In brief
A D&O review should consider:
- who the directors and officers are across the group;
- ownership, shareholders and investors;
- the company’s financial position and debt;
- subsidiaries and board appointments;
- regulatory exposure;
- employment-related allegations where relevant;
- Side A, Side B and Side C structure where applicable;
- defence and investigation costs;
- limits and deductibles;
- insured-versus-insured and other material exclusions;
- prior claims and known circumstances; and
- events such as fundraising, acquisitions, restructuring or significant board change.
The key question is not simply whether the company has a D&O policy. It is whether the protection still reflects who is making decisions and who could challenge them.
Directors carry duties even in private companies
D&O is sometimes discussed as if it is mainly a listed-company issue. That is too narrow. Hong Kong company directors owe duties in the management of the company. The Companies Registry’s Guide on Directors’ Duties includes the duty to exercise reasonable care, skill and diligence under section 465 of the Companies Ordinance. Insurance does not remove those duties and it does not protect deliberate wrongdoing simply because a claim is made. What it can do, subject to wording, is provide financial protection around covered allegations and defence costs where directors and officers are challenged in connection with company management.
Where can claims come from?
Potential claimants or sources of allegations can include:
- shareholders or investors;
- employees;
- creditors;
- customers or counterparties;
- regulators or authorities;
- liquidators or insolvency practitioners; and
- in some situations, the company itself or another insured party, subject to policy terms.
Claims can involve alleged breach of duty, misleading statements, employment decisions, financial reporting, mismanagement, disclosure issues, regulatory matters or governance disputes. The allegation may be defensible. But an individual director can still face the time and cost of responding.
Understanding Side A, Side B and Side C
D&O programmes are often described through three coverage “sides”.
Side A – individual director protection
Side A is intended to protect individual directors and officers where the company cannot or does not indemnify them, subject to the policy. This can be particularly important where the company is insolvent or indemnification is legally unavailable.
Side B – company reimbursement
Side B generally reimburses the company where it has indemnified an insured director or officer for a covered claim.
Side C – entity cover
Side C can provide specified protection for the corporate entity itself. The scope varies and is often narrower or more specific depending on whether the company is private or publicly listed and the policy form used. The labels are useful, but the wording and definitions determine the actual cover.
Limits need to be considered against defence as well as settlement
D&O claims can consume significant defence and investigation costs before any settlement or judgment is reached. A board reviewing limits should therefore consider:
- size and ownership of the business;
- investor profile;
- financial position;
- number of insured directors and officers;
- subsidiaries and overseas boards;
- regulatory exposure;
- employment disputes;
- previous claims;
- transaction activity; and
- whether defence costs erode the limit.
A limit that looked adequate when the company was founder-owned can become less comfortable after external investment, regional expansion or a material increase in headcount.
What we see in practice
D&O often becomes urgent around a corporate event. A new investor asks about cover during due diligence. A lender requires evidence. The company acquires another entity. A director joins a subsidiary board. A dispute develops with a former executive or shareholder. These are exactly the points when the risk profile can change. The better approach is to treat major corporate events as D&O review triggers, not wait until the annual renewal catches up.
Fundraising and new investors can change the exposure
Bringing external capital into a founder-led business changes more than the cap table. There may now be new shareholders with information rights, board representation, investment agreements, warranties and different expectations around governance. The D&O review should consider the new ownership structure, board composition, investor rights and any transaction-specific exposures. This does not mean every fundraising requires a completely new policy. It means the insurer should be given an accurate picture of the company after the transaction.
Insolvency changes the importance of Side A
When a company is financially healthy, directors may assume the company will simply indemnify them. In distress or insolvency, that assumption can fail. Company assets may no longer be freely available for indemnification, and the interests of creditors, liquidators and directors can diverge. For boards of leveraged or financially volatile businesses, the Side A structure and any dedicated Side A limits deserve specific attention.
Multinational boards need an entity map
A regional group may have directors sitting on several subsidiary boards. The D&O programme should reflect which entities are insured, where directors hold appointments and whether local policies or local treatment are required in particular jurisdictions. This is one reason D&O should often be reviewed alongside the wider multinational programme rather than as a purely Hong Kong policy.
A practical board review checklist
Review D&O when there is:
- A new investor or fundraising – ownership, board rights, disclosures and limit adequacy.
- An acquisition or new subsidiary – insured entities, past acts, directors and jurisdiction.
- A board change – insured persons and outside-directorship exposure.
- Financial deterioration – Side A protection, insolvency issues and insurer appetite.
- A significant employment dispute – where employment-practices cover sits.
- A regulatory investigation or change – definitions, investigation cover and notification.
- International expansion or renewal – subsidiary boards, territories, claims, financials and programme structure.
The Trusted Union perspective: D&O should follow governance, not just revenue
Two businesses with the same turnover can have very different management-liability exposures. One may be founder-owned with little debt and a stable board. The other may have institutional investors, overseas subsidiaries, lenders and a rapidly changing management team. Trusted Union therefore reviews D&O in the context of ownership, board structure, financial position, employees, jurisdictions, transactions and insurer appetite. The aim is to understand where personal exposure can arise and whether the programme still matches the way the company is governed today.
D&O should be reviewed when governance changes – not only when renewal arrives.
Trusted Union helps founders, boards and corporate groups review management-liability exposure, policy structure and insurer options in the context of the organisation today.
Explore Directors & Officers Liability
