Prospectus liability insurance from Chubb
Anyone raising money from investors puts forward a document on which they base their decision. If that document later turns out to be incorrect or incomplete, the claim is directed at the issuing institution and at the directors personally.
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In brief
Prospectus liability insurance is a transaction policy. It is taken out around a stock market flotation, a share issue, a bond issue or the issue of participations in a property or investment fund, and then runs for a number of years without your renewing it annually. Finass acts as an intermediary in this through Chubb, among others; the wider business range can be found at Chubb's business insurance.
The legal basis lies in the misleading statement provision in Article 6:194 of the Dutch Civil Code: incorrect or incomplete information about the securities offered, about the results or about the prospects. If the offer is aimed at consumers, the regime on unfair commercial practices in Articles 6:193a et seq. of the Dutch Civil Code applies on top, with a favourable evidential position for the investor. In addition, the regulator assesses the prospectus against the prospectus obligation in the Dutch Financial Supervision Act and the European Prospectus Regulation.
Those who can be held liable are: the issuing institution itself, the directors and supervisory board members who signed the prospectus, a selling shareholder and sometimes the bank acting as adviser. An ordinary directors' and officers' liability policy often has a restriction or a separate limit for this category, so that in an issue-related claim directors suddenly compete with investors and with their own company for the same sum insured.
This page deals with one situation. The full overview is on Directors' and officers' liability in a VvE.
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What to look out for
Four points that determine the value of this cover around an issue.
A term independent of the financial year
An investor's claim rarely arises in the year of the issue. This policy is therefore taken out with a fixed multi-year term, starting on the date of the prospectus. Choose that period in conjunction with the limitation periods applying to a claim for a misleading statement, and not on the basis of the usual insurance year.
What exactly falls under the insured document
What is covered is liability for the prospectus or information memorandum and the documents accompanying it. Statements outside those, such as presentations during a roadshow, press releases or oral assurances by a seller, are by no means always included. Record which documents count and make sure the insurer has the final version.
Investigation beforehand is part of acceptance
The insurer assesses the due diligence process: who verified the figures, which advisers were involved and how the risk factors came about. A file showing that the information was checked carefully is not only good for acceptance but also your most important defence if an investor later claims he was misled.
What falls outside the cover
Excluded are fines and penalty payments from the regulator, deliberate deception and fraud once established in court, and claims arising from facts already known when the policy was taken out. The investment result itself is not insured either: that an issue disappoints is not a loss within the meaning of this policy. Only incorrect information is.
What does your premium depend on?
- Size of the issue: the amount raised determines the possible size of a claim
- Type of security: shares, bonds or fund participations each have their own claims profile
- Category of investor: an offer to private individuals weighs more heavily than one to professional parties
- Countries in which the offer is made: an offer outside the European Union changes the litigation risk
- Term chosen: the cover is taken out in one go for several years
- Quality of the due diligence file: how the verification is recorded is taken into account in acceptance
Insurers weigh these details differently. That is where your saving is.
What is covered
| Situation | Prospectus cover | Ordinary directors' and officers' liability |
|---|---|---|
| An investor claims that the turnover forecast in the prospectus was presented too optimistically | Yes | Provided that |
| The issuing institution itself is pursued by a group of subscribers | Yes | No |
| A selling shareholder is pursued by the buyers over the same issue | Yes | No |
| A bondholder complains about the risk section four years after the issue | Provided that | No |
| A fine from the regulator for an incompletely approved prospectus | No | No |
| Investors demand their money back because the fund achieved a lower return than estimated | No | No |
The right-hand column depends heavily on the issue clause in your existing policy; have it set alongside this overview before you make the issue.
Frequently asked questions
This is what people ask us most.
Why is the ordinary directors' and officers' liability policy not enough here?
Because an issue-related claim hits all the directors and the company at once, and the sum insured on the existing policy can then be used up by a single event. For the rest of the year, the board is then without cover for ordinary claims. A separate transaction policy places its own limit alongside it, for this issue only.
Does this cover also apply to a private placement with no prospectus obligation?
It can, provided the information memorandum used is included in the policy as an insured document. Even without a prospectus obligation, Article 6:194 of the Dutch Civil Code continues to apply to incorrect or incomplete information with which you approached investors. Exemption from supervision is therefore not exemption from liability. So always include the document in the application.
Are the costs of defence insured as well?
Yes, defence costs fall under the cover, usually within the sum insured. In collective actions by investors those costs are often the largest item, even where the claim is ultimately dismissed. Report a claim or a circumstance that may lead to one immediately; Article 7:941 of the Dutch Civil Code requires you to do so and it also determines when the insurer takes over the file.
What if the information was correct but the market turned?
Then there is no misleading statement and therefore no liability. This insurance does not cover a fall in value and does not guarantee a return. It concerns solely the question of whether the picture presented was correct and complete at the moment of publication, including the risk factors and the assumptions used in forecasts.
Every situation is different. For these situations we have a separate page.
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