Understanding How to Mitigate Liability and Navigate Insurance Options

Despite all the proper steps you can take as Chief Compliance Officer (“CCO”) to avoid an enforcement action, insurance becomes a necessary step in self-risk mitigation. It is not only investment advisers and fund boards that can face liability, but CCOs themselves can come under the gun of the Securities and Exchange Commission (“SEC”) as well. CCOs should seek to understand the types of insurance products (eg. and riders that can best protect them and the company. Not all policies have the same exact protections, so it is important to consult with your insurance broker, review your policies and ask the right questions.

Andrew Fotopolous, President Starkweather & Shepley Insurance Corp. of MA ( offers CCOs words of wisdom. ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) “Just because you are given the title of Chief Compliance Officer doesn’t mean you’re a corporate officer. Of course, as the CCO, you believe you are covered under your firm’s D&O, but have you verified this? A majority of CCOs are not subject to indemnification unless designated in the by-laws as a corporate officer or have a stand-alone agreement in writing guaranteeing indemnification.” All CCOs should review the by-laws to make sure they are covered. 

Errors & Omissions (E&O) policies are widely used throughout the industry to help protect against claims by clients arising out of professional services provided by the insured. Directors & Officer Liability (D&O) coverage can be added to an E&O policy or purchased separately to protect the firm as well as the directors, officers, partners and employees of the insured entity for claims arising out of business decisions, not investment decisions. D&O is where you would find coverage for “claims” (including formal regulatory investigations costs) by non-clients such as the S.E.C. and D.O.L. that are not triggered by a client complaint.

Side A, Independent Directors Liability (“IDL”) Insurance typically serves as a supplemental policy to D&O coverage. This can come into play in circumstances where indemnification is not available or is refused. Side A IDL insurance helps fund independent directors mitigate liability and exposure to various risks associated with indemnification (when a fund is legally prohibited from paying for a director/officers defense), erosion risk (when a D&O policy has exhausted its limits of liability), and coverage risk (when a D&O policy does not provide coverage for the situation).

There are many insurance “riders” that can accompany these policies. An insurance rider is an available enhancement option that your broker can negotiate to be included in your policy. Riders can help supplement your existing coverage and provide additional benefits.

Graig Vicidomino, Associate Director at Crystal & Company ( is an expert in the insurance business ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ). Graig emphasizes “most D&O policies will trigger only after a formal investigation, or allegation of wrongdoing has been presented by a regulatory body. This means that it is likely that all expenses incurred during the audit or informal investigatory stages will be coming out of your pocket. So, be sure your D&O policy has been enhanced with Pre-Claim Defense coverage, in order to cover those earlier costs in cases where the audit or investigation turns into a covered claim."

“Pre-claim Defense Costs” riders should be considered for entities and officers when reviewing potential liabilities and analyzing their insurance portfolios.  This coverage can extend not only to formal investigations by governmental entities and self-regulatory organizations, but may also provide some earlier coverage in the informal stages should the investigation result in a claim. This coverage can save those covered a tremendous amount of money and aggravation if ever faced with a difficult regulatory situation.

SEC3 will update you with additional insurance tips in the coming months and we will issue a complete whitepaper on this topic in the fall.


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