Directors & Officers Liability Insurance

I. Introduction 

Directors and officers of organizations face significant and growing liability risks, including regulatory enforcement actions, shareholder lawsuits, and claims from creditors in bankruptcies. Like any risks, these can be offset through insurance. Directors and officers (D&O) liability insurance has become a critical risk-management tool for publicly traded companies, private firms, and even nonprofit organizations, offering a safety net for leaders who may otherwise be personally exposed to significant liabilities.

This report outlines the sources of D&O liability, the basics about D&O liability insurance, the common types of D&O claims, and the related potential D&O liability insurance implications.

D&O insurance protects business leaders from personal financial loss resulting from company-related lawsuits and other claims. (The terms “company” and “organization” are used interchangeably in this publication.) The other side of the same coin is that, without such protection, business leaders would constantly have to grapple with the looming threat of personal liability arising out of each and every business decision made and strategic initiative pursued. This insurance also provides balance sheet protection for companies. D&O policies often cover legal defense costs, settlements, and judgments arising from regulatory noncompliance as well as allegations of mismanagement, breach of fiduciary duty, and negligence. 

Over time, D&O coverage has expanded in response to landmark legal decisions, a growing volume of shareholder lawsuits, and various macroeconomic factors. 

Technological advancements; global geopolitical issues; regulatory changes; an evolving environmental, social, and governance (ESG) landscape; and volatility in the global macroeconomic environment are a few of the areas that are impacting the D&O landscape, including the claim environment, the market for D&O insurance, and the breadth of coverage available.

Understanding D&O Liability 

The potential liabilities that directors and officers face necessitate a robust risk-management approach that includes both indemnification and insurance. D&O indemnification is where a company covers legal expenses and other financial losses that a director or officer might incur when sued (or when defending against other legal matters, such as pre-suit investigations) in the course of his or her board service. It is often accompanied by an agreement to exculpate or hold harmless the director or officer for actions undertaken in the course of their duty. D&O insurance (which may reimburse companies when they indemnify directors and officers) is an insurance policy underwritten by an insurance provider and is typically negotiated and purchased through an insurance broker.

The key to procuring and optimizing D&O insurance is first understanding the types of claims to which directors and officers are exposed. Directors and officers face a variety of potential liabilities arising from their fiduciary duties of care and loyalty and obligations under securities laws. As a general matter, company shareholders are primary plaintiffs in fiduciary duty litigation against directors and officers, while shareholders and government agencies alike are common plaintiffs in litigation involving alleged violations of securities laws.

Duty of Care: The duty of care requires directors and officers to act on an informed basis with reasonable diligence. Claims for breaches of the duty of care are relatively low on the risk spectrum for a few reasons. Some jurisdictions—including Delaware, often considered the business capital of the United States—permit a company to indemnify its directors and officers from monetary liability to the company for breaching the duty of care. Likewise, absent more serious misconduct such as bad faith (which is linked to duty of loyalty), courts are usually highly deferential to directors and officers with respect to claims for alleged breaches of the duty of care.

Duty of Loyalty: The duty of loyalty requires directors' and officers' to act in good faith and in the best interest of the company and its shareholders. Duty of loyalty claims can encompass a wide range of alleged misconduct, such as directors and officers alleged self-dealing, misrepresentations to shareholders, and insider trading, and are high on the risk spectrum. They can and often do include allegations that, in bad faith, directors and officers failed to implement and monitor internal controls to ensure the company’s compliance with laws and regulations. While such “failure to monitor” claims, often referred to as “Caremark” claims,traditionally have been brought only against directors, recent case law affirms that such claims may be brought against officers, as well. Unlike breaches of the duty of care, generally, monetary liability for breaches of the duty of loyalty cannot be waived or indemnified under state law.

Securities Laws: Companies and their directors and officers face potential civil and even criminal liability under various laws, rules, and regulations governing securities, including under state securities laws (called “blue sky” laws) and under the US federal Securities Act of 1933 (’33  Act) and Securities Exchange Act of 1934 (’34 Act). Under securities laws, rules, and regulations, investors and/or government agencies can sue directors and officers for, e.g., alleged material misstatements and omissions arising out of public offerings and merger and acquisition (M&A) transactions, alleged fraudulent representations preceding stock drops, and alleged insider trading.

