For years, venture capital (VC) firms were considered relatively benign risks in the directors and officers (D&O) insurance market.
Compared to traditional buyout private equity, VCs generated fewer claims, fewer losses, and generally enjoyed broad coverage, healthy capacity, and competitive pricing.
However, that reputation no longer holds. According to industry specialists, a subtle but significant shift is underway. Venture capital firms are now facing a growing wave of D&O exposure driven by board participation, portfolio company distress, and the unusually broad insurance structures VCs rely on to protect themselves.
“What we’re seeing now is fundamentally different from the past,” said Maggie Gialessas (pictured on the right), vice president of specialty financial institutions at Alliant.
“We’re now seeing claims where both the individual partner and the firm are named, particularly when a partner is acting as both an investing professional and a board member.”
What Gialessas is describing is what insurers call “dual capacity” exposure. Venture partners often sit on the boards of portfolio companies, acting simultaneously as investors and directors. When litigation arises, frequently after a sharp valuation drop, restructuring or insolvency, claims are increasingly brought against both the individual and the fund.
While a portfolio company’s own D&O policy may indemnify the individual director, it often doesn’t extend to the venture firm or its management company. The result? “One claim can hit two different policies,” Gialessas said.
The structure of venture capital insurance amplifies the effect, said Alliant’s specialists. Unlike operating companies, which typically buy a standalone D&O policy, VCs typically purchase a “hybrid” executive liability policy that bundles D&O, professional liability (E&O), employment practices liability (EPL), and outside director liability into a single form.
That breadth ultimately creates more pathways for claims, according to Dan Berry (pictured on the right), executive vice president and venture capital leader at Alliant
“Most litigation ultimately traces back to portfolio company problems,” Berry said. “But it can come in as a D&O claim, a professional services allegation, or an employment-related dispute. EPL coverage alone can be triggered by first-party or third-party claims, including allegations from portfolio company employees.”
Outside-director liability, in particular, has become a flashpoint. These claims arise when a partner is sued specifically in their role as a board member of a portfolio company, rather than as a fiduciary to the fund.
In distressed scenarios, especially when a startup’s balance sheet is thin, portfolio company indemnification can become meaningless, pushing defense and settlement costs onto the VC firm’s own policy.
“We regularly see situations where multiple VC firms have partners on the same board,” Berry said. “Three different firms, three different policies, all responding to the same litigation.”
The surge in claims closely tracks the financial stress rippling through the startup ecosystem. As valuations reset and companies shut down, restructure, or enter bankruptcy, litigation often follows. Creditors may pursue recovery through insolvency proceedings. Founders may allege that venture investors forced strategic decisions that led to failure. Minority shareholders, including early friends-and-family investors, may claim misconduct or undue influence by institutional backers.
Defense costs, meanwhile, have exploded. Gialessas said legal cost inflation is a key driver for losses. “Partner billing rates of $2,000 to $3,000 an hour are now common,” she noted, among the small pool of specialist law firms that VCs turn to.
Even claims dismissed quickly can generate multimillion-dollar defense bills. Berry cited a recent case dismissed with prejudice that still cost $4.5 million in legal fees in under eight months. “That’s the cost of being right,” he pointed out wryly.
Despite rising losses, underwriters have not yet meaningfully tightened terms. Capacity has shrunk (e.g., $5 million towers are now more common than $10 million, according to the Alliant specialists), but pricing remains relatively flat.
Both Berry and Gialessas describe current pricing as “artificial,” driven by intense competition.
Following the IPO and SPAC boom of 2020-2022, carriers built excess capacity that now needs a home. Venture capital, still perceived as comparatively safe, has absorbed much of it. But it won’t last forever.
“Executive liability is cyclical,” Berry said. “Deductibles usually move first, then pricing, then terms and conditions. Right now, terms are as broad as they’ve ever been. We’re telling clients to take advantage of that while they can.”
Gialessas expects a shift within the next 12 to 36 months. “There are only a handful of truly viable primary carriers in this space. Once the carriers with the biggest losses start driving the market, we’ll see a shift,” she said.
