What Does D&O Insurance Actually Cover?

Your D&O policy sits in a drawer, unread except for the premium notice each year. Then a shareholder dispute arises. A minority investor claims you breached fiduciary duties by pursuing an acquisition that benefited majority shareholders. They’re suing you personally, seeking £800,000 in damages.

You call your insurance broker: “Does my D&O policy cover this?” The answer depends on the specific policy wording, the nature of the claim, and how the alleged breach occurred.

Understanding what D&O insurance cover actually protects—not just in theory but in practical claims scenarios—determines whether your policy provides meaningful protection or leaves critical gaps when you need it most.

This article explains the core coverage that directors and officers insurance provides, the specific claims it responds to, what protection means in practice, and the boundaries between covered and excluded risks.

The Foundation: What D&O Insurance Cover Protects

D&O insurance protects directors and officers from personal financial liability arising from decisions made in their management capacity. The cover responds when someone alleges that directors committed “wrongful acts” while managing the company.

Wrongful acts typically include:

• Breach of fiduciary duty
• Breach of trust
• Neglect or negligence in management decisions
• Errors or omissions in governance
• Breach of warranty of authority
• Misstatements or misleading statements
• Breach of statutory duties under Companies Act, Insolvency Act, or other legislation

The policy doesn’t assess whether you actually committed these acts—it responds to allegations. Even if you’re ultimately found not liable, D&O insurance cover pays your legal defence costs throughout the process.

What the policy actually pays:

Legal defence costs. Solicitors’ fees, barristers’ fees, expert witness costs, court fees, and investigation expenses. For complex claims, defence costs can reach £100,000-£500,000 or more before resolution.

Settlements. If you agree to settle a claim to avoid trial risk, D&O insurance cover pays the settlement amount (subject to policy limits and exclusions).

Judgements. If a claim proceeds to court and you’re found liable, the policy pays the judgement amount up to the policy limit.

Investigation costs. Regulatory investigations by FCA, ICO, HSE, or other authorities trigger coverage even if no formal charges result. The policy pays for legal representation during investigations.

Crisis management and reputation protection. Some policies include cover for PR consultants and crisis communications following high-profile claims or incidents that threaten director reputation.

According to the Financial Reporting Council’s 2023 governance research, approximately 60% of D&O claims against UK directors involve either breach of fiduciary duty allegations or regulatory compliance investigations, with defence costs averaging £85,000-£150,000 even for claims that don’t proceed to formal litigation—demonstrating that directors and officers insurance coverage is primarily a defence costs mechanism rather than purely a liability transfer.

Breach of Fiduciary Duty Claims

The most common D&O claims arise from allegations that directors breached their fiduciary duties under the Companies Act 2006.

The seven statutory duties directors owe:

Duty to act within powers (s.171). Directors must act in accordance with the company’s constitution and only exercise powers for proper purposes. Breach: Using company assets for personal benefit, acting beyond authority granted by articles of association.

D&O insurance cover responds: If shareholders claim you exceeded your authority in approving a transaction, the policy covers your defence. It pays even if the claim has limited merit—the coverage is triggered by the allegation, not the underlying facts.

Duty to promote the success of the company (s.172). Directors must act in good faith in the way they consider most likely to promote company success for the benefit of members as a whole.

Breach: Making decisions that benefit certain shareholders over others, pursuing strategies that clearly harm the company, prioritizing personal interests over company interests.

D&O insurance cover responds: Common in minority shareholder claims where they allege directors favored majority investors or made decisions benefiting themselves. The policy covers defence costs and potential settlements.

Duty to exercise independent judgement (s.173). Directors must not simply follow others’ instructions or rubber-stamp decisions without proper consideration.

Breach: Investor-appointed directors who vote according to investor instructions without independent assessment, directors who don’t review materials before board votes.

D&O insurance cover responds: If challenged for failing to exercise independent judgement, the policy provides defence. This is particularly relevant for non-executive directors who may be accused of insufficient oversight.

Duty to exercise reasonable care, skill, and diligence (s.174). Directors must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill, and experience of that director.

Breach: Failing to identify obvious risks, not reading board papers, approving transactions without proper due diligence.

D&O insurance cover responds: One of the broadest duties, creating significant potential liability. The policy covers claims alleging negligent oversight, inadequate risk management, or failure to prevent foreseeable losses.

Duty to avoid conflicts of interest (s.175). Directors must avoid situations where personal interests conflict with company interests.

Breach: Competing with the company, taking business opportunities that belong to the company, undisclosed related-party transactions.

D&O insurance cover responds: Covers defence costs when conflict allegations arise, though outcomes depend on whether conflicts were properly disclosed and managed. Deliberate concealment may trigger exclusions.

Duty not to accept benefits from third parties (s.176). Directors mustn’t accept benefits that might create conflicts or compromise independence.

Breach: Taking bribes, kickbacks, or inappropriate gifts from suppliers or customers.

D&O insurance cover responds: Defence costs are covered, but if deliberate wrongdoing is proven, the fraud exclusion may apply and the insurer won’t pay settlements or judgements.

Duty to declare interests in transactions (s.177). Directors must disclose any direct or indirect interest in proposed transactions with the company.

Breach: Failing to declare interests before board votes, undisclosed related-party transactions.

D&O insurance cover responds: Covers defence against allegations of undisclosed conflicts, though if failure to disclose was deliberate, coverage may be contested.

Wrongful Trading and Insolvency Claims

When companies enter insolvency, liquidators or administrators often pursue directors for wrongful trading under the Insolvency Act 1986, s.214.

The wrongful trading test: If directors knew or should have concluded that the company couldn’t avoid insolvent liquidation, and they continued trading, they’re personally liable for company debts incurred after that point.

Why this matters for D&O insurance cover: Wrongful trading creates personal director liability for company debts—potentially hundreds of thousands or millions depending on how long trading continued. This is one of the most material director liability exposures.

How D&O responds: Side A coverage (non-indemnifiable loss) protects directors personally when the company is insolvent and can’t indemnify them. The policy pays defence costs and may cover settlements or judgements.

The complexity: Some D&O policies exclude or limit cover for “trading losses” or claims arising from insolvent companies. Others provide full Side A coverage regardless of insolvency status.

This is critical policy wording to review: Does your Side A coverage remain available even if the company is insolvent? Can the insurer reduce cover or apply special terms if wrongful trading claims arise?

Best practice: Ensure your policy explicitly states that Side A coverage is independent of company solvency and available to directors even in insolvency proceedings.

Related insolvency claims D&O covers:

• Fraudulent trading (s.213) – though deliberate fraud may trigger exclusions
• Misfeasance claims (breach of duty during insolvency)
• Preferences or transactions at undervalue benefiting directors
• Failure to cooperate with liquidators or administrators

According to research from the Insolvency Service, wrongful trading claims are pursued in approximately 15% of UK company insolvencies where directors are perceived to have continued trading inappropriately, with average claims ranging from £150,000 to £800,000—making this one of the most financially material director liability exposures that UK D&O insurance protects against.

Regulatory Investigations and Enforcement Actions

Directors face increasing personal liability from regulatory bodies, and D&O insurance cover responds to these investigations and enforcement actions.

Financial Conduct Authority (FCA) enforcement. For regulated firms, the Senior Managers and Certification Regime (SM&CR) makes senior individuals personally accountable for regulatory compliance in their areas.

What D&O insurance cover protects: Defence costs for FCA investigations, legal representation during enforcement proceedings, costs of responding to regulatory information requests, and in some cases regulatory fines (where legally permissible).

Information Commissioner’s Office (ICO) enforcement. Under UK GDPR, the ICO can pursue directors personally for serious data protection breaches, not just companies.

What D&O insurance cover protects: Investigation defence costs, legal representation during ICO proceedings, costs of remediation advice, and potentially personal fines issued to directors (policy wording varies on whether fines are covered).

Health and Safety Executive (HSE) prosecution. Directors can face personal prosecution for corporate manslaughter, gross negligence, or health and safety breaches under the Health and Safety at Work Act.

What D&O insurance cover protects: Criminal defence costs (usually under a separate employment practices or crime extension), legal representation during HSE investigations, and costs of expert witnesses.

