The Reason Limited Partners Require Venture Capital Firms Carry Fund-Level Insurance

(And What Sophisticated LPs Expect Today)

Introduction

The relationship between venture capital firms and their Limited Partners (LPs) has evolved.

As institutional capital flows into venture funds, LP expectations around governance, transparency, and risk management have sharpened considerably.

Today, it is no longer optional for venture firms to maintain fund-specific insurance protections.  Through diligence processes, side letters, and compliance certifications  LPs are actively requiring funds carry tailored insurance coverage to safeguard both general partners and the capital LPs have entrusted to them.

This shift reflects real risks venture firms face - from litigation and regulatory scrutiny to operational complexity - and the growing recognition that insurance for venture capital funds is now a critical piece of professional fund management.

1. Fund-Level Risks Are Real - and LPs Know It

Venture capital firms today face heightened exposure to:

• LP lawsuits alleging mismanagement, conflicts of interest, or breaches of fiduciary duty

  
  

• Regulatory investigations by the SEC around disclosure practices, hidden fees, and co-investment conflicts

  • Example:  in 2022 and 2023, the SEC launched enforcement actions against private fund advisers (including venture firms) for failures in fee transparency, conflict disclosures, and compliance oversight.

    
    

• Employment claims brought by fund-level employees as firms build out operational teams

  
  

• Reputational risks stemming from governance issues at portfolio companies or from regulatory fines

LPs are well aware of these exposures, and increasingly expect venture funds to proactively mitigate them.

Insurance is no longer viewed as optional compliance; it is a necessary financial backstop that preserves investor capital and ensures operational continuity.

2. Insurance is Designed to Protect LP Capital - Not Just General Partners

Dedicated venture capital fund insurance is critical because it creates a separate, external pool of resources to respond to legal challenges.

Without insurance, defense costs, settlements, or judgments may have to be paid from fund assets, directly harming LP returns.

With proper fund D&O insurance and General Partnership Liability (GPL) coverage, costs are absorbed externally, insulating both the general partners and the LPs' investments.

Insurance aligns the interests of GPs and LPs by ensuring that risks are managed responsibly and do not unexpectedly erode fund capital.

3. Institutional LPs Expect Institutional-Grade Risk Management

Institutional LPs (pensions, endowments, sovereign wealth funds, and large family offices) expect venture firms to operate with the same governance rigor they demand from public company boards or private equity funds.

Specifically, they expect venture firms to:

• Maintain dedicated Fund D&O Insurance to cover management and fiduciary exposures

  
  

• Carry General Partnership Liability (GPL) Insurance to protect the partnership entity and individual GPs

  
  

• Secure Employment Practices Liability (EPL) Insurance if the firm has employees

  
  

• Demonstrate that policies are placed with highly rated insurers and meet specific limit thresholds

During fundraising, these insurance protections are reviewed alongside audited financials, compliance policies, and fund documents.

Sophisticated LPs are no longer assuming sophisticated insurance exists - they are verifying its adequacy during diligence.

4. Different LP Profiles Drive Different Insurance Expectations

(Breakout Insight)

While all LPs are increasingly conscious of risk, the type of LP influences how insurance requirements are handled:

	Institutional LPs	Family Offices / Individual LPs
Risk Expectations	Formalized and rigorous. Insurance is seen as mandatory for fiduciary reasons.	Often more informal, but growing; expect professionalism, especially at larger family offices.
Documentation	Side letters requiring specific insurance coverages, minimum limits, and notifications of material changes.	Rarely formal requirements unless the family office is sophisticated; insurance often assumed rather than verified.
Diligence Approach	Comprehensive risk reviews, including insurance audits by third parties.	More relationship-driven; diligence may focus more on fund strategy unless risk concerns are triggered.
Regulatory Sensitivity	Very high - institutions must justify their risk frameworks to stakeholders.	Lower, unless operating as a quasi-institutional family office managing large AUM.

✅ Key Insight:

• Institutional LPs require documented, audited insurance protections.

  
  

• Family offices and individuals often trust GPs to handle insurance, but the expectation of professionalism remains.

  
  

For venture capital firms, this means that regardless of LP type, demonstrating that proper risk management infrastructure, including insurance, is in place strengthens credibility, protects relationships, and supports smoother fundraising.

5. Side Letters Are Now Formalizing Insurance Obligations

Beyond diligence conversations, insurance requirements are increasingly embedded directly into fund agreements through side letters.

Typical side letter provisions require:

• Maintaining specified D&O and GPL insurance limits

  
  

• Naming the LP as an additional insured where feasible

  
  

• Notifying LPs of any lapses, cancellations, or material policy changes

  
  

• Providing annual proof of insurance upon request

Some LPs even reserve rights to review and approve insurer changes for successor funds.

Venture firms that anticipate these requirements and build insurance into their compliance infrastructure will be far better positioned during fundraising.

6. Insurance Strengthens Fund Positioning in a Competitive Market

Proactively structuring venture capital fund insurance is not just about meeting LP demands.

It’s about strengthening the fund's operational credibility at a time when competition for LP capital is intensifying.

Funds that present:

• Tailored, active insurance coverage,

  
  

• Alignment between risk and operations,

  
  

• Clear, proactive compliance practices,

  
  

signal professionalism, foresight, and fiduciary seriousness - critical factors in winning commitments from sophisticated LPs.

Conclusion

LPs are requiring venture capital firms to maintain dedicated insurance because the risks to fund assets and reputations are both real and rising.

Fund D&O insurance, GPL insurance, and EPL insurance are no longer optional tools - they are baseline expectations for modern venture firms.

Protecting the fund’s leadership, insulating LP capital, and preserving operational integrity are critical to long-term success.  And in today’s environment, demonstrating smart, tailored risk management is not just protective - it is a competitive advantage.

If your fund is raising successor capital, expanding its LP base, or formalizing side letter obligations, now is the time to ensure your insurance structure aligns with today’s LP and regulatory expectations.

We work with venture firms to structure efficient, fund-specific insurance programs that deliver real protection - without disrupting the pace of growth.