Directors and Officers insurance: comprehensive protection for decision-makers to minimise risk
27.05.25
3
Minutes
Katrin Straub
Managing Director at nextsure
Management mistakes can have financially devastating consequences, often with personal liability extending to private assets. Directors and Officers insurance (D&O insurance) provides an indispensable shield here. Find out how this specialist policy works and why it is essential for executives.
The topic in brief and concise terms
A D&O insurance policy protects the personal assets of executives against claims for damages arising from breaches of duty and covers both internal and external liability.
The sum insured should be selected carefully, often based on equity or total assets (e.g. ten per cent of total assets), and important clauses such as retroactive cover and long extended reporting periods (often three to ten years) are crucial.
New laws such as the NIS-2 Directive and the Supply Chain Due Diligence Act are tightening managers’ personal liability and increasing the need for D&O insurance, as this is often the only way to limit risk.
Understanding the basics of Directors and Officers insurance
Directors and Officers insurance, often referred to as D&O cover, is a liability insurance policy for financial losses that is specifically designed for board members and senior executives. It applies when these individuals are held personally liable for financial losses due to a breach of duty in the course of their work. The cost of such cover starts at just a few hundred euros a year, but can vary significantly depending on the size of the company and the level of risk. Many managers underestimate the fact that even slight negligence can leave them liable with their entire personal assets. (§ 93 AktG, § 43 GmbHG). This insurance is therefore an important component of risk management in every company and protects the financial existence of decision-makers. D&O insurance covers both internal liability (claims from the company itself) and external liability (claims from third parties). It creates the basis for responsible entrepreneurial action, without the constant worry of personal ruin.
Identifying the need: Who benefits from D&O insurance?
In principle, a Directors and Officers insurance policy is relevant for a broad group of decision-makers. This includes board members, managing directors, supervisory board members and senior executives with signatory authority or general power of attorney. Managers of start-ups and people in special roles such as data protection officers or compliance officers should also consider such protection. Even in associations and foundations, the responsible bodies can benefit from D&O insurance. Personal liability is not limited to large corporations; even in small and medium-sized enterprises (SMEs), management errors can lead to significant claims. A study shows that the majority of D&O claims actually concern SMEs. The need arises from the potentially unlimited personal liability with private assets for breaches of duty. A professional legal expenses insurance policy can provide additional support here, but it does not cover direct financial losses. Protection through a D&O policy is therefore essential for many executives.
Optimising the scope of cover: What does a good D&O insurance policy cover?
A powerful Directors and Officers insurance policy offers comprehensive protection against financial losses. Core benefits include the assumption of claims for damages up to the agreed sum insured. Another important aspect is passive legal protection: the insurance covers lawyers', court and expert costs to defend against unjustified claims. Look out for important clauses such as retroactive cover, which also covers breaches of duty before the policy start date, provided they were unknown at the time of inception. Likewise, a sufficiently long extended reporting period, often between three and ten years, is crucial, as claims are often only made after the policy has ended. Some policies even offer an unlimited extended reporting period after a certain policy term. The following points are typical cover components:
Cover for defence costs (lawyers, courts, experts).
Indemnification against justified claims for damages.
Protection for internal and external liability.
Co-insurance for subsidiaries, often worldwide too (with restrictions for the USA/Canada).
Costs for PR advice to restore reputation.
Support in criminal and regulatory proceedings.
Optional modules such as deductible insurance for management board members of public limited companies.
Careful review of the policy terms is essential to avoid coverage gaps. Commercial legal expenses insurance can complement the cover, but it does not replace the specific benefits of D&O.
Analysing practical cases: Typical scenarios for D&O claims
The range of potential breaches of duty is broad and can affect any management area. A common example is the incorrect selection of business partners or service providers without adequate due diligence, resulting in financial losses for the company. Missing deadlines, for example when applying for grants, can also trigger a D&O claim if the company loses out on funding as a result. A managing director who sells goods on credit without checking the customer’s creditworthiness exposes the company to a significant risk of default – a classic case of internal liability. Even an inadequate market analysis before launching a new product can lead to claims for damages if the launch is unsuccessful. In the external relationship, the late submission of the annual financial statements can result in fines for which the responsible manager may be held liable. Or a managing director continues to place orders for goods even though insolvency is looming, which may prompt suppliers to bring claims against him personally. These examples show how quickly a financial loss can arise that, without Directors and Officers insurance, threatens the executive’s personal assets.
Determining the right level of cover: recommendations for optimal protection
Setting the appropriate cover limit is a crucial factor in Directors and Officers insurance. There is no one-size-fits-all answer, as it depends on many individual factors. As a rule of thumb, experts often recommend that the cover limit should be at least half of the company’s equity or ten per cent of the company’s total assets. For medium-sized companies, sums between one million and five million euros are common, while for small businesses policies starting at 250,000 euros are also offered. Around seventy per cent of D&O policies taken out have a cover limit between one and ten million euros. The following aspects should be taken into account when calculating the amount:
Company size and turnover.