Securities claim exposure is particularly acute for public companies required by applicable laws, rules, and regulations to routinely make public disclosures about various aspects of their business. Securities regulations invoked in disclosure claims against public company directors are Section 11 of the ‘33 Act (regarding a prospectus in an initial public offer); Section 10(b) and Rule 10b-5 of the ‘34 Act (regarding ongoing disclosures such as annual reports); and Section 14 of the ’34 Act (regarding disclosures in proxy statements). 

Private companies, however, are not immune from securities liability, as exemplified by numerous headline-making civil and criminal lawsuits brought against so-called private company “unicorns” and/or their directors and officers over the past decade, such as the well-publicized litigation involving Theranos.

ll. Nuts & Bolts of D&O Insurance

With the D&O risk landscape in mind, D&O insurance is a foundational component of risk management for any organization with a board or executive leadership team. It protects individuals from personal losses if they are sued as a result of serving as a director or officer and helps cover legal costs and settlements arising from such claims. Understanding the structure of D&O insurance and how it functions in different contexts is critical for boards to confidently navigate the complexities of today’s risk environment. 

Coverage Types

D&O insurance is typically broken into three main insuring agreements, each serving a distinct purpose:

D&O Insurance Coverage Types

• Side A – Individual Coverage (Non-Indemnifiable) 
  This protects individual directors and officers when the company cannot legally or financially indemnify them. This might happen during bankruptcy or if corporate bylaws restrict indemnification. Further, in many jurisdictions, a company is unable to indemnify individual defendants for settlements in derivative lawsuits, when the plaintiff sues directors and officers on behalf of the company. Side A ensures that human beings are not left personally liable for defense costs or damages. Typically, the insurance provider will pay starting at first dollar of loss: no self-insured retention or deductible applies.
• Side B – Individual Coverage (Indemnifiable)/Corporate Reimbursement 
  Side B is designed to reimburse the company when it advances or otherwise pays legal fees or settlements on behalf of its directors and officers. While it does not directly protect individuals (as the company is indemnifying the individual(s)), it helps ensure the company can financially support directors and officers when claims arise. In this case, the insurance provider may pay the claim, albeit once a self-insured retention or deductible has been satisfied. 
• Side C – Entity Coverage 
  Side C, also called "entity coverage," applies when the company itself is named in a claim, or, in the case of a public company, in the more limited scenario when the company itself is named in a securities lawsuit. It protects the corporate balance sheet from claims made directly against the entity. A self-insured retention or deductible likely applies.

In addition to the above three core coverages often contained in one policy, companies may purchase Side A Difference in Conditions (DIC) policies, which offer broader protection. DIC policies are a type of additional Side A policies with fewer exclusions and with "drop-down" features to provide primary coverage if the underlying insurer refuses to pay or becomes insolvent. Another strong feature of these policies is that the coverage provides additional limits dedicated solely to directors and officers in the event of non-indemnifiable loss—meaning that even if underlying carriers in a D&O program have paid out their full limits (e.g., to settle a securities class action), the directors and officers can still look to their dedicated Side A/DIC carriers to pay further financial loss (e.g., in settling a derivative lawsuit that is non-indemnifiable under the applicable law in the case).

Common Exclusions

D&O policies contain standard exclusions to limit insurer exposure and to avoid overlapping coverages with other policies. Exclusions are also designed to reduce the risk of moral hazards among insureds, who might otherwise be motivated to expose themselves intentionally to risk, relying on generous coverage—such as the classic example of business owners who burn their shops down to collect the insurance. Typical exclusions include these:

