Insurance is one of the most common topics in conversations with new fund launches and existing managers. To help fund managers think through their options, Steve Vlasak, Partner in Richey May’s Alternative Investments Practice, sat down with Patrick O’Brien of Windermere Insurance Group’s Financial Institutions Practice to walk through the questions our clients ask most. The full conversation is in the video above. The summary below follows the same structure, so you can watch, read, or follow along with both.
Is Insurance a Regulatory Requirement?
The short answer: no. Insurance is currently optional from a regulatory standpoint. While the SEC and other regulators continue to focus on compliance and practice management, no rule mandates coverage. Requirements often come from another direction. It is increasingly common for institutional investors to require a manager to carry a specified level of E&O or cyber insurance as a condition of investment.
The Core Policies Fund Managers Should Evaluate
Cyber Liability
A cyber policy covers the costs associated with a data breach event: forensic work, rebuilding damaged systems, ransomware payments, client notification and credit monitoring, and the regulatory costs that may follow. It functions as a one-stop shop that coordinates the vendors needed to respond.
Cyber Crime / Fidelity Bond
Distinct from cyber liability, a crime policy indemnifies a manager who is tricked into wiring their own money or a client’s money to a fraudulent location. It also covers employee dishonesty and theft by hacker scenarios.
E&O / D&O
The E&O component covers investor claims, including defense costs, settlements, and judgments, and can also cover trading error losses — fixing a mistake before it escalates into litigation. The D&O component primarily provides enhanced regulatory coverage in the event of a targeted SEC investigation. D&O typically pays defense costs but does not cover fines and penalties ultimately assessed.
Does Exposure Differ for Emerging vs. Established Managers?
Not necessarily. The primary rating criteria are AUM and investment strategy. Because carriers maintain minimum premium levels, an emerging manager with $5 million in AUM and one with $50 million in AUM will often see pricing in roughly the same range. Larger, established funds generally pay above those minimums and should evaluate higher coverage limits.
Are Certain Strategies More Insurance-Sensitive?
Strategy matters. Digital assets and crypto strategies typically face higher premiums, higher deductibles, and a smaller universe of carriers willing to write the coverage. Among traditional strategies, private equity and venture capital tend to carry higher coverage limits than hedge funds or real estate funds. Short-only and sector-specific strategies, including crypto-focused hedge funds, generally warrant higher limits as well.
When underwriters evaluate a strategy, the PPM and marketing materials are the central focus. If a claim arises later, the initial representation to investors is where the conversation starts.
What Claims Do Fund Managers Actually Face?
Over the last five years, cyber liability claims have outpaced E&O and D&O claims in frequency, though they tend to be lower in severity. Cyber claims are almost always the result of human error, an employee clicking a bad link or attachment. Asset managers have become a meaningful target for cyber criminals given the data and money flowing through their operations.
E&O and D&O claims are most often driven by poor performance. An investor points back to how the strategy was represented and argues they were misled. Even before reaching settlement or judgment, defense costs alone can run into the millions over an extended period — often the most underappreciated benefit of having coverage in place.
When Should a Manager Be Thinking About Insurance?
Anecdotally, many emerging managers in the zero-to-$100-million AUM range do not carry insurance at launch. With investor bases that may consist of incubator capital or friends and family, the perceived risk feels lower, and most begin evaluating coverage as they scale. The natural inflection point is when a manager begins fundraising in earnest from third-party investors outside their initial network; that is typically when the cost-benefit calculation tips clearly in favor of coverage.
How Do LP Due Diligence Requirements Factor In?
LP due diligence has intensified meaningfully over the past decade. It is increasingly common for institutional LPs to require $5 million in D&O or cyber coverage as a condition of investment. Even where coverage is not mandated in fund documents, LPs are asking detailed questions about insurance and cybersecurity controls during due diligence.
Connect with Our Team
If you have questions about insurance considerations as you launch or scale your fund, reach out to Steve Vlasak, Partner, Alternative Investments Practice, at svlasak@richeymay.com. To learn more about coverage options, you can also connect with Patrick O’Brien at Windermere Insurance Group.
