What does D&O insurance not cover?

Few things are worse than purchasing an insurance policy, thinking you’re protected, only to realize your situation is not covered. If this happens to you, your insurance provider will probably cite exclusions written into your policy.

A policy exclusion is essentially something that your insurance provider does not cover. It is important to know what is excluded from your insurance policy. This holds especially true for complex coverage like directors and officers (D&O) insurance. 

Wonder what D&O insurance does not cover? You’ve come to the right place. In this article, we’ll discuss several different common and not-so-common D&O policy exclusions, as well as some other insurance policies your business should invest in.

What does D&O insurance not cover?

D&O policies cover a company’s core leadership, protecting them — and their personal assets — from claims that could arise from their decisions and actions while performing their typical duties as company representatives and leaders. This allows executives to do their job without having to worry about personal risks and liability. That said, D&O policies do not cover everything, and there are some crucial exclusions that you should know about.

Additionally, when it comes to D&O insurance, coverage varies widely from policy to policy and insurer to insurer, which is why it’s important to get familiar with the most common types of D&O exclusions and understand how they can affect the coverage provided for your leadership team.

Here are some of the most common things that your D&O insurance will not cover:

• Personal gain exclusions
• Insured vs. insured claims
• Derivative shareholder action carve-back
• Major shareholder exclusion
• Antitrust exclusions
• Prior knowledge claims
• Defamation exclusions
• Criminal acts and misconduct
• Defense cost exclusions

Personal gain

Your D&O policy will not cover a claim if a director or officer of a company directly benefits from the damage caused to the business. For example, if a director engages in insider trading, using confidential company information to profit personally while the company’s stock value declines, the D&O policy will not provide coverage for claims related to that illegal activity. Similarly, if an officer manipulates financial statements to secure a personal bonus or compensation, any resulting claims for financial loss would be excluded from coverage.

Insured vs. insured exclusions

Insurers commonly exclude lawsuits between directors and officers at the same company to avoid collusion and the fallout from corporate infighting. This exclusion means that directors and officers will pay their legal fees out-of-pocket if they sue each other.

While the insured vs. insured exclusion broadly prohibits coverage for an entire category of claims, it often also has exceptions that preserve coverage for specific situations.

The most common exceptions apply to actions brought by bankruptcy trustees, whistleblower suits under the False Claims Act, and claims brought by former directors and officers who haven’t participated on the board for a certain period of time. It’s important to talk to your broker and ensure the policy explicitly lists these exceptions to the exclusion.

Derivative shareholder action carve-back

Board members have a fiduciary duty to act in the company’s and its shareholders’ best interests. If a director or officer breaches this duty and corporate management fails to take corrective action, shareholders can file a shareholder derivative action, suing the director or officer on behalf of the company. These suits are common in D&O claims. Since one insured party is suing another, many D&O policies exclude coverage for these actions. However, companies can often negotiate a carve-back to the exclusion, providing coverage for investigative and legal costs incurred in evaluating the claim.

Major shareholder exclusion

While not found in all policies, some D&O providers include a major shareholder exclusion that excludes coverage for claims brought by shareholders who own a significant portion of the company’s stock, typically around 10% or more. This exclusion prevents conflicts of interest, where major shareholders, who often have insider knowledge and influence over company decisions, might bring legal claims for personal gain. Since these claims can arise from internal disputes or strategic disagreements, some insurers exclude them from coverage to avoid covering high-stakes litigation between the company and its major stakeholders.

Antitrust exclusion

Federal and state governments enact antitrust laws to regulate corporate conduct and promote fair competition. Private companies are currently facing increasingly complex antitrust exposures from federal and state regulators and private plaintiffs.

Most D&O policies will have exclusions prohibiting coverage for any loss (including defense costs) arising from activities that impede competition. This is especially important since these D&O exclusions can often have a broader impact by eliminating coverage for unfair and deceptive trade practice claims as well as general competition law violations. However, it’s possible to negotiate a limited coverage amount for certain aspects of these D&O exclusions or completely remove them from your policy.

Prior knowledge claims exclusions

These exclusions allow insurers to restrict or eliminate coverage for claims or activities known prior to purchasing the policy. One of the most common routine questions insurers will ask in the insurance application is whether you are aware of any circumstances that might lead to a future claim under the policy. If the answer is “yes,” you must provide more details and expand on the circumstances of the potential future claim. This allows the underwriter to determine whether this is a risk that the insurer is willing to cover under the D&O policy.

If a company intentionally omits this information during the application process, the potential claim may lead to a rescission of the policy. Rescission is a practice in which the insurer moves to retroactively cancel the coverage by citing misrepresentation in the initial application. That said, you can negotiate with your insurance provider to eliminate a rescission clause.

In order to get D&O coverage for all current and previous business activities, you should secure “full prior acts,” which will address all management decisions since the company was formed. Any restrictions for prior actions should be limited to a reported claim only.

In addition, you can limit the effect of prior knowledge of events to only those aware of the circumstances. Doing so ensures that “innocent” individuals who had no knowledge of the events do remain protected under the policy.

