Venture Capital Insurance: Coverage, Claim & Exclusions

Updated: 09-11-2022 11:18:53 AM

Venture capital is a lucrative business if the investment pays off. However, as several startups are involved, there are multiple risks associated with this collaboration. To get over the risks that could pose a hindrance in the smooth functioning of the business, one would need a venture capital insurance.

What is Venture Capital Insurance?

Venture capital insurance is especially crafted for venture capital firms to assist them safeguard their reputation and investment returns by mitigating potential losses. This insurance policy is a combined product which offers management liabilities, management indemnification, outside directorship and professional service liability.

How Venture Capital Insurance Functions?

Venture capital insurance is a new addition to the range of insurance plans. This policy functions in the following ways:

• The venture capital firm fills the proposal for insurance and provides company details to the insurance company
• The insurance company checks the details and if the firm is eligible for Venture Capital Insurance, the premium and sum insured is agreed between the two parties
• The insured pays premium as per the policy
• The legal representative from the insurance company regularly analyses the financial status of the firm and provides required advise
• In case of any eventuality, the claimant informs the insurer of the incident
• The required documents and evidence is submitted to the insurer
• A legal representative from the insurance company verifies the claim
• If the claim is as per the policy, the Venture Firm gets required assistance
• If the claim is false, the insurance company might reject the policy
• If the claimant is not satisfied with the compensation, he/she can raise a dispute in the court of law

What all Venture Capital Insurance Covers?

A venture capital insurance offers various kinds of coverage and the venture firm should understand its needs better to get the best deal. Let us understand the kind of coverage offered by this insurance:

• Legal costs associated with Initial Public Offering
• If anything goes wrong during an in-kind distribution
• If there is an incorrect usage of intellectual property
• If any of the startups under the venture capital firm declares bankruptcy
• Active participation and management in the portfolio of the companies under the venture capital firm
• Analysis of all the risks associated with the firms to which investment is provided by the venture capital firm
• Offers compensation when there is a conflict of interest and the involved parties are not benefited from the ordeal
• If any business secret or confidential information is revealed through emails, phone calls, fax or letters
• If there is conflict of interest when new management takes over the responsibilities

Eligibility Criteria 

This is a specialised policy for which fund providing companies can apply. These companies include:

• Private equity funds
• Venture capital firms
• Distressed debt funds
• Mezzanine debt funds
• Corporate sponsored funds
• Government sponsored funds
• Small business investment companies

Venture Capital Insurance Claim Process

Venture capital insurance claim settlement is a quick and easy process. One should be clear of the steps to make claims in order to avoid any rejection of the claims. The steps of claim process are:

• The claimant intimates the insurance company immediately about the issue
• Required documents are submitted at the insurance office
• The claim is verified by the legal representatives of the insurance company
• If the claim is genuine, the insurer offers the required help
• If the claim is false or not as per the policy terms and conditions, it is rejected
• If the claimant is not satisfied with the compensation, the claimant can raise a case in the court of law

Documents Required for Claim Process

The important documents required making a claim under venture capital insurance are:

• Duly filled in claim form
• Photocopy of the policy
• Documents which prove the risk

How Long Does it Take to Pay Out a Claim?

Usually it takes 30 days to pay out under the Venture Capital Insurance. If there is any legal dispute involved, the claim settlement might take some more time.

Cases Where You Can’t Claim Venture Capital Insurance (Exclusions)

Not many companies in India offer venture capital insurance at the moment. It is still in its early stage, thus, the firms are yet to define certain processes and features. Because of this reason, at present insurance companies have not defined any exclusions related to venture capital insurance.

Companies Offering Venture Capital Insurance in India

Venture capital insurance is still evolving in India, so it is not a popular insurance today.

Some of the insurance companies providing venture capital insurance in India are:

• HDFC Ergo

Important Aspects

It is important to understand well all the points related to venture capital insurance in order to be able to buy the most suitable policy. Let us look at some points:

• Venture capital insurance comes with an extended reporting period
• Some premium insurance companies provide a comprehensive insurance which covers most of the relevant features of the insurance

Advantages of Buying Venture Capital Insurance

Venture capital firms should consider venture capital insurance in order to carry on with the business without any problems and risks. Some key benefits of venture capital insurance are:

• Safeguard the reputation of the venture capital firm when it encounters any risk
• Ensures that the investments do not turn dud and run the venture capital firm into trouble
• Insured firms get worldwide coverage against risks
• Insured gets advance defence costs, in case of any issue taken up in the court of law

FAQs

Q1. Can the insured ask for any extension under the venture capital insurance?

The insured can ask for spousal liability extension by paying additional premium.

Q2. Who are covered under the venture capital insurance?

The insurance policy offers protection to critical members of the business. They can be:

• Employees
• General partners
• Executive officers
• Managing directors
• Advisory board members

Q3. How is the premium calculated for this insurance?

The premium amount is dependent on factors like:

• Size of the organisation
• Number of employees in the company
• The potential for employment liability claims

Q4. What is the policy period for venture capital insurance?

1 year.

Q5. What is Initial Public Offering which the venture capital firms face?

This is a scrutiny of past and present financial details of the company by 3^rd party investors.