Most directors of small and mid-sized companies assume directors’ and officers’ insurance is something plc boards buy. It isn’t. The duties in the Companies Act 2006 apply to the director of a three-person engineering firm in exactly the same terms as they apply to a FTSE 100 board, and so does the personal liability for breaching them. The difference is that the plc director has cover, and the SME director very often doesn’t.

D&O is one of the few covers that protects a person rather than a business. This guide explains what it does, what it doesn’t do, and when it stops being optional.

What is directors’ and officers’ insurance?

Directors’ and officers’ liability insurance pays the legal defence costs and civil damages that arise when a director, officer or senior manager is personally pursued for a wrongful act carried out in that role — a breach of duty, a misstatement, a neglect, an alleged error of judgement. It is cover attached to the individual’s decision-making, not to premises, stock or vehicles.

The critical word is personally. Company liabilities are the company’s; director liabilities are yours, and they attach to what you own. Limited liability protects shareholders from the company’s debts — it does not protect directors from claims brought against them individually. If you employ people, hold personal data, sign contracts, have a co-shareholder or could conceivably become insolvent, that exposure already exists.

Who counts as a “director or officer”?

Wider than most SME boards expect. A typical UK wording extends to:

• Registered and de facto directors — anyone acting as a director whether or not formally appointed at Companies House.
• Shadow directors — people whose instructions the board is accustomed to follow, which catches the owner who has “stepped back”, a family member, or a controlling investor.
• The company secretary, non-executive directors, and employees acting in a managerial or supervisory capacity where the claim relates to that role.
• Trustees and committee members of charities and associations, where the policy is written for that structure, and directors of subsidiaries.

An operations manager who signs contracts, or a site manager with health and safety responsibility, is exposed even though they never appear on the register of directors.

What D&O actually covers

UK D&O policies are built around three insuring clauses. Which one responds, and when, is the whole point of the cover.

Side A — the director, when the company cannot indemnify

Side A pays the director directly where the company is unable or not permitted to indemnify them — the part that matters most. Section 232 of the Companies Act 2006 voids most provisions exempting a director from liability to their own company, and a qualifying third party indemnity under section 234 cannot cover fines, penalties or the costs of an unsuccessful criminal defence. In insolvency, a board indemnity is a promise from a company with no money.

Side B — reimbursing the company

Side B reimburses the company where it has lawfully indemnified its directors, typically defence costs paid under a qualifying third party indemnity provision. It protects the balance sheet rather than the individual.

Side C — the company itself (entity cover)

Side C covers claims against the company as an entity. In UK private-company wordings it is usually restricted to specific heads such as employment practices, rather than the broad securities cover in listed-company policies — so read what your Side C actually attaches to.

The exposures that catch SME directors

Insolvency and wrongful trading

The largest single source of claims against SME directors. If a company enters insolvent liquidation, an office-holder can pursue directors personally under section 214 of the Insolvency Act 1986 for wrongful trading, or for misfeasance under section 212. Directors may also face disqualification proceedings under the Company Directors Disqualification Act 1986. At exactly that moment, the company can no longer indemnify anyone.

Health and safety prosecutions

Under section 37 of the Health and Safety at Work etc. Act 1974, where a company’s offence is committed with the consent or connivance of, or is attributable to neglect by, a director or manager, that individual is guilty of the offence too. Corporate manslaughter under the 2007 Act applies to the organisation, but individuals can be prosecuted separately for gross negligence manslaughter. Fines are uninsurable as a matter of public policy; defence costs generally are insurable, and in a contested HSE prosecution they are the bill that arrives first.

Employment practices

Discrimination, harassment, unfair dismissal and whistleblowing claims are frequently pleaded against named individuals as well as the employer, and tribunal awards for discrimination are uncapped. Employment practices liability is sometimes built into an SME D&O policy and sometimes sold as an extension — check which you have.

Regulatory investigations and data protection

Investigation costs cover responds to the cost of dealing with a regulator before any claim exists — the ICO under UK GDPR and the Data Protection Act 2018, HMRC, the HSE or a sector regulator. Under section 14 of the Bribery Act 2010, a senior officer who consents or connives in an offence commits it personally. Investigations are long and expensive to defend even when nothing is found.

Shareholder, investor and joint venture disputes

Owner-managed businesses with two or three shareholders produce a steady flow of unfair prejudice petitions, derivative claims and breach of duty allegations under sections 171 to 177 of the Companies Act 2006. Falling out with a co-shareholder is a governance event, not just a personal one.

