Evolving landscape for Directors & Officers Insurance

For policyholders, the landscape of potential risks for directors and officers continues to evolve, including increased use of artificial intelligence tools, environmental and social governance obligations and the new “failure to prevent fraud” law discussed in detail in the latest edition of this Policyholder Review. Directors’ and officers’ (“D&O”) policies, therefore, remain an essential risk management tool but continue to be a fertile ground for coverage disputes. The Policyholder Review 2026Current landscapeThe acceleration in securities litigation over recent years comes in an environment of heightened shareholder activism, greater availability of litigation funding and artificial intelligence (AI) risks. The current claims environment suggests that insurers are managing this unpredictability by boosting their claims management capabilities and taking a more aggressive approach on claims. It is important that policyholders and their brokers continue to carefully check that their insurance programmes are adequate.Legal updates - securities litigationSecurities litigation remains an increasingly contentious area and merits close attention. An evolving legal, regulatory and technological landscape means it continues to grow as a likely source of claims under D&O policies.Securities litigation in the UK has accelerated in recent years. Common law rights of action were supplemented first by statutory rights under s90 of the Financial Services and Markets Act 2000 (FSMA) and subsequently under s90A. Companies are expressly permitted to indemnify directors under ss232(2)(b) and 234(1) Companies Act 2006, and to purchase insurance for them under ss232(2)(c) and 233. James BreesePartner  Policyholder DisputesSections 90 and 90A of FSMA provide a remedy  to those who have suffered loss in reliance on untrue or misleading statements in listing particulars, or where any required matters were excluded from those particulars. Stewarts has acted on some of the highest value and high-profile securities litigation in the UK, including the RBS Rights Issue Litigation.With both issuers and their directors and officers exposed to securities claims in the UK, securities claims cover for individuals is included under a typical UK D&O wording under Sides A and B, with cover for the company under Side C usually available at an additional premium. Cover for  US claims is often excluded due to the increased exposure.Arjun DharAssociatePolicyholder DisputesThe Court of Appeal had to consider for the first time, in Wirral Council v Indivior Plc [2025] EWCA Civ 40, whether the representative action procedure (which enables opt-out ‘class action’-style group litigation) was appropriate for a securities claim. The court dismissed the appeal, agreeing with the first instance court that the claims should proceed only by way of multi-party proceedings. While this decision may act as an obstacle for book-building claims on behalf of retail investors (whose claims may be more limited in value), it is likely to be temporary. The decision may help potential litigants (and their advisers) navigate a way through the procedural requirements for bringing class action style disputes such as we see in the United States.For example, across the Atlantic, data from the North American market shows an unmistakable upward trend in securities class action lawsuits, particularly those alleging false or misleading statements related to artificial intelligence.Frequent themes in these lawsuits are allegations of (i) exaggeration of AI capabilities; (ii) exaggeration of the effect of AI adoption on the companies’ bottom lines; (iii) failure to disclose limitations associated with the adoption of AI; and (iv) misleading statements about risks associated with the adoption of AI. Indeed, data from Law360 shows that in the  United States, 2025 is on track to break the record for AI-related securities class action filings. It remains to be seen whether these represent an across-the-board increase in meritorious rather than speculative claims, as the courts’ approach to these cases evolves. Directors and OfficersThe D&O claims environment in the UK often follows the trends seen across the pond. Where the potential defendants to a s90 claim could be any person responsible for the prospectus or listing particulars, an array of insured persons under a D&O policy might be part of the factual matrix for a securities claim, which could conceivably give rise to extensive claims under D&O policies. A key area to monitor will be whether the English courts accommodate the use of the representative action procedure in claims alleging harm from the use of  AI tools, which could create a wider exposure that goes beyond potential claims from institutional investors only.Common issues in D&O claimsInternational insurance programmesD&O policies are frequently written as part of global programmes, with a master policy covering claims in a number of jurisdictions, often on a difference-in-conditions basis.Issues can arise where there are legal or regulatory differences between the law of the state governing the policy and the law of the state in which the insured peril has occurred. We also see issues arise in cross-border D&O claims where the insured person may be the subject of some civil, criminal or regulatory investigation (or allegations) in another jurisdiction (often the US) and is concerned about providing disclosure of documents to their D&O insurers when that documentation may become disclosable/discoverable at a later stage in the underlying proceedings to which the insured person is subject. This is a complex issue to navigate when, on the one hand, the insured person is concerned to ensure that any privilege over documents is retained, while on the other hand, they are trying to unlock coverage for defence costs that may be essential to defending the underlying allegations. Allocation4Directors and Officers5Another common issue arises when D&O claims are made in respect of both covered and uncovered matters or made jointly against covered and uncovered individuals or companies. Establishing the proportion of covered loss in such cases is not straightforward and is referred to as “allocation”.  