Industry and the associated specific risks.
Number of insured persons and mandates.
International operations, especially in common law countries such as the USA.
Size of potential transaction volumes.
Whether the company is listed.
An amount that is set too low can be fatal in the event of a claim. Seek advice from experts to ensure adequate cover. A financial loss liability insurance policy for the company itself is to be considered separately from this.
Navigating legal frameworks and current developments
The legal requirements for executives are continually evolving. German stock corporation and limited liability company law forms the basis for the liability of management boards and managing directors (§ 93 AktG, § 43 GmbHG). In landmark judgments, such as the ARAG/Garmenbeck decision, the Federal Court of Justice has tightened the duties of supervisory boards to assert claims against management boards. New legislation such as the NIS-2 Directive on cybersecurity or the Supply Chain Due Diligence Act (LkSG) brings additional personal liability risks for governing bodies. The NIS-2 Directive explicitly provides that governing bodies can be held responsible for breaches of cybersecurity measures and largely prohibits waivers of liability by the company. This underlines the growing importance of D&O insurance as the only remaining protective mechanism. The LkSG can also lead to fines and civil claims in the event of breaches of due diligence obligations in the supply chain, which may potentially affect D&O insurance. A commercial cyber insurance policy is an important supplement, but it does not cover managers' personal liability. Executives must be aware of this complex and evolving legal landscape.
When selecting and designing your Directors and Officers insurance, there are several important points to note. Our expert tip: look out for the insurer's so-called waiver of termination in the event of a claim. Many insurers reserve a special right to terminate following a loss; an appropriate clause can exclude this. You should also check the scope of cover of the policy carefully, especially where there is international activity. The inclusion of cover for mandates in subsidiaries or external committees (ODL mandates) should be clarified. For public limited companies, the legally required excess for directors (§ 93 para. 2 sentence 3 AktG) is relevant; there are special excess insurance policies for this. Document your decisions carefully, as in cases of internal liability a reversal of the burden of proof often applies. Professional indemnity insurance for experts is a different product, but the principle of careful documentation applies there too. If in doubt, always seek expert advice to find the cover that is optimal for your situation. Our advisers at nextsure will be happy to help you.
Your next step towards optimal protection
Directors and Officers insurance is a complex but indispensable instrument for protecting the personal assets of executives. In view of the diverse liability risks and strict legal requirements, it provides security and enables entrepreneurial action with calculated risk. A careful analysis of individual needs and a precise comparison of the tariffs and terms offered are essential. The right sum insured and important clauses such as retroactive cover and extended reporting periods play a decisive role in effective protection. Investing in D&O insurance is an investment in the financial security and ability to act of management. At nextsure, we understand the challenges you face as decision-makers. That is why we offer you tailored, expert advice to find the D&O solution that is right for you. Use our expertise for your security. Request your individual risk analysis now: have your insurance situation reviewed free of charge and receive specific recommendations for optimisation.
More useful links
Wikipedia provides a comprehensive overview of Directors and Officers (D&O) insurance, the liability insurance for board members and senior executives.
The German Corporate Governance Code (DCGK) provides information on key statutory provisions and internationally recognised standards of good corporate governance.
EY Law highlights current developments and relief for managing directors and creditors in the context of corporate liability.
KPMG Law offers insights into legal issues and solutions specifically for the insurance sector.
The Federal Statistical Office (Destatis) provides official data and statistics on business registrations and insolvencies in Germany.
The Frankfurter Allgemeine Zeitung (FAZ) highlights in an article the importance of compliance and why this cannot be replaced by insurance alone.
The German Insurance Association (GDV) provides information and positions from the German insurance industry, including on liability issues.
FAQ
Who is D&O insurance suitable for?
A D&O insurance policy is useful for boards of directors, managing directors, supervisory boards, authorised signatories and senior employees of companies of any size, including start-ups. It may also be relevant for the governing bodies of associations and foundations.
How high should the coverage limit for D&O insurance be?
The sum insured should be appropriate to the individual risk. Recommendations range from at least half of shareholders' equity to ten per cent of the balance sheet total. Sums between one and ten million euros are common.
What does the 'claims-made' principle mean in D&O insurance?
The claims-made principle means that the insured event occurs when the claim for damages is first made against the insured person during the policy period (or an agreed extended reporting period), regardless of when the breach of duty was committed.
What is meant by internal liability and external liability?
Internal liability refers to claims for damages that the company itself asserts against its senior managers. External liability concerns claims by third parties (e.g. customers, suppliers, creditors, authorities) against the senior managers.
Does D&O insurance also cover intentional misconduct?
No, intentional breaches of duty and deliberate misconduct are generally excluded from cover under D&O insurance. Gross negligence, by contrast, is often also covered.
Can I also take out D&O insurance in person?
Yes, alongside the company D&O policy, which the company takes out for its management team, there is also personal D&O insurance. An individual executive can take this out for themselves, e.g. if the company does not offer cover or the existing cover is considered insufficient.