• Fraud and Criminal Acts Exclusion: Intentional misconduct or criminal behavior is excluded from coverage, although most policies will advance defense costs until there is a finding of such behavior in a final, non-appealable adjudication. Having such language in the policy narrows the circumstances in which the exclusion could apply and increases the likelihood of an out-of-court settlement.
  This language is important for stock-drop cases—an archetypal D&O claim—as many of them turn on whether the defendants acted with the requisite scienter, i.e., fraudulent intent (discussed further below). From the perspective of the insured, making the fraud exclusion contingent on a final, non-appealable adjudication in the underlying proceeding is important, as it means that the exclusion would not apply in the event of, for example, a pre-trial settlement of the stock-drop lawsuit or an adverse adjudication in coverage litigation initiated by the insurer.
• Insured vs. Insured or Entity vs. Insured Exclusion: Claims brought by one insured (e.g., a director) against another (e.g., the company or another director or an executive) are typically excluded to prevent collusive lawsuits, though many policies now include certain carve-backs—i.e., exceptions to the exclusion—including for whistleblower, bankruptcy, or derivative claims, thereby limiting the exclusion’s applicability.
• Bodily Injury/Property Damage: This excludes claims for bodily injury or property damage—as carriers often assert that such coverage should fall under other policies such as those insuring against general liability.
• Prior Notice: Claims based upon facts or circumstances that were the subject of a prior written notice to a prior policy may be excluded from coverage. 

International and Global Considerations

Companies operating in multiple jurisdictions require coverage that addresses international risks and regulatory environments. A global D&O insurance program must address varying legal systems, regulatory requirements, and enforcement environments. Some countries mandate locally admitted coverage, which requires coordination between a global "master" policy and local policies to ensure compliant and consistent protection. Considerations include tax laws, claim handling capabilities, and differences in indemnification rights across borders.

In many jurisdictions, locally admitted D&O coverage may be necessary to ensure that individual directors and officers can be indemnified locally for a covered loss. This is especially true in jurisdictions where non-admitted insurance is prohibited, or D&O coverage is compulsory.

Public, Private, and Nonprofit Coverage 

The D&O landscape differs between private and public companies:

• Public Companies

Entity: As compared to the private company form, entity coverage under a public company policy is limited to coverage for “securities claims” only. Such coverage typically extends to claims commenced by securityholders alleging securities law violations, although an increasing number of policies also cover securities-related investigations (e.g., by the US Securities and Exchange Commission (SEC)). Because public company D&O insurance (unlike private and nonprofit company D&O insurance) covers the entity generally only for securities claims and not all claims, there are fewer exclusions in the public company D&O policy.

Individuals: The “insured person” definition in a public company form does not universally extend to employees of the organization (unless the claim fits the definition of “securities claim” or the employee is a codefendant with other insurers), and is typically limited to past, present, or future directors or officers or functionally equivalent positions. In addition, insurers are also generally receptive to adding specific roles or titles to the definition of “insured person,” such as the leader of a company’s cybersecurity efforts or its chief information security officer (CISO), who may be subject to government enforcement activity (as discussed below).

• Private Companies:

Private companies, including closely held or family-held companies, face claims from a myriad of sources, and includes customers, vendors/suppliers, competitors, and partners/security holders. Private company regulatory risk is also a concern and includes proceedings brought by state attorneys general, by a federal government entity such as the US Department of Justice (DOJ), US Federal Trade Commission (FTC), or in a qui tam lawsuit (i.e., a lawsuit filed by a private citizen on behalf of the government). 

As it relates to individuals, private company D&O policies extend coverage beyond directors and officers to also include past, present, and future executives; employees; members of an advisory board; committee members; in-house general counsel; and spouses of these individuals. The definition of an insured may also be expanded to include independent contractors, board observers, and de facto directors of an organization—that is, anyone who is involved in decisions in an organization, regardless of title.

Coverage under private company D&O policies includes broader coverage for the organization—which, unlike in public company policies, is not limited to securities claims only. Rather, the entity coverage for a private company covers all claims unless excluded. 

