Labelled as “the first of its type,” the newest product from Arch Insurance (Canada) is designed exclusively for independent review committee members who could face substantial personal liability from the performance of their duties.

Specifically, the IRC member liability insurance provides protection for IRC members in cases in which they are not indemnified against law or class action suits by the investment fund or its manager on whose behalf they are acting.

The insurance policy is devoted exclusively to and controlled by IRC members and cannot be accessed by other related parties such as fund managers, fund administrators, or directors and officers of the parent company.

The insurance is designed for IRC members who face personal liability exposure and is intended to enable them to fulfil their obligations without fear of exposing their personal assets. If an IRC member is named in a lawsuit, the insurance will relieve him or her of having to retain legal counsel, which will be provided by a pre-approved panel of firms chosen by Toronto-based Arch Insurance, a division of Bermuda-based Arch Capital Group Ltd.

“Most prudent IRC members will be looking for a tailored type of product that indemnifies them against any potential exposure,” says Kathryn Fuller, an associate at Borden Ladner Gervais LLP’s investment management group in Toronto. “Their role is analogous to that of a director sitting on the board of a public company.”

MAY 1, 2007, DEADLINE

The launch of IRC member liability insurance is based on changes to National Instrument 81-107, effective Nov. 1, requiring all investment funds that are reporting issuers to set up an IRC by May 1, 2007.

Reporting issuers typically include publicly offered mutual funds, closed-end funds, labour-sponsored investment funds, exchange-traded funds, commodity pools, split-share corporations and certain deferred-sales financing and flow-through limited partnerships. Pooled funds, which are typically sold by offering memorandum, are exempt from the IRC requirement.

NI 81-107 is intended to enhance investor protection and improve transparency by ensuring that conflicts of interest arising at the fund manager level are referred to the IRC, which will make recommendations in the best interest of the investment fund. The IRC will also review and provide input on the fund managers’ written policies and procedures concerning conflicts of interest, as well as approve certain fund mergers and changes to auditors proposed by the fund manager.

Each investment fund must have an IRC comprising of at least three independent members, but the same IRC could deal with all of the funds in a fund family.

IRC insurance is distributed through selected brokers, including Marsh Canada Ltd. According to David Price, regional vice president of Arch Insurance with responsibility for financial institutions and professional liability, the current aggregate maximum limit of insurance coverage for all members of an IRC is $5 million. The cost of coverage ranges from $25,000 to $100,000 annually, based on assets under administration, breadth of the mandate of the IRC and the strength of the indemnity. Price advises that the strength of the indemnity would be based on the extent of protection provided by the fund or the fund company to the IRC. The policy does not have any deductibles.

81-107’S IRC REQUIREMENTS

“NI 81-107 requires that members of an IRC be accountable for their actions. But this does not prevent an investment fund or manager from limiting an IRC member’s financial exposure through insurance and indemnification on terms comparable to those applicable to directors of corporations — allowing for reimbursement for reasonable good faith behaviour,” says Mike Campbell, a partner at McMillan Binch Mendelsohn LLP who advises public and private, domestic and offshore investment funds. “Regulators will expect that any such coverage be on reasonable commercial terms. Potential IRC members may be deterred from sitting on an IRC that does not have insurance and indemnification.”

According to BLG’s July 2006 Practice Bulletin No. 3 (updated in August 2006), an investment fund manager may indemnify an IRC member, heirs, legal representative or estate only if the member acted honestly and in good faith in the interest of the investment fund, and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the member had reasonable grounds for believing that his or her conduct was lawful.

@page_break@The bulletin also points out that the indemnification standards under NI 81-107 restrict the ability of a fund and the manager to indemnify an IRC member, which is consistent with similar regulations relating to investment funds. As with directors’ and officers’ liability insurance, IRC member liability insurance is set to become a standard feature in the investment funds industry. Price says that IRC insurance currently is available only for mutual funds, but the company is beginning to look at other areas, such as labour-sponsored funds and hedge funds. IE