Professional Indemnity Insurance for Financial Planners - MKM
McDougall Kelly & Martinis is one of Australia’s leading specialist insurance firms that combines global access with in-depth local expertise.
OUR
EXPERTISE
McDougall Kelly and Martinis has the People who understand your unique business requirements, the Process to review your existing cover and the Performance to deliver globally competitive premiums with bespoke policy wording.
At McDougall Kelly and Martinis we advocate purely for our clients, that is why many of Australia’s leading financial services firms trust us to design and deliver their insurance programs. We operate in and access the global insurance market to source the optimal solution for our clients. Our areas of expertise include Professional Indemnity, Directors and Officers Liability, Management Liability, Fund Liability, Fidelity Insurance, Securities Entity Cover, Public offering of Securities Insurance, Cyber Liability and Transactional Risk Insurance (Warranties and Indemnities).
That’s why we are an ANZIIF industry award winner
INVESTMENT MANAGER
With one of Australia’s largest portfolios of Investment Managers we intimately understand how to deliver an insurance solution that meets your unique needs.
FINANCIAL ADVISERS
Our IFA clients range from boutique AFSL’s to large national Dealer Groups, all benefiting from our industry knowledge and expertise.
HEDGE FUNDS
We have practical experience and an extensive portfolio of Hedge Funds, with proven ability to deliver globally competitive price and coverage.
PRIVATE EQUITY
We have the expertise to protect both the Private Equity firm and its portfolio companies
FAMILY OFFICE
With discretion and expertise we protect the interests and reputations of our Family Office clients.
TRANSACTIONAL RISK INSURANCE
We have the demonstrated capability to use insurance as a deal enabler in the M&A transaction.
DIRECTORS INSURANCE
We specialise in Directors and Management Liability Insurance for listed and private companies.
PROFESSIONAL INDEMNITY INSURANCE
We have deep expertise in Professional Indemnity Insurance across a wide range of professional services.
INVESTMENT MANAGERS INSURANCE
We design and deliver high quality tailored insurance solutions for Financial Service entities.
FUND MANAGERS
At McDougall Kelly & Martinis we understand the complexities of Investment Management. The increasing volatility in financial markets since 2007 has led to an increase in investor claims. These claims only serve to further highlight the need for investment managers and their senior executives/directors to be protected. Add to this the ever increasing regulatory requirements and compliance guidelines the risk for Investment managers has never been greater.
As most Investment managers source wholesale fund flows from Institutional Investors, they increase their risk of litigation as these well-resourced Institutional Investors generally have a greater propensity to seek legal action, in order to fulfil their own duties to their underlying investors, when things don’t go as planned. Investment manager’s litigation risk is not limited to investors who can make claims, Investment management firms, their senior executives and company directors owe a duty of care to a wide array of stakeholders including firm shareholders, fund unit holders, employees and third parties.
Further, it’s not just the risk of a successful claim that can seriously impact the ongoing viability of an investment management firm, defence costs alone (even for a frivolous claim) could tie up valuable resources for months on end, and in some cases force an uninsured Investment Manager to shut the doors as they may not be able to fund the legal expenses.
Investment Managers Insurance (IMI) is a program to cover the often complex and unique risks that Investment Managers face on a daily basis. Traditional Professional Indemnity (PI) and Directors and Officers (D&O) policies will not adequately cover those risks.
Some of specific risks faced by investment managers include:
Investment Manager Insurance Policies
At McDougall Kelly & Martinis we understand the enormous demands on your time to deliver relative or absolute returns to your clients. An Investment Manager Insurance (IMI) Policy provides the protection and financial security that allows you to concentrate on meeting those performance expectations. An Investment Management Insurance (IMI) policy is specially designed to respond to claims frequently faced by investment management firms, their funds and senior executives including directors. Cover is also afforded to related responsible entities (RE’s) and listed investment companies (LIC’s) and the professional managers of each of these entities.
An Investment Manager Insurance policy will typically include 3 key sections:
1. Professional Indemnity covering investment services offered by investment managers and investment advisers.
2. Directors and Officers Liability to protect individuals for specific management liabilities.
3. Crime Insurance to protect the investment manages and funds from theft by employees or third parties.
Benefits of an Investment Managers Insurance (IMI) Policy
Covers claims arising from acts, error, and omission, breach of duty, breach of trust, breach of authority, misstatement or misleading statement by the investment manager or managed investment scheme while performing investment services.
Covers fraud, dishonesty and/or theft by any employee or third party.
