How Criminal Acts, Fraud and Intentional Wrongdoing Exclusions Impact Directors and Officers (D&O) Liability Insurance Claims

Directors and Officers (D&O) liability insurance is designed to protect corporate leaders from personal financial loss arising from claims alleging wrongful acts. However, criminal acts, fraud, and intentional wrongdoing exclusions are among the most consequential policy terms — often determinative in whether a claim is paid or denied. This article explains how these exclusions operate in the United States, practical exposure for boards in New York, San Francisco, Chicago and other major U.S. markets, and how in practice companies and their counsel can manage — or mitigate — the exclusion risk.

Key concepts: what these exclusions cover (and don’t)

• Criminal acts/intentional wrongdoing exclusions generally bar coverage for claims arising from criminal conduct, intentional illegal acts, or personal profit gained to which the insured was not legally entitled.
• Fraud exclusions typically address intentionally false statements, misrepresentations, or concealment that materially induced a claim.
• Many D&O policies also include an "insured v. insured" or settlement cooperation carve‑outs that can affect how exclusions apply in shareholder derivative suits, cross‑claims, or claims against multiple directors.

Important nuance: exclusions are frequently subject to policy definitions, choice of law, and judicial interpretation. Courts often examine whether the insurer can show clear and convincing evidence that the insured committed the intentional act or whether the claim merely alleges negligence or poor judgment (which remains potentially covered).

Typical wording and common triggers

A representative exclusion might read:

“We will not pay loss for any Claim based upon, arising out of, or in consequence of any: (a) fraudulent, criminal, or intentionally wrongful act or omission by an Insured; or (b) willful violations of law by an Insured.”

Common triggers in practice:

• Allegations that a director knowingly falsified financial statements.
• Regulatory enforcement claims alleging willful concealment or intentional misreporting to the SEC.
• Employee or third‑party claims asserting intentional embezzlement or theft by a named officer.

How courts and regulators in the U.S. treat these exclusions

• U.S. courts generally require a high evidentiary bar for insurers to deny coverage on the basis of intentional wrongdoing — often demanding a showing beyond mere allegations (varies by state).
• In derivative suits where the company indemnifies executives, insurers may still face coverage disputes about whether control of the defense and settlement processes is impaired by exclusions.
• Regulatory enforcement: Many D&O policies exclude fines and penalties in some states; when exclusions combine with statutory penalties, the effective coverage gap grows. For authoritative carrier background on coverages, see AIG’s D&O overview and Chubb’s D&O product information for U.S. markets (AIG, Chubb).
  • AIG D&O overview: https://www.aig.com/business/insurance/directors-and-officers-insurance
  • Chubb D&O information: https://www.chubb.com/us-en/business-insurance/directors-officers-liability.html

Real‑world cost context (U.S. market)

Insureds must weigh exclusion risk against premium cost. Typical U.S. market premium ranges (illustrative ranges for 2023–2024 market conditions; actual quotes will vary by industry, revenue, claims history and jurisdiction):

Sources for market cost context: Forbes Advisor summary of D&O costs provides consumer-facing ranges and examples; market commentary from Marsh notes continued underwriting pressure and pricing volatility in D&O lines. See:

• Forbes Advisor — How much does D&O cost?: https://www.forbes.com/advisor/business-insurance/do-insurance-cost/
• Marsh — Global Insurance Market Index and D&O market commentary: https://www.marsh.com/us/insights/research/global-insurance-market-index.html

Note: carriers such as AIG, Chubb and Travelers compete on appetite and pricing; for example, Chubb and AIG are known for robust financial capacity for large public-company placements while regional carriers or specialty MGA programs often underwrite smaller private‑company D&O at lower premiums.

How exclusions actually affect a claim — practical examples

• Scenario A: Shareholder sues a director for alleged financial misstatement. The complaint alleges negligence and failure of oversight, not fraud. Result: Coverage likely triggers, subject to defense costs and insuring agreement, because negligence is not an intentional act.
• Scenario B: SEC obtains an indictment alleging the CFO knowingly falsified financials and the criminal conviction follows. Result: Exclusion likely applies — insurers often deny coverage for criminal convictions and related loss (fines, treble damages), though defense pre‑indictment costs can be contentious.
• Scenario C: A derivative suit alleges breach of fiduciary duty and includes both negligence and willful misconduct claims. Result: Allocation disputes commonly arise; advanced allocation and carve‑back language can preserve coverage for the negligence portion. See strategies in How Allocation and Carve‑back Clauses Can Restore Coverage in Directors and Officers (D&O) Liability Insurance Disputes.

Mitigation strategies for boards and risk managers (U.S. focus)

• Secure clear defense/settlement cooperation and insured v. insured carve‑outs where possible to preserve defense control and avoid constructive fraud denials. Read negotiating strategies in Negotiating Carve‑outs: Strategies to Limit Exclusion Impact in Directors and Officers (D&O) Liability Insurance.
• Obtain express allocation and carve‑back clauses for mixed‑allegation claims to allocate covered and non‑covered loss fairly (see internal link above).
• Maintain robust internal controls, documentation, and independent investigations when allegations arise; careful documentation reduces the likelihood that conduct will be later characterized as intentional.
• Purchase entity coverage and consider side‑A or excess tower limits to protect individuals when indemnification is not available or insurers deny indemnity for intentional acts.
• Pre‑bind underwriting diligence: fully disclose prior acts, regulatory inquiries, and any “known loss” exposures to avoid rescission or voiding for misrepresentation. For more on known‑loss management, see Known‑Loss and Prior‑Acts Exclusions in Directors and Officers (D&O) Liability Insurance: How to Manage Retroactive Exposure.

Negotiation levers and policy wording to pursue

• “Insured vs. Insured” carve‑outs — narrow broad exclusions that could collapse coverage for derivative claims.
• Settlement cooperation language — prevents automatic declination of settlement without insurer consent in cases involving alleged intentional acts.
• Allocation and carve‑back — explicitly require insurer to allocate between covered and uncovered loss when allegations mix intent and negligence.
• Consent to settle and Hammer clause moderation — reduce the risk that an adverse settlement posture will be used to apply an exclusion. See practical drafting and review steps in Checklist for Reviewing Exclusions and Limitations in Your Directors and Officers (D&O) Liability Insurance Policy.

Closing advice for boards in New York, San Francisco, Chicago and beyond

• Treat D&O procurement as a legal and commercial negotiation — exclusions materially change the value of a program.
• For publicly traded companies in the U.S., regulatory enforcement risk (SEC enforcement, DOJ criminal probes) increases the likelihood that exclusions will be tested; maintain robust defense funding strategies including Side‑A and Excess limits.
• Engage coverage counsel early when allegations involve potential intentional misconduct or criminal exposure to preserve coverage and insurer notice rights. For a deep dive into the top exclusion types and their meaning, consult Top 15 Exclusions in Directors and Officers (D&O) Liability Insurance and What They Really Mean.

Sources and further reading

• AIG — Directors & Officers Insurance product overview: https://www.aig.com/business/insurance/directors-and-officers-insurance
• Chubb — Directors & Officers Liability Insurance: https://www.chubb.com/us-en/business-insurance/directors-officers-liability.html
• Forbes Advisor — How Much Does D&O Insurance Cost?: https://www.forbes.com/advisor/business-insurance/do-insurance-cost/
• Marsh — Global Insurance Market Index (market conditions and D&O commentary): https://www.marsh.com/us/insights/research/global-insurance-market-index.html