D&O Insurance and Insolvency: Why Cover Matters Most When a Company Is Failing

Directors’ and officers’ insurance is often bought with boardroom disputes or regulatory enquiries in mind. In practice, the moment it earns its keep most reliably is when a company is failing. Insolvency transforms the legal landscape around a director: duties shift, an insolvency practitioner arrives with a statutory mandate to investigate, and the company that would normally have stood behind its board is suddenly unable — and often unwilling — to do so. This page explains why D&O cover matters most in exactly the circumstances where it can no longer be bought.

When a company fails, its directors become the target

A liquidator or administrator’s job includes maximising returns to creditors, and one recognised source of recovery is claims against the former directors personally. Insolvency practitioners routinely review the conduct of the board in the period before failure: what the directors knew about the company’s position, when they knew it, what they paid and to whom, and whether the decisions they took preferred some interests over others. Directors who ran the company honestly and reasonably can still face searching questions, demands for information and, in some cases, formal claims — all of which cost money to answer properly.

It is worth being clear that the claimant here is, in substance, the company itself (acting through its officeholder) or its creditors. The people a director spent years working alongside are replaced by a professional whose duty runs to the creditors, not to the board.

Wrongful trading and misfeasance, in outline

Two concepts come up repeatedly. The first is wrongful trading under the Insolvency Act 1986: broadly, the risk that a director may be ordered to contribute personally to the company’s assets if the company continued trading past the point where there was no reasonable prospect of avoiding insolvent liquidation or administration, and the director failed to take the steps they should have taken to protect creditors. The precise test and its application are matters for legal advice; the practical point is that it is a personal exposure, aimed at the director’s own assets, arising out of ordinary commercial decisions about whether to keep going.

The second is misfeasance — a procedural route by which officeholders can pursue directors for breaches of duty, misapplied company property and similar conduct. Alongside these sit potential challenges to transactions entered into before the insolvency and the possibility of director disqualification proceedings. None of this requires dishonesty to be alleged: a genuinely held but mistaken judgement about the company’s prospects can still need defending, and defence costs are frequently the largest real-world exposure.

The company can no longer protect you

In a solvent company, a director facing a claim can usually look to the company for indemnification. In an insolvent one, that route closes: there is no money, and the officeholder controlling the company is often the person bringing the claim. This is precisely the gap that Side A of a D&O policy exists to fill — paying defence costs and covered liabilities directly on behalf of the individual when the company cannot or will not. For a director of a distressed company, D&O cover is not an abstract corporate purchase; it may be the only thing standing between a claim and their personal savings.

How insolvency can affect the policy itself

Insolvency does not just generate claims; it can also change how the policy responds. Some wordings have contained exclusions or restrictions connected with insolvency — for example, provisions bearing on claims brought by liquidators or other officeholders, or on the company’s financial condition. Market practice has moved over time and many modern wordings are more favourable to directors than older ones, but the position varies significantly from policy to policy. There is no substitute for reading the current wording, and this is an area where the difference between two superficially similar policies can be the difference between a funded defence and an unfunded one. If your company operates in a sector under strain, have your broker check the insolvency position of your wording now, while changes can still be negotiated.

Two further practical points. First, notification: policies impose conditions about when and how claims and circumstances must be notified, and a distracted board in a distressed company can easily miss them. Second, continuity: if the premium goes unpaid or the policy is allowed to lapse in the run-up to failure, cover may be lost at the worst possible moment.

Claims-made: cover bought in good times responds in bad times

D&O insurance is written on a claims-made basis. The policy that responds is the one in force when the claim is first made (or the circumstance notified), not the one in force when the underlying decisions were taken. The consequence is stark: by the time a company is visibly failing, meaningful cover is difficult or impossible to buy, and any policy incepted at that stage will be priced and worded for a distressed risk, with disclosure obligations to match. The cover that protects directors through an insolvency is almost always the cover the company bought, and kept renewing, while things were going well. That is the strongest argument for treating D&O as a standing part of the insurance programme rather than a purchase to consider when trouble appears on the horizon.

As an illustrative scenario only: a company renews its D&O policy in the spring, trades into difficulty in the autumn and enters administration the following year. Claims later brought by the officeholder against the former directors would look to the policy position at the time the claims are made — which is why run-off provisions and continuity of cover through the failure matter so much, and why the decisions made at that spring renewal turn out to be the ones that counted.

What directors of a struggling company should do

Take insolvency advice early — that is the single most important protective step, and nothing on this page is a substitute for it. On the insurance side: confirm the policy is in force and premiums are paid; find out what the wording says about insolvency, officeholder claims and run-off; notify circumstances properly and promptly; and do not let the policy lapse. Apex Insurance Brokers is an independent broker, authorised and regulated by the Financial Conduct Authority, and we can review a wording’s insolvency position and explain it in plain English — ideally well before it is needed.

Frequently asked questions

Does D&O insurance protect me against wrongful trading?

D&O policies commonly cover the costs of defending wrongful trading allegations, and may respond to some liabilities, but the scope of cover differs between wordings and some outcomes may not be insurable. Check your policy, and remember that the best protection is taking professional advice early and documenting the board’s decisions.

Can I buy D&O cover once the company is already in difficulty?

Sometimes, but the market for distressed risks is limited, terms are restrictive and the duty of fair presentation requires the company’s position to be disclosed. Cover bought and maintained while the company is healthy is what realistically protects directors through a failure, because the insurance is claims-made.

Does the policy die when the company goes into liquidation?

Not automatically — but what happens next depends on the wording, whether premiums are paid and what run-off arrangements exist. Wordings vary, and the current policy documents govern; this is exactly the point at which directors should get the policy reviewed rather than assume.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy; wordings vary and your current policy documents govern what is and is not covered.