1. Errors & Omissions / Directors & Officers Liability Insurance for Hedge Funds
WHAT DOES AN E&O / D&O POLICY COVER?
The policy covers claims made by investors, regulators, and other third-party stakeholders for any
actual or alleged negligent act, error or omission, misstatement or misrepresentation, or breach of
fiduciary or other duty in the operation of the hedge fund. The policy is written with an insuring
agreement that provides a broad coverage grant for any wrongful act except those acts that are
specifically excluded. The policy pays for your defense costs, as well as any judgment or settlement
up to the policy limit, but only after you have paid the retention (deductible) amount. In the better
policies a "claim" also includes any administrative or regulatory proceeding (i.e.; an investigation),
commenced by the filing of a notice of charges, formal investigative order or similar document.
WHO IS INSURED?
The policy is written with the Investment Manager (the Investment Adviser entity) as the Named
Insured. The named insured appears on the Declarations Page (the front page) of the policy and
is the entity that purchases and controls the policy. The policy covers as Insureds all of the
following individuals and entities connected with the hedge fund:
Individuals
Past, present or future partner, principal, officer, director, member, trustee or
employee of the Investment Manager
Past, present of future partner, principal, officer, director, member, trustee or
employee of:
A covered hedge fund
The general partner or managing general partner of each covered hedge
fund that is organized as a limited partnership
The managing member of any covered hedge fund organized as a LLC
(limited liability company)
o Entities
The Investment Manager (Investment Adviser)
Each covered hedge fund. Many, but not all, policy forms provide automatic
coverage for new funds formed during the policy year.

2. POLICY STRUCTURE
The policy is comprised of four distinct parts:
Policy Declarations
The first two or three pages of the policy contain all the basic policy information, including:
the name and address of the insurance company, notification statement advising that the
policy is written on a "claims made" basis, that defense costs erode the policy limit, and that
the insurer has no duty to defend, the policy number, the name and address of the named
insured, the policy period, the limits of liability, the retentions (deductibles), the cost and
length of time of an extended reporting period ("Tail Coverage"), the address to be used for
notifying the insurer of a claim, the annual premium, list of policy forms and endorsements
attached at issuance, signatures of the officers of the insurance company
• Base Policy Forms
Every insurer has its own proprietary base policy form. Unlike Workers' Compensation or
Automobile insurance, there are no industry-standard forms. In fact, there is tremendous
variability in the forms used by Hedge Fund E&O / D&O underwriters. That's why it is so
important to choose a knowledgeable broker who can point out the differences and
recommend the best form for your fund.
The typical Hedge Fund E&O / D&O base policy form has a General Terms & Conditions
part - plus at least three other coverage parts as shown in the illustration below:

3. • The Investment Manager E&O Coverage Part covers the Investment Manager (Investment
Adviser) entity and the individuals who own/manage/work for the entity for claims alleging
wrongful acts in providing or failing to provide investment management services to the
covered fund(s). Think of this part as professional liability or malpractice insurance for the
adviser. The policy also covers the Investment Manager's vicarious liability exposure for
outside service providers who perform professional services on behalf of the company.
• The Investment Manager D&O Coverage Part covers the Investment Manager (Investment Adviser)
entity and the partners/members (or directors and officers, if the Investment Manager entity is a
corporation) of the Investment Manager for claims alleging wrongful acts in the conduct of the
business, other than claims alleging wrongful acts as adviser to the covered fund(s). The policy will
also pay on behalf of the Investment Manager entity amounts it pays as indemnification to the
partners/members (or directors and officers) as prescribed by the entity's by-laws. Some insurers
include coverage for Employment Practices Liability claims within this Coverage Part, while other
insurers break this out as a separate Coverage Part. Employment Practices Liability provides coverage
for claims by employees alleging wrongful termination, discrimination, or sexual harassment.
• The Hedge Fund E&O/D&O Coverage Part covers the insured Fund(s) and the individuals
who are responsible for oversight of the Fund(s) for claims alleging wrongful acts in the
operation of the Fund(s). The Directors & Officers Liability (D&O) coverage in this Coverage
Part is a misnomer: it really should be called E&O/GPL or General Partners Liability because
most funds are organized as either a partnership or limited liability company (LLC) and the
policy covers as Insureds any general partner or managing member of the fund(s).
• The optional Fiduciary Liability Coverage Part covers claims alleging a breach of fiduciary
duty under ERISA as well as other wrongful acts arising out of the Insured's role as a fiduciary
of one or more qualified plans. Hedge Funds with more than 25% of their AUM from ERISA
and other benefit plan investors may be deemed to be fiduciaries under ERISA rules.
Fiduciaries may be held personally liable for damages under ERISA. This Coverage Part may
also be used to cover the Investment Manager's own sponsored 401(k) or pension plan.
• The optional Outside Directorship Liability Coverage Part covers Hedge Funds that have
representatives on the boards of directors of portfolio companies. Coverage usually applies
excess of any indemnification provided by the portfolio company, and excess of the
portfolio company's own Directors & Officers Liability policy. This added layer of
protection ensures that coverage will be available for the director representing the Hedge
Fund, in the event the portfolio company's D&O policy limits are exhausted or the policy is
rescinded or canceled due to fraud or non-payment of premium.

