Investment managers are exposed to many risks including professional liability to their clients and stakeholders. Investment managers can help to protect themselves from their professional liabilities (including any property development activities) via various insurance solutions.
To determine the most suitable solution, two key factors need to be considered: the insured company’s structure and the activities of the insured entities.
Corporate structure and which entities need to be insured
The corporate structure helps to identify all the entities and illustrate the relationships that exist between the various entities. The entities that play a role in any particular fund will also need to be identified. There may be entities in the corporate structure which do not form part of the fund structure. It is critical they all be clearly identified with their respective responsibilities clearly understood by the insured and the relevant insurer/s.
Activities of the entities
Understanding the nature of the activities of each entity and how they relate to each fund will allow the insured to understand the type of exposures that may exist and how these exposures can be managed.
How investment managers (including fund managers) can choose the right insurance solution
For investment managers that only perform the typical activities of an investment manager or fund manager:
Investment Managers’ Insurance (IMI) policy
An IMI policy is designed for Australian Financial Services Licence (AFSL) holders that raise capital or manage assets on behalf of investors (investment managers). These responsibilities are somewhat finite, making it easier for insurers to adequately price the policy, but also to help cover the applicable exposures.
An IMI policy has three policy sections:
Directors’ and Officers’ Liability (D&O): is designed to cover the directors and officers of the company for any wrongful acts in relation to their role in managing the company including managing the relevant investment fund;
Professional Indemnity (PI): helps to provide cover for the professional risks associated with being an investment manager including errors and omissions; and
Crime: this policy is designed to cover any crime related activities that may cause a financial loss to the company as well as any crime within the company such as company theft.
For investment managers that perform other activities such as property development:
Option one: endorsing property development onto the IMI policy
An IMI policy can be amended to include Property Development Services but these exposures may be better served under a separate stand-alone Professional Indemnity (PI) policy.
Some benefits of adding these activities to an IMI policy include:
one policy designed to cover all exposures of the business rather than multiple policies;
potentially a cheaper overall premium spend; and
only needing to negotiate with one insurer.
Some drawbacks to consider include:
there are certain risks, such as construction or specific classes of property development that insurers do not want to cover and insurers will apply exclusions accordingly;
there are limited insurers that have the appetite to insure both investment managers and property developers. The result can be that the insured is collectively charged at the higher rate; and
there is one policy with a shared limit to cover both the funds management activities and property development activities. Making a claim related to Investment management will erode the overall limit also shared for property development activities. This could have implications with ASIC and certain licensing requirements.
Option two: stand-alone PI policy to cover property development
The other alternative is to purchase a stand-alone PI policy, specifically designed to cover the activities of Property Developers.
The benefits of a stand-alone PI policy include:
it is a tailored policy for the professional liabilities of a property developer; and
there is a separate PI limit: In the event of a claim for Property Development related activities the limit under the IMI policy will not be eroded as the limit is not shared with any other sections of the cover;
the separate PI policy frees up appetite from insurers for the IMI policy as only the investment management activities need to be covered; and
there are more options from the market for a standalone PI policy.
Some drawbacks to consider include:
there may be potentially a higher premium spend as a standalone policy can be more expensive;
the market for insurance for Property Developers remains limited, with decreased capacity and high rates; and
an additional policy will be required which increases administration and potentially costs.
How property developers can choose the right insurance solution
For property developers who only focus on property development:
A Professional Indemnity policy will help cover the professional risks of property developers.
Professional Indemnity (PI)
This policy will help provide cover for claims arising from professional services performed as a property developer, for example, design, certification, consulting and breach of contract. It is important to note that PI policies exclude cover for claims in connection with the physical construction, installation or fabrication of any goods or products related to the professional services or advice provided.
When the property developer is also involved in the actual construction of the project:
Design & Construct (D&C) Professional Indemnity:
A D&C PI Policy is recommended as this policy is designed to cover for the physical construction or manufacture of structures or buildings for which the property developers provided the professional services. A standard PI policy will not provide cover for the physical construction of the product.
It is still important to note that the D&C cover is not designed to respond to matters such as faulty workmanship.
Professional Indemnity policies can be purchased for Project Specific Developments or on an Annual Basis to covering all projects annually.
Looking ahead: insurance market update
Competition is starting to improve for insurance for investment managers broadly, however, there are some pockets of the industry (such as property developers), that continue to face challenging market conditions with higher deductibles being applied, increased rates and reduced capacity.
More generally, premiums remain stable, with premium increases slowing and deductible levels moderating. New local insurance market entrants have not yet filled the void of AIG withdrawing from the market, however, competition within Lloyd’s of London is improving by the quarter giving clients more options and capacity.
Considering all these challenges, it is imperative to allow extra time in preparing for renewals. This will allow time to prepare a best-in-class submission into the market including the right detail and information to allow insurers to provide more favourable terms and conditions.
Choosing the right insurance policy for investment managers can be challenging, especially when other activities are involved such as property development.
An insurance and risk advisor can work closely with your business to guide you through all aspects of your investment and development projects to help ensure you are protected.
Lockton’s Professional & Financial Risks specialists find solutions to help protect your professional risks as an investment manager and/or developer. Lockton’s specialist Global Real Estate & Construction practice can tailor risk solutions for the whole asset investment cycle from acquisition, development, holding and management through to the sale of your assets.
Contents of this publication are provided for general information only. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. Lockton arranges the insurance and is not the insurer. Any insurance cover is subject to the terms, conditions and exclusions of the policy. For full details refer to the specific policy wordings and/or Product Disclosure Statements available from Lockton on request.