Directors and Officers Insurance: Comprehensive protection for decision-makers to minimize risks
27 May 2025
12
Minutes
Katrin Straub
CEO at nextsure
Mistakes in management can have financially threatening consequences, sometimes with personal liability impacting private assets. A Directors and Officers insurance policy (D&O insurance) offers an essential protective shield in such cases. Find out how this specialised policy works and why it is indispensable for executives.
The topic in brief and concise terms
A D&O insurance protects the personal assets of executives from claims for damages arising from breaches of duty and covers both internal and external liability.
The coverage amount should be chosen carefully, often based on equity or total assets (e.g. ten percent of the total assets), and important clauses such as retroactive coverage and long notification periods (often three to ten years) are crucial.
New laws such as the NIS-2 directive and the Supply Chain Act increase the personal liability of managers and heighten the necessity for D&O insurance, as they often represent the only means of risk limitation.
Understanding the Basics of Directors and Officers Insurance
The Directors and Officers Insurance, often referred to as a D&O policy, is a professional liability insurance designed specifically for company officers and executives. It provides coverage 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 coverage starts at a few hundred euros annually but can vary significantly depending on the size of the company and the risk involved. Many managers underestimate that they can be liable with their entire personal assets even in cases of slight negligence. (§ 93 AktG, § 43 GmbHG). As such, this insurance is a crucial component of a company's risk management strategy and protects the financial well-being of decision-makers. The D&O insurance covers both internal liability (claims from the company itself) and external liability (claims from third parties). Thus, it establishes a foundation for responsible entrepreneurial conduct without the constant worry of personal financial ruin.
Identifying the need: Who benefits from D&O insurance?
Essentially, a Directors and Officers insurance is relevant for a wide range of decision-makers. This includes board members, managing directors, supervisory board members, and senior executives with procuration or general power of attorney. Managers of start-ups and individuals 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 involve SMEs. The necessity arises from the potentially unlimited personal liability with private assets for breaches of duty. A professional legal protection insurance can supplement this, but it does not cover direct financial losses. Therefore, coverage through a D&O policy is a must for many executives.
Optimising the scope of coverage: What does a good D&O insurance cover?
A robust Directors and Officers insurance provides comprehensive protection against financial losses. The core benefits include covering compensation claims up to the agreed coverage limit. Another important aspect is passive legal protection: the insurance covers lawyer, court, and expert costs to defend against unwarranted claims. Pay attention to essential clauses like retroactive coverage, which also covers breaches of duty before the contract starts, provided they were unknown at the time the contract was signed. Additionally, an adequately long notification period, often between three and ten years, is crucial, as claims often arise after the contract ends. Some policies even offer an unlimited notification period after a certain contract term. The following points are typical benefit components:
Covering defence costs (lawyers, courts, experts).
Release from legitimate compensation claims.
Protection against internal and external liability.
Co-insurance of subsidiaries, often worldwide (with restrictions for the USA/Canada).
Costs for PR consultancy to restore reputation.
Support in criminal and regulatory offence proceedings.
Optional components such as deductible insurance for board members of AG.
Careful examination of the insurance conditions is essential to avoid coverage gaps. A commercial legal protection insurance can complement the cover, but 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 area of management. A common example is the incorrect selection of business partners or service providers without sufficient examination, leading to financial losses for the company. Missing deadlines, for instance, when applying for grants, can also trigger a D&O claim if the company misses out on funds as a result. A managing director who sells goods on credit without checking the customer's creditworthiness exposes the company to significant risk of loss—a classic case of internal liability. Even an inadequate market analysis before launching a new product can lead to claims for damages if it fails. In external relations, the late submission of annual accounts can result in fines, for which the responsible manager can be held liable. Or a managing director continues to order goods despite impending insolvency, which may prompt suppliers to make claims against him personally. These examples illustrate how quickly financial losses can arise, threatening the private assets of the executive without Directors and Officers insurance.
