Protect personal assets, board decisions and deal certainty when investors, regulators or employees bring claims

Directors and Officers (D&O) insurance protects the personal assets of company directors, officers, and the company itself when board decisions, management actions, or governance failures lead to claims from shareholders, investors, employees, regulators, or creditors. The policy covers legal defence costs, settlements, and judgments arising from alleged wrongful acts in managing the company.

Common coverage triggers:

• Shareholder claims alleging breach of fiduciary duty, misrepresentation, or self-dealing
• Investor claims following down rounds, failed exits, or material forecast misses
• Employment practices claims for wrongful termination, discrimination, or harassment
• Regulatory investigations by the FCA, ICO, MHRA, or Companies House
• Breach of warranty claims in M&A transactions not covered by W&I insurance
• Creditor claims during insolvency alleging wrongful trading or preference payments

Why D&O becomes essential:

1. Investor term sheet requirements — According to the British Venture Capital Association, 89% of Series A and later stage term sheets mandate D&O coverage. Typical limits: £2m–£5m for Series A; £5m–£10m for Series B and growth stages; £10m+ for pre-exit companies.
2. Personal liability exposure — UK directors face personal liability for company obligations when they breach fiduciary duties, trade whilst insolvent, or make fraudulent representations. Legal defence costs typically range £150k–£500k before settlement, with employment tribunal claims averaging £75k in defence costs.
3. Deal protection — D&O insurance prevents investor claims from derailing subsequent funding rounds or M&A processes. Acquirers expect clean D&O claims history and adequate run-off cover as closing conditions.
4. Talent retention — Non-executive directors and senior executives increasingly refuse board positions without D&O protection, recognising personal exposure from governance decisions.

Determining adequate limits:

• Pre-seed to seed stage: £1m–£2m (if purchased; many seed companies defer until Series A)
• Series A to B: £2m–£5m aligned to term sheet requirements
• Growth stage to pre-exit: £5m–£10m reflecting enterprise value and transaction preparation
• Selection factors: investor requirements, employee headcount, sector regulatory risk, cross-border operations

Policy structure: Side A, B, and C coverage:

• Side A covers directors personally when the company cannot indemnify (insolvency, statutory prohibition)
• Side B reimburses the company when it indemnifies directors for covered claims
• Side C (Entity Cover) protects the company directly from securities claims

Most startup policies combine all three sides. Side A is the non-negotiable element protecting personal assets when the company collapses or can’t fund defence.

Critical policy features:

• Side A difference in conditions (DIC) providing excess cover when other coverage fails
• Employment practices liability (EPL) covering discrimination, harassment, and wrongful termination claims
• Regulatory investigation costs covered in addition to policy limits
• Advancement of defence costs (pay as incurred, not reimbursement post-settlement)
• Run-off cover (6 years minimum) purchased at exit or acquisition
• Insured vs insured exclusion carve-outs for investor-board disputes

Claims process reality: D&O claims move slowly. From initial shareholder demand letter to settlement takes 18–36 months typically. Defence costs accumulate monthly as solicitors manage disclosure, witness preparation, and settlement negotiations. The insurer advances these costs but requires detailed quarterly reporting on case progression and settlement prospects. Most claims settle without trial, but settlement amounts remain confidential, making benchmarking difficult.

What investors actually review: Investors examine retroactive dates (must cover all historical board decisions), sublimits for EPL and regulatory defence, insured vs insured exclusions (must permit investor-board disputes), and whether prior claims or circumstances have been notified. They expect policies issued by A-rated carriers with strong financial stability.

Employment practices exposure: For companies with 20+ employees, employment-related claims (unfair dismissal, discrimination, harassment) represent the highest frequency D&O exposure. EPL coverage sits within D&O policies but may have sublimits of £1m–£2m separate from main D&O limits.

Bottom line: D&O insurance enables founders to raise growth capital without personal asset exposure, satisfy investor and non-executive director requirements, and manage the governance risks inherent in scaling high-growth businesses across funding rounds and towards exit.

