Protecting Key Assets: A Guide to Hedge Fund Management Liability Insurance April 2015

Transcription

1 Protecting Key Assets: A Guide to Hedge Fund Management Liability Insurance April 2015

2 Executive Summary 2014 was one of the more stable years for Hedge Fund Management Liability, Directors and Officers & Professional Liability, in the past few years. Rates were relatively flat compared to Insurer capacity increased with several new market entrants generating additional competition and there weren t any significant claims to push rates higher as seen in 2012 and In spite of a heightened regulatory environment and a record number of investigation-related claims in enforcement actions up from 676 in most were smaller in nature so the cost to the industry was lower. In 2015, we expect to see a similar trend: a rise in the number of investigations, which comes as a direct result of the increased number of hired SEC investigators, as well as, fewer large scale claims due to enhanced compliance by fund managers as a result of more due diligence from investors and the heightened awareness around regulation. Normally with more claim activity you would see insurers pulling back on coverage, raising retentions (deductibles) and increasing premiums, but that did not happen in 2014 and we do not expect to see it in We believe rates will remain flat to slightly down due to the excess capacity from new insurers that have entered the space in 2014 and Coverage, Cost and Process We sampled 50 hedge funds that have clearly defined risk profiles across varying asset levels and strategies to look at the buying trends and coverage choices made by those funds. The following four fund strategies were compared: Commodity, Credit/Distressed Debt, Long/Short Equity and Quantitative funds. The assets under management of these managers ranged from $50 million to $15 billion. This white paper will address how the insurance limits, retentions and price per million differ across each strategy. Additionally, we will focus on the key coverage provisions to consider when buying Management Liability insurance, as well as, discuss the process of the purchase and the two types of policy forms offered by the market: Base versus Manuscript. A Base Form is a standard industry policy, which is usually more insurer centric with set coverage, pricing and deductibles. A Manuscript Form is a customizable policy that takes into account the specifics of your individual business and offers less exclusions providing a premium level of coverage to Insureds. Coverage Highlights The Management Liability policy is made up of at least two, and as many as six different coverage parts. Directors and Officers and Professional Liability (Errors & Omissions) are the two coverage parts that will always be on a hedge fund management liability policy. Often Employment Practices Liability, Crime, Fiduciary Liability and Cyber Liability are added to the contract. We will focus 1 As sited on sec.gov April 2015 Maloy Risk Services 2

3 on the D&O/Professional Liability and touch upon the others and why adding them to the policy is not recommended. Directors and Officers & Professional Liability The most common question from a new buyer of Management Liability is: why do we need this coverage if the fund indemnifies us pursuant to the fund documents? The answer is twofold: first, the fund will not indemnify directors, officers or employees for willful misconduct or gross negligence allegations, but the insurance will provide defense costs until a final non-appealable adjudication; and second, the policy backs the indemnification of the fund if the claims are indemnifiable. This protects the fund assets by replacing the fund s indemnification obligations for defense costs and judgments. Since the policy protects fund assets, a majority of the cost of the Management Liability policy is treated as an expense to the fund. The common percentage allocation is 80% to the fund and 20% to the manager. There are approximately fifteen insurers in the Hedge Fund Management Liability space and for the most part the products are more homogeneous than ever. However, significant work is being done by a few insurers and brokers to create broader contracts using manuscript policy wording instead of the basic products seen at most insurers. These manuscript contracts cost more, provide broader definitions, less exclusions and are individually tailored to the fund. These policies are usually leveraged by large funds that employ internal and external counsel to help with the negotiation of coverage terms. We ll focus on the base form from the insurers and compare that to some manuscript policy forms. The Management Liability policy is comprised of four key sections: Insuring Agreements, Definitions, Conditions and Exclusions. The Insuring Agreements outline what is covered and the limits of the policy. The Definitions section is a considerable portion of the policy that defines all of the actors and actions within the policy. The Conditions lay out the obligations of the Insured and the Insurer within the policy. The Exclusions define what is not covered. For the Insuring Agreements make sure that the policy is providing protection for the desired coverage. As we discussed earlier, many times additional insuring agreements can be added to the policy such as: Employment Practices Liability, which protects against claims for sexual harassment, wrongful termination and discrimination claims; Crime, which is theft by employees or third parties; or Fiduciary Liability, which covers claims from employees for the management of their own ERISA plans like a 401K. We have even seen some insurers bring a level of Cyber Liability coverage into the policy. Beyond the Directors and Officers and Professional Liability, managers need to purchase separate dedicated policies for the other exposures since a claim in one of these other coverage parts can erode the Aggregate Limit of the policy. Exhausting or impairing the policy limit to defend an employee matter leaves the directors and officers without coverage for regulatory investigations, trade errors and any other management-related errors which is what the policy is designed to do. April 2015 Maloy Risk Services 3

