M&A Advisory

Co-Defendant Language on a Portfolio Company D&O Policy - It's Probably Just OK

In my opinion, the AT&T “Just Ok is Not Ok” marketing campaign is brilliant.  If you haven’t seen it, people need something important from their doctor, mechanic, or accountant and learn that they can expect service that is

Here are some highlights of the campaign:

Patient Prior to Surgery: “Have you ever worked with Dr. Francis?”Nurse: “Yeah, he’s ok.”

Bob Celery, Accountant (pronounced “Se Lar EE” – long story): “Leave it to me, I’ll get your taxes in an ok place.”Customer: “Just ok?”

“Are you guys good with brakes?”Mechanic: “We’re ok.”

These commercials translate to my world like this:

Newfront General Partnership Liability Prospect: “We can rely on our portfolio company D&O policy to defend us if our firm is named as a defendant in a lawsuit for our actions as a board member because we have co-defendant language on our portfolio company D&O policies.”Me: “Chances are, it’s just ok.”

Not exactly the vote of confidence that you want to hear before a surgery, when you need new brakes for your car, while you’re prepping for an audit, or when there is a claim against a portfolio company board that you sit on.

Portfolio Company D&O and Fund Level GPL

Every Venture Capital or Private Equity investor (GP) expects defense costs associated with claims involving their role as a portfolio company board member to be handled on the portfolio company’s D&O policy. For instance, common allegations against a portfolio company board include:

  • Breach of fiduciary duty

  • Failure to comply with laws

  • Theft of intellectual property

  • Misrepresentation

Conversely, fund level GPL is expected to address matters involving wrongful acts alleged against their firm, such as:

  • SEC investigations into fees/management service contracts with portfolio companies

  • Regulatory compliance issues

  • Style drift (Fund invests differently than initially marketed to investors)

  • Mismanagement of fund

  • Fraudulent conduct (False financial reporting/collusion)

It sounds simple enough.  GP’s are board members at portfolio companies.  That’s just part of the job.  GPL and D&O underwriters know that.  It’s also understood that these policies need to work in conjunction together because it’s unrealistic to think that the GP can purchase high enough GPL limits to address their firm’s activities, as well as, the aggregate exposure across all of their portfolio company board roles.

The first step in cleanly bifurcating these policies is to include co-defendant language on the portfolio company D&O policy. This aligns the defenses of the portfolio company board and the GP if they are both named defendants in the same lawsuit for something alleged to have happened at the portfolio company board level.

There are two potential problems with relying on D&O co-defendant language:

  1. Co-defendant language isn’t automatically granted on every D&O policy. The broker must specifically request it, so just having an “off the shelf” D&O policy isn’t enough.

  2. Even when co-defendant language is included, the policy wording used by most insurers will .

Option No. 1 is obviously bad.  No. 2 is “just ok.”

Hypothetical Claim Example

When a claim is made against a portfolio company board, it is common for plaintiffs to allege many wrongful acts.  For example, a creditor might sue a portfolio company because it was having financial troubles and needed capital.  The creditor might allege the following:

Allegation 1: Breach of fiduciary duty.  Their creditors sue its directors and officers for failure to identify, evaluate, negotiate, and secure the sale of company assets in a timely manner, which resulted in the company defaulting on its outstanding loans.

Allegation 2: Controlling shareholder liability: The creditors allege that the GP, which controls the board, made the decisions that led to the breach of fiduciary duty outlined in Allegation 1.

All members of the board are individually named in Allegation 1.  The GP is named in Allegation 2 with no reference to portfolio company employees or legal entities.

If the D&O co-defendant wording is of the “just ok” variety, then the GP’s defense costs in Allegation 2 would not be covered on the D&O policy.  Allegation 2 would have to be reported to the GPL policy, possibly triggering a separate retention and engaging a new law firm.

If the co-defendant wording on the D&O policy is written in a best-in-class manner, then the D&O policy would cover the GP’s defense costs for Allegation 2. It is important to remember that the D&O policy will do this if the portfolio company AND the GP are both “named & maintained” in the lawsuit.

While the D&O would cover their defense costs, if this claim ultimately settles for ,000,000 (for instance), the actual liability to the GP for Allegation 2 covered on the D&O policy.


GP’s only want to trigger their GPL policy due to their role as a portfolio company board member in case of an emergency. Since defense costs are a significant cost of a claim, hopefully you’ll agree that when it comes to co-defendant wording, just ok, is not ok.

Josh Warren
The Author
Josh Warren

Senior Vice President

Josh is a Senior Vice President and M&A Advisory Practice Leader of Newfront Insurance and Financial Services. His responsibilities include operational leadership, client management, program design, and risk analysis for alternative asset managers and Newfront clients facing a merger or acquisition.

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