If you’re a founder with a board of directors, external investors holding preference shares, and employees who can bring tribunal claims, you’re operating inside a liability framework where board decisions create personal exposure that survives company failure and can’t be eliminated through careful management alone.

The question isn’t whether founders or boards face legal liability; it’s whether that liability gets funded by your insurer or your personal assets. If you’re a founder-CEO with a mortgage, children, and meaningful equity value in your startup, D&O insurance is the difference between defending an investor claim with £300k of specialist legal advice funded by your insurer, or selling your house to pay solicitors whilst watching your startup fundraising collapse because the claim creates due diligence concerns.

But here’s the founder lens most people miss: D&O insurance doesn’t just protect you from catastrophic personal ruin. It protects your ability to raise capital, recruit experienced non-executives, and execute M&A exits without claims creating deal friction. The value emerges when your Series A term sheet arrives and you discover investors mandate D&O as a closing condition. Or when a highly credentialed board candidate asks “what are the policy limits and who’s the carrier?” before accepting nomination. Or when your acquirer’s legal team requests 6 years of run-off cover as a warranty.

What D&O Insurance Actually Covers

D&O insurance operates across three coverage sides that protect different parties for different types of claims. Understanding these distinctions determines whether your policy responds when claims arrive, or whether you discover coverage gaps during the worst possible moments.

Side A: Personal liability coverage for directors and officers

Side A coverage pays defence costs and settlements when directors or officers are sued personally for wrongful acts in managing the company, and the company cannot or will not indemnify them. This protection applies when:

The company is insolvent and has no assets to fund defence. Side A pays directly for directors defending creditor claims during administration or liquidation, or shareholder claims after the company collapses. This is the most critical coverage element because it protects personal assets when everything else has failed.

Statutory provisions prohibit indemnification. UK company law prevents companies from indemnifying directors for certain acts (fines, penalties, defence costs relating to criminal proceedings resulting in conviction). Side A steps in where indemnification is legally impossible.

The company refuses to indemnify because directors and management are in dispute. If the board fractures and some directors sue others, Side A provides independent coverage for both sides because company indemnification only works when the company and directors have aligned interests.

Side A claims handling reality: insurers pay defence costs directly to solicitors and barristers as invoiced, without requiring reimbursement from the company or directors. This “advancement” structure means you’re not funding defence out of pocket whilst waiting for policy settlement. The insurer places funds in a segregated account, and your solicitor draws against it monthly as costs accrue.

Side B: Company reimbursement coverage

Side B reimburses the company when it lawfully indemnifies directors and officers for defence costs and settlements. Most companies indemnify directors to the maximum extent permitted by law (covering all losses except those UK Companies Act 2006 prohibits). When the company advances defence costs or pays settlements on directors’ behalf, Side B repays the company, preserving cash flow for operations rather than litigation.

In practice, Side B responds to most employment practices claims, regulatory defence costs, and shareholder disputes where the company funds defence because directors are acting within their authority and company interests align with directors’ interests.

The coverage trigger: the company must actually indemnify directors and pay costs first. Side B is a reimbursement mechanism, not a direct payment mechanism. For cash-constrained startups, this creates problems because you need available cash to fund defence before insurance reimburses, potentially 60 to 90 days later.

Side C: Entity coverage for securities claims

Side C (also called “Entity Cover”) extends coverage directly to the company for securities claims, typically defined as claims alleging misrepresentations or omissions in connection with securities purchases or sales. This matters when shareholders sue both the company and directors alleging prospectus misstatements, valuation misrepresentations, or failure to disclose material information.

Without Side C, the company funds its own defence whilst D&O insurance covers directors. With Side C, insurance funds both company and director defence from the same policy limits. For UK private companies, Side C has limited application because securities law claims typically arise in public markets. But as companies approach IPO or accept funding from large institutional investors, Side C relevance increases.

The practical constraint: Side C erodes the same policy limits as Side A and B. If your £5m policy faces a £2m securities claim covered by Side C, only £3m remains for other director claims. Policy limits exhaust across all three sides combined.

