Directors and officers insurance for small companies

Q: Which gaps do directors most often miss?

Leaving the company. D&O is commonly written on a claims made basis, so it responds to claims first made while a policy is in force. A director who resigns, or a company that is sold or closed, needs to know who will keep a policy running for claims about the years they were in office. Article 53 allows cover for former directors, but only if someone keeps paying for it. Relying on the articles' indemnity instead. An indemnity is only as good as the company's balance sheet. When a liquidator sues, the company is insolvent and section 234 bars indemnity for claims by the company anyway. The proposal form. Under section 3 of the Insurance Act 2015, a business insured must make a fair presentation of the risk before the contract is entered into, disclosing every material circumstance it knows or ought to know. Known disputes, overdue tax and creditor pressure all need to be disclosed, and circumstances already known are commonly excluded. Shared limits. One limit is usually shared by every insured director and, where company cover is included, the company itself. A large claim against one person can exhaust it for everyone. Court relief is not a substitute. Section 1157 lets a court relieve an officer who acted honestly and reasonably and ought fairly to be excused, but only after the costs of getting there have been run up.

Q: How does this work in practice?

Illustration only. A company with two directors buys a standalone D&O policy costing £1,200 a year, covering only directors' liabilities and associated costs. Each director's proper proportion is £600. A benefit charge arises on each £600 under the benefits code, and an equal deduction is available under section 346 because the policy is a qualifying contract, so no net tax arises. Two years later the company goes into liquidation and the liquidator claims against both directors. The policy in force at the time of the claim responds, subject to its terms, whereas the indemnity in the company's articles would have been worthless. If the company had instead bought a combined package that also insured its own property and liability risks within one contract, HMRC's view at EIM30513 suggests the premium would not qualify and the directors could face a taxable benefit with no offsetting deduction.

Directors and officers (D&O) insurance pays defence costs and damages when a director is personally accused of a wrongful act in running the company. A company can lawfully buy it for its directors under section 233 of the Companies Act 2006, even for claims brought by the company itself that it could not lawfully indemnify against. The gaps small companies miss tend to be about who the policy covers after they leave, what it can never cover, and how a bundled policy is taxed.

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What does D&O insurance actually cover?

HMRC’s Employment Income Manual describes the risk well: directors and officers may face legal action by their employer or by third parties over alleged or actual wrongful acts or omissions in their capacity as directors, and indemnity insurance is available to cover the damages and legal expenses arising from such claims (EIM30501). In a small company, the people who bring those claims are typically:

a liquidator or administrator pursuing directors for breach of duty or wrongful trading;
shareholders, especially minority or former shareholders who say the business was run against their interests;
creditors, lenders, customers or employees who name a director personally;
regulators and investigators, where the cost of responding is often the largest item even if no finding is made.

Cover is usually arranged in parts: the director’s own loss where the company does not indemnify them, the company’s loss where it does indemnify them, and sometimes cover for the company’s own liability. The wording, not the label, decides which applies. A general introduction to the product is at directors and officers liability insurance; this page deals with the company law and tax side.

Is a company allowed to pay for its directors’ insurance?

Yes. Section 232(2) makes void any provision by which a company indemnifies a director against liability for negligence, default, breach of duty or breach of trust in relation to the company, except as permitted by sections 233 to 235. Section 233 then provides that section 232(2) does not prevent a company from buying and maintaining insurance for a director of the company, or of an associated company, against any such liability.

The difference between insurance and an indemnity is important. An indemnity from the company is only valid if it is a qualifying third party indemnity under section 234, which cannot cover liability to the company itself, criminal fines, regulatory penalties, or the cost of defending criminal proceedings ending in conviction or civil proceedings brought by the company that the director loses. Insurance under section 233 is not subject to that list, so it can respond to a claim by the company or its liquidator that an indemnity could never touch. The indemnity rules are covered in indemnifying directors.

The company’s articles also need to allow it. Article 53 of the model articles for private companies lets the directors decide to buy and maintain insurance at the company’s expense for any relevant director, which includes a former director, against loss or liability in connection with their duties or powers in relation to the company, an associated company or its pension fund or employees’ share scheme. Older articles may have no equivalent, in which case the board should check its powers before committing.

