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Directors' & Officers' Liability Insurance Explained
Simon Taylor, Insurance Expert

Directors' and Officers' Liability Insurance

Expert Business Guide

INSURANCE
10th May 2025

 

Key takeaways

  • Directors can be held personally liable, meaning their own assets are at risk for the decisions they make on behalf of incorporated entities
  • The cover provides financial protection for individuals against civil, regulatory, and criminal proceedings
  • Directors' and officers' cover is an important risk management tool to protect the interests of board members
  • Management Liability Insurance is the UK product that provides Directors & Officers Liability Insurance, alongside Corporate Legal Liability Insurance, and Employment Practices Liability Insurance

What is directors & officers liability insurance?

Directors and officers insurance (otherwise known as D&O Liability Insurance) provides financial protection for individuals against civil, criminal and regulatory proceedings, while acting in a managerial capacity on behalf of the company.

The insurance cover will pay legal defence costs incurred in defending allegations and damages arising from any judgment, award or settlement. 

Do we need directors' & officers liability insurance?

Anyone that’s makes decisions on behalf of an incorporated company and partnership can be held personally liable. The law generally seeks to protect individuals from personal liability where they have acted in good faith and complied with their responsibilities. However, any director, partner or employee acting in a managerial capacity on behalf of the company that fails to meet their legal or regulatory obligations can be held accountable.

There are a number of statute laws and regulations that directors need to adhere. The Companies Act 2006 is an important piece of legislation that all directors should be aware of given it details their responsibilities towards corporate governance. Therefore, small businesses as well as large corporations listed on a stockmarket should arrange cover to ensure they have access to a legal defence and financial support should allegations be made against the company directors.

D&O cover is a risk management solution designed to protect those individuals in leadership roles should an allegation of a wrongdoing occur. Allegations made against individual directors can cause significant distress, as well as being very costly and time consuming. Insurance protection can provide you access to a timely legal defence and provide peace of mind you can defend yourself against civil, regulatory, or criminal allegations.

How much does D&O liability insurance cost?

Company director's personal liability

When establishing a company you create a seperate legal entity, this separation protects for the directors of a personal liability that can arise from the company's debts and obligations.

However, there are a number of statuate laws, regulation and case law that means company directors have a personal liability when undertaking their duties. Without D&O cover, directors' and officers' could be liable for damages, legal fees, and settlements, putting their own assets at risk.

Example D&O risks: 

Claims made against directors can originate from a number of different sources, for example: 

•  regulators
•  shareholders
•  customers
•  competitors
•  suppliers
•  employees
•  administrators
 

A D&O policy can provide cover for civil allegations, regulatory investigations, and criminal allegations

The definition of a Wrongful Act - that trigger cover under a policy is very broad. In most cases if the individual was acting on behalf of the company and a third-party has suffered a loss or a regulator is investigating a wrongdoing, the circumstance in most cases will be covered unless they are specifically excluded.
 

Example D&O risks:

  • Breach of fiduciary duty - board members have a fiduciary duty to the stakeholders and if these interests aren't protected, they can find themselves liable.
  • Breach of trust - a liability can occur for breaching a third parties’ trust, when you are in a position of authority and have failed to act responsibly.
  • Neglect - all board members can be held accountable for actions of another director or officer due to a lack of oversight, even though they had no knowledge.
  • Employment allegations - directors can be held personally liable for discrimination, harassment, invasion of privacy, negligent evaluation, refusal to promote, sexual harassment, unfair dismissal, wrongful demotion, wrongful dismissal, and wrongful infliction of emotional distress.

Claim examples

Directors and officers insurance claims can arise from a variety of circumstances, including but not limited to:

•  Breach of law
•  Breach of regulation
•  Insolvency claims
•  Creditor claims
•  Employment claims (against D&O's)
•  Decisions exceeding authority
•  Competitor claims
•  Inaccurate or inadequate disclosure
•  Shareholder claims
•  Reporting errors
•  Mergers and acquisitions
•  Claims made on behalf of the company

Management liability for private companies

D&O insurance is typically provided to UK private companies under a product called management liability insurance. Cover is also commonly provided to the legal entity under corporate legal liability insurance, with the option to also include employment practices liability.

•  Corporate legal liability provides protection to the company from civil litigation and regulatory investigations. Corporate legal liability is similar to D&O, but will defend compensation claims made against the entity as opposed to individuals. Breach of contract, copyright infringement and corporate manslaughter can be covered. 

•  Employment practices liability provides protection to the company from claims arising from a range of employment disputes (i.e. unfair dismissal, harassment and discrimination). Dealing with employees can be highly emotive and if internal procedures aren't followed, you can leave yourself open to successful employment tribunal claims. The EPL section can protect the company by defending allegations, paying damages and settlements for an alleged wrongdoing.

Who is covered under a D&O policy?

Typically, all directors' and officers' of a company and its subsidiaries are covered under a D&O policy, whether current, future and past. The definition of Insured Person will also typically extend to employees whilst acting in a managerial capacity.

The insurance cover will also extend to any lawful spouse, estate, heirs, if named as co-defendant in circumstances where allegations are made against a person who is deceased, insolvent, or bankrupt.

