With increased litigation risk from regulators and private parties, including limited partners and stakeholders in portfolio companies, private equity firms should re-examine their professional liability insurance policies. “One size fits all” policies that are not sufficiently tailored to meet evolving business needs present a risk.

There are six key questions that fund sponsors should ask:

• Are activities by regulators covered “claims,” and if so, what specific types of activities are covered by the policy?

Some coverage is triggered only by certain formalities of the enforcement process. However, responding to a regulator’s “informal” or “voluntary” requests for certain documents can be costly.

• Are the exclusions from coverage for “insured versus insured” claims too broad?

Professional liability policies typically exclude from coverage claims brought by one insured against another insured. It is important to consider whether this exclusion should be “entity versus insured” rather than the broader “insured versus insured.”

• Does the policy provide coverage for claims relating to failed portfolio company transactions?

The definition of “portfolio company” should be closely examined to ensure that it includes prospective portfolio companies.

• Is there a clear order of priority between and among insurance policies and indemnification rights?

Sponsors should evaluate the “priority” of the GPL coverage relative to other insurance coverage, whether at the portfolio company level or the management company level, as well as the priority of the insurance coverage relative to indemnification obligations of the fund, the management company, and the portfolio companies.

• Are the “defense and settlement” provisions too onerous?

Fund sponsors should consider requesting that this provision be scaled back to allow the sponsor to enter into settlements within the retention amount without the insurer’s consent.

• Should the sponsor obtain stand-alone “cyberliability” insurance?

Private equity firms have begun purchasing cyberliability policies which typically supplement GPL policy coverage for regulatory response costs, data and network rebuilding, and recovery costs.

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*Reproduced with permission from Law360.com.