D&O Insurance and SEC Investigations: The Coverage Gaps Executives Discover Too Late
Introduction
Most executives believe their D&O insurance will protect them if the SEC comes calling. They’re often wrong. Directors and officers insurance is marketed as peace of mind, yet the harsh reality is that the policy language is often designed to deny coverage for the exact scenario that ruins careers: an SEC investigation where the company, not just the individual, is under scrutiny.
Executives assume they have protection that doesn’t exist. They discover the gaps only when they need coverage most – when they’re facing an SEC investigation with legal bills climbing into seven or eight figures. When the SEC sends a subpoena, insurers often argue that the company’s legal bills are not a “loss” as defined by the policy. This puts the company on the hook for millions in defense costs – while the board is left exposed, and executives are forced to resign because the costs to defend themselves are unsustainable.
The False Comfort of D&O Insurance
What D&O Insurance Promises (And Often Doesn’t Deliver)
Here’s the uncomfortable truth: D&O policies typically cover defense costs for individual directors and officers facing SEC investigations. They typically do NOT cover costs incurred by the company responding to the same investigation.
What’s covered:- Defense costs for individual directors/officers when the SEC targets them personally (rare)
- Sometimes – but not always – the cost to settle individual claims
- The company’s legal bills to respond to the SEC’s investigation
- The cost to produce documents, hire outside counsel, and respond to subpoenas
- Investigative costs incurred by the company (the bulk of the expense)
Insurers Deny Coverage – And Often Win
This is not theoretical. It happens every day. Insurers argue that an “investigation of the organization” isn’t a “Securities Claim” under the policy. Courts often agree.
Example:
