Insurance cover is increasingly becoming a deciding factor for hedge funds seeking directors, investors and institutional credibility, according to the latest insights from Cayman Islands-based CV5 Capital.
The firm said directors’ and officers’ liability insurance, professional indemnity cover for fund managers and policies covering cyber, crime and employment-related risks have become standard expectations in the investment fund industry.
While such policies are not generally required by regulators, CV5 Capital said they are often reviewed by independent directors before accepting appointments and by investors during operational due diligence processes.
“Nobody reads an insurance policy with attention until the day it is the most important document the fund owns,” said Evan Judd, director at CV5 Capital.
“The trick is to negotiate it on a quiet afternoon as if that day has already come.”
The firm identified three main drivers behind insurance purchases.
Firstly, independent directors often require adequate directors and officers (D&O) coverage and indemnity protections before joining a board, it said.
In addition, institutional investors routinely request policy schedules during due diligence reviews, and the industry continues to face regulatory inquiries, investor disputes, employment claims and cyber incidents.
According to CV5 Capital, defence costs alone can create financial pressure for emerging managers even before a claim is resolved.
As a result, insurance is increasingly being treated as part of a fund’s launch planning rather than a later addition.
The firm also highlighted a common misunderstanding among managers who believe indemnities in fund documents eliminate the need for insurance.
CV5 Capital said indemnities are only as strong as the fund’s ability to honour them.
In situations involving valuation disputes, fund suspensions or fraud allegations, the fund may be unable or unwilling to provide indemnification, making Side A coverage particularly important because it protects directors and officers when the fund cannot.
Another misconception is that a single policy automatically protects everyone involved.
The firm said fund D&O insurance and manager errors and omissions coverage often serve different insured parties whose interests could become adverse during a dispute.
Whether coverage is arranged through a shared or separate insurance structure can determine how policy limits are allocated when multiple parties face claims at the same time.
Insurance limits are typically influenced by assets under management, investor profile and investment strategy rather than a fixed formula.
CV5 Capital said funds with US investor exposure, activist or distressed strategies, or portfolios containing hard-to-value and illiquid assets often require higher limits than managers with less complex risk profiles.
“Buy the policy for the year you suspend redemptions, not the year you launch; the claims that matter arrive with a gate, a drawdown and a regulator on the same phone call,” the firm said.
The firm said policy wording can be as important as the amount of coverage purchased.
Among the provisions it identified as significant are severability clauses that protect innocent directors from another insured party’s misconduct.
It also flagged conduct exclusions that apply only after final non-appealable adjudication, advancement of defence costs, regulatory investigation cover, payment priorities for Side A claims, and run-off protection following fund wind-downs or changes of control.
CV5 Capital added that indemnity agreements and insurance policies should be reviewed together as a single protection framework and that any premiums paid by a fund should be disclosed and handled in accordance with the fund’s governing documents.