When D&O Insurance Becomes Non-Negotiable

D&O shifts from optional to mandatory at specific inflection points in company lifecycle, typically driven by investor requirements, governance complexity, or regulatory exposure rather than sudden changes in actual liability risk.

Series A and institutional investor requirements:

When you accept institutional investment with liquidation preferences, anti-dilution rights, board representation, and protective provisions, you’re creating a capital structure where investor and founder interests can diverge. Down rounds, failed exits, or operational pivots create scenarios where investors claim boards breached fiduciary duties by prioritising common shareholders over preferred shareholders.

According to research by the British Private Equity & Venture Capital Association on UK venture financing terms, 89% of Series A term sheets and 94% of Series B+ term sheets mandate D&O insurance as a closing condition. Typical requirements specify:

Minimum limits matching or exceeding the funding round size. A £3m Series A requires £3m–£5m D&O limits. A £10m Series B requires £10m+ limits. The logic: investors want sufficient coverage to recover losses if boards make decisions favouring founders over investors.

Specific policy features including insured vs insured carve-outs (allowing investor-director disputes), no retention/excess payable for Side A claims, and advancement of defence costs. Investors negotiate these terms to ensure coverage responds to the exact scenarios they’re concerned about.

A-rated insurance carriers with strong financial stability. Investors reject policies from unrated or weakly capitalised insurers because they need confidence the insurer will be solvent 5 to 7 years later when claims potentially arise and close.

The deal reality: negotiating D&O coverage during Series A closing creates unnecessary time pressure and cost inefficiency. Smart founders secure D&O before fundraising begins, allowing investors to review existing policies rather than requiring last-minute placement whilst legal fees burn and closing dates slip.

Non-executive director recruitment:

Experienced operators, subject matter experts, or well-connected advisers with board experience typically refuse non-executive director appointments without adequate D&O coverage. Their calculus: board service provides modest annual fees (£15k–£50k typical for startups) whilst creating unlimited personal liability exposure for company decisions they don’t control day-to-day.

The recruitment consequence without D&O: you’re limited to inexperienced board members willing to accept personal risk, friends and family who trust you personally, or professional directors who demand indemnity agreements so onerous they shift risk entirely to the company.

According to the Institute of Directors’ 2024 guidance on non-executive appointments, experienced directors typically require sight of the D&O policy wording before accepting appointment, specifically reviewing:

Policy limits appropriate to company scale and sector risk. A medtech company preparing for clinical trials or a fintech platform handling regulated financial data represents higher risk than a SaaS analytics tool. Directors expect limits matching the risk profile.

Side A difference in conditions (DIC) providing excess protection if primary Side A coverage exhausts or disputes arise about coverage. DIC sits as a safety net ensuring personal asset protection even if primary Side A coverage proves inadequate.

Run-off coverage provisions specifying the company will purchase extended reporting period (ERP) cover if the policy cancels for any reason. This protects directors from claims arising after policy expiry but relating to acts during their board service.

The practical result: D&O insurance determines board composition quality. Better policies attract better directors. No policy means you’re recruiting from a severely constrained talent pool.

Employment practices liability exposure:

When you employ 20+ people, employment-related claims become your most frequent D&O exposure. Discrimination, harassment, wrongful termination, and whistleblower retaliation claims name directors personally alongside the company, typically seeking compensation for emotional distress, lost earnings, and legal costs.

Employment tribunal statistics from the Ministry of Justice show approximately 15,000 claims per year in the UK, with median awards around £8,000 but upper quartile awards exceeding £30,000. Defence costs routinely reach £50k–£75k even for claims that settle before hearing, reflecting solicitor time preparing witness statements, disclosure, and settlement negotiations.

The exposure multiplier: employment claims arise from individual termination decisions, but systematic practices affecting multiple employees create concurrent claims. If your company conducts a reduction in force affecting 30 people and 5 bring tribunal claims alleging discriminatory selection criteria, you face 5 parallel cases with aggregate defence costs potentially exceeding £250k.

