Venture capital firms are facing a new challenge in the world of directors and officers (D&O) insurance. Once seen as low-risk, these firms now find themselves dealing with more claims and rising legal expenses. This change is linked to the roles venture partners play on portfolio company boards, financial troubles within startups, and the broad insurance policies VCs rely on.
In the past, venture capital firms typically saw fewer claims than traditional private equity groups. Their insurance coverage was broad, capacity was solid, and pricing competitive. But industry insiders say that’s no longer the case. Maggie Gialessas, vice president at Alliant, points out that claims now often name both individual partners and the firm, especially when a partner serves as both an investor and a board member.
This situation is known as "dual capacity" exposure. Venture capital partners often sit on the boards of the companies they invest in. When those companies run into trouble—like a sharp drop in value, bankruptcy, or restructuring—lawsuits tend to target both the individual and the venture firm. While a startup’s D&O policy might cover the individual director, it usually doesn’t protect the venture firm itself, meaning a single claim can affect multiple insurance policies.
The insurance structure itself adds to the risk. Unlike most companies that buy separate D&O policies, VCs often purchase hybrid policies that combine D&O, professional liability, employment practices liability, and outside director coverage. According to Dan Berry, Alliant’s venture capital leader, this creates many ways claims can arise. Problems at portfolio companies can lead to various types of claims, including employment disputes from employees.
One particular concern is outside-director liability. This arises when partners are sued for actions taken specifically as board members of portfolio companies, which can push legal costs back onto the VC’s own insurance. In tough financial times, when portfolio companies can’t fully cover defense costs, venture firms end up footing the bill on multiple policies if more than one firm’s partners are involved on the same board.
The increase in claims comes as many startups face hard times. With falling valuations, shutdowns, and bankruptcies, lawsuits are on the rise. Creditors, founders, and minority investors may all start legal battles over alleged mismanagement or bad decisions. Legal fees have skyrocketed, with partner billing rates at specialist law firms reaching $2,000 to $3,000 an hour. Even claims that get dismissed quickly require millions of dollars in legal costs.
Despite all this, insurance pricing for venture capital firms hasn’t risen much yet. According to experts at Alliant, this is because competition among insurers keeps prices artificially low. After the IPO and SPAC boom between 2020 and 2022, insurers built up a lot of capacity that they now need to use. Venture capital remains attractive because it’s still seen as relatively safe. But this situation likely won’t last.
Experts expect changes over the next one to three years. As insurers with large losses push for tougher terms, deductibles and prices will increase, and coverage will tighten. For now, though, venture capital firms are advised to make the most of the broad terms and competitive pricing while they can, knowing that a market shift could be just around the corner.