Why Your D&O Policy Doesn’t Cover Your 220 Defense

Wednesday morning. The day after the Section 220 demand letter arrived. Your general counsel forwards the demand to your broker at 9:02 a.m. with a one-line note: please put the carriers on notice. Your broker forwards the demand to the primary D&O carrier at 9:14 a.m. with a one-line note: please confirm coverage. The primary carrier acknowledges receipt at 11:46 a.m. with a four-paragraph reservation-of-rights letter that you read three times before you understand what it says.

The letter says, in the careful neutral language of an insurance coverage opinion, that the carrier is reserving its rights under the policy with respect to whether the demand is a “Claim” within the meaning of the policy, whether the corporation is an “Insured” with respect to the matters alleged, whether the costs of responding to the demand fall within the definition of “Defense Costs,” whether any sublimit applies, whether the retention has been satisfied, and whether the allocation between covered and non-covered matters has been established. The letter requests that the corporation submit a coverage position memorandum within 30 days, supported by the underlying demand, the corporation’s response, and counsel’s preliminary defense budget. The letter notes, in the second-to-last paragraph, that nothing in the letter should be construed as an admission of coverage and that the carrier reserves the right to deny coverage in whole or in part based on facts developed in the course of the matter. [S: this is the moment the policy stops being theoretical.]

You forward the letter to outside coverage counsel. Outside coverage counsel reads the policy. Outside coverage counsel calls you back at 4:30 p.m. and tells you the policy your company bought, on the broker’s recommendation, at the standard premium for a Series B Delaware corporation with your headcount and your sector, contains four discrete coverage gaps that map almost perfectly onto the architecture of a 220 demand and the derivative suit that follows it.

Your defense costs through the 220 production and the follow-on suit will, on outside counsel’s preliminary estimate, run between $2.8M and $4.2M. Your D&O tower has a face value of $15M. You assumed you were covered for the spread. You are not. The gap between the policy you thought you bought and the policy you actually bought is somewhere between $1.4M and $3M of uninsured defense cost, payable, on a current basis, by the corporation.

This is the story of a meaningful share of the D&O claims being submitted in 2026. It is happening at companies whose boards approved the policy at renewal without reading it, on the recommendation of brokers whose incentives are aligned with placement rather than coverage, written by carriers whose forms have not caught up to the litigation practice the policies are sold to defend.

What D&O insurance actually is

Directors and Officers liability insurance is a contract between the corporation and a carrier (usually a tower of carriers, with a primary layer and one or more excess layers) under which the carrier agrees to pay specified categories of loss arising from claims made against the directors, the officers, and (in some structures) the corporation itself. The standard architecture has three sides.

Side A. The carrier pays the directors and officers directly when the corporation cannot indemnify them, typically because the corporation is insolvent or because indemnification is prohibited by law (most importantly, in derivative suits where the corporation is on the other side of the table from its own directors). Side A is the personal protection. It is what individual directors care about when they accept board seats.

Side B. The carrier reimburses the corporation when the corporation indemnifies its directors and officers. The corporation pays first. The carrier reimburses, subject to the retention and the policy terms. Side B is the corporation’s protection against its own indemnification obligation.

Side C. The carrier pays the corporation directly for claims against the corporation itself. In a public-company D&O policy, Side C is generally limited to securities claims. In a private-company policy, Side C is usually broader, covering employment practices, certain regulatory matters, and sometimes books-and-records-style proceedings, but the breadth is policy-specific and the exclusions are extensive.

The policy is claims-made. It covers claims made against the insureds during the policy period and reported to the carrier within the notice window. It does not cover claims made before the policy incepted. It does not cover claims reported after the notice window closes. The retention (what the corporation pays before the carrier’s coverage attaches) runs from a few hundred thousand dollars at the small end to many millions at the public-company end. The aggregate limit is the most the carrier will pay in any policy year, across all claims, defense costs, and indemnity, combined.

The architecture is built for shareholder lawsuits, derivative actions, regulatory investigations, and securities fraud claims. It is built around the assumption that the claim is a lawsuit, the lawsuit names the directors and officers, the corporation indemnifies them, and the carrier reimburses on the back end.

A 220 demand is not a lawsuit. It is a pre-suit investigative tool. The architecture handles it badly.

How a 220 demand sits in a D&O policy

Three structural mismatches, each producing its own coverage fight.

