D&O insurance is essentially important to safeguard against liability risks for executives and companies. But numerous stumbling blocks and challenges are lurking relating to D&O insurance - from inconsistent insurance terms and conditions and ambiguities about the scope of insurance benefits to the potential for disputes in the event of a claim and gaps in cover in the event of re-insurance. Without expert advice, the outcry "D&O Insurance - Help!" is often more than justified.
D&O insurance is deemed to be an indispensable instrument in the risk management of modern companies. It protects managing directors, members of management and supervisory boards, and other executives against the financial consequences of any erroneous decisions contrary to duty and organisational deficits.
However, in practice, it turns out: D&O insurance is a complex insurance product that often raises many questions for those involved. Policyholders, intermediaries, injured parties and even insurers are often confronted with a variety of challenging questions.
The insurance terms and conditions of D&O policies are often complicated and hard to understand for laypersons. The benefits vary greatly from one provider to another. In addition to defending against unjustified claims and indemnifying against justified claims for damages, many insurers now offer numerous additional services, such as criminal law protection, continued payment of salary in the event of claims for damages, medical and psychological care, reimbursement of ransoms, PR advice and much more.
Policies also often differ greatly from one another with respect to exclusions. Restrictions on insurance cover are often found not only in the general insurance terms and conditions, but also in the insurance policy or in separately agreed terms and conditions.
Therefore, the scope of cover of D&O insurances is difficult to compare. In any case, a comparison of the sum insured, and the premium alone is not very conclusive.
Claim settlement shows that many policyholders and insured persons do not know how a D&O insurance is designed. They wrongly assume that the injured party can directly contact the D&O insurance company regarding the claim settlement, and, in this respect, no personal liability is threatening. In fact, a D&O policy, however, generally requires such a personal liability claim for the occurrence of an insured event.
In many cases, the existence of such a D&O cover is even the "motivator" for personal liability claims which often renders the insurance purpose absurd. For only in very few cases, D&O insurance provides for a so-called self-insurance which at least allows injured policyholders to make claims directly against the insurer.
The typical benefits of a D&O insurance include on the one hand providing defence cost protection, i.e. covering the legal costs for the defence against unjustified claim, and on the other hand indemnifying against justified claims. Contrary to the widespread view, not every D&O contract also offers criminal law cover, in other words protection against criminal investigation proceedings.
The situation is similar with covering fines and penalties, in particular with antitrust violations. In misjudgement of this, insurers are increasingly confronted with the reporting of claims which are already not covered on the merits according to the wording of the insurance terms and conditions.
Especially in the area of D&O insurance, there are often nasty surprises in the event of a claim.
The parties involved are often not aware of the obligations of a D&O insurance or they are disregarded by ignorance of the legal consequences. It seems to have become common knowledge among claimants that the D&O insurer must be informed immediately of the insured event; in the vast majority of cases, letters concerning liability claims contain such a notice. The legal consequences of a delayed or erroneous damage report, however, still seem to be unknown to the vast majority of claimants. In any case, the damage reports to the insurers are mostly made very late and often only very cryptically.
But also, the violation of pre-contractual obligations may lead to a (total) loss of insurance cover, for instance where incomplete information is provided in the questionnaires or critical facts are not disclosed upon conclusion of the D&O contract.
It is noticeable that such cases are becoming more frequent. The reasons therefor are manifold. Mostly, there is a fear that they will not receive any insurance cover or that they must pay a high premium if all information is provided. Often, the questionnaires are simply not given too much importance and are not completed with the necessary care. In this context, it is overlooked that the information for the insurers is relevant for decision-making and the insurers increasingly react to the violation of pre-contractual notification obligations with challenging the entire policy.
By ignorance of the insurance terms and conditions, the primary obligation to provide coverage from other sources or from the previous insurer is often overlooked. Especially D&O insurances often provide for long subsequent reporting periods which may lead to an obligation to provide coverage of the previous insurer. As a result, the insurer actually responsible is usually informed far too late - in the worst case after expiry of the subsequent reporting period - about the event of a claim.
In the event of a claim, it is also often revealed that the sum insured was set too low. Very often, this sum insured is not sufficient to cover the entire damage. In larger events of a claim with high amounts in dispute or many parties involved, the sum insured is often used up merely by defence costs. When concluding a D&O policy, it must therefore always be ensured that the sum insured is sufficiently high. In this context, the premium should not always be the decisive criterion. Affordable insurance cover can also be achieved by waiving certain - not always necessary - additional benefits or taking out excess insurances.
Incident reports and serial defect clauses also entail potential for disputes - especially also with regard to the often not sufficient sum insured. Through the incident report, an insured event can be drawn into a previous insurance period. Insurance exclusions are also often defined through incident reports.
Serial defect clauses can be used to combine several insured events into one claim and assign them to a specific insurance period which may have implications for the sum insured (still) available or retentions. In practice, disputes regularly arise over the range and scope of such incident reports and serial defect clauses. The legal effectiveness of individual serial defect clauses is also highly controversial.
Frequently, difficulties also arise when changing to a new D&O insurer. The reason for a change is usually striving for a more favourable premium or a better insurance cover. In case of a change, care must always be taken to ensure that the old and new D&O policy harmonise with regard to the insured periods (key word: retroactive cover) and their subsidiarity clauses. Otherwise, a game of ping-pong between the insurers is threatening in the event of a claim.
In the worst case, changing to a new insurer may lead to the fact that no insurance cover exists for certain circumstances due to the resulting gap in cover. With regard to allegedly affordable premiums or better insurance cover, an expert comparison of the respective terms and conditions is therefore always required.
In case of D&O insurances, the demand for advice is high. The numerous insurance products on the market and the often very extensive insurance terms and conditions are mostly very difficult to understand for policyholders. They usually rely on the advice and the recommendation of their advisors and insurance brokers. The situation is similar with the insured persons who rely on their legal advisors in the event of a claim. Brokers and advisors should therefore also always be aware of the numerous pitfalls in processing in order to avoid falling into (their own) liability trap.
Dr Florian Weichselgärtner
This article was first published in the Versicherungsmonitor magazine on 16 June 2025. Here you can find the original article.
