Legal and market shifts in D&O insurance Post-China’s company law reform

Recent developments in the D&O sector – Mainland China’s updated company law

As regulatory scrutiny continues to
intensify across the region, recent legislative developments in Mainland China
have further reshaped the D&O insurance landscape. In particular, the 2023
revision of the PRC Company Law marks a significant turning point in how
corporate liability and governance are regulated.

On 29 December 2023, the Standing Committee
of the National People’s Congress passed the Company Law of the People’s
Republic of China (the revision), which came
into effect on 1 July 2024. Among its many updates, the new law explicitly
endorses the use of D&O liability insurance – a first in Chinese corporate legislation. Under Article 193,
companies are now encouraged to purchase D&O insurance for their directors
during their term of office, and are required to report key policy details
(such as coverage and premium) to shareholders after purchase.

This legislative recognition reflects a
growing awareness of the need to protect directors, supervisors, and senior
executives from personal liability risks arising from their corporate duties.
It also signals a broader shift in governance expectations, as the law now
extends D&O insurance applicability beyond listed companies to include
non-listed entities, and broadens coverage from independent directors to all
directors.

In parallel, the revision also tightens the
standards of liability for senior management. Articles 180 to 184 of the
revised law clearly define the duties of loyalty and diligence, and introduce
more detailed restrictions on conduct such as related-party transactions,
misuse of corporate opportunities, and conflicts of interest. These changes are
expected to increase exposure to civil claims, thereby reinforcing the role of
D&O insurance as a critical risk transfer mechanism.

As a result, insurers are likely to play a
more prominent role not only in underwriting risk, but also in supporting
corporate governance through policy design and claims management. For companies
operating in or investing into China, these developments underscore the
importance of reviewing existing D&O coverage and ensuring alignment with
the evolving legal framework.

In the following paragraphs, we will examine the key legal reforms introduced under the revision of the PRC Company Law and explore their implications for the insurance industry in Mainland China.

Key legal developments under Mainland China’s updated company law

Building on the legislative recognition of D&O insurance, the 2023 revision of the PRC Company Law introduces a series of substantive legal reforms that reshape the liability landscape for corporate leadership in China.

1. Legislative recognition of D&O insurance

For the first time, D&O insurance is formally codified in primary legislation. Article 193 of the revised law explicitly permits companies to purchase liability insurance for directors during their term of office, covering compensation liabilities arising from the performance of their duties. This marks a significant shift from previous policy-level encouragement to formal legislative endorsement. Where such insurance is purchased or renewed, the board is required to disclose key policy details—including insured amount, coverage scope, and premium rate—to the shareholders’ meeting, enhancing transparency and accountability.

2. Broadened scope of coverage and applicability

The revised law expands the applicability of D&O insurance beyond listed companies to include non-listed entities. This reflects a policy shift toward universal governance protection and risk transfer mechanisms across corporate structures, acknowledging that liability risks are not confined to publicly traded firms.

3. Codification of fiduciary duties

Under Article 180, directors, supervisors, and senior executives are now subject to express fiduciary obligations, including a duty of loyalty and a duty of diligence. They must avoid conflicts of interest, refrain from seeking improper personal benefits, and act in the best interests of the company with reasonable care. Notably, these duties also extend to controlling shareholders and actual controllers who exercise de facto control over company affairs, broadening the scope of accountability.

4. Prohibitions on high-risk conduct

Articles 181 to 184 introduce specific restrictions on conduct that may harm the company’s interests, such as engaging in related-party transactions, misappropriating corporate opportunities, and violating non-competition obligations. These provisions not only clarify the boundaries of acceptable behaviour but also have direct implications for D&O insurance, as such acts may be classified as intentional illegal conduct—often excluded from coverage under standard policy terms.

5. Expanded liability for corporate and third-party losses

The revised law imposes joint and several liability on directors and senior officers for losses resulting from unlawful capital withdrawals, improper profit distributions, and failure to fulfill liquidation duties. Additionally, they may be held personally liable for damages caused to third parties through gross negligence or intentional misconduct, as outlined in various articles including 51, 53, 163, 191, 211, 226, and 232.

6. Establishment of a dual derivative action mechanism

Under Article 189, shareholders holding more than 1% of shares for at least 180 consecutive days are now empowered to initiate lawsuits not only against directors and officers of the company, but also of its wholly-owned subsidiaries. This dual derivative action mechanism significantly increases litigation exposure and necessitates broader coverage considerations in D&O insurance policies.

Impact on the insurance industry

The 2023 revision of the PRC Company Law presents
both challenges and opportunities for the insurance industry, particularly in
the D&O sector.

First, the broadened applicability of D&O
insurance to non-listed companies and a wider range of directors significantly
expands the market scope. This creates new demand among SMEs and private
enterprises, many of which previously lacked access to such coverage.

At the same time, expanded liability standards and
the introduction of dual derivative actions increase the likelihood of claims.
Insurers must respond by enhancing underwriting diligence, refining policy
wording, and reassessing risk exposure across different corporate structures.

To mitigate coverage disputes and regulatory risks,
insurers will need to tailor exclusion clauses more precisely—particularly
around intentional misconduct, shadow directors, and cross-claims between
insured parties. Clear definitions and exclusions will be essential to ensure
policy enforceability under the new legal framework.

Finally, these developments present an opportunity
for insurers to offer governance-linked advisory services. Value-added
offerings such as compliance training, risk assessments, and policy audits can
help clients align with the revised law and proactively manage
exposure—positioning insurers not just as risk carriers, but as strategic
partners in corporate governance.

Authored by Andrew McGinty and Zoe Dong.