Optimal Coverage: Recommendations for Best Protection
Determining the appropriate level of coverage 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 general rule, experts often recommend that the coverage amount should be at least half of the company's equity or ten percent of its total assets. For medium-sized companies, amounts between one million and five million euros are common, while contracts starting at 250,000 euros are also available for small firms. Around seventy percent of D&O policies concluded have a coverage amount between one and ten million euros. The following aspects should be considered when calculating:
Company size and revenue.
Industry and associated specific risks.
Number of insured individuals and mandates.
International activity, particularly in common law countries such as the USA.
Volume of potential transactions.
The company's stock market listing.
An amount set too low can be disastrous in the event of a claim. Seek advice from experts to ensure adequate coverage. Liability insurance for financial losses for the company itself should be considered separately.
Mastering legal frameworks and current developments
The legal requirements for executives are constantly evolving. The German Stock Corporation Act and the Limited Liability Companies Act form the basis for the liability of board members and managing directors (§ 93 AktG, § 43 GmbHG). The Federal Court of Justice has intensified the duties of supervisory boards to assert claims against board members in landmark rulings, such as the ARAG/Garmenbeck decision. New legislation, such as the NIS-2 Directive on cybersecurity or the Supply Chain Due Diligence Act (LkSG), introduces 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 underscores the growing importance of D&O insurance as the only remaining protective mechanism. The LkSG can also lead to fines and civil lawsuits for violations of due diligence obligations in the supply chain, potentially affecting D&O insurance. A cyber insurance for businesses is an important addition but does not cover the personal liability of managers. Executives need to be aware of this complex and evolving legal situation.
Expert tips for your Directors and Officers insurance
When selecting and designing your Directors and Officers insurance, there are several important points to consider. Our expert tip: Pay attention to the so-called insurer’s waiver of the right to terminate in the event of a claim. Many insurers reserve the right to terminate after a claim; an appropriate clause can exclude this. Also, check the scope of the policy carefully, especially if you operate internationally. The co-insurance of mandates in subsidiaries or external bodies (ODL mandates) should be clarified. For public companies, the legally required deductible for board members (§ 93 Abs. 2 sentence 3 AktG) is relevant; there are special deductible insurances for this. Document your decisions carefully, as in cases of internal liability, there is often a reversal of the burden of proof. Professional indemnity insurance for experts is a different product, but the principle of careful documentation applies there as well. Always seek expert advice in case of doubt to find the optimal coverage for your situation. Our advisors at nextsure are happy to support you with this.
Your next step towards optimal protection
More useful links
Wikipedia offers a comprehensive overview of Directors and Officers (D&O) liability insurance for board members and senior executives.
The German Corporate Governance Code (DCGK) provides information on essential legal regulations and internationally recognized standards of good corporate governance.
EY Law highlights in an article current developments and reliefs for 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) examines in an article the importance of compliance and why it cannot be replaced by insurance alone.
The German Insurance Association (GDV) offers information and positions of the German insurance industry, including liability issues.
FAQ
Who should consider a D&O insurance?
A D&O insurance policy is advisable for board members, managing directors, supervisory boards, authorized signatories, and senior executives of companies of all sizes, including start-ups. It can also be relevant for the bodies of associations and foundations.
What should the coverage amount of a D&O insurance be?
The coverage amount should be commensurate with the individual risk. Recommendations range from at least half of the equity to ten percent of the total assets. Amounts between one and ten million euros are common.
What does 'claims-made principle' mean in D&O insurance?
The claims-made principle means that the insurance event occurs when a claim for damages is first made against the insured person during the contract period (or an agreed 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 makes against its executives. External liability involves claims made by third parties (e.g., customers, suppliers, creditors, authorities) against the executives.
Does D&O insurance also cover intentional actions?
No, intentional breaches of duty and knowing misconduct are usually excluded from the coverage of D&O insurance. However, gross negligence is often included in the coverage.
Can I also take out D&O insurance personally?
Yes, in addition to the corporate D&O insurance that the company takes out for its leadership team, there is also personal D&O insurance. This can be taken out by an individual executive for themselves, for example, if the company does not provide coverage or if the existing coverage is deemed insufficient.