The “Claim” definition mismatch. The policy covers “Defense Costs” incurred in defending a “Claim.” The definition of “Claim” varies by carrier and by policy form. Most include written demands for monetary or non-monetary relief, civil proceedings, criminal proceedings, regulatory proceedings, and arbitrations. Some include “formal investigations.” Some include “informal investigations.” A 220 demand is none of these, exactly. It is a written demand for inspection of records, made by a stockholder against the corporation, framed as the exercise of a statutory inspection right rather than a claim for relief. Whether it is a “Claim” within the meaning of the policy is the first coverage question, and the answer depends on which policy form you bought, which endorsements you negotiated, and which carrier is on the risk. Some policies cover books-and-records demands by express endorsement. Most do not. The corporation that did not negotiate the endorsement is the corporation that fights the carrier on the threshold definitional question, while the response clock is running and the production is being pulled together. [M: every policy form is different.]

The “Insured” mismatch. A 220 demand is brought against the corporation. Side B and Side C are the relevant coverage parts. Side A is generally irrelevant unless and until the demand morphs into a derivative suit naming the directors. In a private-company policy with broad Side C, this may be fine. The corporation is an Insured with respect to the demand, and the defense costs are covered subject to the retention. In a public-company policy with Side C limited to securities claims, this is not fine. The corporation is not an Insured for non-securities matters, the demand is not a securities matter, and the corporation funds the defense entirely out of pocket until the demand develops into something covered. Many corporations transitioning from private to public miss this transition. The renewal at the IPO converts the broad Side C to the narrow securities-only Side C, the corporation continues to assume it is covered for everything, and the first 220 demand after the IPO is the moment the assumption is tested.

The “Defense Costs” mismatch. Even if the demand is a Claim and the corporation is an Insured, the policy covers Defense Costs, not response costs. The carrier’s position, variable across carriers but increasingly aggressive, is that the cost of producing documents in response to a 220 demand is an internal compliance cost, not a defense cost, and is therefore not covered. The carrier will pay outside counsel’s fees for advising on the demand, negotiating its scope, and litigating it in Chancery if litigated. The carrier may not pay for the e-discovery vendor, the document review platform, the contract attorneys, or the corporation’s own employees’ time spent collecting records. The line between covered defense costs and uncovered response costs is the second coverage fight, and the carrier draws it where the carrier’s interest lies, which is high enough to leave the corporation funding most of the actual production work.

The four coverage gaps

The claim-definition gap. Standard D&O forms in market through 2024 and into 2025 do not uniformly treat books-and-records demands as covered Claims. Some forms include them by express reference. Most include them only as “investigations” or “formal proceedings,” which a 220 demand may not satisfy depending on whether litigation has been filed. The market has been moving (better carriers now offer “books and records” coverage by endorsement), but the endorsement is not automatic, and many corporations do not know to ask for it at renewal. The corporation whose policy does not address books-and-records demands head-on funds the threshold coverage litigation against the carrier as part of the cost of responding to the underlying demand.

The retention gap. The retention on a typical mid-market D&O policy is $300K to $500K for non-securities claims and $1M to $3M for securities claims. The retention applies to defense costs as well as indemnity. The corporation pays every dollar of defense cost up to the retention before the carrier pays anything. A 220 demand and its follow-on derivative suit may not, in the early phases, exceed the retention. The corporation funds the entire 220 production, at the corporation’s cost, before any carrier dollar comes in. A modest 220 production ($300K in defense costs, retention of $500K) is entirely the corporation’s expense even on a fully covered claim.

The sublimit gap. Many D&O policies impose sublimits on certain categories of claim or expense. Investigation costs are often sublimited. Books-and-records defense, where covered, is increasingly sublimited at carriers that have started addressing the category. Sublimits run anywhere from $100K to $2M. A $2M sublimit on a $15M policy means that, regardless of what the rest of the tower says, the carrier will not pay more than $2M toward the books-and-records phase of the matter. Defense costs above the sublimit, even if otherwise covered, are the corporation’s. The corporation that did not read the sublimits at renewal is the corporation that finds out about them in the second coverage opinion.

The allocation gap. When a 220 demand develops into a derivative suit naming individual directors, the matter becomes an allocation problem. Some defense costs are attributable to defending the directors (Side A, no retention applies in most policies). Some defense costs are attributable to defending the corporation’s indemnification of the directors (Side B, retention applies). Some defense costs are attributable to defending the corporation itself (Side C, where covered, retention applies). The allocation between Side A, B, and C is negotiated with the carrier, and the carrier’s incentive is to push as much as possible into Side B and Side C. The retention reduces the carrier’s exposure on those sides, and the policy limits on Side B and Side C are often shared with other claims, while Side A is usually a dedicated tower. The corporation that does not have allocation language pre-negotiated in the policy fights the allocation question on every invoice, in real time, while the matter is moving.

