Key risk trends for Directors and Officers in 2025 and beyond

Despite increasing mass-shareholder claims brought under s.90 and s90A of the Financial Services and Markets Act 2000¹, a revamped Serious Fraud Office  with new leadership and an increased toolkit of powers under the Economic Crime and Corporate Transparency Act 2023 (“ECCTA”), and developing AI-related liability case law in many common law countries such as the UK²; the market remained soft with good availability, with these conditions predicted to continue into early 2025.

But is change on the horizon for the D&O market? Emerging risks such as the increased adoption of AI, ESG litigation, and the new "failure to prevent fraud" corporate offence under ECCTA will be weighing on the mind of organisations reviewing their D&O cover, as well as those looking to purchase cover for the first time. Additionally, many corporate policyholders will also be navigating the complexities of climate-related disclosure obligations and greenwashing risks, which also have the potential to lead to claims against directors. The role of the C-suite in managing cyber risk adds yet a further layer of complexity and exposure. Geopolitical tensions have accelerated the development of a complex web of international sanctions and regulation, non-compliance with which can also lead to significant exposures.

The development of these risks serves as a reminder to corporate policyholders of the importance of robust D&O insurance. This article is the first in a series that will address key trends and issues concerning D&O insurance, provide insights for corporate policyholders about how D&O insurance can help an organisation mitigate the sorts of risks mentioned above, and practical advice on managing your D&O programme. 

In this initial article, we explore the advantages and disadvantages to a director of a company of indemnity versus D&O coverage, laying the groundwork for a deeper understanding of the evolving D&O market and claims landscape.

The Importance of D&O Insurance for Corporate Policyholders

D&O insurance is designed to protect directors and officers from personal financial loss resulting from legal claims brought against them related to their corporate decisions. While some companies may offer an indemnity to their directors, this approach has inherent limitations that corporate policyholders must understand.

Limitations of Company Indemnity

Under section 232 of the Companies Act 2006, there are specific restrictions (which are subject to certain exceptions) on the extent to which a company can indemnify its directors. For example, a company cannot indemnify a director for liability incurred in connection with any "negligence, default, breach of duty or breach of trust in relation to the company". This limitation raises the risk that directors could face claims that are outside scope of the company indemnity and thus expose directors to claims that would need to be met from their personal assets.

Additionally, company indemnities may not be permissible in all jurisdictions. In some regions, local laws may restrict or prohibit indemnification altogether, leaving directors exposed to personal liability. This variability highlights the importance of understanding the legal framework governing company indemnities in the jurisdictions where a company operates.

The Role of D&O Insurance

D&O insurance is a form of liability insurance specifically designed to protect current (and former) company directors and officers against personal liability if they are sued for alleged wrongful acts (or personally involved in a regulatory investigation). It covers the legal costs incurred in defending against such claims, ensuring that individual directors and officers are safeguarded from personal financial loss. The definition of ‘wrongful act’ is usually very wide and so, subject to any policy exclusions, D&O insurance covers directors against offer a broad range of claims. This coverage is particularly valuable in today’s litigious environment, where directors may face allegations of mismanagement, breach of fiduciary duty, or regulatory violations.

A significant advantage of D&O insurance is the provision of Side A coverage, which protects individual directors when the company is unable to indemnify them. This is particularly relevant in situations where the company is facing insolvency or financial distress, as the ability to indemnify may be compromised. Ensuring that there is ‘ground up’ cover for Side A, with no retention applied for individual directors, provides an additional layer of security.

On the other hand, Side B cover offers reimbursement where a company has elected to indemnify a director or officer in respect of a claim made against a director/officer. This provides balance sheet protection for the company. In certain cases, a company may also wish to explore Side C cover, which covers losses suffered as a consequence of securities claims (this is also sometimes called "Entity Cover").

The Scope of D&O Insurance

When renewing or purchasing a D&O insurance policy, it is crucial to thoroughly review the terms, conditions, and exclusions of the policy. Understanding these elements can help ensure that the coverage adequately protects the individual directors and officers against potential liabilities. Here are some tips to consider:

• Read the fine print: examine the policy language to understand what is covered and what is excluded. Look for exclusions related to specific types of claims, such as those arising from fraud, criminal acts, or prior knowledge of wrongful acts. Ensure you are aware of any gaps in coverage.
• Understand the limitations of D&O cover: for example, regulatory fines or criminal penalties will typically not be covered (though a director may benefit from cover for their defence costs before any fine/penalty is levied).
• Assess coverage limits: evaluate whether the coverage limits are sufficient for your organisation’s size and risk profile.
• Consult with experts: engage with insurance brokers or legal advisors who specialise in D&O insurance to gain insights and recommendations tailored to your organisation’s needs.
• Stay informed on regulatory changes: Keep abreast of changes in laws and regulations that may result in new or increased risks for directors and assess the scope of cover for those risks under your D&O policy, particularly in areas like ESG compliance and data protection.

Access to D&O Policies

Generally, directors should have the right to review their company's whole D&O policy to understand its terms, including coverage limits and exclusions, which is essential for adequately assessing their risk exposure. However, there are many circumstances where a director might not have seen the whole policy, for example, if the company has circulated its own summary document, or if the policy is held by a third party such as an insurance broker. In these circumstances, the director may need to request access through the appropriate channels and should make sure they see all relevant documents, including both the policy schedule and the policy wording (Side A, B and/or C as applicable).

If a director realises they haven't seen their organisation’s complete D&O policy, they can take proactive steps to request a copy from their company’s management or legal department. This transparency allows directors to make informed decisions regarding their protection and ensures they are aware of their rights and responsibilities under the policy.

Notification Responsibilities

The responsibility for making notifications regarding potential claims can be a complex issue. Directors should be aware of the notification obligations under the D&O policy, including the requirement to notify the insurer of any potential claims in a timely manner. Often the act of notification will be done by the policyholder (usually the company purchasing the D&O for the benefit of the various directors) but a covered director can usually make an independent notification if necessary.

Cooperating with insurers

Once a claim (or potential claim) has been notified to insurers under a D&O policy, there are usually obligations placed on the insureds to cooperate with insurers and to provide them with information they reasonably request regarding the claim that has been made.  It’s important to be mindful of these obligations and you may want to consider putting in place express confidentiality terms with insurers if the claim is particularly sensitive.

Employment Disputes and Departing Directors

It is essential that ongoing D&O coverage remains in place, particularly for former directors. D&O policies operate on a 'claims made' basis, meaning that they provide coverage only for claims that are made during the policy period, regardless of when the alleged wrongful act occurred.  For that reason D&O policies typically extend cover to former (as well as current) directors and officers.

Next Steps

As we conclude this first article in our series, it is evident that D&O insurance offers valuable protection to corporate directors and operates alongside any corporate indemnities to provide directors with protection against having to fund legal fees or liabilities from their own assets.  In the forthcoming articles of this series, we will explore a range of topics that are critical for policyholders to consider, including recent market developments, emerging trends in claims, and best practices for managing D&O insurance. By staying informed, corporate policyholders can understand the adequacy of protection offered and make informed decisions moving forward.

Authored by Lydia Savill, Sara Bradstock, Matt Steven, and Bethan Savage.