The current U.S. Directors and Officers (D&O) liability insurance market is defined by a striking paradox: declining frequency of traditional securities class actions (SCAs) alongside sharply rising claim severity and a surge in insolvency-related and derivative litigation. This shift impacts both public and private companies, pressuring D&O programs, and forcing risk managers, boards, and insurers to rethink coverage structures, limits, and governance practices. Here is what you need to know.
According to NERA Economic Research's 2025 Full-Year Review, federal securities class action (SCA) filings fell 11% to 207 cases, down from 232 in 2024, the lowest level since 2021. Resolutions increased with 139 dismissals (up 32%) and aggregate settlements declining to $2.9 billion (down 25% inflation-adjusted from 2024). However, the median settlement rose 21% to $17 million, the highest since 2016—while the 10 largest settlements accounted for more than half the total value. This "lower frequency, higher severity" pattern signals that individual claims, particularly those tied to major corporate distress, are becoming far more expensive to resolve.
Exacerbating this trend is an ongoing wave of corporate insolvencies. Allianz Trade forecasts global business insolvencies rising 5% in 2026, following a 6% increase in 2025—marking five consecutive years of growth and reaching levels 24% above pre-pandemic averages. In the U.S., Chapter 11 filings through mid-2025 were up 11% compared to 2020 levels, with "mega-bankruptcies" (filings exceeding $1 billion in assets) concentrated in sectors such as automotive, construction, retail, consumer goods, and technology. These events frequently trigger complex D&O claims alleging breaches of fiduciary duty, inadequate oversight of financial strategy, misleading disclosures, or failure to address red flags—exposures that hit private companies particularly hard.
The Insolvency-D&O Connection
Bankruptcy filings do not just reflect economic stress; they often serve as catalysts for D&O litigation. Once a company enters Chapter 11, claims shift from shareholders to bankruptcy trustees, creditors' committees, or litigation trusts. These parties pursue directors and officers for alleged pre-filing misconduct, such as reckless debt accumulation, flawed M&A decisions, or insufficient risk disclosure. Recent examples, including high-profile retail and media-related filings like QVC Group in 2026, illustrate how legacy business models strained by digital disruption, leverage, and tightening credit conditions lead to substantial D&O exposures.
Allianz Commercial's D&O Insurance Insights 2026 report identifies insolvencies as a key driver of D&O liability, especially for private companies. With 327 major insolvencies recorded globally in the first three quarters of 2025 (one every 20 hours), the risk of domino effects and supply-chain contagion is elevated. In the U.S., projected increases of approximately 8% in corporate insolvencies for 2026 will amplify fiduciary duty claims. WTW's 2026 outlook similarly cautions that bankruptcy-related D&O claims can be among the most severe, recommending specialized distressed-risk brokerage support for any company showing early warning signs.
Such claims often trigger Side A coverage (non-indemnifiable losses) because bankrupt companies typically cannot advance or reimburse defense costs or settlements. This stresses D&O layers and heightens the importance of clear policy wording around change-of-control coverage triggers, runoff periods, and priority of payments provisions.
Derivative Suits Surge
Shareholder derivative actions have also surged in both frequency and severity. Once considered low-exposure "tag-along" suits, derivative claims now routinely settle for nine-figure amounts. Allianz notes that there are now as many as 100 derivative actions annually, with 13 of the 18 largest shareholder derivative settlements exceeding $100 million in recent years. High-profile resolutions, such as those involving governance failures in high-stakes industries, underscore this shift.
This evolution links closely to the resurgence of Caremark oversight claims under Delaware law. Historically difficult to sustain, Caremark actions—alleging directors and officers "utterly failed" to implement reasonable monitoring systems or ignored red flags—have gained traction. Courts have sustained more such claims in the past five years than in the prior two decades, particularly where human health/safety, regulatory compliance, or systemic risks (e.g., cyber, ESG, or financial reporting) are involved. In bankruptcy contexts, trustees gain unique access to internal documents, strengthening pleading positions and increasing settlement pressure.
Third-party litigation funding has accelerated this trend by enabling plaintiffs' firms to pursue complex, costly cases with greater tenacity. Combined with rising defense costs and social inflation, this has driven nuclear settlements and heightened loss ratios for insurers.
Market and Underwriting Implications
The combination of elevated severity and insolvency/derivative activity is prompting underwriters to adjust. While overall D&O market conditions remain stable with abundant capacity and flat-to-modest premium changes in many segments, insurers are applying stronger scrutiny to distressed or high-risk accounts. Middle and excess insurance layers face particular pressure, with increasing demands for higher retentions, more detailed financial disclosures, and evidence of robust and effective governance.
Insurers increasingly specialize in distressed-risk placements and emphasize proactive early engagement. Policy language around interrelated claims, bankruptcy triggers, and allocation of limits is under renewed focus. Some carriers are tightening terms for sectors with elevated insolvency forecasts, while rewarding companies with strong board oversight documentation and enterprise risk management programs.
Practical Recommendations for Risk Managers and Boards
Organizations should treat these trends as a call to action rather than inevitability. Key strategies include:
- Strengthen Governance and Documentation: Implement robust Caremark-compliant oversight systems, particularly for financial health, regulatory compliance, cyber resilience, and emerging risks. Maintain detailed board minutes demonstrating active monitoring of red flags and strategic decisions.
- Stress-Test D&O Programs: Review limits (especially Side A and excess layers) against potential mega-claim scenarios. Model insolvency and derivative exposure using recent settlement data. Consider dedicated bankruptcy runoff coverage or alternative risk transfer mechanisms.
- Enhance Early Warning and Claims Preparedness: Establish protocols for early broker and insurer notification in distress situations. Conduct exercises simulating bankruptcy-triggered claims and coverage disputes.
- Coordinate Coverage: Ensure uniform integration between D&O, cyber, E&O, and other financial insurance policies. Clarify language on investigative costs, regulatory inquiries, and non-indemnifiable losses.
- Board and Executive Training: Provide regular training on fiduciary duties, evolving Caremark standards, and disclosure obligations. For companies in vulnerable sectors, engage specialized D&O counsel and distressed-risk experts proactively.
- Monitor Sector-Specific Risks: Entities in retail, construction, automotive, tech, and life sciences should pay particular attention to macroeconomic headwinds, tariffs, and supply-chain vulnerabilities that could accelerate insolvency filings.
Outlook for the Remainder of 2026 and Beyond
Barring a significant economic rebound or policy shifts that ease credit conditions, insolvency-driven D&O claims are likely to remain elevated through 2026 and into 2027. While SCA frequency may stabilize or modestly rebound, the severity trend—fueled by derivative actions, bankruptcy litigation, and third-party funding—is likely to continue.
For risk managers, the message is clear: the soft market window for broad terms and competitive pricing is narrowing in distressed segments. Proactive governance enhancements and strategic insurance program reviews today will mitigate exposures and improve renewal outcomes tomorrow.
In an environment where one major bankruptcy or derivative settlement can consume substantial limits, comprehensive D&O protection paired with disciplined risk management is no longer optional—it is a board-level imperative. Companies that anticipate these dynamics and act decisively will be best positioned to protect directors, officers, and organizational value amid the continuing evolution of D&O liability.