When a problem occurs, regardless of the originating cause, all roads tend to lead to the directors, who, individually and collectively have unlimited personal liability and stand to lose everything if things go wrong.
Although good internal controls and governance reduces the risk of an operational breakdown, transferring the cost of any litigation or investigation off the respective balance sheets to an insurance policy is one of the few ways a director, investment advisor, manager and funds can truly limit the financial impact of the cost of an operational breakdown.
Due to the proximity of the investment advisor, manager and the funds, protection can often be bought on a blended basis that covers the respective entities and directors by absorbing the cost of such litigation and investigations.
The following diagram outlines some typical channels of responsibility, liabilities and how directors and officers and professional indemnity insurance policy can be positioned to absorb those liabilities.
The red lines indicate some of the exposures to liabilities from claims for damages arising out of allegations of a breach of duty by a director or officer. The blue lines indicate how the liabilities from potential “professional negligence” claims usually occur.
