D&O Insurance for Non-Executive Director

By Adrian Lawrence FCA, founder of NED Capital · Part of the Board Governance Hub

Most non-executive directors understand, at least in outline, that the role carries personal responsibility. Fewer understand exactly how they are protected against it. Directors’ and officers’ liability insurance — almost always shortened to D&O — is the main thing standing between a non-executive director and their own personal assets if a claim is ever made against them. Yet it is one of the least-examined parts of a board appointment. Directors sign up, assume they are covered, and never read the policy. That is a mistake, because what a D&O policy does and does not cover, who pays for it, and how robust it actually is can matter enormously on the rare occasion it is needed.

This guide explains what D&O insurance is, what it covers for a non-executive director, the important things it does not cover, who pays, and what every incoming NED should check before accepting a seat. It is written for both sitting and prospective non-executives, and it draws on NED Capital’s experience advising directors and boards on appointments. It is general guidance rather than insurance or legal advice, and anyone with a specific concern should take professional advice on their own circumstances.

What D&O Insurance Actually Is

Directors’ and officers’ liability insurance is a policy that a company buys to protect the people who serve on its board and in its senior management against personal liability for decisions they take in that role. If a director is sued — by shareholders, a liquidator, a regulator, an employee or a third party — for something they did or failed to do as a director, a D&O policy can cover the cost of defending the claim and, in many cases, any damages or settlement that results. The crucial word is personal: a director’s liability as a director is their own, not the company’s, and without insurance it is their own assets that are exposed. D&O exists precisely because the law makes directors personally accountable, and few capable people would accept a board seat if a single claim could cost them their house.

A non-executive director is a director in law in exactly the same way as an executive one. The duties set out in the Companies Act 2006 — to promote the success of the company, to exercise reasonable care, skill and diligence, to avoid conflicts of interest — apply to NEDs as much as to the executive team. The fact that a non-executive is part-time, independent and not involved in day-to-day management does not reduce their statutory duties. It follows that a NED needs the protection of a D&O policy just as much as any other director, and arguably should scrutinise it more carefully, because a non-executive has less visibility of the company’s affairs and relies more heavily on what management tells the board.

What a D&O Policy Covers

A typical D&O policy covers the legal costs of defending a claim against a director and the financial consequences of that claim where the director is found liable or settles. The claims it responds to are varied: allegations of breach of duty or breach of trust, negligence or mismanagement, misstatements to shareholders or investors, employment-related claims such as wrongful dismissal or discrimination brought against directors personally, regulatory investigations and the costs of responding to them, and claims brought by a liquidator or administrator if the company fails. For a non-executive, the most relevant exposures tend to be allegations that the board failed to exercise proper oversight — that it did not challenge management, did not spot a problem it should have spotted, or allowed the company to continue on a course it should have questioned. D&O is what funds the director’s defence in those situations, and the cost of defending even an unmeritorious claim can run to a great deal, which is why the defence-costs cover matters as much as the liability cover.

Good policies also include cover that is easy to overlook but valuable. Cover for the costs of attending a regulatory interview or investigation, which can arise even when no wrongdoing is ultimately found. Cover that continues to protect a director after they have left the board, for claims relating to their time in office — relevant because claims often surface long after the event. And, importantly, cover that protects the individual director even where the company cannot or will not indemnify them, which is the situation in which a NED is most exposed. These features are the difference between a policy that genuinely protects a non-executive and one that looks reassuring but falls away at the moment it is needed.

What D&O Does Not Cover

A D&O policy is not a blanket indemnity, and the exclusions are where directors are most often caught out. Most policies will not cover deliberate dishonesty, fraud or a director who knowingly obtains a personal benefit they were not entitled to — and rightly so, since insurance cannot be used to reward wrongdoing. Fines and penalties imposed as a punishment are frequently uninsurable as a matter of public policy, even where the defence costs are covered. Claims by one insured director against another, and some claims by the company against its own directors, may be excluded or limited. Bodily injury and property damage usually belong under other policies, not D&O. And policies carry limits: a maximum total payout, which can be eroded by defence costs and by claims against other directors drawing on the same pot, so that a NED can find the cover exhausted by the time their own claim is dealt with. Understanding the exclusions and the limits is as important as understanding the cover, because they define the edge of the protection a non-executive is actually relying on.