With a broader universe of claims to potentially trigger entity coverage, additional exclusions not found in a public company D&O form may exist in a private company form (e.g., breach of contract exclusion, professional services exclusion, antitrust exclusion, public offering/securities claims, etc.). The public offering/securities exclusion applies only to the registered public offering of the organization’s securities and usually provides an exception for the roadshow activities leading up to an initial public offering and for private securities offerings exempt from registration (e.g., typical private financing rounds). Entity investigation (i.e., SEC, DOJ, etc.) coverage may be available on a limited basis.

• Nonprofit Organizations:

While private company D&O policies and nonprofit D&O policies offer similar protections for insured persons and organizations, nonprofit D&O policies typically contain blended coverage with employment practices liability insurance (EPL). It is also more common for the D&O and EPL limits to be shared in the nonprofit context.

In terms of specific policy language, often, the nonprofit policy’s insured persons definition is tailored to address certain roles including trustees and volunteers.  The most notable difference perhaps is that most nonprofit policies expand the wrongful act definition to include publisher wrongful acts (infringement of copyright or trademark or unauthorized use of title, plagiarism or misappropriation of ideas) and personal injury wrongful acts (false arrest, imprisonment, malicious prosecution, libel, slander or defamation of character, wrongful entry or eviction). Additionally, nonprofit policies may include civil fines or penalties relating to defined tax matters and excess benefit penalties in the amount of 10 percent by the Internal Revenue Service against a nonprofit organization for their involvement in the award of an excess benefit. Exclusions found in nonprofit and private company policies are similar, however, the nonprofit policy securities exclusion is typically modified to provide exceptions for debt offerings.

Other Notable Insurance Coverages and Risks

While D&O insurance is a vital risk-mitigation tool for directors to purchase, additional management liability insurance coverages are available—either as standalone policies, or as part of a packaged private company policy. Five common additional coverages are discussed below. 

Five Additional Coverages for Directors and Officers

Employment Practices Liability

Employment claims can adversely impact a business by damaging a firm's reputation, straining relationships with clients, and forcing change in senior management. While a standard D&O policy may cover a portion of these claims, employers may need more coverage. Employment practices liability (EPL) insurance addresses specialized liability risks arising from actual or alleged wrongdoing at work, including, but not limited to

• wrongful termination or constructive discharge;
• sexual and non-sexual harassment;
• discrimination;
• employment-related negligent hiring, supervision, or retention;
• failure to employ/promote/make partner;
• employment-related emotional distress;
• retaliation; and
• invasion or breach of privacy.

Employment-related claimed damages such as front pay, back pay, attorney’s fees, and damages for emotional distress may also be covered by this policy.

While it is possible that employment-related coverage can be available for individuals under a D&O policy, an EPL policy contains robust coverage to mitigate employment-related risks.

Fiduciary Liability

Fiduciary liability insurance is designed to provide coverage for (1) the insured company and its subsidiaries; (2) the employee benefit plans which the company sponsors for its executives and employees, including both qualified and nonqualified retirement and health and welfare plans; and (3) the company’s executives and employees in their capacity as fiduciaries, administrators, or trustees of those employee benefit plans.

Common covered claims under a fiduciary policy may include these:

1. Breaches of fiduciary duty, including violations of fiduciary obligations, responsibilities, or duties under the US Employee Retirement Income Security Act of 1974 (ERISA) and similar laws worldwide
2. Failures in administration—acts, errors, or omissions in the administration of a plan (whether as a fiduciary or in a settlor capacity), such as failures in advising, counseling, or giving notice to executives, employees, participants, and beneficiaries; providing interpretations of plan documents; handling records; and activities affecting enrollment, termination, or cancellation of executives, employees, participants, and beneficiaries under the plan 
3. Settlor capacity—functions carried out in a business-like, rather than a fiduciary, capacity

Plan fiduciaries are facing unprecedented exposure to litigation in a variety of forms, the most notable of which involves claims from plan participants for alleged breaches of duties under ERISA in the management of defined contribution retirement plans. 

