Insurance & Liability for Fractional Leaders

Engaging a fractional executive raises a question that a permanent hire rarely does: who carries the risk when a part-time leader is making real decisions? A fractional CFO signing off on numbers, a fractional COO reshaping operations or a fractional director sitting on the board holds genuine authority — and with authority comes exposure, for both the individual and the business engaging them. This guide sets out how insurance and liability work in a fractional arrangement, the cover that tends to matter, the legal duties that apply regardless of hours worked, and the contract terms worth getting right before an engagement starts. Where a full-time hire is premature, a fractional CEO can provide senior leadership for a few days a week.

It is a general overview for planning purposes, written for UK businesses and the fractional leaders they engage. It is not legal, tax or insurance advice; specific cover should always be confirmed with a qualified broker, and the engagement contract reviewed by legal counsel.

Why Fractional Arrangements Are Different

A permanent executive is an employee, covered by the firm’s policies and clearly inside its liability perimeter. A fractional leader usually sits in a greyer zone — often engaged as a contractor through their own limited company, frequently working with several businesses at once, and not automatically named on the firm’s existing cover. That ambiguity is the whole issue: a decision that would be plainly the company’s risk for an employee can be less clear-cut when the person making it is part-time and external.

Three features of fractional work create most of the uncertainty. The first is the contracting structure: the business may be contracting with a personal service company rather than the individual, which changes who owes what to whom. The second is title versus reality: a fractional leader may be called “CFO” or “Managing Director” without being formally appointed to the board, yet still act like a director in practice. The third is time: cover and contractual protection need to work across a start date, a possible change of scope and an end date, and claims can arrive long after the engagement has finished. Getting the position defined up front, rather than discovering a gap after a claim, is what separates a clean fractional engagement from a messy one.

The Cover That Usually Matters

Directors & Officers (D&O) Insurance

Where a fractional leader holds a formal directorship or officer position — a fractional managing director or a board-level appointment — D&O cover is usually the central protection. It responds to claims of alleged wrongful acts made against directors and officers personally, and typically meets defence costs as well as damages or settlements within the policy terms. Company law specifically allows this: under sections 232 and 233 of the Companies Act 2006, a company may buy and maintain insurance for its directors against liabilities it would not be permitted to indemnify them for directly.

The key question in a fractional engagement is whether the company’s existing D&O policy extends to a part-time or contracted appointee. Many policies define an “insured person” broadly enough to include past, present and future directors and officers, and sometimes de facto directors, but definitions vary, and someone holding a senior title without a board seat may or may not fall inside them. This is worth confirming in writing with the insurer or broker rather than assumed. Two further points matter: most D&O policies are written on a claims-made basis, so it is the policy in force when a claim is made that responds, and the fractional leader should ask how they are protected after they leave — usually through the company keeping the policy in place with cover for former directors, or through run-off cover if the company is sold or wound up.

Professional Indemnity / Errors & Omissions

Professional indemnity insurance (the UK equivalent of what US sources call errors & omissions) covers claims of negligence, error or inadequate advice in a professional capacity. Many fractional executives carry their own PI cover precisely because it travels with them across engagements and does not depend on any one client’s policy. For advisory-heavy roles — a fractional CFO or strategy leader giving recommendations a business acts on — it is often the most relevant single policy.

PI and D&O are not interchangeable. PI generally responds to claims arising from professional services delivered to a client; D&O responds to claims arising from acts as a director or officer. A fractional leader who advises on some matters and holds a board seat for others can sit across both, and some PI policies exclude claims arising from directorships altogether. Checking how the two policies interact — and where the boundary falls — is one of the most useful conversations to have with a broker at the outset.

Other Cover Worth Checking

Depending on the role, public liability may matter where the individual works on client premises, and cyber liability is increasingly relevant given how much a modern leader touches sensitive data and systems. Employers’ liability may also be relevant if the fractional leader engages staff of their own. None of these is universal, but each is worth a deliberate check rather than an assumption that it is “probably covered”.

Who Covers What: Personal vs Company Cover

Two arrangements are common, and each has trade-offs. Cover the fractional leader carries personally travels with them and is consistent across clients, but may not stretch to every risk a specific engagement creates, and a personal policy’s limit is shared across every client they work for. Cover the company extends to them — naming them on its D&O or PI policy — can be neat, but its scope, exclusions and whether it survives the end of the engagement need checking carefully.

In practice the cleanest engagements decide this explicitly at the outset: which policy is primary, what each side maintains, at what limits, and what proof of cover is exchanged. A short schedule in the engagement letter listing the policies, insurers, limits and renewal dates removes most of the ambiguity. The failure mode is both sides assuming the other has it covered. For businesses in the insurance sector itself — insurers, MGAs, brokers and Lloyd’s market firms — the same questions apply, with the added layer of regulatory accountability covered below, and it is a recurring theme in our insurance recruitment work.

