Insurance policies

Understanding the Complexities of Directors’ and Officers’ Liability Insurance Policies in China – Commentary

How does A&D liability insurance work?
What are the limits of liability insurance for D&D?
What laws govern Chinese A&D liability insurance?


Directors and Officers (D&Os) bear responsibility for many of their company’s activities, especially when those companies are publicly traded. In many cases, D&Os face significant legal exposure based simply on their:

  • Signature;
  • role and title; Where
  • manager status.

This means that no matter how efficiently, carefully, or faithfully their decisions are made, D&Ds run the risk of being sued. D&O insurance is therefore designed to cover this risk. It provides protection for officers and directors, and the businesses they serve, against liability arising from the management and conduct of business. Such protection may include:

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

D&O insurance first appeared on the Lloyds of London insurance market in the 1930s and, although not compulsory, is common in private and listed companies.

With more and more Chinese companies listing in overseas markets, an increasing number of these companies are now purchasing A&D insurance. In China, due to securities law revisions and resulting litigation, D&O insurance has also attracted the attention of Chinese D&Os.

How does A&D liability insurance work?

When a crisis strikes, a typical D&O policy covers both the business and individual D&Os. Possible areas of coverage include:

  • insurance for investigations;
  • tax liability;
  • securities; and
  • job applications.(1)

Of these potential sources of liability, securities claims tend to generate the most exposure. When a debt claim arises, D&Os are designed to cover “wrongful acts”. Depending on the wording of D&O policies, this generally covers the kinds of errors, lack of judgment or negligence that lead to shareholder litigation. However, such “wrongdoing” does not normally include intentional or fraudulent acts committed by D&As.

What are the limits of liability insurance for D&D?

D&O insurance does not cover all types of liability. A number of exclusions exist to limit the insurer’s liability, which can greatly affect the coverage and resolution of shareholder disputes. Conduct exclusions exist to prevent benefits from willful wrongdoing, such as criminal or fraudulent (including market fraud). In some cases, improper conduct may result in termination of coverage. Many policies also include a “foreknowledge” exclusion, which bars claims from claims arising from lawsuits involving matters of which the D&As were aware or should have been aware prior to the litigation. In some cases, the exclusion can only be triggered by a judicial decision (for example, a final decision without appeal). In China, there is fierce debate over whether D&O covers losses resulting from government sanctions. Chinese insurance market makers are hoping for court precedents that could clarify this issue, particularly regarding the proper application of insurable interest in D&D insurance.

What laws govern Chinese A&D liability insurance?

Chinese entities raising funds overseas through IPOs are increasingly turning to Chinese insurers for their D&O insurance needs. In many cases, these entities earn their income in China but are structured as a variable interest entity (VIE) headquartered in a tax haven such as the Cayman Islands or the British Virgin Islands. When a claim on foreign securities arises, these policies become notable in that they generally involve both Chinese and foreign law.

This leads to multi-faceted insurance policies – for example:

  • a Caymanian party, which could be the subject of bankruptcy proceedings following a fraud on the commercial debt;
  • a Chinese part, which governs politics; and
  • a US part, which, for example, governs settlement benefits when a class action lawsuit is settled.

For example, while most securities disputes are currently heard in US district courts or New York state courts, Chinese D&O policies typically establish an arbitration center in Beijing or in Shanghai as a forum for policy disputes, with Chinese law as the governing law.

This can lead to extremely complex proceedings where disagreements arise over how a Chinese court or tribunal should determine the award of damages under US law. Chinese arbitration of D&O claims often involves lawsuits in the United States where multiple defendants decide to settle with plaintiffs. This leaves important questions of attribution unresolved, as no foreign court has definitively determined each defendant’s share of liability, only some of whom are insured or covered by the D&D 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, in particular the US laws on securities.


Similar to their common law precursors, China’s D&O policies protect against title claims, including when D&Os commit “wrongdoing”. However, this coverage does not extend to fraudulent or criminal behavior, and policies may also exclude broader categories of behavior.

Challenges to these policies are rarely based on one jurisdiction’s laws alone, as Chinese D&O policies typically interact with Chinese, US, and even Cayman Islands or British Virgin Islands laws governing the formation of a VIE. Instead, they are multi-faceted transactions that are far more complex than the domestic D&O policies of publicly traded US companies.

For more information on this subject, please contact Hao Zhan, Jia Wan Where Hannibal El Mohtar at AnJie Law Firm by telephone (+86 10 8567 5988) or by e-mail ([email protected], [email protected] Where [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.