Common D&O Insurance Mistakes General Counsel Should Avoid

Directors and Officers (D&O) insurance is an important component of corporate governance, designed to protect both the personal assets of directors and officers and the company’s balance sheet. But D&O is not an off-the-shelf product. Policies can vary considerably in their terms, definitions, exclusions, and additional coverages, which makes it especially important to understand what you have—and how it will respond.

Having spent years as a securities litigator before moving into executive risk insurance, I have seen D&O issues from both sides. One of the biggest lessons is not to wait until after a claim to understand your policy. General counsel should help plan D&O coverage, understand how it addresses the organization’s risks and business plans, and maintain an ongoing dialogue with their broker.

Here are some common mistakes to avoid.

Waiting Too Long to Report a Claim

Late notice may be one of the most consequential D&O mistakes because, in many cases, it cannot be undone. D&O policies are written on a claims-made basis, meaning a claim must typically be made and reported within the time the policy prescribes, which may include a limited grace period after expiration. A common misconception is that an insurer can deny coverage only if late notice made it harder to investigate or defend the claim. That is rarely the case.

Problems often arise when a company initially views a matter as manageable. The legal department handles it internally, outside counsel gets involved, or the matter doesn’t initially seem significant enough to warrant an insurance claim. Months later, it escalates into litigation, and only then does someone think about the D&O policy. By that point, it may be too late, and many unreimbursable costs may have already been incurred.

The better approach is to involve your broker early. When a demand, investigation, or other potentially covered matter arises, discuss whether to give notice rather than wait to see how serious it becomes. The same principle applies to settlements: policyholders almost always need to obtain the carrier’s consent before settling a covered matter. The same goes for choosing counsel—carrier consent must always be obtained, and in some cases, the carrier has the right to choose counsel.

Assuming You Know What Investigations Coverage Includes

Regulatory investigations can also be confusing because D&O policies vary widely in what they cover. Depending on the policy language and circumstances, coverage may attach at different points in an investigation. A formal proceeding may qualify as a claim while an earlier inquiry does not. Certain policy enhancements may provide some form of pre-claim or informal investigation coverage, but that requires negotiation at the time of the policy’s placement.

That distinction can have significant financial consequences. A company may hire expensive outside counsel expecting the carrier to pay, only to learn that coverage has not yet begun. The opposite can also happen: the company may fail to submit potentially covered legal expenses because it assumes they are not covered.

General counsel should understand how their policy defines a claim and covers investigations before any investigation begins. As soon as there are signs of regulatory activity, they should involve the broker to determine when coverage starts and how to manage defense costs.

Looking at D&O Insurance in Isolation

A lawsuit, regulatory matter, or corporate event does not necessarily fit neatly into a single insurance policy. Depending on the allegations, D&O may intersect with Employment Practices Liability (EPL), Errors & Omissions (E&O), Cyber and Privacy Liability, Fiduciary Liability, Crime, or other coverage. M&A transactions can introduce additional considerations, including Representations and Warranties insurance.

Instead of advising the broker to “Please report this to our D&O carrier,” explain what happened and ask which policies could potentially respond. In some cases, notice may be required under more than one policy or across different layers of an insurance tower.

This becomes even more important when an organization uses multiple brokers for different coverages or when private equity sponsors and portfolio companies maintain separate insurance programs.

Treat notice as part of a broader coverage discussion, not simply an administrative task.

Treating the Policy as a Once-a-Year Purchase

D&O insurance should reflect the organization it is intended to protect. That means the conversation should begin with fundamental questions: Who are we trying to protect? What risks concern us most? What is our risk tolerance? What is happening within the business over the next year or several years?

Policy language that works well for one organization can create a significant gap for another. A family-owned company, for example, needs to pay particular attention to family-related exclusions. A private equity-backed organization may need coverage structured with future acquisitions, divestitures, or an eventual IPO in mind.

The amount of insurance purchased also deserves more analysis. For public companies, potential losses can be modeled using factors such as market value, potential stock-price declines, and past settlements. Companies should also consider industry litigation patterns, financial strength, board expectations, and risk tolerance.

