CAYMAN 2012 - HFMWeek

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<strong>CAYMAN</strong> <strong>2012</strong> FINANCIAL SERVICES SOME OF THE BIGGEST HEDGE FUND CLAIMS HAVE STEMMED FROM CASES OF FRAUD ” domiciled investors or regulatory exposures. As a minimum, directors should ensure their D&O policy is separate to the limits of liability of any insurance coverage held by the fund manager. The choice of broker is an important decision. Ultimately it is the broker who, with the aid of their claims teams and advocacy services, should guide the directors through the entire insurance process and ensure valid claims are paid promptly by insurers. At Lockton Companies LLP, our primary focus is to provide the right cover to protect our clients’ true risks. The right cover does not necessarily mean a higher premium, however, buying the wrong coverage given the typically limited indemnities within funds’ articles of association (and this is not just limited to Cayman funds) could be personally very expensive for directors. HFM: What are the consequences for the fund manager’s D&O HK and GW: In these uncertain times of ever-increasing regulation and in light of frauds like Weavering, Madoff and Stanford, the cover afforded by D&O insurance for fund managers is more crucial than ever. Some of the biggest hedge fund claims have stemmed from cases of fraud which can result not only in the loss of reputation but also the potential for allegations to be made against the directors/principles/partners of the management entities for not having implemented the correct controls and procedures to mitigate the fraud in the first place. Consequently, greater focus by investors and regulators on corporate responsibility, corporate governance, transparency of investment exposures and the escalating costs associated with defending lawsuits, means that the sourcing of adequate insurance protection against a host of risks is now an essential part of any fund manager’s business plan. In the same way that funds are looking to purchase standalone D&O insurance, fund managers should ensure that their D&O limit is separate to the professional indemnity limit. Structuring the policy in this way will ensure that a claim against the management entities will not be able to erode the limit of liability available to the directors/principles/partners of the management entities in the event of subsequent claims being made against them. It is important to remember that professional indemnity and D&O insurance policies are not a fail‐safe mechanism designed to cover all unforeseen eventualities, as inevitably they are subject to their terms, conditions and limitations. These insurances are designed to compliment sensible risk management procedures and diligence that, when implemented properly, will protect fund managers from certain adverse situations. HFM: What are the implications for insurers as a result of Weavering HK and GW: The Weavering judgment and subsequent appeal are not likely to increase D&O premiums alone. D&O premiums have certainly stopped reducing in light of losses sustained by insurers providing liability insurance policies for other financial institutions and so, subject to the current level of premium paid by a fund not being unreasonable, efforts should be focused instead on the scope of coverage afforded by the D&O policy, while selecting the most suitable broker and insurers to service the fund’s requirements. What the Weavering case has highlighted is the importance of the composition of the board and the quality of both employed and independent directors. As a consequence, insurers are asking additional questions to reassure themselves that directors (including the independent directors) of funds are fit for the role charged to them. ■ 46 HFMWEEK.COM
We have expanded our horizons... ... to the Cayman Islands Dillon Eustace is pleased to announce the opening of its new office in the Cayman Islands. Dillon Eustace focuses on providing innovative advice on alternative investment products such as single and multi-strategy hedge funds, FoHFs, private equity funds and real estate vehicles. The firm works with on-shore counsel in advising international and domestic asset managers, banks, prime brokers and other service providers on all aspects of alternative investment products including product design, launch, listing, tax and compliance. For more information contact: Matt Mulry Tel: +1 345 949 0022 matt.mulry@dilloneustace.ie Lorcan Tiernan Tel: + 353 1 673 1736 lorcan.tiernan@dilloneustace.ie Andrew Bates Tel: +353 1 673 1704 andrew.bates@dilloneustace.ie
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