Most D&O policies include Employment Practices Liability (EPL) as a sublimit within the main policy, typically £1m–£2m for EPL claims separate from the £5m–£10m main D&O limit. This sublimit structure prevents employment claims from exhausting coverage needed for investor or creditor claims.

The claims handling reality most founders don’t expect: EPL claims settle. Insurers push hard for settlement in the £15k–£40k range plus defence costs rather than defending to tribunal because trial costs exceed settlement costs. Your insurer will fund defence initially, but within 3 to 6 months they’re negotiating settlement terms and strongly encouraging you to accept. You have input on settlement but not control once the insurer is funding defence.

Regulatory investigation costs:

If you operate in a regulated sector (financial services, healthcare, data processing), regulators including the FCA, MHRA, ICO, or Companies House can launch investigations into board decisions, governance processes, or company disclosures. These investigations require directors to retain solicitors, produce documents, attend interviews, and defend personal actions even when no formal enforcement action results.

The regulatory defence cost reality: a full-scale FCA investigation lasting 12–18 months typically costs £150k–£500k in director legal costs before any penalties or enforcement actions are considered. The ICO’s power to conduct audits and issue information notices creates similar costs for companies processing substantial personal data.

D&O policies cover regulatory investigation costs, but policy structures vary significantly on how this coverage operates:

Some policies cover investigation costs in addition to policy limits, meaning a £200k ICO investigation defence doesn’t reduce the £5m available for other claims. This “in addition to” structure provides the strongest protection.

Other policies cover investigation costs within the main policy limits but in a separate sublimit (e.g., £500k for regulatory defence within a £5m policy). This means investigation costs don’t erode main policy limits but are capped at the sublimit amount.

Budget policies cover investigation costs within the main policy limit with no separate sublimit, meaning a £500k regulatory defence erodes the same £5m pool available for shareholder claims or employment tribunal defence.

The structural question when reviewing policies: do regulatory defence costs sit in addition to limits, within a sublimit, or within the main limit? This distinction matters enormously when facing concurrent regulatory investigation and investor claims.

Decision Framework: Understanding Who Pays What and When

D&O coverage involves complex interactions between company indemnification, personal director liability, and insurance coverage across different sides of the policy. Understanding these interactions prevents nasty surprises when claims arrive.

If a claim alleges:

→ Breach of fiduciary duty benefiting founders over investors Coverage: Side A (personal liability) if company can’t or won’t indemnify; Side B (reimbursement) if company does indemnify Why: This is a classic director liability claim. Coverage depends on whether company indemnification is available and lawful. If the company indemnifies, Side B reimburses. If indemnification fails (insolvency or statutory prohibition), Side A covers personally.

→ Wrongful termination with discrimination allegations Coverage: EPL within Side B (if company indemnifies employee’s claims) or Side A (if directors personally liable) Why: Employment claims typically get indemnified by the company unless directors acted outside authority or contrary to company interests. Side B/EPL reimburses the company for settlements and defence costs.

→ Regulatory investigation for inadequate data protection measures Coverage: Side A or Side B depending on policy wording for regulatory cover Why: Regulatory defence costs often blur between company costs and personal director costs. Better policies cover both under Side B with a separate sublimit, reimbursing the company for funding director legal representation.

→ Investor claim alleging prospectus misrepresentations Coverage: Side C (entity cover) for company liability; Side A or B for director personal liability Why: Securities claims typically name both company and directors. Side C covers company defence, while Side A/B covers directors depending on indemnification arrangements.

→ Creditor claim during insolvency alleging wrongful trading Coverage: Side A (personal liability) only; Side B explicitly excluded for insolvency-related claims Why: Wrongful trading claims arise when directors allow companies to trade whilst insolvent, creating personal liability that cannot be indemnified. Only Side A responds, and only if directors are ultimately found not liable (UK law prevents indemnifying or insuring directors for losses from conduct they knew was wrongful).