Directors’ Duties Do Not Shrink With the Hours

A common misconception is that a director who works two days a week owes the company a lighter set of duties. That is not how UK company law works. A director appointed to the board owes the same general duties set out in the Companies Act 2006 whether they are full-time, part-time, executive or non-executive. The duty to exercise reasonable care, skill and diligence in section 174 is measured against two tests: the knowledge, skill and experience reasonably expected of someone carrying out that director’s functions, and the knowledge, skill and experience the individual actually has. An experienced finance professional serving as a fractional finance director is judged against what that experience should bring, not against the number of days in the contract.

Part-time hours do shape what is reasonable — nobody expects a two-day-a-week director to know everything that happened on the other three — but they do not remove the duty to ask questions, read the papers, challenge what looks wrong and make sure there are systems to surface problems between visits. The other general duties, including the duty to promote the success of the company and the duty to avoid conflicts of interest, apply in full and carry particular weight for someone serving several businesses at once.

Liability can also attach without a formal appointment. The Companies Act treats a director as “any person occupying the position of director, by whatever name called”, and a person who acts as a director without being appointed (a de facto director), or whose instructions the board is accustomed to follow (a shadow director), can be exposed to many of the same duties and to insolvency-related claims such as wrongful trading. A fractional leader with a senior title who is effectively running the business should assume the duties may apply, and the business should check that its D&O policy would treat them as an insured person.

The Contract Terms That Do the Work

Most of the liability position is settled not by insurance but by the engagement contract. Four clauses carry most of the weight:

• Indemnification: defines when the company will protect the fractional leader against liability arising from their proper performance of the role — and, importantly, where that protection stops (typically excluding fraud, wilful misconduct or acting outside authority).
• Limitation of liability: caps the exposure between the parties at a level proportionate to a part-time engagement, rather than leaving the individual open to disproportionate claims.
• Insurance requirements: states what cover each side must hold, at what limits, for how long after the engagement ends, and who provides proof — turning “we assumed” into a documented position.
• Scope and authority: defines exactly what the fractional leader is empowered to decide. Clear limits on authority are themselves a liability control — it is much harder to hold someone liable for a decision they had no authority to make.

The legal limits on indemnifying a director

Where the fractional leader is a statutory director, the indemnity clause has to work within company law. Section 232 of the Companies Act 2006 makes void any provision exempting a director from liability for negligence, default, breach of duty or breach of trust in relation to the company, and any company indemnity against that liability, unless it falls within the permitted exceptions — insurance, a qualifying third-party indemnity or a qualifying pension scheme indemnity. A qualifying third-party indemnity can cover claims brought by third parties, but it cannot cover criminal fines, regulatory penalties, or the costs of defending criminal proceedings where the director is convicted or civil proceedings brought by the company where judgment goes against them.

In practical terms, a director cannot contract out of liability to the company itself, and a limitation-of-liability clause that tries to do so is unlikely to hold for the directorship. The cap can still be useful for the separate consultancy services a fractional leader provides, which is one reason many engagements separate the board appointment from the advisory contract. Legal counsel should draft this; it is an area where template wording frequently overreaches.

Regulated Firms: Personal Accountability Under SMCR

In an FCA-authorised firm, the liability picture has a further layer. Under the Senior Managers and Certification Regime, individuals approved to hold a senior manager function are personally accountable for the areas set out in their statement of responsibilities, and most staff are bound by the FCA’s individual conduct rules. That accountability applies to a part-time SMF holder in exactly the same way as a full-time one. A fractional compliance officer holding SMF16, or a fractional MLRO holding SMF17, carries the regulatory responsibility for that function personally, whatever the contract says about days per month.

This matters for insurance because the FCA can take action against individuals, and regulatory fines are among the liabilities a company cannot lawfully indemnify. Many D&O policies will meet the costs of responding to a regulatory investigation, subject to their terms, but cover for fines and penalties themselves is restricted by law and policy wording. A fractional SMF holder should understand exactly what the firm’s D&O policy provides for regulatory investigations, and should keep a clear record of the resources, information and time they were given — the regulator will look at whether they took reasonable steps within their area of responsibility.

The regime is also changing. The FCA and PRA finalised a first phase of SMCR reforms in 2026, including a change that allows temporary cover for a senior manager function to continue beyond the usual 12 weeks where a complete application for the replacement has been submitted within that period. HM Treasury has confirmed further legislative changes, including removing the certification regime from primary legislation, as parliamentary time allows. Firms relying on fractional or interim SMF holders should check the current FCA rules at the point of appointment rather than relying on older guidance.

Tax Status, IR35 and Engagement Structure

Insurance and liability are not the only reasons the engagement structure matters. Where a fractional leader works through their own limited company, the off-payroll working rules (often called IR35) apply. For public sector clients and medium or large private sector clients, HMRC’s guidance places responsibility for deciding the worker’s employment status on the client; for small private sector clients, the worker’s own company decides. HMRC has confirmed that the higher company size thresholds — meeting two or more of turnover of £15 million or less, a balance sheet total of £7.5 million or less, and 50 or fewer employees — apply to the off-payroll rules, although HMRC has said the change will have no practical effect until 6 April 2027 at the earliest, because size is judged by reference to earlier years. Some businesses that were previously “medium” will then be treated as small.

