D&O Insurance Exclusions: What’s Not Covered

Your D&O policy pays £250,000 in defence costs over 18 months defending a shareholder claim. Then the insurer declines to pay the settlement. The claim involved allegations that you personally profited from the disputed transaction—triggering the “personal profit” exclusion buried in Section 7.3 of the policy wording.

You paid premiums for years assuming full protection. The exclusion you never read eliminates coverage at the moment you need it most.

D&O insurance exclusions define what’s not covered—and directors routinely discover these gaps when claims arise rather than when policies are arranged. Understanding exclusions before you need to rely on coverage determines whether your D&O protection is meaningful or illusory.

This article explains the critical D&O policy exclusions UK directors face, why each exists, how they’re applied in practice, and what gaps you need to address through policy negotiation or complementary insurance.

The Fraud and Dishonesty Exclusion

Every D&O policy excludes deliberate fraud, dishonesty, and criminal conduct. This is universal and non-negotiable.

Standard wording: “The Insurer shall not be liable for any claim arising from or based upon any dishonest, fraudulent, criminal or malicious act or omission or any wilful violation of any statute, rule or law.”

What this excludes: Directors who knowingly commit fraud, steal from the company, engage in bribery or corruption, deliberately mislead shareholders or regulators, or commit any criminal acts.

Why it exists: Insurance exists to cover accidents and negligence, not deliberate wrongdoing. Covering fraud would create moral hazard and undermine the entire insurance mechanism.

The critical nuance—severability provisions. What if one director commits fraud without other directors’ knowledge? Should innocent directors lose coverage because a colleague engaged in misconduct?

Most D&O policies include “severability” clauses that assess fraud separately for each director. If Director A commits fraud but Directors B and C had no knowledge, B and C remain covered even though A isn’t.

Severability wording example: “The knowledge or conduct of any Insured Person shall not be imputed to any other Insured Person for the purpose of determining the availability of coverage.”

This is critical protection. Ensure your policy has explicit severability provisions—without them, one director’s fraud can eliminate coverage for all directors.

The burden of proof. The insurer must prove fraud to invoke this exclusion. Allegations of fraud aren’t enough—if a claim alleges fraud but you’re ultimately found not guilty or the case settles without fraud admission, coverage typically remains available.

But the investigation and defence costs while fraud allegations are assessed can be substantial. Some policies cover defence costs pending determination of fraud, then seek reimbursement if fraud is proven. Others exclude defence costs entirely once fraud is alleged.

According to the Financial Conduct Authority’s enforcement data, approximately 8% of director liability claims in the UK involve fraud allegations, but only 2% result in proven fraud findings—demonstrating that fraud exclusions are invoked more often than they ultimately apply, creating coverage disputes that directors must navigate even when ultimately vindicated.

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The Prior and Pending Litigation Exclusion

D&O policies exclude claims arising from litigation or circumstances known before the policy inception date.

Standard wording: “The Insurer shall not be liable for any claim arising from, based upon or attributable to any pending or prior litigation as of the Policy Inception Date, or any fact, circumstance or situation which has been the subject of any notice given under any previous insurance policy.”

What this excludes:

• Lawsuits already filed before you bought D&O
• Circumstances you knew about before policy inception that could lead to claims
• Situations you notified to a previous insurer that later develop into formal claims

Why it exists: Insurers price coverage based on unknown future risks. They won’t cover problems you already know about—that’s not insurance, it’s funding known liabilities.

The practical impact for directors. This exclusion creates permanent gaps if you:

• Arrange D&O after disputes emerge
• Switch insurers without properly notifying circumstances to the old insurer
• Let D&O coverage lapse, then rearrange it later

Example scenario: You’re negotiating with a disgruntled shareholder in January. Discussions are tense but no formal claim. You don’t notify your insurer as a “circumstance.” In March, your D&O renews with a new insurer. In June, the shareholder files a lawsuit.

The new insurer may argue this was a “prior circumstance” known before their policy started and decline coverage. Your old insurer’s policy expired, so they won’t cover it either. You have a coverage gap.

The protection mechanism—circumstance notification. Most policies allow you to notify “circumstances” that might give rise to claims even if no formal claim exists. Once notified, any future claim arising from that circumstance is covered under the policy where you notified it—even if the formal claim arrives years later under a different insurer.

If you become aware of potential claims, notify immediately. This preserves coverage and prevents gaps.

What Does D&O Insurance Actually Cover? →

The Bodily Injury and Property Damage Exclusion

D&O policies exclude physical injury and property damage—these are covered under different insurance products.

Standard wording: “The Insurer shall not be liable for any claim arising from, based upon or attributable to bodily injury, sickness, disease or death of any person, or damage to or destruction of any tangible property.”