4 The other policies are less expensive and will come with broader terms and lower deductibles, if they are removed from the Management Liability policy. One drawback is that the Employment Practices, Fiduciary and Cyber Liability are not generally fund expenses. However, Crime is considered a fund expense. Usually there are about thirty Definitions within the Management Liability policy; we will analyze the most fundamentally important. The first set of definitions to focus on is: Insured, Insured Entity and Insured Fund. In the base forms you will see fairly consistent language across most insurers, spelling out who is an insured: the directors, officers, employees, all entities within the fund structure, as well as the funds which often have to be listed. However, in the manuscript forms you will see advisory boards, creditor committees, independent contractors or any type of affiliated entity and any type of fund; this removes the dangerous practice of listing funds and entities. If a fund is not listed within the base form, a carrier might deny coverage. These definitions need to be broad enough to encompass every type of entity to avoid the need to list them. Be leery of policy forms that only use a Named Insured and any Subsidiary definition language, this is for Corporations and not General Partnership structures so all of the entities will fall outside the scope of coverage. This is a quick determining indicator that the policy will need significant endorsing to cover the fund and entities effectively. The second important set of definitions is: Claim, Wrongful Act, Loss and Professional Services. The definition of Claim is the most important and will encompass criminal, civil and regulatory demands, accusations and investigations. In the base forms, the greatest challenge is around regulatory investigations coverage. All base forms require the receipt of a Wells Notice, Target Letter, a Formal Order of Investigations or Subpoena that is tied to a Wrongful Act to trigger coverage. In the manuscript policy, the Claim definition is expanded to include claims made in regards to sections 11, 12 and 15 of the 1933 Securities Act. Many times you can tie in any type of inquiry providing the greatest chance for informal defense cost coverage. Similarly, sections 11 and 12 need to be within the definition of Loss and Wrongful Act to include defense costs. These personal profit sections of the SEC code would normally be excluded unless you carved back coverage for defense costs within these sections. For Professional Services, many of the base forms have a fairly limited scope of coverage and they do not mention Separately Managed Accounts. Manuscript policy forms will have extensive wording to incorporate all aspects of a fund managers services. Since this is the Professional Liability coverage definition, it is important to review that definition in order to confirm that it captures all of your services. The Conditions of the base form and manuscript policies do not vary greatly between one another, but there are some areas you will want to focus on: Automatic Fund and New Fund Coverage, Defense and Settlement, Application, Warranty and Severability. Make sure to have the Automatic Fund and New Fund Coverage threshold high enough or auto- April 2015 Maloy Risk Services 4

