D&O insurance is becoming increasingly important because the 2023 China Company Act heightened directors’ and officers’ personal liability for fiduciary duty breaches.[1] The Act also endorses companies’ purchase of liability insurance to manage that liability risk. Within D&O insurance, Side A covers directors’ and officers’ personal loss when the company cannot indemnify them, but coverage may be denied if insured persons are poorly defined. Courts in China usually decide insured status by substantive review of the individual’s role, even if their position title says something different. Side A generally requires director or officer misconduct as a trigger, but excludes intentional misconduct. Late notice of a potential claim may also cause coverage denial.

In this CBL explainer, we’ll walk you through the D&O insurance, insured definitions in China, coverage types, Side A conditions, exclusions, and strategies to avoid coverage denial.

Contents

• Substantive Determination of Insured Persons
• Coverage Types
• Side A Coverage: Triggers & Exclusions
• Coverage Denial Risk Controls

Substantive Determination of Insured Persons

Directors and officers are insured persons under a D&O policy; if defined inadequately, courts determine status by a substantive approach.

Who is an “officer”? Disputes may arise over who is considered an officer if the insurance policy does not define the term. The China Company Act defines officers to include the president, vice president, financial controller, the secretary of the board of a public company, and other positions as defined by the governance documents.[1]

Actually, governance documents do not always define officers, in which case, Chinese precedent deems a person an officer if they have management authority and perform executive duties. Even if a person does not hold a formal officer title, they may be substantively deemed an officer if they exercise officer authority.

For example, under Hubei Supreme Court 2017 Appeal 698, the court held that a party’s status as a corporate officer turns on substantive authority and duties.[2] That means manifestation of corporate intent and execution of important documents, and not merely observing documentary formalities in officer appointment and removal. Zhan ceased serving as company president on May 18, 2012, and thereafter served as a director. Although her term ended procedurally that day, Zhan, as director, continued exercising managerial authority by approving major expenditures and signing daily operating documents. She was therefore deemed substantively the president despite lacking a formal appointment.

Both 2018 Guangdong Appeal No. 10433 and 2022 Beijing Third Lower Court Appeal 03-cv-5329 held that a person is an officer when one exercises officer authority and duties and is paid substantially more than other employees.[3][4] § 265(a) defines officers to include the president, vice president, financial controller, the secretary of the board of a public company, and other positions as defined by the company’s governance documents. The plaintiffs held none of those listed titles and were not designated officers under the governance documents. Yet they directed business, controlled HR and employment matters, had final approval over reimbursements and other financial matters, could execute business contracts, and were paid substantially more than other employees. The courts, therefore, held that they exercised officer authority and duties and thus were officers in substance.

In 2021 Anhui Case 0111-cv-10253, the court held an insured company director and financial controller at a regional office did not qualify as officers under the insurance.[5] A key finding was their roles were confined to internal business matters at this regional office. The court reasoned that individual authority and the company governance structure are dispositive here, as a basis for concluding this did not meet the definitions of officers under the Act.

As can be seen, it is important to carefully review the definition of officer used in the insurance policy when purchasing the D&O liability insurance. This review should determine whether the policy limits coverage to officers as defined by the China Company Act or a company’s governance documents. Also consider whether it also extends to other persons who are substantively treated as officers. If the policy includes the latter, then specify whether the insurer’s determination or a court ruling will be controlling. Define the insured as precisely as possible to avoid future coverage disputes over claims.

Identifying who is covered as an officer can be complicated; consider consulting a CBL legal expert to help you navigate this.

Are controlling shareholders and ultimate beneficiaries insureds? Even if not holding formal positions in the company under Chinese corporate law, they are, in fact, key persons who often influence the company’s management and growth, as the Act imposes heightened duties on those persons.

For example, the duty of care and duty of loyalty now apply to a company’s controlling shareholders or ultimate beneficiaries who do not hold any office but in fact exercise corporate powers (See § 180 of the 2023 Act). § 192 provides that controlling shareholders or ultimate beneficiaries of a company who instruct a director or officer to take actions that harm the company’s or shareholders’ interests are jointly and severally liable with them.