4. • Endorsements
The base policy is always accompanied by one or more endorsements which serve to broaden or
restrict the terms and conditions of the base policy. Some endorsements, known as State Amendatory
Endorsements, are required by insurance regulators in the state in which the Investment Manager is
located. Endorsement wordings vary not only from insurer to insurer, but sometimes a given insurer
will have multiple versions of the same endorsement. Many endorsements that provide broader
coverage are available without additional premium cost - but your broker needs to know enough to ask
for them. Hedge Fund Insurance maintains a library of endorsements currently used by all insurers.
We use our knowledge of available endorsements to craft state-of-the-art policies for our clients.
• Application
The completed and signed application is the fourth part of the policy. Not only is the
application physically attached to the policy, but most policies state that all information
submitted to the insurer along with the policy, such as performance data and roadshow
presentations, will be considered physically attached to and part of the policy. The application
and all the statements therein are considered material representations. Any errors or
misstatements in the application could allow the insurer to disclaim coverage in the event of a
claim. The better policy forms provide for severability of the application so that misstatements
made by an insured in completing the application are not imputed to innocent insureds who
did not complete the application and had no knowledge of the misstatements.
CLAIMS MADE FORM
Hedge Fund E&O/D&O policies are always written on a Claims Made form - a policy that covers claims
first made during the year the policy is in force, or during an Extended Reporting Period (also known as a
"Tail"). This form of coverage is in contrast to an Occurrence form policy, which covers a wrongul act
committed while the policy is in force regardless of when the claim arising out of that wrongful act is made.
COVERAGE FOR PRIOR WRONGFUL ACTS
If you purchase a Hedge Fund E&O/D&O policy you want to make sure your policy covers unknown prior
wrongful acts. Some underwriters will try to exclude coverage for wrongful acts committed prior to the policy
effective date. As you would expect, there will be no coverage for known prior wrongful acts (you must
disclose these in your application), or for claims arising out of circumstances reported to any prior insurer.
LIMITS
Hedge Fund E&O/D&O policies are written with minimum limits of $1,000,000. Additional limits
are purchased in increments of $1,000,000. The policy limits apply for each claim and also as a
policy aggregate. The maximum aggregate limit of liability is the most the policy will pay for all
costs under the policy, including defense costs, judgments and settlements. It is important to note
that defense costs erode the limit of liability. So if your policy has a limit of $1,000,000 and it costs
$600,000 to defend a claim, then there will only be $400,000 left to pay any judgment or settlement.

5. WHAT LIMITS TO PURCHASE?
Hedge funds should not purchase a policy with the idea that it will pay for investor losses if the
Investment Manager makes bad investment decisions. For most funds, adequate limits to cover
investor losses are simply not available due to market capacity constraints - and even if they
were, the cost would be prohibitively expensive. For example, Amaranth Advisers LLC lost more
than $6 billion for its investors in September 2006 trading natural gas futures. Amaranth could
only have purchased a small fraction of the E&O/D&O limits that would have been needed to
make all their investors whole. Instead, funds should purchase an E&O/D&O policy to cover the
cost of defending a lawsuit or investigation. These costs can easily run into seven figures. Many
of our clients are purchasing coverage as a marketing tool: potential investors like to hear that a
fund manager is protected by an E&O/D&O policy written by a major insurer.
The chart below shows the distribution of limits purchased by a large sample of hedge funds (data
courtesy of Advisen Ltd.):
RETENTIONS
Hedge Fund E&O/D&O policies are subject to a retention or deductible, which is the amount you
must pay out of pocket before the insurer starts paying a claim. The retention applies to both
defense costs and any judgment or settlement. The insured must pay the retention amount for
each claim. Retentions for Hedge Fund E&O/D&O policies are high - typically from $150,000 to
$250,000. Larger funds with AUM over $5B may have a retention of $1,000,000.

