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Understanding the Need for Search Funds to Add Co-Defendant Language to their D&O Policy

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In light of the increasing popularity of Search Funds and investors exclusively dedicated to this class of private equity, the importance of properly structuring an Executive Liability (Directors' & Officers', Employment Practices Liability, Fiduciary, Crime) policy has never been higher.  Executive Liability is not an "off the shelf" insurance product and each endorsement and the various coverage enhancements require careful consideration. Today, we are going to bring more clarity to the "Co-Defendant Extension" endorsement. 

Why the need for a Co-Defendant endorsement?

From an insurance company's perspective, the Search Fund appears to be a "one-time" private equity entity. During the Search Phase, the Searcher is operating and reviewing investment opportunities similar to a traditional private equity firm. This is where difference ends. After a target Company is acquired, the Search Fund immediately assumes executive management positions, managing the strategic and day-to-day operations. A traditional private equity firm does not assume this level of involvement and, instead, holds a board position and provides strategic guidance. 

Private Equity firms obtain General Partnership Liability coverage or "Fund-Level Coverage". This protects the private equity firm from liability arising out of claims brought against the firm and provides errors and omissions coverage for advisory services, consulting arrangements, or any operational or administrative services provided to a portfolio company.   

Due to the one-time nature of the target and acquisition phase process, Search Funds typically procure coverage more similar to a private company Directors' & Officers' policy rather than a typical General Partnership Liability policy. 

At the time of a Search Fund acquisition, a number of entities maybe created (i.e OperatingCo, AcquistionCo, HoldCo, etc). An Executive Liability (Directors' & Officers', Employment Practices Liability, Fiduciary and Crime) policy is usually obtained at the Operating Company Level.  As a result, the Holding Company is often left unaddressed. However, this is where the board of directors will sit.

In order to provide the appropriate level of coverage, it is important that you negotiate "Co-Defendant language" by endorsement with your insurer.

The Co-Defendant endorsement  grants coverage to named individuals or entities that would otherwise not be covered by the Executive Liability policy, so long as at least one insured under the policy is also continuously named as a defendant in the same claim. Through this method, the Holding Company will have Executive Liability coverage if a claim arises under the policy where both the Operating Company and Holding Company are named as a Co-Defendant. 

Due to the complexity of policy language, endorsements and exclusions contained within the policies, professional advice should always be sought after when crafting and implementing an Executive Liability program.  A detailed analysis should be performed  each renewal to ensure state of the market terms and coverages are obtained. 


MCMJoshua Richman - Principal 

Joshua Richman works exclusively with private equity firms and search funds. He is responsible for conducting pre-closing insurance due diligence, constructing post-closing insurance programs and on-going risk management at close. Prior to Equity Risk Partners, Mr. Richman worked in Business Development at Rocket Lawyer, an venture backed on-line legal services business. He started his career as an Investment Banking Analyst at Morpheus Capital. 

Mr. Richman is a graduate of Arizona State University with a degree in Finance and Supply Chain Management. He lives in San Francisco with his wife Kelly. 

Contact Information: jrichman@equityrisk.com

Phone: (415) 874-7114