5 matic at any level. Many base form policies say 175% of the last fund raised; manuscript policies will say 35% of the total AUM of all funds managed or in some cases all new funds are covered automatically without a threshold. If a new fund does not meet the threshold, the insurer is entitled to charge additional premium to incorporate it into the policy. On Defense and Settlement make sure the Insurer is obligated to pay on a current basis and within 90 days. The base forms do not stipulate a time frame. Some manuscript policy forms will also provide usual and customary attorney fee language, which can help in the negotiation of claim rates at the time of loss. For the Application make sure it is limited to twelve months of information. Often the base form will say any and all applications submitted to insurers. On Severability and Warranty make sure the acts and knowledge of one Insured cannot be imputed to another Insured (Severability) and that statements made on the application (Warranties) will not void coverage if they are false. Most base forms will have a list of officers that if they were aware of a misleading fact the entity and that individual(s) will not have coverage. On manuscript policies you can limit the number of officers listed. Also make sure the policy is non-rescindable for any reason. When completing renewal Applications never answer Warranty questions, which can potentially break continuity of the coverage from year to year. The Exclusions you find in a base versus a manuscript form can be significantly different and special care needs to go into reviewing the differences. Some of the key Exclusions to focus on are: Insured versus Insured, Fiduciary Liability, Contract, Fraud and Personal Profit. Insureds cannot sue insureds in a Management Liability policy, however there are circumstances where that may be necessary and extensive carve-backs to the exclusion are built into manuscript policy forms to address those situations. The base forms will carve-back coverage for usually six to eight of those situations, while a manuscript policy will usually outline twelve. (For a sample of a comparison between the two see Appendix A) Fiduciary duties of the directors and officers for the management of the fund are covered, however certain base forms will have an exclusion for Fiduciary Liability claims relating to ERISA. It is important to make sure the exclusion only applies to the management company s own ERISA plans, not the funds they manage. A manuscript policy provides the proper wording to provide for ERI- SA claims for everything other than a fund s own ERISA plans such as a 401K plan, a Pension or a Profit Sharing Plan. A separate Fiduciary Liability policy would be necessary to cover claims from employees or regulators stemming from mismanagement of the fund manager s own plans and why it is excluded from the Directors and Officers Liability policy. Often the Contract Exclusions are very broad in the base form and should be extensively modified to keep the insurer from using this clause to deny investment management claims. The manuscript April 2015 Maloy Risk Services 5

6 policy forms will narrow the scope of the exclusion and make sure it is clear that the exclusion does not apply to the following fund documents: the limited partnership agreements, investment management agreements, sub-advisory agreements and managed account agreements. (For a sample of base form versus manuscript form wording see Appendix B) The Fraud and Personal Profit Exclusion removes coverage for willful misconduct. Make sure that the defense is provided until a final non-appealable adjudication. Some of the base forms will not cover appeals, so this language is important. Many of the manuscript forms go beyond simple non-appealable language and remove the exclusion completely surrounding claims relating to sections 11, 12, and 15 of the 33 Act. Professional Liability and Trade Errors All Professional Liability policies cover Trade Errors. A mistake made by management in the execution of a trade does not trigger the policy without litigation by investors or other third parties. The claim trigger is the suit not the error. The industry created an endorsement to eliminate the need for litigation, called Cost of Corrections Coverage, allowing managers to access insurance coverage for the error. The insurance industry does not want investors to bring litigation against funds to recoup Trade Errors, which could lead to a complete erosion of policy limits if defense costs and allegations of negligence are added on top of the Trade Error loss. The Cost of Corrections response is to help the insurer protect policy limits. To offset this wide grant of coverage, the insurer will raise the retention of the policy for Trade Errors. It is usually $500K and up. Base forms do not have Cost of Corrections Coverage built into their policies. It must be added by endorsement and not all insurers in the space will offer this coverage. Many that do offer Cost of Corrections have limiting language and they place heavy restrictions on the definition of a Trade Error and often written Insurer approval needs to be received to accept it as a Trade Error. In manuscript policies there are no such caveats; an error triggers coverage and the definitions of a Trade Error are much broader. (For a sample of the base versus manuscript form comparisons see Appendix C) Investors, particularly seeder platforms, are keenly interested in how Trade Errors are handled by a manager. Depending on the terms outlined in the fund documents, the manager may be responsible for all Trade Errors, but often the fund has to absorb the cost. By providing the Cost of Corrections Coverage, both the manager and fund can benefit from having this added protection. The following charts and graphs illustrate the various price points for the four different fund strategies: Long/Short, Credit/Distressed Debt, Commodity and Quantitative. The primary layer of coverage for most funds starts with a $5MM or $10MM limit from the first insurer. Additional layers of coverage will increase by $5MM or $10MM depending upon the starting point of the tower of coverage, but all terms and conditions within the program are based on the primary layer s policy wording. Everything above that layer is simply ad April 2015 Maloy Risk Services 6

