Insurance for General Partners

A general partner of a partnership is exposed to certain liabilities. General partners are responsible for the management of the partnership and can be held personally liable for any debts or obligations incurred by the partnership. It is essential to understand these liabilities and take steps to mitigate them.

In this article, we will provide a comprehensive explanation of the liabilities a general partner faces and how to insure against these risks.

Joint and Several Liability

One of the most fundamental concepts of partnership is ‘joint and several liability.’ Joint and several liability is a legal concept that can apply when multiple parties are jointly responsible for a particular liability. Under joint and several liability, each party can be held liable for the full amount of the liability, regardless of their individual level of fault or responsibility.

In the context of a partnership, joint and several liability means that each partner can be held liable for the full amount of any liability arising from the partnership’s activities, regardless of the level of involvement or responsibility of each partner.

This means that if a partnership incurs a debt or faces a legal claim, each partner may be held liable for the full amount of the debt or claim, rather than only being responsible for their share of the liability.

For example, if a claimant wins a judgment of $100,000 against the partnership and one partner cannot pay their share of the claim, the creditor may seek payment from the other partners to make up for the shortfall. Under joint and several liability, each partner could be required to pay the full $100,000, even if their individual share of the claim is less than that amount.

Joint and several liability can create significant risks for individual partners, as they may be held liable for the full amount of liability even if they did not contribute to the situation that gave rise to the liability.

To mitigate these risks, partners should ensure that they have appropriate insurance coverage, such as professional liability insurance (PLI) or general liability insurance (GLI). They should carefully review any contracts or agreements they enter into on behalf of the partnership. Additionally, partners should seek legal advice to fully understand the risks and liabilities associated with joint and several liability.

Liabilities Faced by a General Partner:

Unlimited Liability: One of the most significant liabilities General Partners face is unlimited liability. This means that if the partnership is sued or owes money, the general partner can be held personally liable for the full amount of the debt or damages.

Joint and Several Liability: General partners are also subject to joint and several liability. This means that each general partner is individually liable for the partnership’s debts and obligations, and any partner can be held responsible for the full amount of the debt or damages, even if they did not directly cause the problem.

It also means that if the partnership is sued for any reason relating to the business, the judgment applies to all partners equally and severely. Each partner can be held liable for the full amount of the judgment, regardless of their stake in the partnership. If other partners cannot or do not contribute to the settlement of the liability, the whole amount could be attributed to the individual partner.

Fiduciary Duty: General partners have a fiduciary duty to act in the best interests of the partnership and its partners. Failure to fulfill this duty can result in legal action and personal liability.

Breach of Contract: General partners can be held personally liable for breaching a contract entered into on behalf of the partnership.

Negligence: General partners can be held liable for damages resulting from their negligence or wrongdoing in the course of their duties.

Mitigating against risks

To protect themselves against these risks, general partners can take several steps, including:

Purchase Liability Insurance: Liability insurance can protect general partners from personal liability resulting from partnership-related claims. This insurance can cover legal fees, damages, and other costs associated with a lawsuit.

Draft a Comprehensive Partnership Agreement: A well-drafted partnership agreement can clearly define each partner’s rights and responsibilities, reducing the risk of disputes and legal action.

Conduct Due Diligence: General Partners should conduct thorough due diligence to identify potential risks and liabilities before entering into any business relationship or transaction.

How a General Partner (GP) can insure themselves against the risks they face

Professional Liability Insurance (PLI): PLI is also known as Errors and Omissions (E&O) insurance. It provides coverage for legal fees and damages resulting from claims of professional negligence or failure to perform professional duties. PLI is particularly important for GPs who provide professional services or advice, such as investment consultants and financial advisors.

General Liability Insurance (GLI): GLI covers bodily injury, property damage, and personal injury resulting from the partnership’s operations. GLI can help protect General Partners from third-party claims, such as slip and fall accidents, product liability, and advertising injury.

Directors and Officers Liability Insurance (D&O): D&O insurance covers legal fees and damages resulting from claims of wrongful acts committed by the partnership’s directors and officers. This insurance is especially relevant for GPs who serve on the board of directors or are involved in management decisions.

Cyber Liability Insurance: Cyber liability insurance provides coverage for data breaches, cyber-attacks, and other cyber-related incidents. This insurance can help protect GPs from third-party claims and the cost of notifying affected individuals, restoring data, and investigating the incident.

Employment Practices Liability Insurance (EPLI): EPLI provides coverage for legal fees and damages resulting from claims of wrongful termination, discrimination, harassment, and other employment-related issues. This insurance can help protect General Partners from employee claims and litigation.

To insure themselves against these risks, GPs should work with an insurance broker or agent to identify their specific insurance needs and obtain appropriate coverage. The broker or agent can help GPs choose the right policies, determine the appropriate coverage limits, and negotiate favorable terms and rates.

When purchasing insurance, GPs should carefully review the policy terms and conditions, including coverage limits, exclusions, and deductibles. They should also ensure that the policy covers all relevant risks and exposures and that the premiums are affordable and sustainable.

