Research shows careless approach to quality of D&O insurance by many private equity firms: Mactavish

Many private equity firms are “not placing enough focus on the quality of insurance cover” in place at portfolio companies, according to research from Mactavish, the expert on commercial insurance placement and disputes.

The company warned that organisations are taking on more risks as their businesses change. But many commercial insurance policies are becoming increasingly generic, which means the chances of them not paying out on claims is rising, Mactavish said.

A qualitative survey conducted by Poolright with 30 senior private equity professionals on behalf of the specialist firm revealed that just 20 percent said they take an active role with the Directors and Officers (D&O) insurance cover of new portfolio companies.

A further 40 percent of respondents said they take an active role but leave it to the portfolio companies to decide upon cover specification, although the private equity firm has oversight of this.

Nearly a fifth (17 percent) of respondents admitted they “play no role in helping portfolio companies choose their D&O cover”, while the balance of 23 percent said they did not know what role private equity firms play here.

Respondents were also asked about the overall due diligence run by private equity firms when reviewing the insurance policies of companies they are considering buying. The results showed that only 30 percent of the senior private equity professionals interviewed describe their industry’s process here as ‘very robust’. A further 30 percent said it is ‘quite robust’. However, a similar proportion (27 percent) of the private equity professionals said processes were ‘not robust’.

Liam Fitzpatrick, client services director at Mactavish, said: “Only too often is an insurance policy, like D&O, dusted off and looked at when it needs to be relied upon. By that stage, it could be too late for the private equity firm to either fill a gap or fix a problem with the existing policy wording for a portfolio company."

Fitzpatrick added: “The private equity industry is under greater scrutiny than ever before to monitor and take an active role with its investments. It also has to demonstrate greater due diligence before investing.

“Furthermore, the Insurance Act 2015 requires companies to adequately investigate all the risks they face and disclose these to their insurers. Given this, if private equity firms are not reviewing the insurance cover of portfolio companies, they are not across one of the biggest risks those organisations are facing and it could even make some insurance cover invalid.”

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