What this excludes:

• Workplace injuries to employees
• Customer injuries from products
• Property damage from operations
• Environmental damage or pollution

Why it exists: These risks are covered under employers’ liability, public liability, product liability, and environmental liability insurance. D&O covers economic loss and management liability, not physical damage.

Where directors get confused. Sometimes physical injury claims include allegations of director negligence—failing to implement safety procedures, inadequate health and safety governance, or negligent oversight.

Is the director’s alleged failure to oversee safety a D&O claim (management liability) or an excluded bodily injury claim?

Most D&O policies clarify this: They exclude the underlying bodily injury claims but may cover directors’ personal liability for failure of governance or oversight that contributed to injuries. The boundary can be contested.

Practical guidance: If your company operates in sectors with physical injury risk (manufacturing, construction, logistics, healthcare), ensure you have robust employers’ liability and public liability insurance alongside D&O. Don’t assume D&O will respond to injury-related director liability—it usually won’t.

The Professional Services and Operational Errors Exclusion

D&O policies exclude professional negligence in delivering services to clients—that’s covered under professional indemnity or Tech E&O.

Standard wording: “The Insurer shall not be liable for any claim arising from the rendering or failure to render professional services by or on behalf of the Company.”

What this excludes:

• Software bugs causing client losses
• Negligent consulting advice
• Professional errors in architecture, design, or implementation
• Service delivery failures

Why it exists: Professional indemnity (PI) and Technology E&O (Tech E&O) cover operational service delivery. D&O covers management decisions and fiduciary duties.

The boundary directors need to understand. If you’re a founder who’s also operationally involved (CTO writing code, CEO providing strategic consulting to clients), your activities might span both D&O and PI/E&O.

Board decisions about strategy, resource allocation, and governance are D&O. Technical decisions in your operational role delivering services to clients are PI/E&O.

Example scenario: You’re the CTO. You make a technical architecture decision at the board level about the company’s product roadmap (D&O). Separately, you personally deliver consulting services to a major client that prove negligent (PI/E&O).

Ensure you have both D&O and PI/E&O coverage. Don’t assume one policy covers both roles.

The Personal Profit and Conduct Exclusions

D&O policies exclude claims arising from directors personally profiting from wrongdoing or engaging in conduct that benefits them inappropriately.

Standard wording: “The Insurer shall not be liable for any claim arising from any Insured Person gaining any profit, remuneration or advantage to which such Insured Person was not legally entitled.”

What this excludes:

• Directors stealing from the company
• Unauthorized bonuses or remuneration
• Self-dealing transactions benefiting directors
• Taking corporate opportunities for personal benefit

Why it exists: Directors shouldn’t profit from wrongdoing, and insurers won’t subsidize illegal personal gain.

The grey areas that create disputes:

Legitimate compensation vs unauthorized profit. Directors receive salaries, bonuses, and equity. When does legitimate compensation become “profit to which they’re not legally entitled”?

Usually, compensation authorized by the board or shareholders is excluded from this exclusion. But if compensation is challenged (excessive pay, unauthorized bonuses), whether the personal profit exclusion applies depends on the circumstances.

Failed transactions where directors received fees. If directors advised on a transaction that failed, and they received consulting fees, is that “personal profit”? Typically no if the fees were properly authorized, but it can be contested.

The practical protection—clear board authorization. Document all director compensation, fees, and benefits through proper board or shareholder authorization. This creates evidence that any personal profit was legally entitled and shouldn’t trigger exclusions.

The Insured vs Insured Exclusion

Many D&O policies exclude claims by the company against directors or claims between directors.

Standard wording: “The Insurer shall not be liable for any claim brought by or on behalf of the Company or any Insured Person against any other Insured Person.”

What this excludes:

• Company suing directors for breach of duty
• Directors suing each other
• Derivative actions (shareholders suing on behalf of the company)

Why it exists: Insurers want to avoid collusive claims where insured parties manufacture claims against each other to access policy proceeds. The exclusion prevents gaming the system.

The problem this creates. Derivative actions are legitimate shareholder claims where shareholders sue directors on behalf of the company. These should be covered—they’re genuine third-party claims, not internal disputes.

Many modern D&O policies carve derivative actions out of the insured vs insured exclusion, providing coverage for these claims. Ensure your policy includes this carve-out.

Wording to look for: “The Insured vs Insured exclusion shall not apply to shareholder derivative actions brought on behalf of the Company.”

Without this, legitimate shareholder claims may be excluded.

According to research from the Institute of Directors, approximately 25% of D&O coverage disputes in the UK involve contested application of the insured vs insured exclusion, particularly around derivative actions and circumstances where directors’ and company’s interests diverge—highlighting the importance of clear carve-outs for derivative claims.

