A wrongful act is the trigger that determines whether your directors and officers liability insurance responds to a claim. Most directors in Hong Kong have never read the definition in their policy, and that gap matters enormously when a claim arrives.
This article explains what a wrongful act means under D&O insurance in Hong Kong, what is covered, what is excluded, and why the definition in your specific policy wording deserves scrutiny.
Explore directors and officers liability insurance in Hong Kong through MGG Insurance before reading further.
Short Explanation for Hong Kong Directors and Officers
Under a standard D&O policy, a wrongful act is any actual or alleged breach of duty, neglect, error, omission, misstatement, or misleading statement committed by a director or officer in their official capacity. The definition is broad by design. It covers both genuine mistakes and alleged wrongful acts, meaning the claim does not need to be proven to trigger defence costs under the policy.
The phrase “actual or alleged” is significant. A director who has done nothing wrong can still face a substantial claim, and the legal defence costs of defending that allegation fall squarely within the insurance coverage scope. Without this protection, personal assets are directly at risk.
D&O policies in Hong Kong operate on a claims-made basis. The policy in force when the claim is reported must be active. A gap in cover can leave a former director exposed for decisions made years earlier.
How a Wrongful Act Fits Within Financial Lines and Business Insurance
D&O insurance sits within financial lines, a category of liability policies that protect individuals and organisations against financial loss claims. It is distinct from general liability insurance, which covers bodily injury and property damage, and from professional indemnity insurance, which covers claims arising from the delivery of professional services to clients.
The alleged wrongful act in the D&O context arises from a director’s role in governing and managing the company, not from the delivery of a professional service to a client. For Hong Kong companies, D&O cover typically forms part of a broader management liability insurance programme.
How Wrongful Act Is Defined in D&O Policy Wordings
The standard policy definition of a wrongful act covers any actual or alleged error, omission, misstatement, misleading statement, neglect, or breach of duty committed by a director or officer in their capacity as such. Some policies add “or any matter claimed against them solely by reason of their status as a director or officer”, extending the definition to catch-all scenarios.
Broader policies replace “breach of duty” with “breach of trust” or “breach of any duty imposed upon directors by law”, which pulls in statutory duties under the Companies Ordinance (Cap. 622) more explicitly. Some wordings specifically include “wrongful employment practices” within the definition, while others treat employment practices as a separate coverage extension. Directors serving on multiple group company boards need a wording that responds across all of those roles.
Typical Wrongful Acts That Trigger D&O Claims in Hong Kong
Governance and Fiduciary Duty Breaches
Fiduciary duties for Hong Kong directors arise from the Companies Ordinance (Cap. 622) and the common law. Directors owe duties of loyalty, care, and skill to the company. A breach of fiduciary duty is one of the most common causes of action in D&O claims.
Typical governance-related wrongful acts include failure to act in the best interests of the company, approving connected party transactions without proper disclosure, and making strategic decisions without adequate due diligence. Non-executive directors face the same personal liability exposure as executive directors. Both can face civil and criminal proceedings in their personal capacity.
Errors, Omissions, and Misstatements
Errors and omissions in the D&O context typically arise from disclosure failures and financial misstatements. For listed companies, the obligation to disclose price-sensitive information under the Securities and Futures Ordinance creates a specific enforcement risk. A director who approves a misleading statement to the market, fails to ensure timely disclosure, or signs off on a prospectus containing a misstatement faces claims from regulators, shareholders, and potentially criminal prosecution for market misconduct.
Employment-Related Wrongful Acts
Employment practices liability claims targeting directors personally arise when an employee alleges wrongful dismissal, discriminatory treatment, harassment, or retaliation in connection with whistleblowing. The claim is directed at the director personally on the basis that they made or approved the relevant decision.
Company secretaries, who are legally responsible for statutory filings and regulatory compliance under the Companies Ordinance, are typically defined as insured persons under officers’ insurance policies alongside senior managers. All are covered for employment-related wrongful acts arising from their official capacity. Side B provides corporate reimbursement to the company for defence costs and settlements it has advanced on behalf of these insured persons.
Common Exclusions That Limit Coverage
Fraud and proven dishonesty are excluded once fraud has been established by a court or regulatory determination. Most D&O policies advance defence costs during the investigation and defence of a fraud allegation, and the exclusion only bites if fraud is actually established.