Defamation exclusions

Company executives are not protected by D&O insurance if they are sued for defamation, slander, or libel. These types of claims are not covered as they are seen as intentional wrongful acts. Since D&O insurance typically excludes coverage for intentional misconduct, any lawsuits related to defamation must be handled through other means, which generally leaves executives personally liable for legal and settlement costs in such cases.

Criminal acts and misconduct exclusions

D&O policies will almost always exclude coverage for losses related to criminal or deliberately fraudulent activities. Additionally, if an insured individual is sued for receiving illegal profits or remuneration to which they were not legally entitled, the policy will not cover them.

However, insurance companies follow the “innocent until proven guilty” principle. So, individuals will generally receive defense costs until a final adjudication or a formal court judgment attests to the action being criminal or fraudulent. 

This means that allegations alone are insufficient to trigger the exclusion. The best-negotiated policies contain “final non-appealable adjudication” wording on this exclusion, which triggers coverage for the defense costs of D&O misconduct claims. In addition, you should ensure that the exclusion contains a provision that allows coverage for “innocent” executives who were not a party to the alleged criminal or fraudulent action.

Defense cost exclusions

A D&O suit commonly includes extensive allegations. Therefore, you cannot be certain that the policy will insure all aspects of the claim. The insurance company is technically only responsible for defending your interest based on the actual coverage the policy affords.

While most D&O policies do not contain specific exclusions, many have limitations that can restrict the defense provisions to only the covered portion of a claim. This can vary from policy to policy. For example, some simply exclude any defense costs reimbursement for the uncovered portion of the claim, while others may proportionately determine an amount between the covered and uncovered parts.

To avoid any confusion or conflicts, your best bet is to obtain a “100% defense cost allocation clause,” which outlines that defense coverage applies as long as a portion of the claim is covered. With this stipulation, all costs will be insured under the policy.

Uncommon D&O exclusions

All of the above situations are typically excluded from D&O coverage. However, there are a few less common things that may not be covered by your policy.

• Commissions exclusions: This exclusion declines coverage for claims arising from payments, commissions, gratuities, or benefits provided to “agents or employees of a foreign government.” This is not a very common exclusion, but it’s worth reading the fine print of your policy to make sure.
• Creditor’s exclusion: The creditor’s exclusion prevents coverage for claims brought by creditors, such as disputes over unpaid debts or bankruptcy proceedings. 
• Failure to maintain insurance (FTMI) exclusion: This exclusion comes into play when a company neglects to maintain necessary insurance coverage. If a policy includes an FTMI exclusion, any claim that arises against executives will not be covered if the company failed to maintain D&O insurance.

D&O exclusions covered by other policies

Some of the most common D&O exclusions pertain to coverage that other policies offer. The intent of D&O insurance is to cover only the risks involving executives in their capacities as a director or officer. Because of this, most policies exclude coverage provided by other policies, such as cyber risk and professional risk. Here are some of the most common exclusions that are covered by other business insurance policies.

Cyber threats

Cybersecurity has become a major focus for many businesses in essentially every industry in recent years. Cyber threats are becoming more elaborate and are causing more damage than ever before. To transfer some of the potential risks of cyberattacks and data breaches, many companies are investing in cyber liability insurance, which protects company assets and covers financial losses following a cyber event. D&O policies do not provide coverage for cyber threats, so it is important to invest in cyber liability coverage to avoid the catastrophic damage a cyber incident can cause.

Personal injury or property damage

Personal injury and property damage claims can arise from accidents or incidents that occur during regular business operations. While D&O insurance doesn’t protect against these risks, you can invest in a business owners policy (BOP). A BOP is a package of coverage that can combine multiple coverages: General liability, commercial property, and business interruption insurance. A BOP is one of the first insurance policies that many businesses purchase as it provides the most essential coverage.

Errors and omissions

Mistakes or oversights in providing professional services can lead to costly lawsuits. This is why professional liability (errors and omissions) insurance is a crucial policy for accountants, law firms, software developers, consultants, and other businesses that provide specialized professional services. Professional liability coverage protects companies against claims of negligence, malpractice, or failure to deliver promised services. Since D&O policies do not cover errors or omissions related to professional services, securing this policy is essential to prevent financial losses from these types of claims and to maintain a strong reputation in your specific industry.

Employment-related claims

Discrimination, harassment, wrongful termination, and other employment-related claims can be disruptive and costly for businesses. Employment Practices Liability Insurance (EPLI) is a policy that protects your company from employment-related lawsuits, covering legal costs, settlements, and judgments arising from workplace disputes. While some D&O policies provide limited coverage for employment claims, most EPLI triggers are not covered, so it is important to invest in EPLI coverage for your business.

The bottom line: What does D&O insurance not cover?

D&O insurance exclusions can vary greatly even within a single provider, and simply paying more for D&O insurance will not always guarantee full protection. When shopping for D&O policies, be sure to review any exclusions carefully. That way, you’ll get a better sense of what these gaps in coverage could mean for your company — as well as any additional coverages you should consider.

Understanding what D&O insurance does not cover allows you to negotiate better policy terms, so if and when a claim happens, you’ll get the largest payout possible from the insurance company.

Want a complete walkthrough of D&O insurance, including claims examples? Check out our extensive guide to D&O Insurance.

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