D&O Coverage for Directors in Insolvency & Crisis: Cross-Border Perspectives

The Restructuring & Insolvency Resolution Group began the year with a virtual session focused on D&O coverage for directors in insolvency and crisis, using German and EU law as the starting point before comparing how similar issues play out in other jurisdictions.

Franziska Fuchs of CMS Germany set the stage with an overview of the German legal framework, where directors are subject to particularly strict obligations once a company enters financial distress. Under German law, directors are expected to have continuous visibility into the company’s financial position, and once insolvency thresholds are met—whether through illiquidity or over-indebtedness—specific statutory duties are triggered. A key feature of this regime is the insolvency payment ban, which restricts payments made after insolvency conditions arise and can expose directors to personal liability, subject only to limited exceptions. These claims are frequently pursued by insolvency administrators, whose role includes maximizing the insolvency estate and whose compensation is linked to recoveries.

The discussion highlighted why these rules have cross-border implications. In multinational structures, directors may be appointed for governance, oversight, or informational purposes rather than operational control, yet still face full liability exposure under German law. In practice, this can result in non-German directors being targeted after insolvency proceedings begin, sometimes with little advance warning. Against this backdrop, D&O insurance becomes a critical but complicated factor.

Participants examined how D&O insurance functions in German insolvency cases and why it has become a focal point for litigation. While D&O policies are intended to protect directors and the company from financial loss, they often attract claims precisely because they represent a potential source of recovery. German courts have spent years addressing whether claims arising from insolvency-related payment restrictions fall within standard D&O coverage, particularly where insurers argue that exclusions apply due to alleged intentional or knowing breaches of duty. Recent decisions from Germany’s highest court have clarified that such claims can be covered and that insurers bear the burden of proving deliberate misconduct. While this has strengthened directors’ coverage position, it has also made insured directors more attractive litigation targets for insolvency administrators.

The discussion also addressed a number of practical considerations. At earlier stages of financial difficulty, careful liquidity planning and independent expert assessments can help directors manage risk and demonstrate compliance with their duties. As insolvency approaches, payment decisions require close scrutiny, as directors must balance the need to continue operations with the risk of personal liability. Once insolvency proceedings begin, communications with insolvency administrators become particularly sensitive, as statements and cooperation can affect both liability exposure and insurance coverage. In many cases, disputes are resolved through negotiated settlements involving the director, the insolvency administrator, and the insurer rather than through final court judgments.

From this German and EU perspective, the conversation expanded to include comparisons with other jurisdictions. In the United States, D&O insurers typically choose between accepting coverage, denying it, or defending under a reservation of rights, often advancing defense costs while preserving the ability to recover them if coverage is later rejected. Coverage disputes are commonly litigated separately from the underlying liability claims, in contrast to the more consolidated approach now available in Germany.

In Singapore, a very different dynamic was described. D&O insurance is often viewed as expensive and of limited value due to broad exclusions, particularly for negligence and misfeasance. As a result, liquidators are less inclined to pursue directors aggressively, given the lack of meaningful insurance recoveries. The discussion also emphasized the need to consider D&O insurance alongside company indemnities, which in some jurisdictions are restricted by statute and offer limited protection in insolvency situations.

Mexico provided another point of contrast. While the legal framework allows for director liability, enforcement is less common in practice. Companies often seek to restructure informally or reorganize outside the local court system, particularly where confidence in domestic insolvency proceedings is limited. Sector-specific pressures, including those affecting the automotive industry, were noted as contributors to restructuring activity, though director liability claims remain a less prominent feature.

Taken together, the discussion illustrated how differently director risk is treated across jurisdictions, depending on insolvency regimes, insurance markets, and enforcement practices. The session reinforced the importance of understanding not only formal legal duties, but also how insolvency proceedings, insurance coverage, and litigation interact in practice when advising directors operating across borders.