Bodily injury and property damage are excluded, as these fall under public liability insurance. Prior known circumstances are excluded where a director was aware of a potential claim before the policy was placed. Personal profit or advantage derived improperly is typically excluded where a director is found to have benefited personally in an improper manner.
Regulatory fines and civil fines are generally not insurable under Hong Kong law. Defence costs for the regulatory proceedings that lead to a fine are covered, but civil penalties and the fine itself typically are not.
Legal Costs, Investigations, and Regulatory Actions
D&O insurance in Hong Kong provides cover for legal costs and defence costs from the moment a claim or investigation is notified. AIG reported paying over HK$62 million in D&O claims in Hong Kong in 2016 alone, with approximately 90 percent resulting from regulatory investigations. Management liability claims from shareholder actions account for a significant further share of the overall D&O exposure.
Bail bond costs, crisis costs, prosecution costs, and public relations expenses are covered under most comprehensive Hong Kong D&O wordings. Extradition proceedings and tax contributions where the company has become insolvent, and there is personal liability of an insured, are also covered under broader policy wordings.
Policy Structure: Side A, Side B, and Side C
Most Hong Kong D&O policies are structured in three layers.
Side A provides personal asset protection for individual directors when the company is unable or unwilling to indemnify them. This applies in insolvency situations, where criminal proceedings prohibit company indemnification, or where the company is itself named as a defendant. Side A is the most critical protection for individual directors because it responds precisely when the director is most exposed.
Side B, or corporate reimbursement, reimburses the company for defence costs and damages it has advanced to directors as indemnification.
Side C, also called entity coverage, covers the company itself for securities-related claims, protecting against shareholder actions and regulatory claims where the company is named directly.
Side A becomes critical in insolvency. If the company becomes financially unable to advance defence costs, Side A responds independently of the company’s financial position. Sophisticated directors negotiate for a separate Side A limit that cannot be eroded by company-level claims under Side B or Side C.
Practical Steps After a Potential Wrongful Act Claim
Notify your insurer as soon as a claim or potential claim is identified. Late notification is one of the most common grounds for coverage complications. Secure specialist D&O legal representation early and do not rely on the company’s general legal counsel if a conflict of interest exists. Preserve all documents, communications, and board minutes immediately and do not delete any records after a claim is identified. Confirm whether the policy requires insurer consent before incurring defence costs.
For specialist D&O insurance placement across the Lloyd’s market in Hong Kong, MGG Insurance works with directors, boards, and companies to arrange coverage that matches the specific risk profile of each organisation, including Side A enhancements and run-off cover.
For authoritative guidance on director duties under Hong Kong company law, the Hong Kong Companies Registry publishes the Companies Ordinance (Cap. 622) in full.
Frequently Asked Questions
Are criminal fines covered under a D&O policy in Hong Kong?
No. Criminal fines and most regulatory financial penalties are not insurable under Hong Kong law. However, defence costs for criminal proceedings and regulatory investigations are covered, including prosecution costs and legal representation throughout the investigation and any subsequent hearing.
Does a former director remain covered after leaving a board?
Yes, if appropriate cover is in place. D&O policies operate on a claims-made basis. A former director is protected under the policy in force when they served on the board, provided the claim is reported during the policy period or within an extended reporting period. Run-off cover should be requested on departure.
How long does a claims-made reporting period typically last?
The standard policy period is twelve months. Extended reporting periods can be purchased for additional terms, commonly one, two, or three years. Upon director departure, run-off cover of at least six years is recommended to account for limitation periods applicable to civil claims under Hong Kong law.
Do non-executive directors need separate D&O cover?
No. Non-executive directors are covered under the same D&O policy as executive directors and face the same personal liability exposure. Hong Kong company law does not distinguish between executive and non-executive directors for fiduciary duty or liability purposes. They should verify they are named within the policy’s definition of insured persons.
Written by Joshua Lynch, MGG Insurance. M.G. Geraghty (Insurance Brokers) Limited is a specialist Lloyd’s Coverholder with extensive experience arranging directors and officers liability insurance for listed companies, private companies, and SMEs across Hong Kong and the Asia Pacific region.
MGG Insurance provides tailored directors and officers liability insurance for Hong Kong companies, listed entities, and SMEs. Contact the team today for a no-obligation assessment.