Who Pays for It

D&O insurance is bought and paid for by the company, not by the individual director, and this is entirely normal and proper. The company takes out a single policy covering all its directors and officers, and the premium is a business cost. A non-executive should not expect to pay for their own cover, and should treat a company that has no D&O policy, or expects directors to arrange their own, as a warning sign. The Companies Act allows a company to indemnify its directors and to purchase insurance for them, and most well-run companies do both: they give directors a contractual indemnity in addition to maintaining a D&O policy. The indemnity and the insurance work together — the indemnity is the company’s promise to stand behind the director, and the insurance is what funds that promise, including in the one situation where the indemnity is worth least, which is when the company itself has become insolvent.

That last point deserves emphasis for non-executives. A company indemnity is only as good as the company. If the business fails, the indemnity may be worthless, and it is precisely in a failure that claims against directors — often from the liquidator — are most likely to arise. This is why a NED should care not only that a D&O policy exists but that it is the kind of policy that continues to protect the individual director when the company can no longer stand behind them. A policy that pays the director directly, independent of the company’s solvency, is far more valuable to a non-executive than one that relies on the company being around to claim.

What a NED Should Check Before Joining a Board

Before accepting any board seat, a non-executive should ask to see evidence of the company’s D&O cover and satisfy themselves on a handful of points. Does the policy exist and is it current. What is the limit of cover, and is it adequate for the size and risk profile of the business. Does it cover defence costs as well as damages, and does it pay those costs as they are incurred rather than only at the end of a case. Does it protect the director personally where the company cannot indemnify them, and does it respond if the company becomes insolvent. Does it continue to cover the director for an adequate period after they leave the board. And is there a company indemnity in the letter of appointment alongside the insurance. A director should also understand the main exclusions, so there are no surprises. None of this is awkward to ask — a well-run board will have clear answers, and a board that cannot answer is telling the incoming NED something important about its governance. We cover this and the wider pre-acceptance checks in our guidance on NED responsibilities and legal duties.

Why This Matters More for Non-Executives

It is worth being honest about why D&O deserves particular attention from a non-executive rather than an executive director. A NED carries the same legal duties but has far less information: they see what management chooses to put in the board pack, they are present for a fraction of the week, and they depend on the honesty and competence of the executive team in a way a full-time director does not. When something goes wrong, the question asked of the board is almost always about oversight — whether the non-executives challenged enough, probed enough, insisted on enough. A non-executive who has done the job well, asked the right questions and recorded their challenge in the minutes is in a strong position; but defending even a good record costs money, and that is what D&O is for. For a non-executive, robust insurance is not a luxury or a formality. It is one of the conditions on which the role can sensibly be accepted at all, and understanding it is simply part of doing the job properly.

Frequently Asked Questions

Does a non-executive director need D&O insurance?

Yes. A NED is a director in law with the same statutory duties, so the same personal liability applies. Because a non-executive relies heavily on what management tells the board, robust D&O cover is arguably even more important for a NED than for an executive director.

Who pays for a NED’s D&O cover?

The company does. D&O is a single policy the company buys to cover all its directors and officers, and the premium is a business cost. A non-executive should not pay for their own cover, and a company with no policy should be treated as a warning sign.

Does D&O cover fraud or dishonesty?

No. Deliberate dishonesty, fraud and improper personal gain are standard exclusions, and punitive fines are often uninsurable. D&O protects directors against claims arising from honest decisions and oversight, not against their own wrongdoing.

What happens to D&O cover if the company becomes insolvent?

This is exactly when cover matters most, as claims from a liquidator often follow a failure. A good policy protects the individual director directly, independent of the company’s solvency, which is why a NED should confirm the policy does so rather than relying on a company indemnity alone.

NED Capital | Sister practice of FD Capital | ICAEW practising certificate held by Adrian Lawrence FCA. This article is general guidance and not insurance or legal advice.