By analyzing the sample of Taiwan’s non-financial firms over the period of 2009 to 2024, we find that directors’ and officers’ insurance (D&O insurance) positively affects stock price crash risk. Moreover, such positive effect is more pronounced in the presence of foreign institutional ownership. Instead of exerting monitoring effect on firms, foreign institutional investors seem to induce firms’ risk-taking and exacerbate moral hazard of D&O insurance coverage. The extended analyses further show that D&O insurance coverage is related to increased number of financial restatements in the subsequent year, which echo our main findings and suggest that insured firms may engage in aggressive accounting practices and misreporting after acquiring D&O insurance coverage. Collectively, our study suggests the concern of moral hazard problem arising from insured firms’ ex-post risk-taking leading to the instability of stock returns, and foreign institutional ownership is an important driver of such moral hazard concern.