What changed in 2025

Two things, both relevant to coverage.

The volume of 220 demands has continued to climb. Carriers have been paying more 220-driven defense costs, year over year, for the last five years. The category has gone from a rounding error in D&O loss data to a measurable line item. Carriers have responded the way carriers always respond: by tightening definitions, adding sublimits, narrowing endorsements, raising retentions, and pushing harder on allocation. The carrier that paid 220 demand defense costs without question in 2020 is the carrier that issues a four-paragraph reservation-of-rights letter in 2026. The policy form did not change. The carrier’s posture did.

And the 2025 SB 21 amendments to the DGCL, which narrowed Section 220 in some respects and added confidentiality conditions, have not made the demands less expensive to defend. The categorical limits introduced new fact-driven coverage questions: what counts as books and records under the new statutory definition, what counts as a “compelling need” outside the categories, what confidentiality conditions are reasonable. Each of those is itself a litigation point and itself a defense cost. The amendments narrowed the field. They did not narrow the bill. Carriers are aware of this and are pricing accordingly. Premiums on policies with broad books-and-records coverage have risen materially over the last two renewal cycles. Most corporations have not noticed the underlying coverage shift because they have not read the policy.

What this means for you

Three things every founder, every general counsel, and every CFO should understand about the policy on the books today.

The policy you bought in 2022 is not the policy you would buy in 2026. The market has moved. The carriers have moved. The demand practice has moved. The policy that responded to the corporation’s needs three years ago does not respond to the corporation’s needs today, and the gap is not visible until a demand arrives and the reservation-of-rights letter shows up at noon on a Wednesday. The policy is reviewed at renewal by your broker, who places it, and by your finance team, who pays the premium. It is not reviewed by counsel who has actually litigated the coverage fight that the demand will produce. The renewal pass is a pricing exercise, not a coverage exercise. The coverage exercise is the part that matters and the part that is not happening.¹ [S: most boards approve renewal in five minutes.]

The broker is not your coverage counsel. Brokers are intermediaries between the corporation and the carrier. They are paid by commission on placed premium. They are competent at price discovery, market intelligence, and renewal mechanics. They are generally not lawyers. They will not, in the ordinary course, identify the four gaps above and recommend specific endorsement language to close them, because doing so would slow the placement and complicate the renewal. The corporation that relies on the broker for coverage analysis is the corporation that buys the standard form and finds out what it does not say after the demand arrives. Coverage counsel is a separate engagement, separate fee, often the cheapest legal expense the corporation will incur in any given year. Coverage counsel reviews the policy against the corporation’s specific risk profile and recommends specific changes. Most corporations do not retain coverage counsel. The cost of not doing so shows up as the gap between the tower face value and the actual recovery. [S: the broker is paid on placement, not coverage.]

The notice is the first coverage moment, and the first place coverage is lost. D&O policies require notice of claims within a defined window. The window is short. The notice has to be in writing, addressed to the right party, with the right information, attached to the right documentation. A late notice is a denial. An incomplete notice can be a denial. A notice given to the wrong carrier in a multi-carrier tower can be a partial denial. The notice for a 220 demand is harder than the notice for a lawsuit, because the demand is not a “Claim” by some policy definitions, the corporation is uncertain about whether to provide notice at the demand stage, and the broker may advise waiting until the matter develops. Waiting is the wrong answer. The right answer is notice at the demand stage, in writing, to every carrier in the tower, accompanied by the demand letter, with a reservation of the corporation’s rights to supplement. The corporation that waits to see whether the demand develops is the corporation that gives the carrier a notice argument when the demand develops.

What to do

Five things, in order.

