How does D&O liability insurance work?
What are the limitations of liability insurance for D&Os?
What laws govern Chinese D&O liability insurance?


Directors and officers (D&Os) assume liability for many of their company's activities, especially when such companies are publicly listed. In many cases, D&Os face significant legal exposure based simply on their:

  • signature;
  • role and title; or
  • status as a manager.

This means that no matter how effectively, carefully or faithfully their decisions are made, D&Os face the risk of being sued. D&O insurance, therefore, is designed to cover this risk. It provides protections for executives and directors, as well as the companies that they serve, against liability that arises while managing and doing business. Such protection can include:

  • the legal costs and damages from being sued by plaintiffs or prosecuted by regulators;
  • the costs of settling such actions; or
  • other forms of liability.

D&O insurance first emerged on the Lloyds of London insurance market in the 1930s and, while not mandatory, it is common with private and publicly traded companies alike.

With the listing of more and more Chinese companies in foreign markets, an increasing number of such companies now acquire D&O insurance. Within China, due to revisions to the Securities Law and ensuing securities litigation, D&O insurance has also captured the attention of Chinese D&Os.

How does D&O liability insurance work?

When a crisis hits, a typical D&O policy covers both the corporate entity in addition to individual D&Os. Possible areas of coverage include:

  • insurance for investigations;
  • tax liability;
  • securities; and
  • employment claims.(1)

Among these potential sources of liability, securities claims tend to raise the greatest exposure. When a securities claim arises, D&Os are designed to cover "wrongful acts". Depending on the language in D&O policies, this typically covers the kinds of mistakes, poor judgment or negligence that lead to shareholder litigation. However, these "wrongful acts" normally do not include intentional or fraudulent acts committed by D&Os.

What are the limitations of liability insurance for D&Os?

D&O insurance does not provide cover against all types of liabilities. A number of exclusions exist to limit insurer liability, which can greatly affect coverage and settlements of shareholder litigation. Conduct exclusions exist to prevent benefits for intentional wrongdoing, such as a criminal or fraudulent act (including fraud on the market). In some cases, inappropriate conduct can lead to termination of coverage. Many policies also include a "prior knowledge" exclusion, which prevents claiming losses from lawsuits that involve matters which D&Os were aware of or should have known about prior to litigation. In some cases, the exclusion can only be triggered by a judicial ruling (eg, a final non-appealable adjudication). In China, there is fierce debate over whether D&O covers losses that result from government penalties. Decision-makers within China's insurance market hope for court precedents that could clarify this issue, especially with regards to the proper application of the insurable interest in D&O insurance.

What laws govern Chinese D&O liability insurance?

Chinese entities that raise funds abroad through initial public offerings increasingly turn to Chinese insurers for their D&O insurance needs. In many cases, such entities earn their revenue in China but are structured as a variable interest entity (VIE) headquartered in a tax haven such as the Cayman Islands or British Virgin Isles. When a foreign securities claim arises, these policies become notable in that they typically engage both Chinese and foreign law.

This leads to multifaceted insurance policies – for example:

  • a Cayman side, which might face bankruptcy proceedings following a fraud on the market claim;
  • a Chinese side, which governs the policy; and
  • a US side, which, for example, governs settlement allocations when a class action settles.

To illustrate, while most securities litigation is currently heard before US district courts or state courts in New York, Chinese D&O policies usually set an arbitration centre in Beijing or Shanghai as the forum for policy disputes, with Chinese law as the governing law.

This can lead to extremely complex proceedings where disagreements arise on how a Chinese court or tribunal should determine allocation of damages under US law. Chinese arbitration of D&O claims often involves US lawsuits where multiple defendants decide to settle with the plaintiffs. This leaves important issues of allocation unresolved, with no foreign court having definitively determined the portion of liability for each defendant, only some of whom are the insureds or covered under the D&O policy. Therefore, in addition to the underlying Chinese laws, it is also crucial to understand the rules that surround the applicable laws of the jurisdiction where the VIE is headquartered and where the insured entity is listed, especially US securities laws.


Similar to their common law precursors, Chinese D&O policies protect against securities claims, including when D&Os commit "wrongful acts". However, this cover does not extend to fraudulent or criminal conduct, and policies may also exclude wider categories of behaviour.

Litigating these policies rarely relies on only the laws of one jurisdiction because Chinese D&O policies typically interact with Chinese, US and even Cayman or British Virgin Islands laws governing a VIE's incorporation. Instead, they are multifaceted operations that are far more complex than domestic D&O policies of US publicly listed companies.

For further information on this topic please contact Hao Zhan, Jia Wan or Hannibal El-Mohtar at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected], [email protected] or [email protected]). The AnJie Law Firm website can be accessed at


(1) Some policies also include fees for crisis management, including emergency consulting and public relations services.