The objective is to build an insurance structure that reflects the company’s actual exposures, plans, and risk tolerance.

Waiting Until a Transaction to Think About Insurance

I’ve often seen insurance treated as a last-minute cleanup item just before a major transaction closes. That can severely limit a company’s options.

Mergers, acquisitions, divestitures, IPOs, and other significant corporate events can affect D&O coverage in ways that are easy to overlook. A change in control may put an existing policy into runoff (i.e., the policy stops covering new claims but still covers past acts). An acquisition may mean the parties have to decide which company’s insurance should remain in place. A company preparing to go public should consider whether its existing carrier is well suited to the transition from private- to public-company coverage, how claims spanning that transition will be handled, and who will pay the premium.

These decisions are easier to make – and usually offer more options – when the broker is involved early. If an IPO or significant transaction is on the horizon, even if it is confidential, consider bringing your broker into the discussion at the appropriate time. Coverage, carrier selection, tail provisions, and other terms can then be addressed before the organization is focused on getting the deal across the finish line.

Overlooking Valuable Supplemental Coverages

D&O policies can include benefits that are easy to forget because they are not part of the core coverage that initially drove the purchase. For example, some policies provide coverage or sublimits for responding to books-and-records demands, crisis management, electronic discovery consultants, derivative investigations, shareholder activism, and certain government interview requests.

These benefits can be particularly valuable because some provide assistance early, before an issue develops into significant litigation, and may be available without the retention required under the primary D&O coverage.

General counsel should know these provisions exist. A policy sitting on a shelf cannot provide its full value if no one remembers the resources it includes.

Missing the Coverage Gap for In-House Counsel

General counsel and other in-house lawyers frequently wear several hats. They may serve as an officer, corporate secretary, compliance leader, risk manager, business advisor, and attorney—sometimes at the same time. That creates a potential D&O coverage issue.

D&O coverage generally protects directors and officers for actions taken in their insured capacity. At the same time, policies may contain professional services exclusions. When general counsel acts as a lawyer rather than a corporate officer, the D&O policy may not respond as expected.

Companies should examine whether general counsel and other in-house lawyers are expressly included within the definition of insured and how the policy addresses their different capacities. Employed Lawyers Liability coverage may also help address this exposure. It can sometimes be endorsed onto a D&O policy, while standalone coverage is generally broader and can address circumstances beyond an in-house lawyer’s traditional corporate responsibilities.

Treating the Carrier as an Adversary

A D&O policy is a contract, and the terms and conditions ultimately govern. But that does not mean every coverage discussion needs to become a fight.

Sometimes the company wants to use a particular law firm, but the carrier’s approved counsel costs substantially less. Perhaps the parties can agree on how to allocate those costs. A matter may include both covered and uncovered allegations, creating an opportunity for the insured and carrier to reach a reasonable allocation. In other cases, involving the carrier in mediation or settlement planning may bring useful experience to the table.

Look for solutions that recognize the contractual terms while addressing the legitimate interests of both parties. Remember that the carrier relationship does not end with the current claim; the organization will continue to need insurance going forward.

The opposite is also true: know when a coverage fight is unlikely to be productive. Some losses simply are not covered. Continuing to spend money and political capital contesting clear policy language may not produce a better result. And it may be a sign that you need a different carrier or different policy terms at the next renewal.

Make D&O an Ongoing Conversation

Many of these mistakes share the same underlying problem: D&O insurance is too often treated as a product purchased at renewal rather than as an ongoing component of corporate risk management.

General counsel does not need to become a D&O insurance specialist. But the legal team should understand the fundamental structure of the company’s coverage, participate in decisions that could affect it, and know when to bring the broker into the conversation.

That relationship should extend well beyond renewal. If the only meaningful discussion with your broker occurs when the renewal proposal arrives, you may not be getting the level of advice a complex D&O program requires.

D&O policies should evolve as companies evolve. Regular conversations about claims, transactions, corporate strategy, emerging exposures, and organizational changes can help ensure that your coverage is structured to respond as expected when you need it.

Coverage is subject to the specific terms, conditions, limitations, and exclusions of the applicable insurance policy. This article is for general informational purposes and is not intended as legal or insurance advice.