7 COST There are several factors that set the pricing of policies, but are not necessarily limited to the following: By 1) providing Strategy of the the Cst Fund of Correction Coverage, both the 5) manager Number and of insurance fund can benefit markets from for having the risk this added protection. certain strategies have fewer willing markets to 2) Management experience provide competition for pricing and coverage By providing the Cost of Correction Coverage, both the manager and fund can benefit from having this added 3) Fund protection. AUM and the length of time in operation (Note: The longer and larger the fund operation the more costly investigative discovery becomes due to larger amounts of data than would be requested for a smaller and newer fund.) 4) Insurance market conditions number and frequency of claims and the relative costs of those claims 6) Base Form policy language vs. Manuscript Form policy language 7) Limits purchased 8) Retentions or deductibles 9) The number Insuring Agreements selected for coverage -ditional coverage that follows the underlying terms. As illustrated in the Price Per Million chart, the Long/Short strategy is typically the least expensive and the most desirable class of business for the underwriting community. The other three categories - Credit/Distressed Debt, Commodity and Quantitative strategies - are considered to be the most expensive. $14,000,000 Average Total Limit Purchased $12,000,000 Limit Purchased $10,000,000 $8,000,000 $6,000,000 Manuscript Base $4,000,000 $2,000,000 $- Long/Short Equity Commodity Credit/Distressed Quant Strategy Type April 2015 Maloy Risk Services 7

8 $25,000 Average Price Per Million $20,000 Price Per Million $15,000 $10,000 Manuscript Base $5,000 $- Long/Short Equity Commodity Credit/Distressed Quant Strategy Type The lack of underwriting capacity is the primary due to the litigious nature and board positions reason the Quant and Commodity strategies have involved with these funds. Shareholder class actions, forced bankruptcy and proxy battles can higher costs, not all insurers will cover them. One caveat on Long/Short strategies: Activist Funds lead to litigation backlash against the drivers of are the highest price per million of any strategy change. $600,000 Average Reten%on $500,000 $400,000 Reten%on $300,000 $200,000 Manuscript Base $100,000 $- Long/Short Equity Commodity Credit/Distressed Quant Strategy Type April 2015 Maloy Risk Services 8

9 APPLICATION ITEMS the The Cost following of Correction data items Coverage, are needed both the to manager obtain quotes from the market: and fund can benefit from having this added protection. 1) Offering Memorandums for all funds Bpoviding the Cost of Correction Coverage, both 2) Limited Partnership Agreements for all funds the manager and fund can benefit from having this added 3) Latest protection. audited financial statements for all funds 4) Historical performance on all funds 5) Most recent investor letters (usually the ones issued during the policy term) 6) Latest Due Diligence Questionnaire 7) ADV I and II 8) Entity Structure Chart 9) Application 10) If the fund is a new launch 3, 4 and 5 will not be required, but a pitch book will be requested in lieu of the others. The Insurance Process When approaching the Directors and Officers and Professional Liability market, you will need to access the insurers using an insurance broker. It behooves the fund manager to select a specialty brokerage for placement due to the complexity of the coverage wording and experience in dealing with investigation-related claims. Once a broker approaches the insurers, it will block any other broker from approaching the market. Broker interviews ahead of the submission process are the best way to ensure the broker selected has expe rience in hedge fund management liability placement. If you select multiple brokers then split the market among the selected brokers. Request a list from each broker with their top insurance markets in order of preference and then allocate the insurers to each broker in the process allowing them to only send a submission to their assigned insurers. During the submission process, it may be advisable or requested by the competing insurers to have meetings or conference calls to ask more specific questions about the fund and management company operations. The more complex the fund the more likely the insurers will follow-up with questions. Often a conference call will be arrange with the insurers to provide additional details. Managing A Claim During the past 18 months, the benchmarked funds have experienced three SEC regulatory examinations compared to five in the previous 12 years. The claims from the past 12 years predominately stemmed from the 2008/2009 financial crisis. The increase in claims activity coincides with the amount of regulatory scrutiny being launched by the past two SEC chairpersons. The current three regulatory matters have cost the insurers on average roughly $1.2 million in legal defense costs just to respond to an SEC s Request for Information. If any of these investigations move beyond discovery and head to depositions and testimony, the costs based on legal counsels litigation summaries are estimate to climb well beyond most policy limits. The litigation costs are impacted by: the time each fund has been in business; the fund structure s complexity; the number of employees (both current and previous) and the April 2015 Maloy Risk Services 9