Covers the investment manager, the managed investment scheme, the responsible entity Directors, Officers or employees and the investment and compliance committee(s).
Provides for Defence costs to the insured as they are incurred.
An Investment Managers Insurance (IMI) policy complies with the Insurance requirements of the Managed Investments Act.
By combining all three elements of cover under one policy it overcomes the potential for multiple insurance companies arguing over whether a claim originated out of the investment managers professional duty or whether a claim originated out of a failure to exercise due care and diligence in the management of the investment management company.
FINANCIAL ADVISERS
Insurance Obligations for Financial Planners
Under s912B of the Corporations Act 2001 (Corporations Act), Australian financial services (AFS) licensees that provide financial services to retail clients must have arrangements for compensating retail clients for losses they suffer as a result of a breach by the licensee or its representatives of their obligations in Ch 7 of the Corporations Act.
Licensees must obtain PI insurance cover that is adequate, considering the nature of the licensee’s business and its potential liability for compensation claims.
Our step by step assessment of your requirements:
Step 1: Assess your business:
Review your business, taking into account any proposed changes to the business. Review your claims history (if any) and risk management procedures.
Step 2: Assess potential liability:
Determine ‘the maximum liability that has, realistically, some potential to arise. ASIC suggest you do this by making a reasonable estimate of the following factors:
Step 3: Assess amount of cover:
Consider whether the amount of cover is adequate. It should at least meet ASIC’s minimum requirements as per RG 126.
Step 4: Assess scope of cover:
Consider whether the scope of cover is adequate as per RG 126.
Step 5: Consider financial resources:
Ensure that you have the financial resources to pay the excess on the estimated number of claims and cover any gaps and legal costs (if necessary). Consider how you will cover these claims and retain records of the assessment (e.g. through capital, cash flow, overdraft, support).
HEDGE FUNDS
Hedge funds and private investment funds are often the investment vehicles of choice for many Sovereign Wealth Funds, High Net Worth Individuals and Family Office investors, however all too often Hedge Funds become easy scapegoats for investors looking for someone to blame during periods of prolonged drawdowns.
Further, with the increase in capital sourced from Institutional Investors, Public Offer Superannuation and Industry Funds, Hedge Fund Managers can face well-funded and resourced Institutional Investors with a greater propensity to take legal action, in order to fulfil their own duties to their members, when things don’t go as planned.
No matter how well-run your firm is, in a litigious environment no manager is insulated from the risks of management and professional liabilities.
The typical hedge fund investor’s expectations of risk adjusted performance coupled with their insistence on meticulous adherence to standards of care, good faith, and fiduciary duty, create a wide array of liability exposures for Hedge Fund managers.
It’s not just fund investors that hedge fund managers should be conscious of, the increased focus on corporate governance and the potential for greater regulatory scrutiny creates further exposures with regulatory investigations and the potential for civil fines and penalties levied by any number of government agencies.
Hedge Funds can receive claims for significant compensation for mismanagement, misrepresentation, employment practices violations, breach of duty, or failure to provide adequate disclosure of the investment risks involved. In the complex world of hedge funds a simple error or oversight can lead to numerous claims that can have a devastating effect on a business.
These claims can be brought by a myriad of sources including investors, shareholders, employees of the fund, and may be directed at the Directors and Officers, the Investment Management Entity or the Fund itself. For example, a hedge fund assumes vicarious liability for the actions of its outside service providers. If an error is made in misstating performance or in the funds financials, the manager and or fund carries responsibility.
Defence costs alone (even for a frivolous claim) could tie up valuable firm resources for months and in some cases years, and lead an uninsured Hedge Fund Manager to shut the doors as they may not be able to fund the legal expenses.
Investment Managers Insurance for hedge funds which included Professional Indemnity Insurance, Directors and Officers Insurance and Crime Insurance covers defence costs, as well as any judgment or settlement. Given the complex nature of hedge fund litigation and the cost of engaging experienced securities litigation counsel, defence expenses in claims against hedge funds can escalate rapidly. In most cases, once the policy deductible (Excess) is satisfied, the insurer will advance defence costs – relieving the firm, fund or management insured from the cost of defending the claim.
Investment managers need to ascertain the tangible and intangible costs and benefits of insurance.
For example, Institutional investors are often seeking insurance coverage in their request for proposal documentation and by-passing firms that do not have adequate Investment Managers Insurance and a portion of the costs of insurance may be recouped via the fund expenses and included in the funds indirect cost ratio.
