The Hidden Gaps in D&O Insurance You Need to Watch Out For

When you finally invest in Directors and Officers (D&O) insurance, there’s a sense of relief. Your leadership team is protected, your board can breathe easier, and you feel like your organization is finally safeguarded. But what if you’ve missed something?

D&O insurance exclusions and policy gaps are more common than most small businesses and nonprofits realize. And unfortunately, these hidden pitfalls usually only show up when it’s too late—after a claim has been filed.  Further, in my experience, Directors and Officers insurance is one of the most misunderstood insurance coverages that people buy.  Very frequently, people will buy insurance will purchase this line of coverage because they want to make sure their board is covered.  While it does protect the board, it protects the board for very specific kinds of lawsuits, not all of them.

In this article, we’ll uncover the most dangerous gaps in D&O coverage, explain why they exist, and show you how to avoid the common D&O insurance mistakes that can cost your organization millions.

It's important for Directors and Officers to understand what D&O policy will and won't do.

Why Exclusions Exist in D&O Policies

Let’s start with a reality check: insurance companies are in the business of managing risk, not absorbing every possible loss. That means D&O policies are intentionally designed to exclude certain types of claims—especially those that are difficult to predict, hard to underwrite, or tied to high-frequency legal issues, or lawsuits that are bettered insured under a different line of coverage.

Unfortunately, these exclusions aren’t always obvious to the average buyer.

Key Takeaway: Not all D&O policies are created equal. Even if two policies have the same coverage limit, one might quietly exclude your organization’s biggest risk.

Real-World Example #1: The "Credentialing Clause"

I work with a trade association that provides a course and then credentials their members.  This credential is a mark of a higher level of achievement, knowledge, and experience within their industry.  Since is involved with creating the credentialing process and overseeing it, it is a blend of a “Professional liability” and “Management Liability” exposure.

When I reviewed their program, the D&O insurance excluded any claims related to credentialing.

What went wrong? The board knew this was important and highly valued the coverage.  However, since the exclusion was buried on page 95 of 120, they didn’t realize that there was a problem.

How to fix it: Work with an advisor who knows your industry. If your organization offers exams, certifications, or accreditations, flag this during the application process and negotiate coverage enhancements if needed.

Real-World Example #2: The "Prior Acts Exclusion"

My real-life claims example is actually an employment practices liability claim, but it illustrates the concept you need to understand.

A nonprofit in Maryland switched companies at their July 1st renewal.  Several weeks after switching companies, they received notification that an employee was filing suit for wrongful termination that happened prior to July 1st.

Both policies were written on a claim made basis.

The previous insurance company declined coverage because the policy was no longer in place.

The new insurance company declined coverage because no claims prior to July 1st were covered.

This type of exclusion—known as a "prior acts exclusion"—can completely derail an otherwise solid policy.

What went wrong? The organization switched insurance carriers without requesting a continuity endorsement or tail coverage.

How to fix it: Always ask for a "full prior acts" clause when you change D&O insurers. You may need to purchase extended reporting coverage (also called "tail coverage") if you’re switching providers or winding down operations.

Real-World Example #3: The "Lobbying" Exclusion

One of my clients is a workforce development program that advocates for apprenticeship programs.  They help local organizations develop apprenticeships, and also talk to lawmakers about the value of apprenticeships in developing the local workforce.

When I approached the marketplace, an insurance company came back with an offer for the organization with two options, one to include the lobbying activities, and the second to exclude the lobbying activities.

One of the more common Directors and Officers claims is when a board member makes a public statement that draws unwanted attention and even lawsuits.  This means that any organization with an “advocacy” element can attract additional attention from underwriters.

Further, it’s a common tactic for an insurance company to exclude operations when they are uncomfortable with the exposure. 

What went wrong? The insurance company identified an operation that made them uncomfortable and chose to exclude coverage from the policy.

How to fix it: Look for exclusions on your policy that may relate to advocacy, lobbying, or other public facing activities. 

Other Common D&O Coverage Gaps to Watch Out For

Earlier in the blog, I mentioned that many exclusions on a policy exist because the insurance company wants you to purchase coverage elsewhere.  Different insurance policies exist to defend you for different kinds of lawsuits.  Your Directors and Officers are likely listed as “insureds”, or protected people under these other policies. 

Here are some frequent D&O exclusions and how they might affect your coverage:

1. Employment-Related Claims

Most D&O policies don’t cover employment practices unless you bundle in Employment Practices Liability Insurance (EPLI). This includes claims for:

• Wrongful termination

• Discrimination or harassment

• Retaliation

Solution: Add an EPLI endorsement or separate policy.

2. Cyber Liability

If your directors are sued for failing to prevent a data breach, standard D&O coverage won’t apply unless explicitly included.

Solution: Consider bundling D&O with a Cyber Liability policy.

3. Professional Services

If your organization delivers professional services (consulting, therapy, financial advice), D&O insurance won’t cover malpractice or negligence in those services.

Solution: Secure a separate Errors & Omissions (E&O) policy.

4. Sexual Misconduct

If your organization works with children or vulnerable people, Sexual Misconduct will likely be added as an exclusion on your Directors and Officers Liability policy.

Solution: Purchase Sexual Misconduct Liability coverage on your package policy.

How to Avoid the Most Common D&O Insurance Mistakes

When shopping for D&O coverage, avoid these costly missteps:

Mistake #1: Buying on Price Alone

Cheaper isn’t always better. Low-cost policies often have broad exclusions that gut their usefulness.

Mistake #2: Assuming All Policies Are the Same

Policy language matters. Subtle wording differences can have massive legal implications. For example, how does the policy define "claim" or "wrongful act"?

Mistake #3: Not Using a Specialist Broker

A general insurance agent might miss the nuances of your industry or fail to catch a critical exclusion. Work with someone who lives and breathes executive risk coverage.

Mistake #4: Failing to Update Coverage as You Grow

A policy that was sufficient when you started may not protect you once you add employees, open new offices, or start fundraising.

Pro Tip: Schedule an annual policy review, especially after major changes in leadership, operations, or funding.

Final Thoughts: Don’t Let Hidden Gaps Leave You Exposed

Buying D&O insurance isn’t the end of the road—it’s the beginning of your risk management strategy. And while having coverage is smart, having the right coverage is essential.

If you’ve already purchased a D&O policy, review it with an expert to identify any exclusions or gaps that could put your board at risk.

If you’re shopping for D&O insurance for the first time, don’t go it alone. A small oversight today could become a million-dollar lawsuit tomorrow.

I’ve helped hundreds of small businesses and nonprofits purchase D&O insurance.   I can help :

• Understand what’s covered (and what’s not)

• Navigate industry-specific risks

• Compare policies with a critical eye

Let me help you find the protection your leadership deserves—before you find out what your policy won’t cover.