Do D&O Policies Cover Directors and Officers in their Individual Capacities?
by Brit Weimer
Directors and officers liability policies are intended to protect managers from personal financial exposure for claims alleging “wrongful acts” committed in their corporate roles, rather than to insure purely personal ventures. Consistent with that purpose, D&O policies generally limit coverage to acts done in an insured capacity. Most policies restrict coverage for wrongful acts to an individual insured acting “solely in an insured capacity,” even though wrongful acts themselves are broadly defined to include errors, omissions, and breaches of duty. See Britton D. Weimer, Management Liability Coverages: EPL and D&O Insurance Demystified, Colorado Lawyer (Jan.–Feb. 2025). When directors and officers are alleged to have acted for “personal purposes,” this insured-capacity limitation becomes a central coverage battleground.
Under Colorado’s well-established “complaint rule,” an insurer’s duty to defend is determined by comparing the four corners of the complaint with the language of the policy, without resort to extrinsic evidence. See Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1089 (Colo. 1991). Federal courts applying Colorado law have emphasized that this duty is broad: “an insurer’s duty to defend arises when the underlying complaint alleges facts that might fall within the policy’s coverage,” and “if those allegations potentially come within coverage, or if there is even a doubt, the insurer must defend the claim.” Nicholls v. Zurich Am. Ins. Grp., 244 F. Supp. 2d 1144, 1294–1301 (D. Colo. 2003). This standard frequently drives early coverage disputes in D&O cases involving alleged self-interest or mixed motives.
At the same time, Colorado law requires that exclusions be enforced as written, but only when they eliminate all potential coverage. As Nicholls explains, “[f]or an insurance policy exclusionary clause to be enforced it must be drafted in clear and specific language,” and only “[i]f the insurer can establish that the allegations in the complaint are solely and entirely within the exclusion” is the insurer excused from its duty to defend. Id. at 1307–1316. Within this framework, coverage exists only for claims made against insured persons “by reason of their serving in such insured capacities,” and the policy “does not insure against personal liabilities unrelated to corporate duties.” Id. at 1258–1266. This rule is particularly important where complaints plead alternative theories, some tied to corporate governance and others to personal benefit, because the presence of even one potentially covered theory generally preserves the defense obligation.
Where alleged “personal purposes” involve self-dealing or improper enrichment, D&O disputes frequently turn on the personal profit or advantage exclusion. In Nicholls, the court held that the exclusion was “clear and unambiguous” and applied where “the insured has gained a profit, remuneration or advantage to which such insured was not legally entitled.” Id. at 1394–1402. The court further emphasized that the exclusion turned on the receipt of improper benefits, explaining that “the evidence establishes that the Directors and Officers received proceeds from the sale of stock that they were not legally entitled to receive,” and therefore “the personal profit exclusion applies.” Id. at 1411–1420. This is consistent with the intent of these exclusions, which are designed to bar indemnity for disgorgement of ill-gotten gains, even where defense coverage may initially exist.
In sum, D&O policies may provide defense coverage for claims alleging that directors or officers acted for personal purposes, depending on how the claim is pled and how the policy is written. Colorado’s broad duty-to-defend standard requires insurers to defend whenever allegations potentially fall within coverage, unless exclusions clearly and entirely apply. Ultimately, however, indemnity is frequently barred where a director or officer is found to have acted outside an insured capacity or to have obtained an improper personal benefit. The interaction between insured-capacity limitations, exclusionary language, and Colorado’s complaint-rule jurisprudence makes careful pleading analysis and early policy review critical in D&O disputes involving alleged personal motives.
If you would like help evaluating the pros and cons of submitting a D&O or CGL insurance claim on behalf of the association, the experienced lawyers at Moeller Graf are available to assist. This information should be viewed as informational and not direct legal advice.