10 allegations being brought against a firm. A manager that employs many people and/or has been in business for a long period will have higher discovery costs than a smaller firm and/or newer firm; a direct result of having to sort through more data, records, trades, s and texts. There are many ways in which a regulator, like the SEC, will notify a manager about an inquiry: informal request for information, subpoena, wells notice, target letter, or formal order are the most common. It is critical for the manager to notify their insurer about any of these matters and provide as much detail as possible about the inquiry. Unfortunately if a manager receives a formal order of investigation, the SEC will not allow that formal order to be shown to anyone other than the manager and the manager s attorneys. This concealment is an issue when trying to trigger your insurance policy since the insurer will not be able to see the Order to determine if it is alleging a Wrongful Act against the manager. This is where Claim and Wrongful Act definition language becomes very important. Usually you can simply trigger the policy with the formal order provision of the Claim definition, but many are tied specifically to the Wrongful Act and therefore give the insurer a reason to try to deny coverage since they cannot see the allegations of the Order. Work with your counsel to describe the nature of the order and be prepared to push the insurers to accept it as a claim. Once your coverage is established, it is necessary for the insurer and the legal team managing your case to agree on the proposed rates. Once your attorneys understand the scope of the inquiry they will provide a claim estimation letter to the insurer outlining a projected cost and the team s rates by class of attorney. You, as the insured, will pay the retention and then the insurer will pay the attorneys fees upon agreement. They can pay the attorneys directly or you can pay the attorney and get reimbursed by the insurer. It is important to have itemized billing from your attorneys to ensure timely payment because the insurer will review each bill before payment is made. They will look to make sure that all billable items relate to the claim, which can take time. The key to successful claims management is consistent communication with the insurer and your insurance broker to make sure the process is moving forward to your satisfaction. Summary The hedge fund management liability placement is highly specialized: from the specific insurers; to the specialty brokers; as well as the legal and financial considerations that go into the decision making process. Focus on contract terms, conditions, definitions, and exclusions that are customizable and be sure to include internal and external counsel to make the best decisions for both the fund and the management company. The market is ever changing, so constant monitoring of the market, policy forms and litigation trends are essential to understand how much insurance to buy, which terms to negotiate and which insurers are providing the best protection and at what price. Work with specialized providers to make sure you are getting the best coverage for the fund and management company. April 2015 Maloy Risk Services 10

11 Insured Vs. Insured Base Form: APPENDIX A in connection with any Claim by or on behalf of any Insured, provided that this exclusion shall not apply to a Claim: 1) that is a Derivative Suit; 2) by an Insured Person for contribution or indemnification if such Claim directly results from a Claim that is otherwise covered under this Policy; 3) by any Employee who is not a past or present Executive if such Claim is made without the assistance, participation or solicitation of any Executive; 4) that is an Employment Claim; 5) by a former Executive who has not served as an Executive for at least two years prior to such Claim being made, provided that such Claim is made without the assistance, participation or solicitation of any current Executive or any former Executive who has served as an Executive during the two years prior to such Claim being made; 6) by any bankruptcy or insolvency trustee, examiner, receiver, creditors committee or similar officials for any Insured Organization or any assignee of such trustee, examiner, receiver, creditors committee or similar officials; 7) made in a jurisdiction outside the United States of America, Canada or Australia by an Insured Person of an Insured Organization organized in such jurisdiction; or 8) by any Fund if, prior to such Claim being made, the Fund is advised in a written opinion by independent legal counsel selected by the Fund with the consent of the Insurer, such consent not to be unreasonably withheld, that failure to make such Claim would be a breach of fiduciary duty owed by an Insured to such Fund or to investors in such Fund, 9) provided that assistance, participation, or solicitation shall not include Whistleblowing; Insured Vs. Insured Manuscript Form: The Insurer shall not pay Loss for that part of any Claim against an Insured: by or on behalf of any Insured, provided that this exclusion shall not apply to any Claim: 1) that is a Derivative Action; 2) for contribution or indemnification if such Claim directly results from a Claim that is otherwise covered under this Policy; 3) by an Insured making the Claim where failure to make such Claim would result in liability upon the Insured for failure to do so; April 2015 Maloy Risk Services 11