What D&O does not cover

• Fraud, dishonesty and deliberate wrongdoing — though most wordings advance defence costs until dishonesty is established by final adjudication or admission. Check that carve-back is there.
• Bodily injury and property damage — that is public liability and employers’ liability territory.
• Professional advice or services provided to clients — that is professional indemnity, which covers what you advised rather than how you directed the business. Many firms need both.
• Fines and criminal penalties, uninsurable in the UK on public policy grounds. Defence costs are a different matter.
• Personal guarantees, directors’ loan accounts and other contractual debts — though allegations of preferring one creditor, or misapplying company assets, do sit within the cover.
• Circumstances known before inception and not disclosed — what you knew about and didn’t notify won’t be picked up by next year’s policy either.

Claims-made cover, and why the dates matter

D&O responds to claims made and notified during the policy period, whenever the act complained of occurred. Two consequences follow. Let the policy lapse and cover for past decisions goes with it — which is why retired directors, and directors of companies sold or wound up, need run-off cover. And the retroactive date determines how far back cover reaches, so switching insurer without carrying it across can quietly delete years of protection.

Disclosure matters too. Under the Insurance Act 2015 you must make a fair presentation of the risk: past insolvencies, disqualification proceedings, live disputes and regulatory contact, across every director. Getting that wrong at proposal stage is the most reliable way to lose a claim.

How much cover should an SME buy?

There is no formula, but the drivers are consistent: number of directors, turnover, sector, external investors or minority shareholders, headcount, the personal data you hold, and any US or Canadian exposure. For a small private company £1 million is a common starting limit; boards with outside investors or regulated activity routinely buy more.

Remember the limit is usually shared and defence costs erode it: if three directors are named in one action and each instructs their own solicitor, a modest limit disappears quickly.

Common mistakes we see on SME D&O policies

• No cover at all, on the assumption that limited liability or the company’s indemnity is enough. Neither survives insolvency.
• Limits set years ago and never revisited, or retroactive dates lost when switching insurer to save a small premium.
• No run-off arranged after a sale, a retirement or a solvent wind-up.
• Employment practices assumed to be included when it is an optional extension, and senior managers or de facto directors left outside the definition of insured person.
• Subsidiaries and newly acquired entities never added to the policy.

How much does D&O insurance cost?

It depends on turnover, sector, number of directors, balance sheet strength, claims and insolvency history, overseas exposure and the limit you buy. A stable, profitable company with a clean history sits at the cheaper end; a board with a previous insolvency behind it, an investor-backed structure or a regulated activity will pay more and face more underwriting questions. As with any liability cover, a quote dramatically cheaper than the rest usually reflects a narrower definition of insured person, a lower sub-limit or a missing extension rather than a better deal.

How Cornerstone helps

Cornerstone is an independent insurance broker based on New Walk in Leicester, arranging management liability and business insurance for companies, charities and boards across Leicestershire and the East Midlands. Because we’re independent, we compare D&O wordings across the market rather than accepting one insurer’s standard form — and wordings are where this cover is won or lost. We check who is actually defined as an insured person, whether employment practices and investigation costs are included or bolted on, where the retroactive date sits, and whether the limit covers more than one director in the same action. When something happens, you deal with our claims team, not a call centre.

To discuss D&O cover with a broker, call us on 0116 3440 040 or request a call-back. If you already have a policy, send us the schedule and wording — we’ll review it free of charge and tell you plainly whether the definition of insured person, the limit and the retroactive date do what you think they do.

Frequently asked questions

Is directors’ and officers’ insurance a legal requirement in the UK?

No. Unlike employers’ liability, there is no statutory obligation to buy it. Section 233 of the Companies Act 2006 expressly permits a company to purchase and maintain D&O insurance for its directors, but the decision is the board’s.

Does D&O cover me if the company goes into liquidation?

That is precisely what Side A is for. A liquidator or administrator can pursue directors personally for wrongful trading or misfeasance, and at that point the company’s indemnity is worthless. The policy must be in force when the claim is made and notified, which is why letting cover lapse during a wind-down is a serious mistake.

Do charity trustees need it?

Yes, and they are frequently the least protected group we meet. Trustees of unincorporated charities can be personally liable without limit, and trustee indemnity insurance needs to be arranged in line with Charity Commission guidance.

What happens to my cover when I resign or the company is sold?

Cover for past acts ends with the policy unless run-off is arranged — usually six years, matching the limitation period for breach of duty claims. Negotiate it as part of a sale, not afterwards.