→ Breach of warranty in M&A transaction Coverage: Generally excluded from D&O; covered by Warranty & Indemnity (W&I) insurance purchased for the transaction Why: D&O policies exclude claims arising from breach of specific transaction warranties because these are commercial risks best covered by W&I insurance. The boundary blurs when acquirers allege fraudulent misrepresentation going beyond warranty breach.

→ Shareholder derivative action alleging mismanagement Coverage: Side B (reimburses company for funding director defence) or Side A if company refuses to indemnify Why: Derivative actions technically sue directors on behalf of the company for harm to the company. Coverage depends on whether the company supports directors’ defence (Side B) or the claim creates conflicts between company and directors (Side A).

The advancement question: when claims arrive, who pays defence costs immediately, and who reimburses later?

For Side A claims (personal director liability with no indemnification), the insurer pays solicitors directly as invoices arrive. No company involvement, no personal funding required.

For Side B claims (company indemnifying directors), the company funds defence costs upfront, then seeks reimbursement from the insurer. This creates cash flow pressure on startups that may need 60–90 days before insurance reimbursement arrives.

For Side C claims (entity securities liability), the company funds its own defence and claims reimbursement from the policy, subject to policy limits and any retention/excess.

The practical implication: Side A provides the strongest director protection because it removes company cash flow constraints from the funding equation. Directors get defended regardless of company financial position.

Critical Policy Features That Determine Real World Value

The difference between D&O insurance that protects directors during claims and D&O insurance that creates coverage disputes sits in specific policy wordings and structural features that brokers often overlook when prioritising premium cost over coverage quality.

Retroactive dates and prior acts coverage:

Your D&O policy covers claims made during the policy period for wrongful acts occurring after the retroactive date. If your retroactive date is 1 January 2023 and an investor claim arises in May 2025 alleging board decisions in November 2022, you have no coverage because the wrongful act preceded the retroactive date.

The critical mistake happens at renewal or when switching insurers. A new insurer offers a lower premium but with a retroactive date matching the new policy inception date rather than your original policy inception. You’ve just eliminated coverage for all board decisions made before the new policy started, creating a silent coverage gap for any claims arising from historical decisions.

Correct approach: maintain a continuous retroactive date matching when you first formed a board of directors, first appointed directors, or first purchased D&O insurance, whichever is earliest. Never allow a retroactive date to move forward. If a new insurer won’t match your existing retroactive date, they’re not providing equivalent coverage regardless of premium savings.

The investor due diligence question: “What’s your D&O retroactive date?” If your answer is “the current policy inception date” rather than “when we formed our first board,” you’ve just flagged a coverage gap that diligence lawyers will require you to fix before closing.

Insured vs insured exclusions and carve-outs:

D&O policies exclude claims brought by one insured against another insured, preventing directors from using the policy to sue each other or shareholders from using the policy to sue directors. This exclusion prevents collusive claims and moral hazard.

But the exclusion creates problems when legitimate disputes arise. If preferred shareholders elect directors to your board, and those directors subsequently sue founder-directors alleging breach of fiduciary duty, the insured vs insured exclusion could eliminate coverage because both preferred director claimants and founder-director defendants are insureds under the policy.

Investor-friendly policies include carve-outs to the insured vs insured exclusion permitting:

• Claims brought by shareholders holding more than 10% to 15% of voting shares
• Claims brought by shareholder-nominated directors acting on behalf of shareholders
• Employment practices claims brought by employee-shareholders
• Derivative actions brought nominally by the company but actually driven by investors

These carve-outs recognise that venture-backed companies have complex shareholder-director relationships where investor-driven claims represent legitimate coverage scenarios, not collusive claims.

The term sheet negotiation: sophisticated investors require insured vs insured carve-outs as policy conditions. If your existing D&O lacks these carve-outs, investors will require policy amendments at closing, adding time pressure and cost to transaction execution.

Sublimits for EPL, regulatory, and specific claim types:

D&O policies frequently include sublimits restricting coverage for high-frequency claim types. Understanding these sublimits determines whether your policy provides adequate protection across all exposure areas.

