When D&O Insurance Doesn’t Protect You
The fine print matters — here’s what executives and board members should look for.
All too often, someone says, “We have D&O,” and the thinking stops. That’s exactly when the thinking should start.
When companies purchase Directors & Officers (D&O) insurance, many treat it as a simple box to check. D&O insurance is a liability policy designed to protect the personal assets of a company’s leadership team if they are sued for their management decisions. The policy gets filed away, rarely reviewed, and assumed to be there if needed. That assumption has become increasingly risky.
D&O coverage is important risk management in the normal course of business. It becomes even more important during hard times — when the blame game begins and the likelihood of lawsuits against management increases.
How the D&O Market Shifted — and Why Leaders Are Still Paying for It
Beginning in 2019 — and accelerating through the pandemic — the D&O insurance market tightened significantly. Insurers had leverage, pricing rose, and coverage terms narrowed. During that period, many policies were issued with problematic exclusions: bankruptcy, insolvency, creditor claims, even major shareholder exclusions. These are precisely the types of claims D&O insurance is meant to cover.
The market has since softened, and pricing has come down. However, in many cases, coverage quality hasn’t improved. CAC, a specialty broker with a unique expertise in the restructuring space, continues to see policies placed by other brokers where those exclusions were never removed — simply carried forward year after year at renewal.
At the same time, a growing number of low-cost, high-volume insurance platforms have made it easy to “check the box” on D&O coverage. Companies may have $5 million in limits for a surprisingly low premium. The limits look fine. The coverage often isn’t.
In restructuring, D&O coverage is frequently the last safeguard protecting directors’ and officers’ personal assets. And far too often, the fine print leaves leadership exposed.
Real-World Example: When Coverage Fell Short
We’ve seen this dynamic play out even at sophisticated, high-performing companies.
Take one of the fastest-growing tech company in North America in 2022 — backed by institutional investors and a globally recognized brand. Like many companies, it had D&O insurance in place, and leadership assumed that meant they were protected.
When Paladin was engaged, we reviewed the policy as part of our standard kickoff process. What we found were meaningful coverage gaps — not because anyone was careless, but because no one had stopped to read the fine print. The policy existed, the limits looked adequate, and the conversation had moved on.
That experience reinforced an important lesson: having D&O insurance is not the same as being protected.
Program Structure Matters: Side A, B, C and Tail Coverage
Not all D&O programs are structured the same. Understanding how coverage is layered is critical — particularly in distress.
- Side A protects individual directors and officers when the company cannot pay for management’s defense — for example, in bankruptcy.
- Side B reimburses the company when it pays to protect management.
- Side C protects the company itself against certain securities-related claims.
If additional limits are needed during distress, it is recommended to consider dedicated Side A only coverage to ensure individuals will have protection if the company cannot protect them.
D&O Runoff / Tail extends the claim reporting period for acts that occurred before the runoff is triggered. Because D&O is a claims-made policy, it responds only to claims made during the policy period. Litigation, however, can arise years later — often within a six-year statute of limitations. Without a properly structured and prepaid runoff or tail policy, that timing gap can leave leadership exposed.
Common Pitfalls
The following gaps don’t only show up at under-resourced companies. We’ve seen the following problems in companies led by institutional sponsors, experienced boards, and top-tier advisors. The most common issues we see include:
- Bankruptcy, insolvency, or creditor exclusions that eliminate coverage during restructuring.
- Insured vs. Insured exclusions that can block claims brought by creditors’ committees or trustees.
- Underinsurance, where limits appear sufficient in good times but fall short once defense costs and litigation mount.
- Program structures that fail to address the increased personal asset exposure for directors and officers in a restructuring scenario.
- Price anchoring, where a low premium for headline limits makes it harder to justify additional protection — even when the underlying policy leaves real gaps. At that point, cost comparisons obscure the more important question: does the coverage actually work?
What Leaders Should Do
- Review policies directly. Don’t rely on assurances that “we have D&O.”
- Engage experienced D&O brokers with restructuring expertise.
- Scrutinize exclusions, structures, and limits to ensure the policy would actually respond in distress.
- Act early. Waiting until a company is deep into a crisis reduces leverage and increases cost.
The Bigger Picture
At Paladin, when our team members are named as officers, it is standard practice to have the company’s D&O policy reviewed by independent brokers with deep experience assessing coverage in distressed situations. We understand how often this risk is overlooked, and how costly it can be when it surfaces too late.