Board appointments add a twist. A statutory director is an office holder, and HMRC treats fees for the duties of that office as employment income subject to PAYE and National Insurance, whatever the contracting route. That is why many fractional engagements separate the directorship from the advisory or consultancy work under different agreements, and why the structure should be agreed with an adviser before the appointment is made. Our guide to IR35 rules for senior executive engagements covers the status questions in more depth.

Practical Risk Management

Beyond policies and clauses, a few habits reduce exposure in practice:

• Keep the scope genuinely clear, so decisions sit with whoever properly owns them, and update the written scope when the role changes.
• Document decisions and the basis for them. A contemporaneous record — board minutes, emails, papers reviewed — is the strongest evidence of due diligence if a decision is ever challenged.
• Review cover when the role changes. A fractional remit often grows over an engagement, and the original policy may not have kept pace.
• Ask for the policy, not a summary. A fractional leader joining a board should ask to see the D&O wording, or at least the insured-person definition, limits and key exclusions.
• Plan the exit. Agree how cover continues after the engagement ends and who keeps records, before anyone needs them.
• Take specialist advice. A broker who understands fractional and interim arrangements, and legal counsel on the contract, are worth the modest cost against the exposure they address.

Engaging a Fractional Leader Well

The insurance and liability position is one part of engaging a fractional executive properly — alongside scoping the role, agreeing the commercial terms and finding the right person. Exec Capital places fractional CFOs, COOs, managing directors, compliance officers and other senior leaders into UK businesses, and can help you structure an engagement that is clear on responsibilities from the outset. Where the business is itself an insurer or broker, our insurance executive search team brings sector knowledge of underwriting, claims and regulatory roles to the brief. A good engagement usually starts with a short written brief that covers the outcome expected, the authority the leader will hold, whether they will sit on the board, how many days a month are needed, and which insurance each side will hold.

The Liability Risks Specific to Part-Time Leadership

A fractional leader faces a few risks a permanent executive largely does not, and they are worth naming because they shape which cover and clauses matter. The first is incomplete context: working a couple of days a week, a fractional leader may act on a partial picture of the business, and a decision that looks sound in isolation can misfire against facts they were not close to. The second is conflict of interest: serving several clients at once, they must keep information and loyalties cleanly separated, and a lapse there is both a commercial and a legal problem — for a director, it engages the statutory duty to avoid conflicts. The third is compliance drift: a part-time appointee may not track every regulatory change affecting a client, yet can still carry responsibility for the consequences.

A fourth is the “title without the seat” problem described earlier: someone introduced to banks, investors or staff as the company’s CFO may be treated by others as having authority they do not formally hold. None of these is a reason to avoid fractional leadership — they are simply the risks that clear scope, good documentation and the right cover exist to contain.

How This Plays Out in Practice

The abstract points become concrete quickly. Consider a fractional finance leader whose client suffers a data breach exposing financial records: the live question becomes whether the company’s cyber cover extends to a part-time officer at all — a gap far better identified at engagement than after an incident. Or a fractional marketing leader whose campaign draws a competitor complaint: here a clear indemnification clause is what stands between the individual and personal exposure for a decision taken in good faith on the company’s behalf. Or a fractional operations leader who, on arrival, spots that the firm’s liability cover does not contemplate an external officer, and has it extended before taking up executive responsibilities. Or a fractional SMF16 at a small authorised firm who keeps a running log of the issues raised with the board and the resources requested, so that if the FCA later asks what reasonable steps were taken, the answer is on paper.

The pattern across all of them is the same: the exposure was manageable, but only because someone checked the position deliberately rather than assuming it. These are illustrative situations rather than accounts of specific engagements, but they reflect the questions that recur whenever a business brings a fractional leader inside its decision-making.

Frequently asked questions

Does a company’s D&O policy automatically cover a fractional director?

Not automatically. Many policies cover all past, present and future directors, which would include a formally appointed fractional director, but the definition of an insured person varies. Someone with a senior title but no board appointment may fall outside it. Confirm in writing with the insurer or broker.

Should a fractional executive have their own professional indemnity insurance?

Usually, yes, particularly for advisory work. Personal PI travels across engagements and covers professional advice, but check whether it excludes claims arising from directorships, which are normally a matter for the company’s D&O policy.

Are part-time directors held to a lower standard?

No. Section 174 of the Companies Act 2006 applies to every director. The standard reflects the functions the director carries out and their own experience, not their hours, although what is reasonable will take account of the role as agreed.

Can a company indemnify a fractional director against regulatory fines?

No. A qualifying third-party indemnity cannot cover criminal fines or penalties payable to a regulator. Insurance may meet some investigation and defence costs, depending on the policy, but fines themselves are generally the individual’s own liability.

Does IR35 apply to a fractional director?

It can. Fees for the duties of a statutory directorship are treated as employment income, and separate consultancy work through a limited company is assessed under the off-payroll rules. Take tax advice on the structure before the appointment.