Companies House and HMRC enforcement. Failure to file accounts, tax evasion allegations, or phoenix company investigations can result in personal director penalties.

What D&O insurance cover protects: Defence costs for investigations and enforcement proceedings. Actual fines or penalties may be excluded depending on policy wording and whether they’re legally insurable.

Competition and Markets Authority (CMA) investigations. Directors of companies under competition investigation face personal liability if found to have authorized anti-competitive conduct.

What D&O insurance cover protects: Investigation defence costs, legal representation, and potentially penalties (though competition fines are often excluded or limited).

The critical distinction: D&O insurance primarily covers defence costs for regulatory matters. Whether it covers actual fines, penalties, or sanctions depends on:

• Policy wording (some explicitly cover, others exclude)
• Whether fines are legally insurable in the jurisdiction
• Whether the conduct was deliberate or negligent

Always review the regulatory defence costs provisions and penalties clauses in your D&O policy wording.

Shareholder Litigation and Derivative Claims

Shareholder claims against directors are a core coverage area for D&O insurance.

Derivative actions under Companies Act s.260-264. Shareholders can bring claims on behalf of the company against directors for breach of duty. These are relatively rare but increasing, particularly in companies with complex shareholder structures.

What D&O insurance cover protects: Directors’ personal defence costs, settlements if directors agree to resolve claims, judgements if claims succeed.

Unfair prejudice claims under Companies Act s.994. Minority shareholders can claim directors conducted company affairs in a manner unfairly prejudicial to minority interests.

What D&O insurance cover protects: Defence costs, potential buyout costs if settlement involves purchasing minority shares, legal fees for valuation disputes.

Class actions and group litigation. Multiple shareholders bringing coordinated claims against directors for mismanagement, misrepresentation, or breach of duty.

What D&O insurance cover protects: All directors’ defence costs (even if some directors are more culpable than others due to severability provisions), settlement amounts, and judgements.

Shareholder agreement disputes. Claims that directors breached specific provisions in shareholders’ agreements—drag-along rights, tag-along provisions, information rights, pre-emption rights.

What D&O insurance cover protects: Typically yes, if the breach relates to directors’ management of the company. Pure contractual disputes between shareholders (not involving director duties) may not be covered.

The practical dynamic: Shareholder claims often settle because trials are expensive and outcomes uncertain. D&O insurance cover facilitates settlement by providing funds for resolution, avoiding prolonged litigation that damages all parties.

Employment Practices Liability

Most UK D&O policies include employment practices liability coverage protecting directors from employee claims.

Covered employment claims:

• Discrimination (race, sex, age, disability, religion, sexual orientation)
• Harassment and bullying
• Wrongful or constructive dismissal
• Whistleblowing retaliation
• Failure to promote or provide equal opportunities
• Wage and hour violations

What D&O insurance cover protects: Directors’ personal defence costs if named in employment tribunal claims, settlements or awards against directors personally, legal costs for preparation and attendance at tribunals.

Why directors face personal employment liability: Employment law can pierce the corporate veil in certain circumstances. Directors who personally engage in discriminatory conduct or authorize unlawful treatment face personal liability alongside the company.

The policy structure: Employment practices coverage is often an extension or endorsement to the main D&O policy rather than core coverage. Ensure your policy explicitly includes EPLI, or arrange standalone employment practices liability insurance.

Interaction with company indemnity: Companies often indemnify directors for employment claims. D&O Side B coverage reimburses the company when it provides indemnity, protecting the company’s balance sheet.

Securities Claims and IPO Litigation

For companies with public shareholders or preparing for IPO, securities claims become a material exposure.

What constitutes securities claims:

• Misrepresentation in prospectuses or offering documents
• Failure to disclose material information
• False or misleading public statements about financial condition
• Insider trading allegations against directors
• Market manipulation or price-fixing claims

What D&O insurance cover protects: This is where Side C coverage (entity coverage) becomes relevant. Side C covers the company itself, not just directors, for securities claims.

Side A and B still cover directors personally for their individual liability arising from securities claims. Side C adds company protection.