Employment practices liability sublimits typically range from £1m to £2m within policies offering £5m to £10m main limits. This sublimit operates as a maximum payment for all EPL claims during the policy period. For companies conducting workforce reductions or operating in employment litigation-intensive sectors, this sublimit can exhaust before main policy limits are ever tested.

Regulatory investigation sublimits operate similarly, capping coverage at £500k to £1m for all regulatory defence costs during the policy period regardless of main policy limits. For regulated financial services or healthcare companies facing concurrent FCA and MHRA investigations, these sublimits exhaust rapidly.

Outside entity sublimits restrict coverage for claims against directors serving on the boards of portfolio companies, joint ventures, or charitable organisations. If your founders serve on third-party boards (common in startup ecosystems), this sublimit determines whether your D&O policy covers their exposure from those roles or whether they’re uninsured.

The policy review question: what sublimits exist, what’s the aggregate exposure in each sublimit category, and are the sublimits adequate for realistic worst-case scenarios? A £10m policy with a £500k regulatory sublimit provides less protection for regulated companies than a £5m policy with a £2m regulatory sublimit in addition to main limits.

Retention and how it applies across coverage sides:

D&O policies include a retention (similar to an excess or deductible) that the company or directors pay before insurance responds. But retention structures vary enormously in who pays, when they pay, and which coverage sides the retention applies to.

Traditional structure: the company pays a retention (£10k–£50k typical for startups) for Side B and Side C claims. Side A claims (personal director liability) have zero retention, meaning directors pay nothing before coverage responds.

This structure makes sense because Side B and C claims involve company indemnification or company liability where the company has resources to pay a retention. Side A claims involve insolvent companies or statutory non-indemnification where directors have no company resources, so retention would fall personally on directors defeating the purpose of insurance.

Budget structure: retention applies to all coverage sides including Side A. This means directors facing personal liability claims during insolvency pay £25k–£50k retention personally before insurance responds. For directors whose personal assets are at stake, this retention structure severely undermines Side A protection value.

The retention question when reviewing policies: does retention apply to Side A claims, or only to Side B and C? Side A retention creates personal out-of-pocket costs when directors can least afford them.

Run-off coverage and change of control provisions:

When your company is acquired, your D&O policy typically cancels because the acquirer’s insurance programme replaces it. But claims arising after acquisition can still relate to board decisions made before acquisition during your management tenure.

Run-off coverage (also called Extended Reporting Period or “tail coverage”) extends the period during which claims can be made for wrongful acts occurring before acquisition, typically 6 years. This protects former directors from claims arising years after their involvement ended.

Standard practice: the company purchases 6-year run-off coverage at acquisition, paying 175% to 300% of annual premium for the extended reporting period. The cost gets negotiated into transaction terms, with acquirers sometimes agreeing to fund run-off as a closing cost.

The critical issue: if run-off coverage isn’t purchased at acquisition, former directors have no coverage for post-acquisition claims relating to their board tenure. Your policy expires, the acquirer’s policy doesn’t cover historical decisions made before they owned the company, and you’re personally exposed.

Investor diligence lawyers check whether D&O policies include change of control provisions requiring the company to purchase run-off, and whether acquisition agreements specify run-off funding. If neither document addresses run-off, investors require amendments ensuring directors get protected post-exit.

Structuring Adequate Coverage for Your Funding Stage

D&O limits need to scale with company valuation, funding round size, and governance complexity. Inadequate limits create investor due diligence issues, whilst excessive limits waste premium budget that could fund product development.

Pre-seed to seed stage (pre-revenue to £1m ARR):

Many companies defer D&O until Series A because:

• Investor term sheets don’t mandate it yet
• Director personal assets remain modest
• Employee headcount stays below 10, limiting EPL exposure
• Premium costs (£3k–£8k annually for £1m–£2m limits) represent meaningful cash burn for pre-revenue companies

If you purchase D&O at seed stage, adequate limits range from £1m to £2m. This covers potential employment claims, regulatory investigations, and provides basic protection if things go wrong. Policies at this stage typically cost £3k–£7k annually with £25k–£50k retentions.