Crime and Kidnap, Ransom & Extortion

Crime insurance protects organizations against direct loss from dishonest or fraudulent acts committed by their employees. Crimes commonly experienced by organizations include these:

• Employee theft
• Unauthorized funds transfers
• Receipt of counterfeit money
• On-premises or in-transit theft of money and securities
• Computer-related crime (for money and securities only; crime insurance policies typically exclude coverage for theft of information)
• Forgery of specified documents

In addition to the above exposures, a crime insurance program can offer coverage for third-party computer crime losses and financial losses from social engineering—fraudulent schemes that manipulate employees into transferring funds. Crime programs generally do not cover losses of intangible items such as data, personal or other sensitive information, patents, or trade secrets. 

Kidnap and ransom policies provide expert crisis-management support in the event of a kidnap for ransom, extortion, detention, hijacking, or a hostage crisis. Policies often reimburse ransom payments, medical expenses, and other related costs. Some policies also offer evacuation coverage, threat coverage, and missing persons coverage. 

Cyber Liability

Cyber incidents continue to grow in frequency and severity, especially as new technologies emerge. While D&O and cyber liability policies offer distinct coverages, the claims they cover may be linked. Cyber events, while causing their own direct financial impact (covered under a cyber policy), can lead to downstream D&O liability (covered under a D&O policy).

Cyber liability policies provide first- and third-party coverage for business losses that are tied to a cyber incident. Coverages, which are not available under a D&O policy, include these:

• Costs to engage a breach counsel to help companies understand what regulatory obligations they have and map out initial steps when remediating a cyber event
• Hiring forensic professionals to determine the incident’s magnitude
• Expenses to notify stakeholders that their information has been compromised
• Expenses to repair networks and systems impacted by the incident
• Public relations efforts to manage business reputation
• Other costs to repair a breach, mitigate liability, and return operations to normal
• Defense costs and damages associated with claims or investigations brought by third parties or regulatory bodies
• Credit monitoring costs
• Damages, settlements, and judgments related to certain third-party liability due to a cyber event
• Business interruption loss

As cyber events continue to evolve, directors and officers face an increasingly attentive plaintiffs’ bar challenging management decisions and oversight. Should claims be asserted against directors and officers for wrongful acts relating to mismanagement, improper disclosure, or a breach of fiduciary duty relating to a cyber incident, coverage is more likely to become available under a D&O policy. As history has demonstrated, securities class actions and derivative actions have been filed against directors and officers after cyber events. 

Artificial Intelligence

As AI evolves, directors and officers must maneuver through a complex landscape of regulatory and legal risks. They should look toward a D&O policy, among others, should concerns arise over possible claims of AI mismanagement—including “AI washing” (companies falsely touting their use of AI), regulatory inquiries, or malfeasance with respect to corporate implementation and use of AI.

lll. Common Claims Against Directors and Officers 

In addition to understanding the sources of D&O liability and the basics about D&O liability insurance, directors and officers must also understand the common types of claims that might be asserted against them and the related potential D&O liability insurance implications. There are five common types of claims against directors and officers: (1) stock drop disclosure-related claims, (2) shareholder derivative lawsuits, (3) regulatory claims, (4) M&A and corporate spin-off claims, and (5) bankruptcy claims. These claims, and related D&O insurance implications, are discussed below. 

1. Shareholder Stock-Drop Disclosure Claims

Stock price volatility is often part of the cost of doing business and brings with it the risk that, in the event of a precipitous drop in a company’s stock price, shareholders will bring class action claims against the company and its directors and officers. These claims typically allege that the defendants defrauded investors and artificially inflated the stock’s price at some point (for example, on an earnings call or in a prospectus), and that the stock’s price fell once the supposed “truth” was revealed.

The amounts at stake in stock-drop litigation can be immense. For large market cap companies, a stock drop of even a few percentage points can amount to hundreds of millions or even billions of dollars in alleged damages. The amounts arising from even a relatively small stock drop can be substantial and exacerbated by significant defense costs incurred by counsel in multiple rounds of motions to dismiss, discovery, and other aspects of litigation.

D&O insurance can help companies and their directors and officers to mitigate the risk of such immense potential liability. Indeed, the hallmark of public company D&O insurance policies is that, while the entity is not covered for most claims against it (unlike in private company D&O policies), the public company is covered alongside its directors and officers for these types of securities claims, the defense costs, and other loss, including potentially significant court-awarded plaintiffs’ attorneys’ fees.

