In asset management, companies with Directors and Officers (D&O) coverage on a general private company form can leave firms vulnerable to significant exposures related to professional services as asset managers. If a company is involved in soliciting and managing investment capital from third parties, it is important for them to have D&O coverage under a Financial Institution (FI) policy specifically designed for asset management. This policy should cover both D&O and professional liability for asset management services. These services include everything from developing and operating investment vehicles to ensuring compliance and handling transactions.
The FI Asset Management form combines D&O and Error and Omissions (E&O) on the same policy because the types of claims often overlap between both coverages. While some companies might choose to have separate policies for D&O and E&O with different insurance providers, it’s usually better to combine them into a single policy. This helps avoid disputes about how to share costs between multiple insurers.
For asset management companies focused on real estate, it is important to include a variation of Real Estate coverage. This is typically achieved through an endorsement that should extend coverage to:
- All Special Purpose Entities (SPEs): An SPE is created to hold specific assets, like one or more properties. It can be part of a larger investment fund or an independent entity that raises its own capital. Given the diverse structures of real estate investment assets, the Real Estate endorsement should encompass all SPEs, regardless of their configuration. It should also cover any related sub-entities, ensuring that all entities controlled/operated by the insured are included, regardless of ownership percentage. Companies can choose whether to list all entities individually or apply an omnibus endorsement that covers all entities without listing them on the policy.
- Selection and Oversight of Service Providers: It is important to understand that only the selection and oversight of the vendor is covered and the services provided by vendors are not covered under the policy. Some real estate risks may involve a subsidiary that acts solely as a property manager for their properties, prompting consideration of a separate Property Management E&O policy for that entity. Evan if services are only provided for properties the insured controls there is still a tenant exposure for issues related to:
- Discrimination under the Fair Housing Act (FHA)
- Tenant losses due to not inspecting or maintaining the property, or not properly screening tenants
- Wrongful eviction
- Tenant-led class-action lawsuits claiming violations of local ordinances
There are two important things to check on the FI Asset Management form. First, make sure that any anti-trust provisions are removed if they are included in the base form. Second, ensure that the contract exclusion has a specific exception for professional services.
As mentioned earlier, D&O insurance E&O insurance are included in the same policy because the types of lawsuits often overlap. Common situations that lead to claims include:
- Lawsuits from buyers or sellers regretting their decisions due to inaccurate cash flow projections, inaccurate inspection reports, or misrepresentation.
- Lawsuits from lenders when a debt agreement is unmet, particularly with multiple mortgages stacked, preventing second and third lenders from reclaiming the property.
- Less common but can be more severe are investor claims often involving financial losses from selecting service providers like subcontractors, architects, or property managers, or from asset performance issues.
Claims covered under an asset management policy can last years. They may seem minor for a while, but ongoing developments can significantly alter the trajectory of a claim leading to a spike in costs.