The case for early purchase: establishing a retroactive date covering all historical board decisions prevents coverage gaps later. If you wait until Series A to purchase D&O, your retroactive date will be Series A closing, eliminating coverage for seed stage decisions that could generate claims years later.

Series A (£2m–£5m round):

Investors mandate D&O as a closing condition. Adequate limits match or exceed the round size, typically £3m–£5m. This reflects investor thinking that if board decisions destroy shareholder value equal to the full funding round, insurance should cover investor losses.

Policies at this stage cost £8k–£15k annually with retained structures where Side A has no retention and Side B/C retentions range from £25k to £50k. EPL sublimits of £1m to £2m become standard as employee headcount grows above 20.

Critical features investors review:

• Retroactive date covering all historical decisions
• Insured vs insured carve-outs for investor-board disputes
• A-rated carrier (AM Best A- or better, S&P A- or better)
• Advancement of defence costs
• Regulatory investigation cover in addition to or within generous sublimits

Series B and growth stage (£5m–£20m round):

Limits increase to £5m–£10m reflecting higher valuations, more complex cap tables, and increased regulatory exposure as companies expand internationally or pursue regulatory approvals.

Premium costs range from £15k–£35k annually, with pricing increasingly sensitive to sector risk (fintech and medtech paying 50%–100% more than SaaS tools), headcount growth rates, and international operations.

Additional policy features become relevant:

• Side A Difference in Conditions (DIC) providing backup Side A coverage if primary Side A disputes arise
• Outside entity coverage for directors serving on portfolio company boards
• Cyber and technology E&O specific endorsements addressing director oversight failures relating to cyber security
• Enhanced EPL coverage including wage and hour defence (important for US operations)

Pre-exit and M&A preparation (18–24 months before anticipated exit):

Limits increase to £10m–£20m reflecting enterprise value in the £50m–£200m+ range. Acquirer due diligence requires demonstrable D&O coverage quality and adequate run-off provisions.

The pre-exit timing issue: if your current D&O policy expires 6 months before anticipated acquisition close, you need to ensure the renewal policy includes change of control provisions and competitive run-off pricing. Waiting until closing to negotiate run-off coverage gives your insurer pricing power at the worst possible moment.

Smart structuring: purchase a 6-year run-off option at your final renewal before acquisition, locking in run-off pricing at 175%–250% of annual premium. If the acquisition closes, you exercise the option. If the acquisition delays, you’ve locked in fair pricing rather than facing 300%+ run-off costs negotiated under time pressure during deal closing.

Preparing for the Claims Process

D&O claims move slowly, often taking 18 to 36 months from initial demand letter to settlement or judgment. Understanding the process stages prevents strategic mistakes that undermine coverage or settlement leverage.

Stage 1: Pre-claim or circumstance notification (weeks before formal claim)

Often you’ll become aware of potential claims before formal legal demands arrive. An investor sends an aggressive letter questioning board decisions. An employee lodges a grievance alleging discrimination. A regulator issues an information notice suggesting investigation.

The notification decision: D&O policies require you to notify the insurer of circumstances that might give rise to claims, not just formal claims. Failing to notify circumstances means subsequent claims may fall outside coverage if the insurer argues you knew about the claim potential before the current policy period.

The practical complication: notification is voluntary, but failure to notify creates coverage disputes later. Over-notification irritates insurers and potentially increases premium at renewal. Under-notification creates gaps. The balance requires legal judgment about whether circumstances genuinely might generate claims or whether they’re routine business disputes.

Best practice: when in doubt, notify. Work with solicitors who understand D&O policies to craft circumstance notifications that preserve coverage without making premature admissions. The notification gets recorded, the insurer acknowledges, and if claims follow you’ve established coverage under the current policy.

Stage 2: Formal claim and insurer notification (week 1 to 4 after claim received)

When formal legal demands arrive (employment tribunal claims, shareholder demand letters, regulatory information notices), you must notify your insurer within the time period specified in your policy, typically “as soon as reasonably practicable” which claims handlers interpret as 7 to 14 days maximum.