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Does the company have to disclose it?

Not under the indemnity rules. Section 236 requires the directors’ report to state when qualifying third party indemnity provision or qualifying pension scheme indemnity provision is or was in force. Insurance bought under section 233 is not indemnity provision, so the statutory disclosure in section 236 does not apply to it. If the company has given indemnities as well as buying cover, that disclosure still applies to the indemnities.

How is the premium taxed for the director?

EIM30501 explains that where an employer pays for insurance covering a director’s liabilities, a charge arises under Chapter 10 of the benefits code on the director’s proper proportion of the premium. Section 346 of the Income Tax (Earnings and Pensions) Act 2003 then allows a deduction for a premium under a qualifying insurance contract, so far as it relates to indemnifying the director against a liability related to the employment or the associated costs, and HMRC confirms at EIM30505 that the deduction offsets the charge.

The catch is the definition of a qualifying contract in section 349. Condition A requires the contract, so far as the risks insured are concerned, to relate only to the listed risks: indemnifying employees, vicarious liability, the costs of claims and proceedings, giving evidence, and reimbursing the employer for paying an employee’s liability. Condition B limits the period of cover to two years (renewals aside) and bars any obligation to renew. HMRC states at EIM30513 that the first exclusion is intended to exclude mixed policies covering both qualifying and other liabilities. A package that bundles D&O with unrelated company covers may therefore leave a taxable benefit without the matching deduction, unless the D&O section is a separate contract.

Former directors are not left out. EIM30530 explains that section 555 gives a deduction from total income for uninsured liabilities an ex employee bears, and that the rules also cancel charges where someone else bears the liability or provides cover under a qualifying contract after the employment ends.

What can D&O insurance never cover?

HMRC states at EIM30523 that liabilities such as fines and penalties, and some costs associated with them, cannot lawfully be covered by insurance, and section 346(2) denies a tax deduction for anything it would be unlawful for the employer to insure. In practice this means a director facing a criminal fine, or a penalty charged personally under tax law, should not expect the policy to pay the penalty itself, though defence costs are a separate question for the wording. See personal liability notices for how HMRC can pass company debts and penalties to officers.

Which gaps do directors most often miss?

Leaving the company. D&O is commonly written on a claims made basis, so it responds to claims first made while a policy is in force. A director who resigns, or a company that is sold or closed, needs to know who will keep a policy running for claims about the years they were in office. Article 53 allows cover for former directors, but only if someone keeps paying for it.
Relying on the articles’ indemnity instead. An indemnity is only as good as the company’s balance sheet. When a liquidator sues, the company is insolvent and section 234 bars indemnity for claims by the company anyway.
The proposal form. Under section 3 of the Insurance Act 2015, a business insured must make a fair presentation of the risk before the contract is entered into, disclosing every material circumstance it knows or ought to know. Known disputes, overdue tax and creditor pressure all need to be disclosed, and circumstances already known are commonly excluded.
Shared limits. One limit is usually shared by every insured director and, where company cover is included, the company itself. A large claim against one person can exhaust it for everyone.
Court relief is not a substitute. Section 1157 lets a court relieve an officer who acted honestly and reasonably and ought fairly to be excused, but only after the costs of getting there have been run up.

How does this work in practice?

Illustration only. A company with two directors buys a standalone D&O policy costing £1,200 a year, covering only directors’ liabilities and associated costs. Each director’s proper proportion is £600. A benefit charge arises on each £600 under the benefits code, and an equal deduction is available under section 346 because the policy is a qualifying contract, so no net tax arises. Two years later the company goes into liquidation and the liquidator claims against both directors. The policy in force at the time of the claim responds, subject to its terms, whereas the indemnity in the company’s articles would have been worthless.

If the company had instead bought a combined package that also insured its own property and liability risks within one contract, HMRC’s view at EIM30513 suggests the premium would not qualify and the directors could face a taxable benefit with no offsetting deduction.

What should the board record?

Minute the decision under article 53 (or the equivalent in the company’s articles), note which directors and former directors are insured, keep the policy and proposal with the company records, and diary the renewal and any run off arrangements. Directors’ wider exposure is set out in when directors are personally liable.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.