2. Shareholder Derivative Claims: When shareholders purport to sue directors and officers on the company’s behalf

Over the past few decades, shareholder derivative litigation has become increasingly common, accompanying parallel disclosure-based securities class actions about 50 percent of the time. Further, derivative suit settlement values have been increasingly large—sometimes hundreds of millions of dollars—with shareholders seeking to hold directors and officers liable for alleged breaches of fiduciary duties (particularly, the duty of loyalty) when a company incurs some type of harm or loss.

The alleged damages in derivative lawsuits can come from multiple, different sources. These include reputational damage from corporate scandals, regulatory fines, and adverse judgments in, or settlements of, other claims, such as consumer and securities class actions.

Shareholder derivative litigation and related shareholder activities surrounding the litigation introduce several important D&O insurance implications. First, D&O insurance policies typically provide defense costs coverage for companies named as nominal parties in derivative lawsuits, which can be material coverage if the company incurs significant expenses in seeking dismissal of the case and/or responding to demands from opposing counsel seeking information via the discovery process. Further, D&O policies often include some amount of coverage for pre-suit investigations undertaken by or on behalf of a board of directors: for example, when shareholders invoke their statutory rights to inspect company books and records, which are often precursors to derivative lawsuits.

While laws vary and companies may be permitted to advance defense costs to directors and officers in derivative litigation, it is common for applicable law to forbid a company from indemnifying directors and officers for the settlement of a derivative action. The rationale is that

• the company in a derivative lawsuit was allegedly harmed by the directors’ and officers’ misconduct,
• the settlement funds are supposed to flow to the company, and
• it would be a circular and perverse result if the company effectively paid that settlement amount back to the directors and officers via indemnification.

The non-indemnifiable nature of these increasingly common and often exorbitant derivative settlements underscores the need to procure robust coverage for non-indemnifiable loss, i.e., “Side A” D&O insurance coverage. Without Side A coverage, directors and officers in many jurisdictions would otherwise have to pay derivative settlements with their own personal assets.

3. Regulatory Investigations and Claims: Investigations and claims brought by government actors

Companies and their directors and officers face significant regulatory risks. While regulatory agencies under different administrations domestically and abroad may be more or less active in seeking financial remedies from companies and/or their directors and officers, insureds should expect regulators to respond to most violations—including violations of new and emerging rules.

Regulators in recent years have demonstrated their commitment to policing misconduct arising from novel technologies. Artificial intelligence (AI) is just one example. 

D&O insurance can help mitigate the impact of a regulatory investigation or enforcement action. D&O policies often cover costs incurred by directors and officers in connection with regulatory investigations and enforcement actions, including coverage for defense costs and potentially even for certain fines and penalties. Although in a public company D&O form, coverage provided to the company for loss incurred in the company’s own right (as opposed to loss the company incurs from indemnifying others) is generally confined to apply only to securities claim-related loss—and not to pre-claim, investigation-related loss—more insurers are becoming receptive to extending coverage for loss incurred in pre-claim, securities-related investigations.

4. M&A and Corporate Spin-Off Claims: Shareholder claims arising from corporate business combinations and divestitures

M&A Claims: When an M&A transaction is announced, particularly one among public companies, the plaintiffs’ bar often challenges the deal on behalf of the target company’s shareholders, seeking to either thwart the deal before it closes or to obtain damages after the deal closes.

Although adverse case law might have eradicated certain permutations of these claims, the majority of public M&A transactions end up in shareholder litigation. Typical shareholder M&A claims include one or more of the following claims:

1. Breach of fiduciary duty claims alleging that the target’s directors led a flawed sale process to sell the company at an inadequate price
2. Disclosure-based claims alleging that the target company and its directors and officers omitted material information concerning the deal
3. Aiding and abetting claims asserting that the buyer “aided and abetted” the target company’s alleged breaches

Target companies and their directors and officers should expect that their D&O policy will provide coverage for these claims and the associated defense costs. Well-crafted policies may even cover the so-called “mootness fees” awarded to plaintiffs’ attorneys when their disclosure claims are mooted by additional disclosures. 