1. Pull your D&O policy and read the definitions of “Claim,” “Defense Costs,” “Insured,” and “Loss.” Read the sublimits schedule. Read the retention schedule. Read the exclusions. Read the notice provision. If you have not done this, you do not know what the policy covers. The policy is 40 to 90 pages depending on the carrier. It is a Tuesday afternoon’s reading. Do it before the next renewal, not after the next demand.
2. Engage coverage counsel for a one-time gap analysis. Coverage counsel is different from the corporation’s general outside counsel, different from the broker, different from defense counsel. Coverage counsel reads the policy against the litigation profile of the corporation and produces a memorandum identifying the gaps. The fee for the analysis is a single five-figure engagement at most firms that do this work. The cost of not doing it is the gap between the tower face and the actual recovery on the next claim, which runs into the seven figures on a meaningful matter.
3. Negotiate specific endorsements at the next renewal. The endorsements that matter for 220 exposure include an express books-and-records-demand endorsement bringing such demands into the definition of “Claim”; an investigation-cost endorsement broadening Defense Costs to include response costs; pre-claim coverage for matters that have not yet ripened into a Claim; and a confirmation that the retention is shared across the books-and-records phase and the follow-on suit phase, not stacked. The carriers that offer these endorsements vary by year. The broker will know which carriers are aggressive on the category at any given renewal. The corporation that asks for the endorsements gets them, with a premium adjustment that is small relative to the coverage.²
4. Calibrate the retention against your actual exposure profile. If your corporation faces a credible risk of 220 demands (Delaware C-corp, board, transactional history, investor base with at least some retail exposure), a retention that puts the entire likely demand cost on the corporation’s books is not a savings. It is a deferred bill. The right retention is high enough to keep premium reasonable and low enough that the carrier participates in the demand-stage defense, not just the follow-on suit. The number is corporation-specific. Coverage counsel and the broker, working together, can land it.
5. Pre-write the notice. The notice the corporation provides to the carriers at the moment a 220 demand arrives is a one-page letter with a defined attachment. Pre-write it. Have it on file with general counsel and the broker. The day the demand arrives, the notice goes out the same day, in writing, to every carrier in the tower. The corporation that has to draft the notice from scratch on the day of the demand is the corporation that gets the notice wrong.

Get counsel before the next renewal

D&O coverage is the cheapest sophisticated insurance on the corporation’s balance sheet. It is also the most contested at the moment of claim. The reason is that the policy form is highly negotiated, the coverage decisions turn on small drafting choices, and the carrier’s posture at the moment of claim is shaped by the carrier’s loss experience across thousands of similar matters, none of which the corporation has visibility into. The policy is sold as a commodity at renewal and litigated as a bespoke contract at claim.

The way to close the gap is not to buy more limit. More limit on a policy with the wrong claim definition, the wrong sublimits, and the wrong allocation language is more capacity behind the same gap. The way to close the gap is to fix the form. Fixing the form is a coverage-counsel exercise, run once or twice a year against the renewal cycle, costing the corporation a small fraction of the premium and a small fraction of the eventual recovery delta.

This is not the kind of work the corporation’s general M&A or corporate counsel can do well, unless they have built a dedicated D&O practice. Most have not. It is also not the kind of work the broker should be expected to do. It is a separate discipline, with its own bar, its own carriers, its own forms, and its own case law. The corporations that do this well retain coverage counsel as a recurring engagement. The corporations that do not do it well find out about the gaps in the carrier’s reservation-of-rights letter on the Wednesday after the demand arrives.

A closing thought

The reservation-of-rights letter is still on your screen. Four paragraphs. Carrier reserves its rights as to whether the demand is a Claim, whether the corporation is an Insured, whether the costs are Defense Costs, whether the sublimit applies, whether the retention has been satisfied, whether the allocation has been established. The letter is not a denial. The letter is an invitation to a coverage fight.

The fight is one the corporation will lose more of than it expects, because the policy was written with the four gaps in it and the corporation paid the renewal premium without knowing they were there. The defense bill will run on a current basis, paid by the corporation, while the carrier and the corporation negotiate which dollars come back and when. By the time the negotiation closes, the demand will have produced the documents that drive the follow-on suit, the suit will be filed, and the next reservation-of-rights letter will be in the inbox before the first one is resolved.

D&O insurance is not a substitute for the certificate amendment from the prior piece. The two pieces work together. The certificate channels the demand into a smaller, narrower, more defensible form. The policy funds the defense of the demand that survives the channeling. A corporation with a clean certificate and a broken policy is paying defense costs out of pocket on a smaller bill. A corporation with a defaulted certificate and a clean policy is recovering most of a much larger bill. The corporation that has both is buying down the largest single category of legal exposure facing the modern Delaware C-corp at a cost that, against the magnitudes involved, is rounding error.

Read the policy before the next renewal. Engage coverage counsel before the next demand. Pre-write the notice before the next claim.

Nobody else will.

About the authors

Sam Shaddox and Matt Souza, Founding Partners

Sam and Matt started in the corporate group at Perkins Coie, advising startups and companies like Microsoft, Amazon, and Zillow on over $15 billion in transactions. They each spent the last decade in-house, serving as attorneys and general counsels at VC-backed unicorns. They built Talairis Law Group to close the gap they kept seeing: founders paying too much, waiting too long, and getting legal work that wasn’t built for their stage.

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