Every Crowdfunding portal should carry liability insurance. The important questions are what kind, how much, and with what terms.
Like all businesses, Crowdfunding portals should consider the following “standard” liability coverage:
- General liability insurance (slip and fall, etc.)
- Employment Practices Liability insurance (sexual harassment, etc.)
- Workers Compensation and Employers liability Insurance (usually mandatory by law)
- Excess or Umbrella Liability coverage (providing additional coverage limits for liability claims, and in the case of umbrella coverage, coverage for some claims not provided by a commercial general liability policy)
However, the “standard” coverage probably won’t cover everything a portal does. For that, a portal will need insurance specific to the world of buying and selling securities.
Someday, maybe soon, the insurance industry will create a product specifically for Crowdfunding portals and buying the right policy will be easier. But that hasn’t happened yet. Today, you have to pick a policy type that seems close – maybe a policy for managing a private investment fund – and then seek to modify the policy yourself. For example, the policy might cover making investments in portfolio companies. You would have to seek to modify that policy to explicitly cover “Raising money for debt and equity investments under SEC Rule 506 and Regulation A, and all related activities.”
Don’t assume that a “standard” policy will cover lawsuits from unhappy investors, for example. Also don’t assume that your insurance agent understands exactly what a Crowdfunding portal does. Sure, the insurance company will sell you the policy and accept the premium, but that’s only the first chapter in the story. The rubber hits the road when you’re sued and submit a claim. That’s a really bad time to find out your coverage is inadequate.
Portals should also consider:
- Director and officer insurance, which protect the officers, directors, and managers of the entity from claims made on behalf of the entity
- Fiduciary Liability insurance, which covers misappropriations by employees.
How much insurance should you buy? You’ve got to consider the size of your deals, how many deals you do each year, the amount of the typical investment, and the risk profile of your deals. You’ll find that the first dollar of coverage is the most expensive, while each additional dollar is relatively less expensive.
As anyone who’s been through litigation knows, being sued is very expensive. That’s why it’s critical that your insurance cover not only payment of the actual claims (if you lose or settle), but the cost of defending the claims. Sometimes the costs of defense are subtracted from the policy limits, and therefore effectively erode those limits.
EXAMPLE: Your nominal policy limit is $3 million, but defense costs are subtracted. The carrier spends $350,000 to defend a claim (yes, that’s possible). Now your policy limit is $2,650,000.
Other key points to consider in an insurance policy:
- Whether the coverage is “occurrence” or “claims made” (the former covers all claims that relate to periods while the coverage was in effect; the latter covers only claims made while the coverage is still in effect)
- Whether and to what extent the coverage includes “prior acts” (things that happened before the coverage was in effect)
- The deductibles (the amount you have to pay before the insurance kicks in)
- Whether you have the right to select legal counsel or must accept the lawyer chosen for you by the insurance company
My colleague, Mitch Kizner, spends most of his time arguing with insurance carriers about terms and coverage. If you’re wondering whether you’re covered, Mitch is a good guy to speak to. His email address is firstname.lastname@example.org and his direct dial is (856) 382-2247. You can also follow his blog at www.mitchkizner.com or on twitter @MitchKizner.