When companies fail, insurers pay – how rising insolvencies leads to an increase in claims

Executive Summary

A surge in corporate insolvencies in the UK has prompted a rise in claims under directors’ and officers’ (D&O), professional indemnity (PI), and financial institution (FI) policies. Insurers are facing tougher coverage disputes, especially around exclusions, timing and aggregation issues. In addition, an increase in litigation funding is fuelling claims that are better resourced and more aggressively pursued so insurers need to be prepared to respond to complicated disputes that are going to be more difficult to resolve.

Why insolvencies have increased

A convergence of economic headwinds is driving a sharp increase in UK corporate insolvencies. In 2024, over 23,000 companies entered insolvency – the same level seen following the 2008 financial crisis. Rising interest rates, supply chain disruption, reduced consumer demand and geopolitical instability have left many businesses exposed, particularly in construction, retail, hospitality, and early-stage tech. Hangovers from the Covid-19 pandemic, such as delayed creditor action, hybrid working and the removal of government support have all contributed to a highly challenging trading environment. While some companies are resilient, many were operating with slim margins, high debt loads and fragile business models and the current macroeconomic climate has left little room for error.

For the financial lines market, this trend has brought a surge in claims across D&O, PI, and FI policies. Liquidators, creditors and stakeholders are all looking to recover value from perceived failures in management, advice or oversight in the period leading up to collapse.

D&O liability: wrongful trading and mismanagement

With an increase in insolvencies, there is an inevitable corresponding increase in claims alleging that directors breached their duties by continuing to trade while insolvent or by failing to act in creditors’ best interests. The Companies Act 2006 and the Insolvency Act 1986 place specific responsibilities on directors in distress scenarios, and insolvency practitioners scrutinise decisions made during the run-up to collapse to see whether those responsibilities were observed.

These claims often focus on whether directors misrepresented the financial position of the company, delayed filing for insolvency, or entered into transactions that failed to prioritise the interests of creditors (as per the Supreme Court decision of BTI 2014 LLC v Sequana SA [2022]). Where a company has failed shortly after raising finance or entering into strategic transactions, investors may allege mismanagement or lack of proper disclosure.

In these circumstances, exclusions come into sharp focus, particularly where the alleged misconduct predates the policy inception or retroactive date. Timing can be another relevant factor as insolvency-related claims often emerge months or years after the relevant events, potentially raising issues of late notification.

PI exposure: advisers in the firing line

Professional advisers involved with distressed companies, especially auditors, accountants, lawyers and corporate finance professionals, will also come under scrutiny. Legal and financial advisers may be criticised for inadequate restructuring advice, or for facilitating transactions that are subsequently challenged under insolvency legislation.

Auditors in particular may face claims for failing to identify going concern issues or material misstatements in financial reports. A £2.7bn claim against EY (formerly Ernst & Young) is currently being heard in the Commercial Court (NMC Health Plc (In Administration) v. Ernst & Young LLP). The claim, by the shareholders of the UAE hospital operator, NMC Health, which collapsed in 2020 after revealing $4bn in hidden debt, alleges that EY’s audits between 2012 – 2018 failed to uncover significant unreported borrowing. EY denies negligence, claiming that the company accounts were manipulated to conceal the fraud from auditors which made it ‘impossible’ to detect. The case is expected to continue until mid-August.

Aggregation becomes a live issue where multiple claims are brought by different stakeholders in respect of the same advice, for instance, investors, creditors and regulators may all issue claims against the same auditor for losses resulting from a group collapse. Whether losses arising from the same set of facts should be treated as a single claim or as multiple separate claims can have significant implications for policy limits and retentions.

Financial institutions: lending, management and oversight

Financial institutions are being drawn into the insolvency fallout, particularly where they have lent to, invested in, or exercised control over distressed entities. Allegations range from negligent lending or failure to enforce covenants, through to claims that banks and asset managers failed to properly supervise investment risk or engaged in conflicted transactions.

The blurring of roles can be particularly problematic. In some cases, lenders may be alleged to have acted as shadow directors, exposing themselves to broader liability. Where investment losses are involved, disputes often arise as to whether the losses stem from professional services intended to be covered under the policy or from a market or credit risk outside the policy’s intended scope. Insolvency exclusions and dishonesty provisions may be invoked, but the factual complexity of these cases often makes them difficult to resolve without litigation.

The growing role of litigation funding

A notable feature of the current insolvency wave is the increasing use of litigation funders and after-the-event (ATE) insurance. For liquidators and administrators, this enables claims to be brought that would otherwise be unaffordable. The result is that claims are more aggressively pursued, better resourced, and often aimed at securing substantial early settlements.

For insurers, this trend raises the stakes. Funded claims are typically accompanied by detailed legal and forensic work, and insurers may feel pressured to settle to avoid the cost and publicity of prolonged litigation.

On 2 June 2025, the Civil Justice Council (CJC) published its report on litigation funding. The report was partly in response to the decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] in which the Supreme Court held that litigation funding agreements (LFAs), which entitle funders to payment based on the amount of damages recovered, were Damages-Based Agreements (DBAs) and unenforceable unless they complied with the regulatory regime for DBAs. The Court of Appeal decision handed down earlier this month in Sony Interactive Entertainment Europe Ltd v Alex Neill Class Representative Ltd [2025] has clarified that LFAs funded by reference to a multiple of the amount that it has committed to pay do not become a DBA simply because that amount is capped at the level of damages received.

The CJC report proposes legislation to reverse the impact of the PACCAR decision, as well as the introduction of a ‘light-touch’ statutory regime to regulate litigation funding. Clearer regulation, transparency and enforceability of the funding agreements is likely to lead to an increased use, especially in insolvency disputes where there is a lack of available assets.

Conclusion

The recent surge in UK corporate insolvencies, though off its 2023 peak, remains at historically high levels. As the financial pressures on businesses persist, insurers will see an increasingly litigious and complex environment emerge around company failures. Directors, professional advisers and financial institutions are all finding themselves exposed to scrutiny and legal action, with D&O, PI and FI policies frequently brought into play.

Landmark decisions like Sequana reflect a judicial landscape that is becoming more willing to hold directors and advisers accountable for actions taken in the run-up to insolvency. At the same time, litigation funding and group actions have tipped the balance in favour of policyholders, increasing both the volume and sophistication of claims.

For financial lines insurers, the challenge is not simply higher claim frequency — it is the heightened severity, complexity, and cost of resolving these disputes. To protect against this, insurers need to be proactive: early investigation, robust reserving and a careful analysis of policy coverage is essential. Insurers should also review wordings now to ensure clarity around insolvency-related exposures and be ready for well-funded, strategically pursued claims that are unlikely to go away quietly.