In ascertaining the tangible and intangible costs of insurance, Investment Managers need to understand how much it will cost to defend a potential regulatory investigation or claim, fund investor claim, employee claim or even a claim by a director the fund. An investment manager needs to consider what will be the impact on the firm if a claim were to arise, how it will impact your reputation and future capital raising efforts, or in some cases will the Firm, Fund or Directors remain solvent whilst defending a claim without insurance.
An Investment Managers insurance policy will typically contain three elements.
And provide emergency defence costs, advanced defence costs, representation and investigation costs, public relations expenses, outside directorship cover for fund directors and employment practices liability cover.
Typical claims made against hedge funds, and their respective directors include:
Examples of actual claims are detailed below:Directors and Officers(D&O)
An Investment manager was involved in an acquisition in which a minority shareholder pursued a petition claiming unfair prejudice. Members of the board of directors of the Investment Manager were named in the petition and incurred significant legal costs. After two and a half years the case went to court. The insurance policy allowed the legal costs to be paid directly by insurers and the claim to be successfully defended in court. Despite the claimant being unsuccessful legal costs paid by insurers were in excess of GBP4m.
D&O - Derivative claim
A listed, Collateralised Loan Obligation hedge fund acquired a real estate fund manager. This was ratified at board level, however one director voted against the transaction. This director then brought a derivative action on behalf of all shareholders against the board alleging the purchase of a real estate manager was not in the best interests of the company and was, in fact, a breach of mandate. The derivative action was struck out in the Guernsey court but not before USD1.5m of defence costs had been incurred and paid by the policy.
Professional Indemnity
A claimant alleged a Fund Manager had been negligent in their accounting procedures (which included the valuation of NAV,) resulting in a potential claim of up to GBP 4m. Coverage was confirmed under the PI element of the Fund Managers Fund Management Liability and Crime policy. Following investigations into liability against both parties, a settlement was reached with cover provided for the cost incurred in defence of this matter, a figure of GBP 640,000 for legal fees, plus the settlement reached with the insured client for GBP 3.8m. The resolution of the case prior to court was facilitated by Underwriters and their monitoring counsel advice.
PRIVATE EQUITY
For Private Equity and Venture Capital companies, their funds and their portfolio companies, the solutions vary from professional risks for Directors and Officers to Industrial Special Risk for portfolio companies.
Some of the most prevalent risks faced by Private Equity managers include:
FAMILY OFFICE
Family Offices Insurance Risks
Family offices are created by wealthy families to handle numerous and diverse functions.
A typical family office might employ professionals to handle everything from investment management of passive assets, board representation of active assets, bookkeeping, administration services, and public relations consulting for the family.
For the Directors, Officers and Employees of a Family office, Professional Indemnity and Management Liability insurance are two levels of cover which should be considered.
Further the Family office itself often has unique and specific risks that need to be insured.
TRANSACTIONAL RISK INSURANCE
Inaccuracies in representations and warranties in a sale and purchase agreements made by the seller of a target company in connection with corporate transactions such as a merger, acquisition or divestiture can result in costly liabilities.
Transactional Insurance supplements the due diligence process, and serves as an additional or alternative risk management tool by transferring the risk of losses from the seller to a third party, thereby reducing or removing exposure by the buyer to any breaches of the warranties provided.
For sellers: W&I Insurance can be used to replace or supplement escrows or indemnities, facilitate a clean exit and allow more of the sale proceeds to be distributed to investors at completion.
For buyers: W&I Insurance is an attractive alternative when the seller will not or cannot provide sufficient protection for breaches of warranties and indemnities. In a competitive environment a purchaser bringing W&I Insurance to the table can gain a competitive advantage over other bidders.
Examples of Transactional Risk Insurance:
Traditionally this insurance has been used to overcome specific deal issues, but more recently the trend has been for Buyers and Sellers to use the product proactively - by allowing for the release of capital from escrow and improvements to Internal Rates of Return or the gain of a competitive advantage in an auction scenario.
McDougall Kelly & Martinis collaborates closely with a London broker that in 2014 placed insured limits of USD 652 million across an aggregate deal value of USD 4.1 billion. These placements were a combination of Representations and Warranties, Tax Opinion and Contingent Risk insurances for clients in the UK, Western Europe, Central & Eastern Europe, the Middle East and the US.
There is now a highly competitive market of specialist Transactional Risk insurers in London to supplement the limited Australian Insurers. Central to our approach is maximising competition between insurers. We achieve this working with a specialist London Broker and by understanding the needs of our clients, the motivation for seeking insurance, and articulating these factors to the underwriters in a way that allows them to evaluate the risk profile.