For private companies: Securities claims are rare because you typically don’t have public shareholders. But they can arise if:

• You’ve conducted equity crowdfunding (creating numerous small shareholders)
• You’ve made public statements about the company’s condition (press releases, social media)
• You’re preparing for IPO and make statements that are later challenged

Most private company D&O policies have minimal or no Side C coverage. It becomes essential approaching IPO or for public companies.

Transaction-Related Coverage

D&O insurance cover extends to various transaction-related claims.

M&A warranty claims. When you sell the company, buyers may claim breach of warranties in the sale agreement. If those warranties relate to company management, director conduct, or board decisions, D&O may respond.

Coverage is limited: W&I insurance is more appropriate for transaction warranties. But D&O provides backstop coverage if W&I isn’t available or if claims fall outside W&I scope.

Failed transactions and deal disputes. If a proposed acquisition, merger, or major transaction fails, parties may claim directors negligently evaluated the deal, failed to conduct proper due diligence, or breached duties in transaction negotiations.

What D&O insurance cover protects: Defence costs and potential settlements for claims arising from directors’ transaction decisions.

Post-acquisition disputes. After your company is acquired, claims may arise alleging directors misrepresented the business, failed to disclose liabilities, or breached duties during the sale process.

What D&O insurance cover protects: This is why “run-off coverage” (extended reporting period) is essential when selling companies. Former directors remain exposed to claims from the pre-acquisition period, and run-off coverage extends protection after the policy expires.

What D&O Doesn’t Cover: The Critical Boundaries

Understanding coverage boundaries prevents surprise gaps when claims arise.

Deliberate wrongdoing and fraud. All D&O policies exclude dishonest, fraudulent, or criminal acts. If directors knowingly commit fraud, they’re not covered.

Bodily injury and property damage. D&O is economic loss coverage. Physical injury and property damage are covered under public liability or employers’ liability.

Professional services to clients. D&O covers management decisions and fiduciary duties. Professional negligence in delivering services to clients is covered under professional indemnity or Tech E&O, not D&O.

Prior and pending litigation. Claims arising from circumstances known before the policy inception aren’t covered. This is why timing matters—arrange D&O before disputes arise.

Cyber incidents and data breaches. These are covered under cyber liability insurance, not D&O (though director liability for inadequate cyber governance may be covered).

Pollution and environmental liability. Excluded from D&O and covered under environmental liability insurance.

The Bottom Line

D&O insurance cover protects directors and officers from personal financial liability arising from management decisions, fiduciary duty breaches, regulatory violations, wrongful trading, shareholder disputes, and employment claims.

The core protection is defence costs—even if claims lack merit, legal costs can reach £100,000-£500,000 before resolution. D&O insurance cover provides access to quality legal defence without directors funding it personally.

Beyond defence costs, the policy pays settlements and judgements for covered claims: breach of fiduciary duties under Companies Act, wrongful trading and insolvency claims, regulatory investigations and enforcement actions, shareholder derivative claims and unfair prejudice actions, employment practices claims, and transaction-related disputes.

The critical boundaries: D&O doesn’t cover deliberate fraud, professional negligence to clients (that’s PI/E&O), bodily injury or property damage, cyber incidents, or prior known claims.

The practical value: D&O insurance cover allows directors to make commercially necessary decisions without personal financial fear. It protects personal assets (homes, savings, investments) from being exposed to company liabilities, regulatory penalties, or shareholder disputes.

For founders and directors of scaling companies, understanding what D&O insurance cover actually protects isn’t academic—it’s knowing whether your personal financial security is genuinely protected when governance challenges arise, or whether critical gaps exist that leave you personally exposed despite paying premiums.

Read your policy wording. Understand what’s covered and what isn’t. Ensure Side A coverage is independent of company solvency. Verify regulatory investigation coverage. Confirm employment practices liability is included. And work with brokers who understand directors and officers insurance coverage rather than treating D&O as generic commercial insurance.

External Resources

Financial Reporting Council (FRC). Search for corporate governance research. https://www.frc.org.uk/library. UK corporate governance regulator, publishes authoritative research on board effectiveness and director liability trends.

The Insolvency Service – Wrongful Trading Statistics. https://www.gov.uk/government/organisations/insolvency-service.UK government agency responsible for insolvency administration, publishes data on director conduct investigations and enforcement.

 

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.