Insurance policies

Wrestling Chimeras – What Are Directors and Officers Liability Insurance Policies Like in China?

What is Directors and Officers Liability Insurance?

Directors and Officers (“D&O”) assume responsibility for many of their company’s activities, particularly when their company is publicly traded. In many cases, D&Os face significant legal exposure simply because of their signature, role and title, or controlling person status. This means that no matter how efficient, prudent or good faith their decisions are, D&Ds run the risk of being sued.

D&O insurance is designed to cover this risk. Namely, to protect officers, directors, and the businesses they serve, from liability arising from actions taken in the course of conducting business or managing businesses. This may include legal fees and damages resulting from lawsuits by plaintiffs or lawsuits by regulators, the costs of settling such actions, or other forms of liability.

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

With more and more Chinese companies listing in overseas markets, an increasing number of them are now purchasing D&O insurance. In Mainland China, due to revisions to the PRC Securities Law and the resulting securities disputes, D&O insurance has also attracted the attention of Chinese D&Os.

How Directors and Officers Liability Insurance Works

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 employment claims. Of these potential sources of liability, securities claims tend to create the greatest risk.

When a debt claim arises, D&Os are designed to cover “wrongdoing”. 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, these “wrongful acts” normally do not include the intentional or fraudulent acts of D&D.

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

A&D 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 “prior knowledge” exclusion, which prevents claims for losses resulting from lawsuits involving matters that D&O knew or should have known before the litigation. In some cases, exclusion can only be triggered by a court decision (“final decision without appeal”, or a variation thereof)

In China, there is fierce debate over whether D&O covers losses resulting from government sanctions. Chinese insurance market makers are hoping for a court precedent 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 through overseas IPOs are increasingly turning to PRC insurers for their D&O insurance needs. In many cases, these entities derive their income from 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 insurance policies that are true pipe dreams – a Caymanian head (which could be subject to bankruptcy proceedings as a result of market fraud), a Chinese body (governing the policy itself) and an American tail (for example, governing the award of settlement when a class action lawsuit settles). To illustrate, while today, most securities disputes are heard in U.S. district or state courts in New York, Chinese D&O policies generally define an arbitration center in Beijing or Shanghai as the forum for political disputes, with PRC 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. Often, Chinese arbitration of D&O claims involves lawsuits in the United States where multiple defendants decide to settle with the 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 crucial to also understand the rules surrounding the applicable laws of the jurisdiction where the VIE is headquartered and where the insured entity is listed, in particular the US securities laws. movables.


Like their common-law predecessors, China 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.

It is important to note that the pursuit of these policies rarely relies solely on the laws of a single jurisdiction, due to the fact that Chinese D&O policies typically interact with the laws of China, the United States, and even the Cayman Islands or the British Virgin Islands. governing the establishment of a VIE. They are more like pipe dreams and far more complex than the national D&O policies of publicly traded companies in the United States.