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Frenkel & Co., Inc. Company
Question: What limits should we buy?
Answer: We try to provide our clients with options for different limits. Based on the quoted premiums, you are then able to make an informed business decision about what limits to purchase. Here are some things to keep in mind when deciding how much insurance to purchase:
| Coverage | Description |
|---|---|
| Property including Business Income and Extra Expense | For Business Personal Property coverage (a/k/a Contents coverage) we recommend that you purchase a limit equal to the replacement cost of your furniture and fixtures, tenant improvements (build out cost, assuming you and not the landlord will have to pay this cost in the event of damage), and electronic equipment including computers, printers, copy machines and phone switch. For the most part, hedge funds have an extra expense exposure, and not a business income (a/k/a business interruption) exposure. Unlike an industrial operation, which cannot readily move to alternate space in the event of a fire, a hedge fund that finds its space untenantable due to a fire or other casualty can usually relocate and get back in business in short order. Extra Expense insurance pays for those costs which are over and above normal operating expenses following a loss. For example, if your rent is $100,000 per month, but following a fire you need to move to temporary space for four months at a cost of $150,000 per month, then the Extra Expense coverage would pay $200,000 (4 x ($150,000 - $100,000)). In addition to higher rental costs, the policy would pay above-normal administrative, IT and telecommunications costs. Most hedge funds should purchase at least $1,000,000 in Extra Expense coverage. Hedge Funds generally do not have a true business income, or loss of profits, exposure. First off, a hedge fund cannot afford to be non-operational for any length of time. You have to do whatever it takes to get back up and running. Your clients will demand this. Second, it's hard for a hedge fund to prove a business income (loss of profits) loss. The insurance company will argue that the trades you would have made during the period of interruption could have resulted in a loss, rather than a gain. |
| Commercial General Liability | The standard limits for Commercial General Liability ("CGL")
coverage are $1,000,000 each occurrence and $2,000,000 general aggregate
(this is the most the policy will pay). Most hedge funds supplement these limits by purchasing an Umbrella Liability policy (see below) which provides additional limits over the base CGL policy. |
| Business Auto | The standard limits for a Business Auto Policy are $1,000,000 CSL
("Combined Single Limit", which means a single limit is provided for
both bodily injury and property damage liability claims). Most hedge funds supplement these limits by purchasing an Umbrella Liability policy (see below) which provides additional limits over the base Auto policy. |
| Umbrella Liability | Umbrella Liability policies are sold in increments of $1 Million. Most of our clients purchase Umbrella limits of at least $5 Million. Larger funds are purchasing limits of $25 Million or more. |
| Workers' Compensation | Limits for Workers' Compensation are statutory, so you do not have to worry about choosing a limit. Workers' Compensation policies also provide Employers Liability coverage for tort claims arising out of workplace injuries. We recommend Employers Liability limits of $1,000,000. Once again, an Umbrella Liability policy (see above) provides additional limits over the base Employers Liability policy. |
| Errors & Omissions / Directors & Officers Liability | Forget about trying to purchase E&O/D&O limits in an amount equal to
potential investor losses. For most funds, that would be
impractical because (a) there is not enough capacity in the market, and
(b) it would be cost prohibitive. Instead, you should purchase
limits that would be sufficient to pay defense costs, and perhaps a
claim settlement. The cost to defend a lawsuit or regulatory
investigation can easily run into the millions of dollars. A key
benefit of having a policy is the fund will not have to liquidate
positions or use the firm's own funds to pay for defense costs. Most funds that purchase E&O/D&O coverage are buying limits of between $2 Million and $5 Million. Some larger funds are buying limits of $10 Million, with a few purchasing even more coverage using several insurers in a layered program. |
| Employment Practices Liability | A small fund should buy Employment Practices Liability insurance ("EPLI") with limits of at least $1,000,000. Larger funds with more than 25 employees should buy limits of at least $5 Million. |
| Fidelity Bond | Losses due to employee dishonesty are rare events but when they are discovered the losses can be very large and span several years. A small fund should consider limits of at least $1 Million to $5 Million. Larger funds may purchase limits as high as $25 Million or more. |
| Life Insurance | Term life insurance is pretty inexpensive right now. Limits to be purchased should be based on the provisions of the buy/sell agreement between the partners, and the personal needs of the principals. |