12 4) that is a bona-fide, non-collusive Claim brought or maintained by an Insured against an Independent Director or against an Investment Fund that is a codefendant in a Claim with such Independent Director; 5) by any former Insured Executive who has not served as an Insured Executive for at least 1 year prior to such Claim being made, provided that such Claim is made without the assistance, participation, or solicitation of any current Insured Executive or former Insured Executive who has served as an Insured Executive during the 1 year prior to such Claim being made; 6) against an Insured Executive brought by an Insured Person who is not an Insured Executive; 7) against an Investment Advisor and its Insured Persons brought by or on behalf of an employee, other than an Insured Executive, acting in their capacity as a customer or client of an Investment Advisor; 8) made by or on behalf of a bankruptcy or insolvency trustee, liquidator, administrator, conservator, examiner, receiver or similar official for any Insured Entity, or by any Insured Entity as a Debtor-in-Possession, or by or on behalf of any assignee of such trustee, liquidator, administrator, conservator, examiner, receiver or similar official or Debtor-in-Possession; 9) made in a non-common law jurisdiction by an Insured Person of an Insured Entity organized in such jurisdiction; 10) brought by, on behalf of or with the solicitation, assistance or participation of an advisory board member (or any limited partner, member, shareholder or investor whom such member represents); 11) for Whistleblower Conduct by an Insured Person, other than a director of the Insured Entity (where Whistleblower Conduct is any of the activity set forth in 18 U.S.C. Section 1514A, Section 806 of the Sarbanes-Oxley Act of 2002, Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or any other similar whistleblower statute); or 12) brought by, on behalf of or with the assistance, cooperation or participation of any Independent Director, so long as such Claim is made without the assistance, cooperation or participation of any other Insured Person. April 2015 Maloy Risk Services 12

13 Base Form Contract Exclusion Wording APPENDIX B Contractual Liability based upon or arising out of: a.) an Insured s alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees; or b.) the liability of others an Insured assumes under any oral or written contract or agreement. However, this exclusion shall not apply to: i.) an Insured s liability that exists in the absence of such contract or agreement; or ii.) any Claim against an Insured by a client or customer of the Insured, if and to the extent that the Claim alleges a breach of contractual obligations in the rendering of or failure to render Professional Services; Manuscript Contract Exclusion Wording Solely with respect to Insuring Agreement (C) Entity Coverage, for any actual or alleged liability of an Insured Entity under any express written contract or agreement (other than the organizational, management, monitoring or advisory documents of any Insured Entity, including but not limited to any partnership agreement, limited partnership agreement, operating agreement, limited liability company agreement, investment management agreement, sub- adviser agreement, subscription agreement, side letter or other organizational, advisory, monitoring, investment, management or subscription agreement); provided however, that this exclusion will not apply to: (i) any Claim arising out of, based upon or related to Investment Activities; (ii) liability which would attach to an Insured even in the absence of a contract or agreement; or (iii) any Claim based upon, arising out of or relating to any contract or agreement with any Investment Fund or investor or client in any separately managed account. With respect to this exclusion, an express written contract or agreement is defined as an actual written agreement of the parties, the terms of which are openly set forth or declared at the time of making in clear or distinct language. April 2015 Maloy Risk Services 13