There are two important limitations to M&A-related coverage. 

The first is the so-called “bump-up” exclusion that is virtually ubiquitous in D&O policies. Bump-up exclusions generally provide that, in M&A litigation, the policy will not cover any settlement or judgment that represents an increase to the deal price. Insurers’ position is often that they do not want to fund companies’ ordinary business costs or indemnify for pricing disputes. They also do not want to incentivize the moral hazard of directors and officers seeking to advance an acquisition on unfavorable terms under the assumption that insurance would fund any pricing shortfall. To mitigate the impact of this narrow exclusion, insureds should work with a sophisticated broker to limit the exclusion’s application, especially if the amounts at issue are non-indemnifiable.

The second limitation to M&A-related coverage is that, depending on the policy’s wording, the buyer may not have coverage in the event it is sued by the target company’s shareholders. And although some insurers might agree by endorsement to cover the buyer’s defense costs in defending against an aiding and abetting claim, insurers generally will not cover the buyer for other aiding and abetting-related loss, such as an adverse judgment.

There are other important D&O insurance considerations tied to M&A transactions, separate and apart from the types of “loss” that might be covered or excluded in M&A litigation. An example is that D&O policies usually cover insureds for wrongful acts before a change of control, and not for wrongful acts occurring after the change of control. As a result, target company insureds should ensure that the go-forward insurance program of the acquiror will provide adequate coverage on a prospective basis after closing. Equally important, target company insureds usually procure a so-called D&O “tail” (or “runoff”) program to extend, often for six years, the post-closing period in which insureds can report claims involving pre-M&A wrongful acts. To avoid coverage gaps, insureds should seek to maximize tail policy coverage and minimize or eliminate coverage exclusions for “straddle” claims, i.e., claims involving a wrongful act or related wrongful acts that began before closing but continued after closing.

Spin-Off Claims: At times, a parent company, particularly a public one, might decide to separate—or “spin off”—part of its business into a new, independent company (SpinCo). This is usually done by distributing shares of the new company to the parent’s existing shareholders. Often, spin-offs are followed by litigation against the parent and its directors and officers.

Much like M&A claims, spin-off claims often come in two key variations. First, parent company shareholders may sue the parent’s board of directors for approving the spin-off in violation of their fiduciary duties, because, for example, the divestiture harmed the company while benefitting directors who stood to gain from new roles at the new company that was spun off. Second, parent company shareholders may sue the parent and its directors and officers for alleged violations of Section 10(b) and Rule 10b-5 of the ‘34 Act based on allegedly fraudulent statements concerning the spin-off.

The D&O considerations relevant to spin-offs track many of the D&O considerations relevant to M&A transactions. For example, although somewhat rare, a spin-off might constitute a change of control for the parent company, meaning that the parent’s existing D&O program might not cover post-spin activities. Prudence thus dictates that the parent and its directors and officers consider this issue and determine how to preserve continuity of coverage.

As for covering the acts of SpinCo and its directors and officers pre-dating the spin, coverage is generally addressed in one of two ways. First, the parent’s D&O policy might provide coverage for acts of the parent’s former subsidiaries and their respective directors and officers undertaken while such former subsidiaries were under the parent’s control. The parties might opt to simply keep the parent’s former subsidiary coverage intact, and the SpinCo could then obtain a D&O program effective as of the spin to cover post-spin acts on a go-forward basis.

Second, the parent could extend its existing D&O policy to cover the pre-spin acts of the parent and SpinCo insureds, with the parent and SpinCo both obtaining their own respective go-forward programs covering their own respective post-spin acts. 

The parent might prefer this second option, called a runoff, so that it can have coverage for pre-spin activities, along with a new post-spin program that is not negatively impacted (e.g., rendered more expensive) by the overhang of pre-spin liabilities. And, as discussed earlier with respect to M&A, careful attention should be given to “straddle” claims, regardless of the option selected, to avoid coverage gaps.

