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Policy Wording Red Flags: Key Clauses to Negotiate in Your Directors and Officers (D&O) Liability Insurance

Directors and Officers (D&O) liability insurance is essential for executives and boards across the United States — from startups in San Francisco to public companies in New York City and private firms in Dallas. But the policy wording determines whether your coverage will respond when it matters. This article highlights the most common policy wording red flags, what they mean, and tactical negotiation points to improve protection and control costs.

Why wording matters (quick overview)

Poorly drafted D&O clauses can:

  • Limit coverage in high-cost litigation events.
  • Shift defense costs onto insured individuals or the company.
  • Create gaps between corporate indemnity obligations and insurer obligations.

Market context: D&O pricing and availability have tightened in recent years. Market reports from Aon and Marsh note rate pressure and capacity constraints for certain industries, especially technology and life sciences. For perspective, primary public-company D&O programs can cost from hundreds of thousands to millions annually, while private and small companies often see $2,000–$50,000+ for typical limits depending on revenue, industry, and risk profile (see Aon and Marsh market summaries). See insurer product pages for small-business D&O starting points at Chubb and Hiscox.
Sources: Aon market commentary, Marsh market insights, Chubb D&O product page, Hiscox small business D&O pages.

Top policy wording red flags and negotiation tactics

1. Narrow definition of “Loss”

Red flag:

  • “Loss” excludes certain non-monetary relief, fines/penalties, or punitive damages in jurisdictions where they’re insurable.

Why it matters:

  • If a settlement includes non-monetary remedies or reimbursable fines, you may face uncovered exposure.

How to negotiate:

  • Seek a broad definition that explicitly includes defense costs, settlements, judgments, pre- and post-judgment interest, and, where permitted by law, fines and penalties.
  • Add language clarifying that costs to comply with injunctive relief or SEC subpoenas are included when they arise from a covered claim.

2. Restricted “Who Is An Insured”

Red flag:

  • Named insured limited to the public company only; officers, employees, and former directors excluded or limited.

Why it matters:

  • Individuals may be left without coverage for derivative suits, regulatory actions, or employment claims.

How to negotiate:

3. Advancement, Cooperation and Severability Clauses

Red flag:

  • Advancement of defense costs subject to repayment if not owed; cooperation clauses that allow insurer to refuse coverage for late cooperation; severe severability carve-outs for fraud.

Why it matters:

  • Delay or denial of defense cost advancement can cripple an executive’s defense before final determination.

How to negotiate:

4. Broad Insolvency and Bankruptcy Exclusions

Red flag:

  • Blanket exclusions for claims “directly or indirectly arising out of bankruptcy.”

Why it matters:

  • Bankruptcy often triggers suits by creditors, trustees or regulators; a blanket exclusion can leave directors exposed during insolvency proceedings.

How to negotiate:

  • Limit to claims brought by or on behalf of the debtor estate or trustee and carve back claims by shareholders, regulators, or third parties.
  • Seek language that preserves Side A coverage for individual directors during bankruptcy.

5. Carve-outs for Conduct, Fraud, and Criminal Acts

Red flag:

  • Insurer reserves unilateral right to investigate conduct and deny coverage upon allegation of fraud or criminal act (without final adjudication).

Why it matters:

  • Accusations alone could allow an insurer to deny coverage for defense costs.

How to negotiate:

  • Require final adjudication or criminal conviction before coverage is forfeited.
  • Insert “innocent insured” language protecting directors who did not personally engage in wrongful conduct.

6. Consent-to-Settle and Allocation Clauses

Red flag:

  • Consent-to-settle grants insurer broad authority to settle and allocate costs in ways that affect corporate indemnity and Side A claims.

Why it matters:

  • Board control over settlement decisions can be crucial. Allocation clauses that favor the insurer may allocate deductible costs to insured individuals.

How to negotiate:

7. Exclusions for Securities Claims or Regulatory Investigations

Red flag:

  • Broad exclusions for “any securities claim” or carve-outs for SEC investigations, insider trading, or anti-trust.

Why it matters:

  • For public companies and financial institutions, securities litigation and regulatory probes are primary risks.

How to negotiate:

  • Replace wholesale exclusions with narrower carve-outs limited to intentional fraud, criminality, or personal profit if permissible by law.
  • Confirm coverage for regulatory defense costs tied to financial reporting or disclosure obligations.

Comparative quick-reference table: Clause, Risk, Typical Negotiation Outcome

Clause / Wording Red Flag Immediate Risk Negotiation Goal
Narrow “Loss” definition Denied coverage for fines, punitive damages, defense costs Broaden “Loss” to include defense, pre/post-judgment interest, and insurable F&P
Limited “Insured” definition Individuals excluded Add current/former/future officers & directors; subsidiary managers
Advancement limited or repayable Defense cost funding gap Unconditional advancement subject to final adjudication
Broad fraud/criminal carve-outs Denial on allegation Require final conviction or judicial finding
Bankruptcy exclusions No coverage during insolvency Narrow exclusions to trustee-driven claims only; preserve Side A
Consent-to-settle broad Insureds lose control Limit insurer settlement authority; reasonableness standard
Securities/Regulatory carve-outs Major exposures uninsured Narrow exclusions; cover regulatory defense where possible

Pricing examples and market players (U.S. focus)

D&O pricing depends on company size, revenue, industry, claims history, and jurisdiction (NY and CA typically higher due to claimant activity). Approximate ranges seen in market summaries:

Top carriers in the U.S. D&O space include Chubb, AIG, Travelers, Beazley, Hiscox, and Allianz — each with differing appetite and endorsement flexibility. Regional litigation climates (e.g., Delaware, New York, California) and industry (biotech vs. SaaS vs. financial services) will materially influence premium and wording negotiations.

Practical negotiation checklist for counsel and risk managers

  • Review definitions: “Loss,” “Claim,” “Insured Person,” “Wrongful Act.”
  • Confirm Side A independence and advancement language.
  • Narrow fraud and bankruptcy carve-outs to require final adjudication.
  • Limit consent-to-settle powers and clarify allocation mechanics.
  • Ensure coverage for regulatory defense costs where possible.
  • Ask for tailored endorsements rather than relying on insurer boilerplate.
  • Obtain insurer W&I (underwriting) statements and representative endorsements in writing.

Final thoughts

D&O coverage is only as effective as its wording. Boards, general counsel, and risk managers in key U.S. markets — from New York City to San Francisco and Dallas — should prioritize negotiating policy language that preserves advancement, broad insured definitions, and fair settlement/ allocation mechanics. Work with brokers and counsel to secure tailored endorsements from market-leading carriers such as Chubb, AIG, Hiscox, or Beazley, and validate pricing and market posture with current Aon/Marsh market reports.

Further reading:

References and further market reading:

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