D&O liability policies may not necessarily list controlling shareholders or ultimate beneficiaries as insureds in the underwriting. However, they are often the company’s shadow directors or de facto directors and are therefore usually included in the insured person definition.

Are statutory representatives insureds? Because most countries’ corporate law lack statutory representative, early China D&O insured definitions omitted it. Under the China Company Act, the statutory representative must be a Director or Manager already insured, so separate inclusion is unnecessary.[1]

Whether “insured person” is defined the same in primary and excess layers?

Judicial precedents have denied reimbursement to the insureds because the excess layer policy’s insured person definition did not match the primary policy’s. In Beijing Case 0101-cv-22256 (2016), the court held that the excess-policy insureds did not include the plaintiff, who was insured only under the primary policy.[6] An agreed non-standard term controls over a conflicting standard term. Under an insurance policy, the insured definition is usually a standard term. Here, the plaintiff sought reimbursement from the insurer under a D&O excess policy. Although the excess policy’s insured definition mirrored the primary policy’s, the excess schedule limited insureds to the company and its current subsidiaries. Therefore, the non-standard term, the definition in the schedule, shall control. The court further reasoned that the excess policy was separate from the primary policy and thus did not insure the plaintiff.

As can be seen, when purchasing D&O liability insurance, the company should ensure the insured definition includes all intended individuals and is identical across primary and excess.

Coverage Types

China D&O insurance typically covers four coverage categories: Sides A, B, C, and D. Side A is a guaranty against D&O personal loss due to covered misconduct (e.g., misjudgment or disclosure error). The insurer will indemnify the loss directly when a claim is first made during the policy period, and the company is unwilling or unable to indemnify. Side B reimburses the company for indemnifying directors or officers for covered acts as required by law or governance documents, including defense costs and settlements. Side C covers the company for investor claims based on false statements or other securities misconduct. Side D covers the company’s loss arising from employment disputes, such as wrongful termination.

As can be seen, directors and officers seeking personal loss protection should prioritize Side A.

Side A Coverage: Triggers & Exclusions

For the Side A cover, misconduct and a prompt claim are required, provided the claimed losses are covered and not excluded.

D&O misconduct is a prerequisite. This typically includes negligence, oversight, omission, misrepresentations, misleading statements, or breaches of fiduciary duties, i.e., duty loyalty and care under the China Company Act. Coverage may apply only if covered D&O misconduct exists and causes indemnification liability or attorneys’ fees.

The insureds’ intentional misconduct is an exclusion under the D&O insurance policy. In practice, not every director or officer connected to a financial misrepresentation scheme has falsification intent. Such schemes are often driven by some D&Os while others remain unaware or uninvolved. Non‑imputation and severability clauses should preserve coverage for innocent insureds facing claims unless the policy says otherwise.

A claim must arise during the policy or extended reporting period. Because a D&O insurance policy in China is usually claims‑made, filing a claim with the insurer within either period is a prerequisite. Claims may come from the company, shareholders, or third parties (creditors) and can run from litigation demands to criminal enforcement. Sometimes, regulatory inquiries or warning letters to public companies may also lead to damages. For the latter, review any such notices and consider giving prompt insurer notice upon receipt to avoid late‑notice coverage denial.

D&O policy exclusions. Common exclusions you may see in the policy include:

• Intentional misconduct: willful or fraudulent acts are excluded, but not ordinary negligence.
• Illegal personal gain: fully excluded.
• Known circumstances or prior claims: potential claims that you knew about before the policy’s effective or retroactive date.
• Fines, penalties, or punitive damages: excluded to avoid creating a moral hazard.

If the insurer asserts an exclusion during the claim process, the insured person should check if it actually applies and see if the exclusion can be defeated on the grounds the insurer’s notice or explanation of the exclusion was adequate.

