Crowdfunding Fidelity - Is this the 'insurance' we have been waiting for?

So, AIG has come out with a product that is being called Crowdfunding Insurance.  The product is Crowdfunding Fidelity and it is important to remember what Fidelity coverage is and is not.  I've attached a marketing document that explains the product.  (currently limited to Canada and the UK)
 
While there have been some ‘requests’ for this kind of a product, I feel that there is limited value in this approach.  As a fidelity bond, this policy only covers the specific loss of dollars stolen by founders, not anything else and does not actually make the investors whole. A Fidelity Bond is designed to cover theft or embezzlement of money.  A  Fidelity policy does not address mismanagement, negligence, bad decision making, and general incompetence.  While outright fraud is a possibility, my experience suggests that bad timing, bad decision making, and poor management are far more likely to cause the failure of a company than the theft of money.  Remember that poor planning and bad spending habits (i.e. renting way too much space, overbuying inventory, paying your staff excessive salaries, wasting money on ineffective marketing, etc., etc., is NOT THEFT).
 
Further, the Crowdfunding Fidelity product is going to be subject to some kind of deductible.  The deductible may be on a per offering/Issuer basis and that deductible will be borne by the platform that purchased the policy.  The deductible will serve as a significant limitation on making an investor 'whole'.
 
I spoke with AIG leadership on this product more than a year ago and have awaited this product with baited breath.  I have asked for the actual policy forms from AIG so I can review the limitations.  The marketing document says this provides coverage “If Issuers fraudulent use of investment causes business to fail”.  First, I think it will be difficult to prove ‘fraudulent use’ and I think that proving that the fraudulent use caused the ‘failure’ of the company will also be difficult to prove (who has the burden to provide that there were not other causes of the failure?).
 
In short, I think The AIG Crowdfunding Fidelity product is of limited value.  Further, I am concerned that individual investors may have a false sense of security when making their investment because the scope is so narrow.  The Crowdfunding Fidelity product may be more appropriate for something like a GoFundMe campaign but probably not appropriate at all for an equity platform.
 
As a platform, make sure you have a comprehensive Professional Liability product in place to address your potential liability for all of the services that you offer, including but not limited to your diligence process in selecting the offerings on your platform and the communication process related to the offerings themselves.  (other insurance like Cyber and D&O are also important)
 
For those raising money on a platform, they should have a layer of coverage in place to address internal exposures like Employee Theft and basic business insurance coverages.  Companies using a platform to raise equity or debt funding should consider D&O insurance as part of their risk transfer strategy.
 
Insurance does not take the place of quality policies, procedures, and diligence process.  Rather, insurance is there to reduce the financial impact after the sprinklers go off.
 
I suspect that AIG will see limited adoption of this product which will probably discourage others from entering the market right away.  There are a few groups of us that are pushing the insurance marketplace to develop insurance products that adequately address the insurable exposures of this emerging industry.  I think that AIG has missed the mark with this.
 
Upon eventual receipt of the product, I will comment further.  (have another discussion scheduled with AIG leadership soon)
 
Feel free to reach out directly to me to discuss further.  Every platform and insurer needs quality insurance.  This is probably not it.
 
InsureCrowd@gmail.com
www.emergingrisks.net