5. Bankruptcy Claims: Claims brought when the company has filed for bankruptcy

Economic challenges can stress organizations’ balance sheets, which are key to its solvency. Much like the risk of derivative lawsuits discussed above, bankruptcy risk underscores the importance of dedicated Side A insurance. Simply put, an insolvent company in bankruptcy is unable to indemnify its directors and officers. In these cases, directors and officers thus will rely on Side A coverage to respond in the event that they are sued by, for example, bankruptcy trustees, shareholders, and creditors.

To maximize Side A recovery in the event of a corporate bankruptcy, insureds should pay close attention to a few key D&O policy provisions. These include the policy’s bankruptcy-specific provisions, which often require the parties to waive or seek relief from the automatic stay (freezing) of the debtor entity’s assets that triggers upon the debtor’s bankruptcy filing. Such provisions also often include an affirmative statement that the policy is intended to benefit directors and officers. These types of provisions may be helpful for directors and officers seeking to access the Side A component of a bankrupt company’s D&O program, notwithstanding the automatic stay.

Equally important is the order of payments provision, in which many policies will expressly require that Side A loss be paid before other loss, with some going as far as requiring that Side A loss involving pre-bankruptcy acts be paid before Side A loss involving post-bankruptcy acts. As a corollary, insureds should ensure that the mere initiation of bankruptcy proceedings does not cause the policy to go into runoff and thereby eliminate coverage for post-bankruptcy filing acts. And, to avoid unintended coverage limitations, insureds should make sure that the policy treats the company as such, even when it technically becomes a debtor in possession under applicable bankruptcy law. 

D&O policies can address bankruptcy-related issues in other important ways as well. At times, they might affirmatively cover directors and officers who are subjected to pre-claim inquiries by bankruptcy constituencies such as bankruptcy trustees (who should be excluded from the definition of “Insured”/ “Insured Person,” lest they potentially seek to tap into and deplete the policy’s proceeds). D&O policies may also specifically cover certain types of loss when the company is insolvent, such as certain corporate taxes. An experienced broker can help navigate the complexities inherent in bankruptcy scenarios and maximize coverage in the D&O policy.

lV. The Role of Governance in Executive and Board of Director Risk

At its core, good governance entails setting up structures and policies that ensure the organization operates ethically, transparently, within market competitive norms, and in accordance with the law. Governance oversight, policies, and programs will be taken into consideration during the D&O underwriting process, at times influencing the premium and scope of coverage. Effective governance not only ensures that risk management strategies are in place but also provides documentation and evidence that can be crucial in defending against claims.

Strong governance mechanisms, such as a well-defined code of conduct, clear committee oversight roles, and robust internal controls, create a framework to help the company navigate potential pitfalls. Additionally, regular risk assessments and benchmarking against current marketplace practices help to identify vulnerabilities and ensure compliance with regulatory (and stakeholder) requirements. Proactive establishment and maintenance of good governance processes can help the company mitigate potential legal challenges and safeguard their leadership from liability exposure.

^©Copyright 2025, National Association of Corporate Directors. All rights reserved.

Except as permitted under the US Copyright Act of 1976, no part of this publication may be reproduced, modified, or distributed in any form or by any means, including, but not limited to, scanning and digitization, without prior written permission from NACD. 

The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. If legal advice or expert assistance is required, the services of a qualified and competent professional should be sought. While care has been taken in the production of this document, neither the National Association of Corporate Directors nor Aon plc warrants, represents or guarantees the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document. This document is for authorized users only and is subject to NACD’s Terms of Use (see https://www.nacdonline.org/about/terms-of-use).

About Aon

Aon plc (NYSE: AON) exists to shape decisions for the better—to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues provide clients in over 120 countries with the clarity and confidence to make better risk and people decisions that help protect and grow their businesses.

Follow Aon on LinkedIn, X, Facebook and Instagram. Stay up –to date by visiting Aon’s newsroom and sign up for news alerts here.