14 APPENDIX C Base Form Cost of Correction Wording (partial endorsement) A. Subject to all of this Policy s terms and conditions, the Insurer shall reimburse the Insured for amounts paid to the Insured in connection with a Claim for Costs of Correction but only if: 1. the Insurer is notified in writing within four (4) business days of the discovery of the Trade Error and such notification is received within 60 days from the date during the Policy Period that the Trader Error occurred but in no event later than 30 days after the Policy s expiration date; 2. such Trade Error arose in the ordinary course of the Insured s operations and occurred during the Policy Period; 3. if not corrected, the Trade Error would reasonably be the basis for a Claim against the In sureds for quantifiable Loss which would be payable and not otherwise excluded under this Policy; 4. the Insured requests prior written approval from the Insurer to incur and Costs of Correc tion, such approval shall not be unreasonably withheld; and 5. the Inured reasonably establishes to the satisfaction of the Insurer that a Trade Error has in fact taken place and that payments constituting Costs of Corrections were paid an in what amount they were paid. The Insureds and the Insurer agree that it is their intention that such reimbursement operates to reduce or avoid in an expedition and economic fashion monetary liability from a Claim which would have been made against the Insureds and that such reimbursement does not afford coverage to the extent that any sum paid by the Insured constitutes an ex-gratia settlement or a commercial settlement to support the Insured s reputation or business relationships. Manuscript Form Cost of Correction Wording (partial endorsement) (D) Trade Error Loss The Insurer shall reimburse Trade Error Loss incurred by the Insured as a result of a Trade Error provided that: (1) Such Trade Error occurs during the Policy Period and in the ordinary course of the In sured s operations or business; and (2) If not corrected, such Trade Error would result in a loss to an Investment Fund, separately managed account or other customer, client or a shareholder of an Insured Entity and could provide a basis to such customer, client, or shareholder to make a Claim which would re sult in covered Loss under this policy; and April 2015 Maloy Risk Services 14

15 APPENDIX C (continued) (3) The liability of Insurers for Trade Error Loss shall not exceed the amount that would have resulted in covered Loss under this Policy had such Claim been made; and (4) The Insured is in compliance with Clause (30) Notice of Trade Error Loss. (5) Any reimbursement of Trade Error Loss shall be in accordance with Clause (7) Defense and Settlement. This policy is amended by the addition of the following: (30) NOTICE OF TRADE ERROR LOSS (A) The Insured shall, as a condition precedent to the obligations of the Insurer under this policy, provide: 1. As soon as practicable, but no later than three (3) business days from the discovery of the Trade Error, notice of the potential Trade Error Loss via electronic mail ( E mail ) to the Insurers Representative at the address specified in the Declarations; 2. No later than seven (7) business days from the discovery of the Trade Error, a written proof of loss (Proof of Loss) setting forth all the circumstances of the Trade Error Loss and why the Insured believes it is entitled to coverage under Insuring Agreement (D); and 3. At the request of the Insurer, the opportunity for the Insurer to interview all Insured Persons in connection with the submission of the Proof of Loss. (B) The date of the E- mail in item (A)1. above shall constitute the date that the notice of Trade Error was given to the Insurer. If mailed, the date of the mailing shall constitute the date that the Proof of Loss was provided to the Insurer. (C) The giving of notice by an Insured of a Trade Error shall be deemed to be notice of a Claim made against an Insured at the time notice of the Trade Error is given to the Insurer. April 2015 Maloy Risk Services 15

16 ABOUT US Claudia J. Ramone, CLCS Vice President of Sales Maloy Risk Services, Inc. Founded in 1872, Maloy Risk Services, Inc. is a specialty insurance broker that caters to hedge funds. As an industry-leading broker, the firm has created its own Manuscript Management Liability policy underwritten by Lloyd s of London. To learn more about Maloy Risk Services and their Hedge Fund Practice Group contact Claudia Ramone at cramone@maloyrs.com or visit our website at Princeton New York Atlanta Winston Salem