It is a common issue for a variety of D&O claims,  not just those that arise out of securities litigation  or potential litigation. In International Energy Group Ltd v Zurich Insurance plc UK Branch (Association of British Insurers and another intervening) [2015] UKSC 33, the Supreme Court approved and applied the allocation principle established by the Privy Council in New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237. In that case, the insured had incurred defence costs jointly on its own behalf and that of an uninsured defendant. Because the insured was able to demonstrate that the costs actually incurred would have been the same regardless of the representation of the uninsured defendant, the court found that all of the costs were proximately caused by an insured peril and therefore covered in full, notwithstanding that they also benefited an  uninsured party.Many policies now contain express allocation clauses, providing that where claims are made in relation to both covered and uncovered matters, or against both covered and uncovered persons, the insured and insurer agree to use commercially reasonable efforts to agree a fair and reasonable allocation of covered vs uncovered costs, in the absence of which the matter is referred for determination by a third- party expert. While it will be in insurers’ interest to argue that such provisions oust the New Zealand Forest principle, it is far from clear that they can do so. It ought to remain fair and reasonable to apply the reasoning set out by the court in that case, as followed by the Supreme Court in International Energy Group.The insured versus insured exclusionMany policies contain an exclusion of liability for loss flowing from claims brought by one insured against another. The exclusion is by no means included as standard, and its scope is often limited to claims brought by a major shareholder of the insured, claims brought in the USA or collaborative claims. The exclusion derives from public policy and commercial considerations to avoid collusion between insured persons and entities seeking to access an insurer’s capital by generating claims against themselves.The Policyholder Review 2026Composite policies: update following Bath RacecourseA typical D&O policy will include, at a minimum, a single corporate entity and its director(s), whose interests under the policy are several and not joint. This can range in complexity, particularly where  D&O cover purchased by an investment fund is extended to cover newly acquired subsidiaries/portfolio companies. The disparate nature of the insureds means that the policy will likely be treated as composite in nature; indeed, it is probably the archetypal example of a composite policy. In other words, the policy is regarded as a single document evidencing a bundle of bilateral contracts between the insurer(s) and each of the insureds, whose respective rights and obligations may be enforced independently.It is common practice for a parent company to purchase a policy in its own name for the benefit of its subsidiaries and affiliates. The subsidiary companies may be individually named in a policy schedule, incorporated by naming the insured as “XCo plc and its subsidiaries and affiliates”, or by defining “insured” or “company” in a similar way. Either method can be effective to ensure that all group companies are insured under the policy, as the Court of Appeal confirmed in Bath Racecourse v Liberty Mutual SE. EWCA Civ 153.The significance of a composite policy is found in the application of the limits and sub-limits of indemnity that are available under such a policy.Directors and OfficersArtificial intelligence  Concluding remarks 6Directors and Officers7Aggregation and limitsIn the context of both fidelity and business interruption insurance, the Court of Appeal has found that the composite nature of a policy insuring a group of companies was a decisive factor that led to the specified limit of liability being available to each of the insured companies separately rather than shared between them (New Hampshire Insurance v MGN [1997] L.R.L.R. 24, Bath Racecourse v Liberty Mutual Insurance Europe SE [2025] EWCA Civ 153).and D&O coverWe have commented above on some of the risks posed under D&O policies from the perspective of securities litigation borne out of allegations relating to the use of, or commentary on, AI. The increased use of AI can also engage a D&O policy in a traditional way, however, with the volume of claim notifications only likely to rise with over half of the UK’s businesses now adopting some form of AI. The Policyholder Review 2026Between the 2025 and 2026 editions of this Policyholder Review, we have commented on the following risks:1. The Economic Crime and Corporate Transparency Act 2023. 2. Significant new precedents in relation to directors’ duties. 3. Claims arising out of increasing numbers of company insolvencies. The basic principle behind establishing how limits of liability apply to insureds under a composite policy is ultimately that it is a matter of policy construction and determining the objective intention of the parties at the time the terms were agreed. The objective intention of the parties in the context of a D&O policy may well be found to produce a different outcome from that in the cases previously decided, given the possible concurrent claims against multiple directors in relation to a single incident and given that the cover is all purchased by the company to cover its employees. However, certainly there can be no presumption that a limit is intended to apply on an aggregate basis in the absence of words to that effect.On one view, there will be familiar arguments around the extent of ‘silent’ cover available, such as we saw years ago in relation to cyber risks and the extent to which D&O policies could respond. On the other, on the face of a typical D&O policy and the widely drafted provisions therein, there may be affirmative cover for losses caused by the use and deployment of AI. Whether there is or is not cover is clearly going to turn on the precise drafting of the policy and the extent of the long list of exclusion clauses that a D&O policy invariably contains. In an evolving area, and with one eye on the nature of AI-related litigation that is already being seen in the US, D&Os and their advisers will do well to think carefully about the scope of cover they require. 4. Climate change-related risks. 5. Claims arising out of AI, including ‘AI-washing’,  as increasingly seen in the US. 6. Increased regulatory activity (and fines) and accountability for individuals. 7. Increase in securities litigation. Directors and OfficersThis extensive list speaks volumes about the challenging environment for D&O claims, reflecting the rapidly evolving underlying risk landscape, which will not abate. For the most part, the claims market for these risks in this jurisdiction is in its infancy, but insureds are still at risk through international markets and stakeholders. Policyholders and their brokers must be increasingly precise about the cover that is required and understand where the gaps in cover may be. There is a myriad of ways that a business and its insured persons could find themselves the subject of unwanted scrutiny by a variety of third parties, which will quickly drain resources if inadequate cover was purchased in the first place and/or if a claim is not appropriately managed from the minute it first arises.