New research from Mactavish, the leading expert on commercial insurance placement and disputes, reveals many private equity firms are not placing enough focus on the quality of insurance cover in place at portfolio companies.
Mactavish warns that organisations are generally 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.
In a survey of senior private equity professionals commissioned by Mactavish, just 20 per cent say they take an active role with the Directors and Officers (D&O) insurance cover of new portfolio companies. A further 40 per cent say they take an active role but leave it to the portfolio companies to decide upon cover specification, but the private equity firm has oversight of this. Some 17 per cent of respondents say they play no role in helping portfolio companies choose their D&O cover, whilst the balance of 23 per cent said they did not know what role private equity firms play here.
Liam Fitzpatrick, Client Services Director at Mactavish, says: “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.”
When asked about the overall due diligence private equity firms run in terms of reviewing the insurance policies of companies they are considering acquiring, only 30 per cent of the senior private equity professionals interviewed describe their industry’s process here as ‘very robust’. A further 30 per cent say it is ‘quite robust’. Some 27 per cent of the private equity professionals interviewed described processes here as ‘not robust’.
Fitzpatrick says: “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.”
