The process of digital transformation in Chinese enterprises is rapidly accelerating, yet the results remain unsatisfactory. Therefore, there is an urgent need to create a favorable institutional environment to better promote corporate digital transformation. Existing research has focused on exploring the driving effects of economic environments such as the governance system of technological innovation, digital economy policies, government fiscal technology expenditures, tax incentive policies, digital cultivation policies for core industries, and regional market development on corporate digital transformation. However, there is a lack of attention to insurance systems such as directors’ liability insurance (DLI). Serving as a risk mitigation instrument in capital markets, directors’ liability insurance may oversee and encourage managers to foster corporate digital transformation or, conversely, facilitate managers’ self-interest, potentially hindering corporate digital transformation. Therefore, the precise impact of directors’ liability insurance on corporate digital transformation warrants empirical investigation. This study explores the impact of directors’ liability insurance on firms’ digital transformation through empirical data from listed Chinese manufacturing companies spanning 2012 to 2022. It is discovered that directors’ liability insurance can advance corporate digital transformation, indicating that the supervisory incentive hypothesis predominantly influences this outcome. The analysis of the impact mechanism suggests that directors’ liability insurance encourages corporate risk-taking and eases financing constraints, thereby making firms more motivated and capable of undergoing digital transformation. Further analysis shows that under conditions of non-state ownership, poor corporate governance, and weak financial development, the positive impact of directors’ liability insurance on corporate digital transformation is more pronounced. This suggests that directors’ liability insurance can compensate for deficiencies in the property rights system, governance environment, and financial landscape, thereby more effectively fostering corporate digital transformation. Compared with prior research, this study makes three main contributions: firstly, it broadens the investigation into the driving factors of corporate digital transformation from an insurance system perspective, clarifying the significant role of the directors’ liability insurance system in this process; secondly, it uncovers the promotion effect of directors’ liability insurance on corporate digital transformation by constructing a competitive analytical framework, enriching the discourse on the economic consequences of this insurance system and clarifying its applicability and effectiveness in China’s capital market; thirdly, the study elucidates the risk-taking mechanism and financing constraint mechanism by which directors’ liability insurance influences digital transformation, as well as its relationship with the property rights system, governance environment, and financial landscape, providing a direction for reform and optimization of the insurance system. The findings of this study offer vital decision-making insights for government bodies aiming to promote the digital economy, insurance departments to optimize the directors’ liability insurance system, and enterprises to promote digital transformation. On one hand, government departments need to promote the development of the DLI market and effectively leverage the risk-taking and financing constraint mechanisms of DLI to drive corporate digital transformation and contribute to building a digital China. On the other hand, government departments should harness the synergistic effects of DLI with property rights systems, governance environments, and financial environments to effectively incentivize corporate digital transformation and promote sustainable development.