Independent Directors


ICI Mutual understands the risks and exposures that civil litigation, regulatory investigations and proceedings, and related matters (such as shareholder derivative demands) may create for funds and fund independent directors. As a resource for the independent director community, ICI Mutual assists directors in evaluating their risks and exposures, and in reaching informed business judgments regarding the purchase of liability insurance coverages for themselves and for the funds they serve.

As a provider of directors & officers/errors & omissions (“D&O/E&O”) liability insurance and independent directors liability (“IDL”) insurance, ICI Mutual offers proven insurance products, tailored to the needs and interests of funds and fund independent directors, along with fair, even-handed and expeditious claims handling. Independent directors protect the interests of their funds and of fund shareholders. ICI Mutual, in turn, protects independent directors and their funds against the legal defense costs and other financial exposures they may face in fund industry claims.


  • What types of liability risks are faced by fund independent directors?

  • Fund advisers, funds themselves, and fund “inside” directors and officers are typically the primary focus of shareholder litigation, regulatory investigations, and regulatory proceedings.   

    Even so, independent directors may find themselves involved in such matters - whether directly or as non-party witnesses. This century, for example, independent directors have been involved as defendants in class action lawsuits challenging fund disclosure, as non-party witnesses in lawsuits challenging fees paid to fund advisers, as witnesses and/or potential respondents in investigations by the enforcement staff of the SEC, and, in isolated cases, as respondents in SEC proceedings.

    Although some degree of liability risk is inherent in board service, the risk to independent directors of personal financial liability from judgments or settlements in fund-related litigation and regulatory proceedings has historically been small, and is likely to remain so.  However, the legal costs to represent fund independent directors in such matters can often be substantial (with such costs typically borne, directly or indirectly, by funds themselves or by insurance).  Independent directors seeking additional information on their risks in fund-related litigation and regulatory proceedings may access this ICI Mutual study.

  • As an independent director, am I at significant risk of incurring personal financial exposure that cannot be paid (i.e., “indemnified”) by my fund?

  • More than thirty years of fund industry claims experience evidences that the risk to fund independent directors of incurring personal financial exposure in fund industry claims is low, and is likely to remain so, for two reasons.  First, fund independent directors, as a legal matter, face a relatively low risk of personal financial exposure (for their legal defense costs or otherwise), where, as is typically the case, they act (1) with due care and independence (i.e., without conflicts of interest), and (2) devote appropriate time, attention, and oversight to reaching considered judgments on fund issues and concerns.  Second, fund independent directors, even where they do incur financial exposure (e.g., legal costs), commonly enjoy the robust protections that are afforded by fund indemnification, and by D&O/E&O insurance, against such financial exposure.

  • What kinds of liability insurance coverages are available to protect funds and fund directors?

  • While there is no legal requirement that they do so, most funds arrange to purchase professional liability insurance for themselves, in the form of “errors and omissions” (E&O) liability insurance, and for their directors and officers, in the form of “directors and officers” (D&O) liability insurance.  In the fund industry, these two forms of professional liability insurance are often combined into a single “D&O/E&O” policy. D&O/E&O insurance thus insures against financial losses that fund directors and officers may sustain in claims made against them for errors or omissions in their capacity as directors and officers, as well as against financial losses that funds themselves may sustain in claims made against them as entities.   Independent directors seeking an introduction to D&O/E&O insurance in the fund industry may access this ICI Mutual study.

    Some fund groups supplement their D&O/E&O insurance policies with separate insurance policies – commonly referred to as "independent directors liability" (IDL) policies.  IDL policies in the fund industry are typically structured to insure only fund independent directors.  IDL insurance thus serves as dedicated coverage for fund independent directors, and no other individuals or entities (e.g., funds themselves, “inside” fund directors, fund officers) customarily have rights to collect under such insurance. Independent directors seeking an introduction to IDL insurance in the fund industry may access this ICI Mutual study.

  • What is the difference between a “funds only” D&O/E&O insurance policy and a “joint” D&O/E&O insurance policy, and what is industry practice in this regard?

  • A “funds only” D&O/E&O policy typically covers all funds within a fund complex (or certain groupings of funds, as when a single complex has multiple “cluster boards”), together with the directors and officers of those funds.  A “joint” D&O/E&O policy extends beyond the foregoing, to also include as insureds one or more affiliated advisers and/or other affiliated service providers (together with the affiliated providers’ own directors and officers).  Under a joint policy, coverage for the service providers may be limited to services provided only to investment companies, or the coverage may also extend to services provided to others (e.g., private advisory accounts).