The notification package should include:

• Formal claim documents or demand letters
• Background information about the claimant and underlying facts
• Any related internal documents, emails, or board minutes
• Details of which directors are named and their involvement
• Your assessment of potential exposure and defence strategy

The insurer responds within 7 to 21 days with coverage position (coverage granted, coverage denied, or coverage reserved pending further investigation) and appoints panel solicitors to defend the claim.

The claims handling surprise most directors don’t expect: the insurer controls the defence once coverage is granted. They select the solicitors from their panel firms, they approve defence strategy, and they make settlement decisions in consultation with you but with final authority resting with the insurer. You’re not hiring your own solicitors and seeking reimbursement; the insurer hires solicitors who represent your interests under their funding and strategic direction.

Stage 3: Defence preparation and disclosure (months 2 to 12)

Your solicitors (funded by the insurer) prepare defence documentation, gather witness evidence, review emails and internal documents through disclosure, and develop legal strategy. For employment tribunal claims, this phase lasts 4 to 8 months. For complex shareholder disputes, 12 to 24 months.

During this phase:

• Defence costs accumulate at £15k–£40k per month for complex claims
• The insurer receives quarterly reports on case status, costs incurred, and settlement prospects
• Settlement discussions may begin through solicitor-to-solicitor correspondence or mediation
• The insurer adjusts case reserves (internal estimates of total claim costs) based on emerging facts

The cost reality that shocks directors: even claims that ultimately settle for modest amounts consume £50k–£150k in defence costs before settlement. The insurer views £75k in defence costs plus £50k settlement as success compared to £200k+ in trial costs plus uncertain judgment amounts.

Stage 4: Settlement negotiation (months 6 to 24)

Most D&O claims settle before trial. Employment claims settle in the £15k–£60k range plus defence costs. Shareholder claims settle anywhere from £100k to millions depending on loss amounts and liability strength. Regulatory investigations settle through agreed actions and penalties rather than monetary settlements.

The insurer drives settlement strategy, but you maintain influence:

• You can refuse settlement if you believe defence is stronger (insurer then decides whether to continue funding defence)
• You participate in mediation and settlement discussions
• The insurer must obtain your consent before settling (but may withdraw funding if you refuse reasonable settlements)

The settlement authority reality: once defence costs reach £100k–£200k, insurers push hard for settlement even if you believe you’d prevail at trial. Their calculation: settlement at £150k total cost beats trial costs of £300k+ with uncertain outcome. You can resist, but the insurer may place a cap on further defence funding, requiring you to fund excess costs personally if you want to continue fighting.

Stage 5: Run-off and legacy claims (years 3 to 8 post-exit)

After company acquisition or wind-down, claims can still emerge relating to historical board decisions during your tenure. Run-off coverage extends the claims-making period for 6 years after the policy expires, protecting directors from these legacy exposures.

The run-off premium gets paid once at acquisition or policy expiry, typically 175%–300% of annual premium for 6 years of extended reporting. This provides ongoing claims-making rights without further premium payments.

The practical consequence: if you’re a founder-director who exits at acquisition and run-off coverage wasn’t purchased, you have no insurance for claims arising 2, 4, or 6 years later relating to your board decisions. The only solution is purchasing individual difference in conditions (DIC) coverage at personal expense, typically costing £5k–£15k annually for £1m–£2m coverage.

Reference Reading

Financial Conduct Authority (FCA) – Director Accountability Research. https://www.fca.org.uk/publications/research/director-accountability-sm-cr. UK financial services regulator, publishes research on director accountability and governance.

Institute of Directors (IoD) – D&O Claims Research. https://www.iod.com/news-and-insights/. UK professional body for directors, conducts research on director liability and governance practices.

 

Simplify Stream provides educational content about business insurance for UK companies, especially those with high growth business models that require specialist insurance market knowledge. We don't sell policies or provide regulated advice, just clear explanations from people who've worked on the underwriting and broking side.