Insurance: There’s a policy for that

PE Manager revisits some of its most well-received features of 2013: In July, we examined some of the more niche insurance policies available to GPs.

1. Key man disability insurance: Fund managers may be aware that the sudden death of a star dealmaker can be insured against, but also insurable is a permanent disability. Key-man insurance provides firms a cash cushion following the loss of a senior partner, but the death of a key man is less likely than a partner becoming too sick or injured to continue work, point out insurance brokers. The odds in fact can be downright worrying: about 25 percent of today’s 20 year-olds will become disabled before they retire, according to the Council of Disability Awareness. If disability occurs, benefits can typically be used at the company’s discretion to stabilize the company until a replacement is found.

2. Political insurance: Since late 2011, private equity funds targeting emerging markets have been able to purchase political risk insurance arranged by the Overseas Private Investment Corporation (OPIC), a development finance institution backed by the US government. The new OPIC insurance facilities will provide “important protection for investors in challenging markets such as the Middle East and Africa”, said OPIC in a statement at the time, adding political uncertainties can cast a shadow over the promising returns offered by developing economies. The insurance offers protection against risks related to expropriation, currency inconvertibility and political violence, among other types of coverage.

3. Escrow insurance: It’s painful for fund managers to lock up 5 to 10 percent of a deal’s value in escrow until certain reps and warranties are fulfilled by either buyer or seller. Insurance brokers have therefore created policies that insure buyers against breaches by a seller, allowing the pot of capital typically reserved in escrow to be immediately released for distribution.

4. Tax liability insurance: GPs concerned a company’s tax planning strategy may face challenge from a tax authority will find comfort in tax liability insurance. If a company in the US for example represents itself as a tax-friendly S-Corp, but later loses that position when challenged by the Internal Revenue Service, it may incur additional taxes as a different legal entity. The insurance policy would cover the tax hike over a set period of time.

5. Employee benefits insurance: Private equity firms (or their portfolio companies) can purchase insurance policies that protect them against the costs of goofing up an employee’s benefits plan. Take US healthcare for example, which is undergoing fundamental reform as part of Obamacare. If the firm’s human resources department makes a filing error when enrolling an employee under a new healthcare plan – which many employees may pursue as select states begin rolling out health insurance exchanges over the next few months – they could be liable for that employee’s medical costs until a correction is made. Employee benefits insurance would cover the cost of the error.

6. Environmental insurance: Insuring the firm against natural catastrophes is nothing new, but various GPs speaking with PE Manager noted how nuanced environmental insurance policies have become. Hurriance Sandy was an unfortunate lesson for some that “wind driven water” for example wasn’t technically covered by a flood insurance policy. Sources say to read the fine print, and ask specific questions about what types of weather events a policy covers.