    Approximately 70% of ICI Mutual’s clients choose to purchase joint D&O/E&O policies, which are frequently viewed as more cost-effective and administratively more efficient than funds only D&O/E&O policies.  Among other things, joint policies permit funds and their affiliated service providers to share premium costs, and can reduce the number of deductibles that would otherwise be applicable to losses (including defense costs) incurred in individual claims.

    Of course, all D&O/E&O insurance policies include an aggregate limit on the amount payable by the insurer for any and all claims made against any and all insureds during a given policy period.  (Independent directors seeking additional information on the “claims made” nature of D&O/E&O insurance policies and other insurance concepts may access this ICI Mutual study.)  As a result,  a joint insurance policy, while cost-effective and administratively efficient, necessarily exposes each insured to “erosion” risk (i.e., the risk that claims against one insured will erode the aggregate limit that would otherwise be available to other insureds).  Some fund groups address this issue through internal agreements, which may guarantee each insured some minimum amount of coverage and/or pre-allocate coverage among insureds in the event losses exceed the policy limit.  Other fund groups view this issue, among others, as a reason to select a separate funds only policy, and/or to supplement their D&O/E&O insurance policies with stand-alone IDL policies.   

  • How much D&O/E&O insurance should our funds purchase?

  • The question of “how much” D&O/E&O insurance to purchase is necessarily a business judgment that may be influenced by a number of factors; and, as for the funds’ own coverage, the ultimate responsibility for this judgment ultimately rests with fund boards.  In reaching such judgments, fund boards may consider a number of factors, including (1) the amount of assets and types of funds being insured, (2) the scope of coverage being afforded (e.g., does the D&O/E&O policy cover fund advisers or other affiliated service providers in addition to funds and fund directors and officers?), (3) the structure of their fund group’s overall insurance program (e.g., is separate IDL insurance being purchased?), (4) their own risk tolerance, and (5) their fund group’s claims history.

    Fund boards—including boards of funds that are not insured by ICI Mutual—frequently turn to ICI Mutual for peer reports, industry loss statistics, analysis of insurance terms, and in-person presentations on insurance program structures, to assist them as they make decisions on how much D&O/E&O insurance protection to purchase.

  • Should our fund group purchase dedicated insurance coverage (i.e., IDL insurance) for our fund independent directors?

  • IDL insurance is a stand-alone liability insurance coverage that affords protection solely to fund independent directors, and is designed to supplement the liability protections afforded to them by fund indemnification and by their funds’ D&O/E&O liability insurance.  IDL insurance mitigates the exposure of fund independent directors to various risks associated with indemnification and D&O/E&O insurance, including (1) indemnification risk (i.e., the risk that a fund will be financially unable or legally prohibited from paying indemnification to its independent directors), and (2) erosion risk (i.e., the risk that the underlying D&O/E&O insurance otherwise available for use by independent directors will be fully depleted through payments made by the D&O/E&O insurer on other covered claims).

    ICI Mutual estimates that over 60% of fund groups purchase some form of IDL insurance, whether from ICI Mutual or from a commercial insurer.  The decision as to whether to purchase IDL insurance necessarily involves the exercise of business judgment, as does the decision on which of the two basic types of IDL insurance to select – i.e., “Side A-Only” IDL, which responds only to non-indemnifiable exposures of fund independent directors, or “Safety Net” IDL insurance (also sometimes referred to as “Side A&B” IDL insurance), which responds to both non-indemnifiable and indemnifiable exposures of fund independent directors.  As with any business judgments, fund boards may find it useful to consult resources that can assist them in determining what inquiries they may wish to make, and what information they may wish to consider, in reaching these decisions.  Independent directors seeking such a resource may access this ICI Mutual study.  

  • What is ICI Mutual’s financial strength?

  • As a fund industry-owned and operated insurer, ICI Mutual’s management and board of directors have consistently followed a conservative approach to managing the Company’s financial aspects.  ICI Mutual’s low underwriting leverages, combined with its use of a diverse group of financially secure reinsurance partners, has enabled the Company to meet all of its claims obligations, to pay dividends to its owners, and to witness its surplus grow to a level that is far in excess of what is required to support the business it writes and of applicable regulatory requirements.

    The Company’s excellent financial condition has been recognized by A.M. Best with its “A” (Excellent) rating since 1993, the first year the Company was eligible to receive a rating.