About claims of professional negligence or failure to perform professional duties

Claims of professional negligence or failure to perform professional duties are a common risk faced by General Partners who provide professional services relating to investment advice. Here are some more details and examples relevant to this type of claim:

Professional negligence: Professional negligence occurs when a GP fails to perform their professional duties to an acceptable standard, resulting in harm or loss to the partnership or its clients. Professional negligence can occur in many fields, including law, accounting, finance, and investment consulting. Examples of professional negligence include:

• A financial advisor who fails to provide appropriate investment advice, resulting in significant losses for the partnership or its clients.
• An accountant who makes an error in the financial statements, causing the partnership to incur penalties or fines.
• A lawyer who fails to meet a deadline or provide adequate legal advice, resulting in a loss of a case or damages to the partnership.

Failure to perform professional duties: Failure to perform professional duties occurs when a GP does not fulfill their obligations as a professional, leading to harm or loss to the partnership or its clients. Examples of failure to perform professional duties include:

• An investment financial advisor who fails to review and update the partnership’s property investment portfolio regularly.
• An accountant who fails to file the partnership’s tax returns on time.
• A lawyer who fails to provide regular updates and communication to the partnership or its clients.

Professional liability insurance (PLI) can help protect GPs against claims of professional negligence or failure to perform professional duties. PLI policies typically cover legal fees, damages, and other costs associated with a claim, subject to the policy’s terms and conditions. By obtaining PLI coverage, GPs can help mitigate the financial and reputational risks associated with professional liability claims.

FAQ

Are there specific professional liability risks for General Partners involved in property development?

Misrepresenting the property: GPs who provide property investment services may be at risk of misrepresenting the property to potential investors. This can occur when the GP makes false or misleading statements about the property’s condition, location, or potential returns. If an investor relies on these misrepresentations and suffers financial losses, they may bring a claim against the GP for professional negligence.

Failing to disclose information: GPs may also be at risk of failing to disclose relevant information about the property to investors. This can occur when the GP fails to disclose known defects or issues with the property, such as zoning restrictions or environmental hazards. If an investor suffers losses as a result of the GP’s failure to disclose this information, they may bring a claim for failure to perform professional duties.

Breaching fiduciary duties: General Partners who offer property investment services may owe fiduciary duties to their clients. This means that they must act in the best interests of their clients and disclose any conflicts of interest. If a GP breaches these duties, they may face legal action from their clients.

Regulatory risks: GPs who offer property investment services may also be subject to various regulatory requirements, such as licensing, registration, and disclosure obligations. Failure to comply with these requirements can result in fines, legal action, and damage to the GP’s reputation.

Market risks: Property investment is subject to market risks, such as fluctuations in property values, interest rates, and economic conditions. GPs who offer property investment services may be at risk of making inaccurate or misleading predictions about the market, leading to investor losses and potential legal action.

To mitigate these risks, General Partners offering property investment services should obtain appropriate insurance coverage, such as professional liability insurance (PLI) and general liability insurance (GLI).

They should also ensure that they provide accurate and truthful information about the property, disclose all relevant information to investors, and comply with all regulatory requirements. Additionally, GPs should stay informed about market conditions and provide realistic predictions about potential returns to investors.

Does a GP have special duties when conducting due diligence?

There are special risks associated with conducting due diligence, and insurance can provide coverage for some of these risks. Due diligence is the process of investigating a potential investment opportunity to identify any risks, liabilities, or other issues that may affect the investment’s value or viability. GPs who conduct due diligence may face the following risks:

• Inaccurate or incomplete information: General Partners may receive inaccurate or incomplete information during the due diligence process, which can lead to incorrect investment decisions. For example, if a GP relies on inaccurate financial statements or incomplete property records, they may underestimate the risks associated with the investment.
• Failure to identify risks: GPs may also fail to identify all relevant risks during the due diligence process. This can occur when the GP overlooks important information or needs more expertise to identify potential risks. If the investment later experiences losses or liabilities that were not identified during due diligence, the GP may face legal action from investors.
• Breach of confidentiality: GPs may be required to sign confidentiality agreements when conducting due diligence, and they may face legal action if they breach these agreements. For example, if a GP discloses confidential information about the investment to a third party, they may face legal action from the investor or other parties involved in the transaction.

To mitigate these risks, General Partners who conduct due diligence should obtain appropriate insurance coverage, such as errors and omissions (E&O) insurance or professional liability insurance (PLI). These policies can provide coverage for legal fees and damages if the GP is sued for errors or omissions during the due diligence process, or if they breach a confidentiality agreement. Additionally, GPs should conduct thorough due diligence, ensure that all information is accurate and complete, and seek expert advice as needed to identify potential risks.

Where can I find comprehensive information about all of these insurances?

Most commercial insurance companies provide comprehensive Professional Liability, Errors and Omissions and General Liability policies. They have websites and can answer most of your questions, or put you in contact with one of their sales specialists.

Independent insurance agencies and brokers usually have people who are experienced in all aspects of commercial insurance, and they can offer you advice, negotiate policies on your behalf with the actual insurer, and generally look after your interests if you are faced with a claim.

There are many websites that offer content about PLI and GLI insurance, and can link you directly to an insurance company or agency. One example is 4menearme.com, which has many comprehensive articles dealing with Professional liability, General liability and E&O insurance.