This blog entry about hedge fund insurance coverage almost sounds like a car insurance commercial. Sadly, both are critical in today's modern society.
Given the current regulatory environment, volatile market conditions, and the public perception of the industry, hedge funds face enormous risk in doing business. Hedge funds should carry both D&O and E&O Liability Insurance to protect directors, officers, managers and the fund itself from liability.
The hedge fund should have coverage for governmental investigations. Additionally, the hedge fund also needs coverage for when it or its affiliates are alleged to have committed fraud. However, the hedge fund must be cautious in this particular area because insurance companies, generally, try to avoid such coverage and will construe just about anything as an admission of wrongdoing or responsibility. Finally, the hedge fund has to ensure that its insurance coverage will pay for defense costs since said costs are usually the most expensive part of the process.
In short, hedge funds cannot just assume that insurance coverage will be there. Periodic audits and check-ups are required before anything arises. Like most insurance coverage, you never want to have to use it, but that is why it is there so make sure it will work.