How is fraudulent, dishonest or criminal conduct dealt with?

It is important to note cover for fraudulent, dishonest or criminal conduct, in addition to gaining an illegal profit, is not insurable. Typically, an insurer will require a final adjudication from a formal authority (i.e. a court of law) or admission of guilt from the offending individual.

As a general rule, the insurer will defend the individual on the basis they are innocent until proven guilty. Innocent directors will remain fully covered if they are co-defendants, even if the acts of their colleagues were fraudulent or dishonest.

What is excluded under a D&O policy?

Policy wordings are designed to provide cover for a wide range of wrongful acts that would trigger a claim, therefore insurers will use exclusions to restrict what will not be covered under the policy. Read more about D&O exclusions.

How to structure a D&O policy?

D&O insurance policies should always be in the name the parent entity as the policyholder. Subsidiary companies (if applicable) and their boards of directors will then automatically be covered by the standard definition of Subsidiary within the policy wording.

Cover for non-UK parent companies can be arranged in Lloyds of London, however there maybe restrictions depending upon where your parent company is domiciled. For further information, please contact us to discuss.

How does D&O cover work?

A company may have an indemnification agreement in place, however the vast majority do not. In which the company agrees to indemnify its directors in respect of legal proceedings. However, even if there is an agreement in place, there will be circumstances which the company will be unable (i.e. insolvency), permitted (i.e. restricted by law), or unwilling to meet its obligations (i.e. company vs executive disputes).

Polices have have therefore been designed to respond to the different circumstances, offering to either pay on behalf of:

• the individual (Side A); or 
• reimburse the company after it has indemnified the individual (Side B). 

D&O can be complicated to understand, therefore it's important to work with a knowledgeable broker to guide you where necessary. It is worth noting that most policies will not maintain a deductible for Side A, however, they will maintain a deductible for Side B.

Do startups need D&O cover?

Founders of startups will often take risks in order for to be successful, unfortunately this can lead to disputes with regulators, shareholders, customers, competitors, employees, and suppliers. If you raise money, it can be a common request by investors to buy the cover. Shareholders may later seek to claim against the policy for several reasons, including misrepresentation, breaches of fiduciary duty, breaches of law, or maleficence.

If you have not submitted a monthly cash flow forecast for the first 12 months and a pitch deck or business plan, insurers will typically apply an insolvency exclusion. Which removes a significant amount of cover for stakeholder claims if the business has failed.

What myths are there about D&O cover?

We have seen many objections over the years for the need to arrange D&O insurance, below we provide some examples

1) The company is a separate legal entity, therefore any awards made by the courts are limited to the company share capital.

A number of statutes exist to make directors responsible for their actions on behalf of corporate bodies. While the company has limited liability, courts have the power to make awards against your personal assets with unlimited liability.

2) As directors we hold the majority of shares therefore the duties owed to the company are a legal technicality.

The shareholders may decide not to hold the directors to account for their actions, however employees, customers, regulators and third parties potentially can. Alternatively, if the company was entering administration, or the company was sold to a third party, they could seek to enforce the legal rights of the corporate entity.

3) As a director or officer I can’t be held accountable for the actions of others if I don’t have any knowledge of the wrongdoing.

A number of statutes exist to make directors responsible, negligent failure to prevent or neglect can mean there is no requirement for knowledge, merely the failure for the individual to act.

4) The company will protect me against any legal disputes or regulatory investigations whilst acting as a director.

You may have an indemnification agreement in place (most companies don’t), however have you considered what would happen if 1) the company was unable to fund your defence; 2) your interests and the company’s interests were not aligned; or 3) you left the company and were held accountable for historic actions?

5) Only public companies purchase D&O insurance because they’re exposed to litigation and regulatory investigations.

The largest single cause of D&O insurance claims is insolvency therefore SMEs that are financially unstable have a higher than average exposure to claims. Whereas a regulators decision to undertake an investigation or issue a fine will be governed by your compliance no matter your size.

6) Health and safety matters are the responsibility of the company rather than of individual directors or managers.

If a company commits a health and safety offence with the knowledge of a person with significant control, or the offence is attributable to their neglect, they can be prosecuted individually under the Health and Safety at Work Act.

What other insurance covers should be combined with D&O?

There are a variety of covers that can be combined with directors & officers liability insurance, below we've highlighted some key covers:

•  Cyber Insurance

•  Professional Indemnity Insurance

•  Crime Insurance

•  Public Liability Insurance

FAQs

Do we need cover if run a charity or non-profit organisation?

If you operate a non-profit organisation or charity, please refer to trustee indemnity. The cover is similar, however some insured person definitions maybe different to ensure that trustees and the appropriate persons which manage the non-profit are protected.

We might consider listing on an exchange in the future, does that matter?

If you are considering issuing a public prospectus to raise capital you will need to separately consider IPO insurance. Talk to one of our D&O experts to find out more.

What is D&O run-off cover?

Run-off cover, alternatively known as an extended reporting period, provides an period of time to notify claims. It is worth considering that your duties as a director will continue to exist even after you ceased to act in the position, therefore in certain circumstances, such as a 'change in control', it is worth considering this option.

What is the Financial Conduct Authority (FCA)?

 

About the author

Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.

 

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