Covered losses. In China, these include:

• damages awarded by a court or arbitration panel;
• settlements;
• attorneys’ fees;
• and any other covered expenses (e.g., public relations costs).

Fines, penalties, punitive damages, emotional distress damages, and liability arising from contracts are excluded.

Coverage Denial Risk Controls

For a successful insurance claim in China, you must also work closely with the insurer to update information and discuss.

Give the insurer prompt notice of claims. Notify the insurer of events that may result in a potential D&O insurance claim as expediently as possible; such events include regulator letters, demand letters, or litigation service of process. Any late notice that prejudices the insurer’s ability to investigate or defend the claim can result in denial of coverage for the resulting increased losses.

Discuss the claim carefully with the insurer. D&O policies in China typically impose obligations on the insured person when a claim arises. Do not admit liability or settle without written insurer consent; otherwise, you may forfeit coverage. Work with the insurer to agree on defense strategy, counsel selection, and settlement proposals.

Review indemnity limits. D&O and the company often share policy limits; if the company can’t indemnify D&O, issues may arise regarding the priority of payment under the shared policy limit. Some policies pay out to directors and officers first, then reimburse the company. Review such arrangements in advance when purchasing insurance.

If you’re facing any such coverage denial risks, CBL can provide you with affordable legal services to manage such risks.

Conclusion

In summary, filing a D&O insurance claim is complex, involving the determination of insured status, coverage determination, applicability of exclusions, and covered loss calculation. When purchasing insurance, use a broker to negotiate terms with the insurer before binding coverage and make sure you understand the policy, as part of managing China company governance legal risks.

Once a claim is filed, carefully review the coverage determination, insured person definition, exclusions, and duties to notify and cooperate. For coverage determination, identify the insurer’s potential grounds for coverage denial and prepare responses in advance, ideally with counsel throughout the claim process. Work closely with the insurer on defense strategy, settlement, and counsel selection to avoid later denial. If coverage is denied, challenge the denial via policy interpretation and exclusion enforceability, and file litigation or arbitration as needed.

Directors and officers should prioritize Side A coverage when indemnification is unavailable. Before purchase, review indemnity limits, priority-of-payment provisions, insured-person definitions, coverage categories, and exclusions. After purchase, promptly notify the insurer of potential claim events, retain complete documentation, cooperate by providing updates and relevant information, and obtain consent before settlement by discussing strategy and timing in advance.

FURTHER READING

Get more insights on D&O personal liability in China and managing governance risks.

• Preventing China D&O Theft and Abuse of Authority
• What Fiduciary and Loyalty Duties Exist in China
• Managing China Company Governance Legal Risks

FOOTNOTES

[1] China Company Act (中华人民共和国公司法), (China National Congress, Dec. 29, 2023) (in Mandarin)

[2] Hubei Supreme Court 2017 Appeal 698 (荆州精湛机械有限公司、湛喻晴损害公司利益责任纠纷二审民事判决书), (Hubei Supreme Court, Dec. 27, 2017) (in Mandarin)

[3] 2018 Guangdong Appeal No. 10433 (刘燕、深圳中企创管理科学研究院有限公司损害公司利益责任纠纷再审审查与审判监督民事裁定书), (Guangdong Supreme Court, Dec. 26, 2018) (in Mandarin)

[4] 2022 Beijing Third Lower Court Appeal 03-cv-5329 (马小飞与北京阶跃创想教育科技有限公司损害公司利益责任纠纷二审民事判决书), (Beijing Third Lower Court, May 6, 2022) (in Mandarin)

[5] 2021 Anhui Case 0111-cv-10253 (中化化肥有限公司、中化化肥有限公司安徽分公司等与乔因国等损害公司利益责任纠纷一审民事判决书), (Baohe District Court, Hefei, Anhui, Aug. 16, 2021) (in Mandarin)

[6] Beijing Case 0101-cv-22256 (2016) (吴琼与中国人民财产保险股份有限公司北京市分公司保险纠纷一审民事裁定书), (Beijing Dongcheng District Court, Oct. 9, 2019) (in Mandarin)