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The Regulatory Fines and Penalties Exclusion

Whether D&O covers regulatory fines varies by policy and jurisdiction. This is one of the most important exclusions to understand.

The complexity: In the UK, some regulatory fines are legally insurable while others aren’t. D&O policies vary in how they handle this.

What’s typically excluded:

• Criminal fines
• Punitive damages (though rare in UK law)
• Penalties specifically designated as uninsurable by law

What might be covered (depending on policy):

• Regulatory fines where insurable under law
• Civil penalties
• Defence costs for regulatory investigations (usually covered)
• Compensation orders or remediation costs

Key UK regulatory contexts:

FCA fines. The Financial Conduct Authority can issue personal fines to directors under the Senior Managers and Certification Regime. Whether D&O covers these depends on policy wording and whether the fines are deemed insurable.

ICO penalties. Information Commissioner’s Office can issue fines for data protection breaches. Similar ambiguity—some policies cover, others exclude.

HSE penalties. Health and Safety Executive fines for safety breaches may or may not be covered depending on policy wording.

The critical question to ask your broker: “Does this policy cover regulatory fines and penalties? If so, which ones specifically? What’s the limit for regulatory defence costs?”

Don’t assume coverage exists. Many policies exclude fines entirely or limit them to specific amounts.

The Cyber and Data Breach Exclusion

Most D&O policies exclude cyber incidents, data breaches, and network security failures—these are covered under cyber liability insurance.

Standard wording: “The Insurer shall not be liable for any claim arising from, based upon or attributable to any actual or alleged unauthorised access to, or unauthorised use or disclosure of, confidential or personally identifiable information.”

What this excludes:

• Data breaches and privacy violations
• Ransomware and cyber extortion
• Network security failures
• Loss or theft of personal data

Why it exists: Cyber liability is a separate insurance product with different underwriting, pricing, and coverage mechanisms. D&O insurers don’t want overlap.

The nuance for directors. Directors can face personal liability for cyber incidents if they failed to implement appropriate security governance.

The cyber incident itself is excluded from D&O. But director liability for failure of oversight that contributed to the cyber incident might be covered under D&O.

The boundary is contested and depends on policy wording. Best practice: Carry both D&O and cyber liability insurance to ensure comprehensive coverage.

How to Address D&O Coverage Gaps

Understanding exclusions is step one. Addressing gaps is step two.

Review policy wording carefully. Don’t rely on broker summaries or policy schedules. Read the full exclusions section, definitions, and coverage provisions.

Negotiate exclusion carve-outs. Some exclusions can be narrowed or eliminated through negotiation:

• Ensure severability provisions protect innocent directors
• Add derivative action carve-outs to insured vs insured exclusions
• Clarify regulatory fines coverage
• Negotiate defense costs coverage pending fraud determination

Arrange complementary insurance. For excluded risks, arrange appropriate separate cover:

• Professional Indemnity/Tech E&O for professional services
• Cyber liability for data breaches
• Employment Practices Liability for employment claims (if not included in D&O)
• Crime/Fidelity insurance for employee dishonesty

Maintain continuous coverage. Never let D&O lapse. Gaps create permanent uninsured exposure for acts during the lapsed period.

Notify circumstances promptly. If you become aware of potential claims, notify your insurer immediately. This preserves coverage and prevents prior knowledge exclusions from applying.

The Bottom Line

D&O insurance exclusions define critical boundaries where coverage stops: fraud and dishonesty (but severability should protect innocent directors), prior and pending litigation (arrange cover before problems emerge), bodily injury and property damage (covered under other policies), professional services (covered under PI/E&O not D&O), and personal profit from wrongdoing.

Additional exclusions that create common gaps: insured vs insured (ensure derivative actions are carved out), regulatory fines and penalties (varies by policy and jurisdiction), and cyber incidents (covered under cyber liability).

Understanding what D&O insurance doesn’t cover is as important as understanding what it does cover. Directors who assume full protection without reading exclusions face surprise coverage denials when claims arise.

The practical approach: Read your policy wording, understand exclusions, negotiate carve-outs where possible, arrange complementary insurance for excluded risks, and maintain continuous coverage to prevent gaps.

And remember: exclusions aren’t insurance company tricks—they’re how policies define scope and prevent overlap with other products. But you need to understand them to ensure your director liability risk is actually protected, not just theoretically insured.

External Resources

Financial Conduct Authority (FCA). Search for enforcement data. https://www.fca.org.uk/publications UK financial services regulator, publishes enforcement statistics and regulatory action data.

Institute of Directors (IoD) – D&O Coverage Research. https://www.iod.com/resources/. UK professional body for directors, conducts research on director liability and insurance coverage disputes.

 

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.