability and risk management issues relating to venture capital funds. With pleasure! Together with the team, Florian not only provided insights into current challenges, but also suggested practical solutions to effectively minimize and sensibly transfer the risks of a VC fund. You will therefore find in the VC-Magazin article: Added value of customized insurance concepts for VC funds (focus: D&O/E&O insurance #Moonshotprotect), key measures for risk prevention

Read more "
January 26, 2024

Digital and effective prevention of directors' and officers' liability by Risk Partners & Fides Technology

Innovation by Risk Partners & Fides Technology Now on Vimeo and Soundcloud: get practical tips from experts with high relevance for avoiding liability for business managers. Question unanswered? Content: Personal liability is a constant sword of Damocles hovering over managing directors in everyday life. The standard of care is strict and directors bear the burden of proof. In cooperation with the distinguished corporate lawyer Eva Homborg (Esche Schümann Commichau) and the governance expert Philippa Peters (Fides Technology GmbH)

Read more "
January 12, 2024
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