6. DEFENSE
The cost of defense is covered under a Hedge Fund E&O/D&O policy and the insurer will start
paying defense costs on behalf of the insureds once the amount of loss paid out of pocket by the
Insureds has exceeded the retention (deductible) amount. Defense costs erode the policy limit. So
if you have a policy with a $2,000,000 limit of liability and if costs $700,000 to defend a claim,
then only $1,300,000 will be left to pay any judgment or settlement. Unlike a Commercial
General Liability policy, the underwriter has no duty to defend a claim. Instead, the Insureds are
responsible for their own defense. The Insureds may choose their own defense counsel, subject to
the insurer's approval. The insurer usually retains the right to consent to any settlement.
Some policies contain an unfavorable provision known as a "Hammer Clause" which limits the
amount of the insurer's payment if the insurer recommends a settlement and the Insureds opt to
continue to litigate. In that case, the insurer's obligation is capped at the recommended settlement
amount. The Insureds will be responsible for the amount in excess of the recommended
settlement amount if they choose to keep litigating and ultimately lose the case. Thus the term
"Hammer" is used to describe the leverage the insurer applies to the Insureds to get them to agree
to the recommended settlement amount when the policy contains a "Hammer Clause".
POLICY PERIOD
Hedge Fund E&O/D&O policies are written for a term of one year.
EXTENDED REPORTING PERIOD
If the Investment Manager closes the fund(s) and ceases operation it is advisable to purchase an
Extended Reporting Period or Tail Coverage which allows more time - one or more years - to make
claims under the policy. The length and cost of the Extended Reporting Period is usually stated in
the policy declarations. A typical Extended Reporting Period is one year at a cost of 150% to 225%
of the annual policy premium. Longer tail periods of up to six years can be negotiated.
POLICY TERRITORY
Some U.S. insurers limit coverage to claims brought in the United States and Canada. We think it
is important that your Hedge Fund E&O/D&O policy cover claims made anywhere in the world.
EXCLUSIONS
Every Hedge Fund E&O/D&O insurer has its own exclusions - and for any given exclusion, the
variations may range from subtle to dramatic. Some exclusions can be deleted, while others can
be softened. At The Rampart Group, we know which exclusions can be eliminated or modified
so as to provide the broadest possible coverage for our clients. Here are some of the most
common exclusions:
Any dishonest, fraudulent or criminal act by an Insured
Any willful or intentional violation of any statute, rule or law by an Insured

7. The gaining of any profit, remuneration or advantage by an Insured to which the Insured
was not legally entitled
Any wrongful act, circumstance or claim reported under a prior policy
Any wrongful act, circumstance or claim reported in the application
Pollution or nuclear activity
Personal injury, bodily injury, and property damage liability
Contractual liability
Claims made by one insured against another insured
Service as a director of officer of an outside entity
Acting as an Investment Banker
Acting as a Broker/Dealer
Bankruptcy or insolvency (but any claim arising from the negligence of an Insured in
rendering or failing to render professional services is covered)
ERISA claims (unless optional Fiduciary Liability coverage is included)
Soft dollar disclosure claims
Late trading and market timing
Claims based upon commissions or fees charged by any Insured
Information needed to quote
Underwriters require the following information to quote an E&O/D&O policy:
Fully completed and signed application, including schedule of funds with AUM for each
PPM for each fund
Latest audited financial statement + interim statement for the investment adviser
(business plan and/or pro-forma statement if start-up)
Historical performance of fund(s)
Resumes/CVs of investment adviser principals
"Road Show" presentations, if any

8. URL of website, if any
Summary and status of any litigation filed within the last five (5) years against any
person(s) or entity(ies) proposed for this insurance (including any litigation that has been
resolved)
Employee Handbook for investment adviser entity (if Employment Practices Liability
coverage is desired)
Key Underwriting Factors
Here are some of the factors underwriters look at when deciding whether to quote an account and
what terms and conditions to offer:
Claims history
Has the firm been the subject of any investigations or inquiries of any kind by any
regulator in the past year?
Investment strategy
Leverage
Liquidity
Counterparty risk
Experience of the management team
Number of partners / viability of firm without key personnel
Experience of the chief compliance officer
Compliance / internal audit function
Due diligence regimen
Disaster recovery preparation
Historical fund performance
AUM
Minimum and average investment amount
Net flows ($ amount of subscriptions and redemptions past year)
Investor profile / percentage of institutional investors
Quality of outside service providers

9. Recent changes of outside service providers
Transparency / communications with investors
Use of independent custodian
Whether the adviser is registered with the SEC
Redemption restrictions
Use of side letters
Number of funds managed
Whether any funds have been closed, and if so, why?
Outlook for next 12 months
Strategic plan
Claim Examples
Allegations made against hedge funds, investment advisers, and their respective
directors/partners/members include:
Mismanagement
Misstatement
Negligence
Misrepresentation made in the PPM or other communication
Fraud
Breach of duty
Failure to supervise the investment adviser
Failure to perform adequate due diligence in evaluating potential investments
Failure to provide adequate disclosure of the investment risks involved
Investing in assets or using strategies not mentioned in the PPM
Failure to follow investment guidelines
Failure to properly value assets

10. Failure to invest
Failure to redeem investor funds in a timely and orderly manner
Manipulation or misrepresentation of historical performance
Excessive fees
Contracting with substandard vendors/submanagers
Conflicts of interest / related party transactions
Claims against individuals serving as directors on the boards of portfolio investments
Claims by the SEC or state attorneys general or other regulatory body alleging violations
of rules or statutes. It is important to note that coverage under some E&O/D&O policies can
only be triggered by the filing of a notice of charges, formal investigative order or similar
document.
Market timing / Late trading
Claims made by employees alleging discrimination, sexual harassment, or wrongful
termination