As an important subject of green innovation, enterprises have dual goals of economic and environmental protection in their actions. However, in practice, these two goals may conflict, and enterprises will not spontaneously transform to green due to the path dependence of innovation. Based on the agent’s loss avoidance psychology, the existing research suggests that some innovation risks can be transferred through Directors’ and Officers’ liability insurance (D&O insurance) to reduce the innovation losses that enterprises may suffer, so as to encourage them to carry out independent innovation. However, as a collective behavior, if innovation mainly comes from cooperative division of labor, it could also lead to ineffective innovation incentives. Therefore, from the perspective of reputation insurance, using the data on D&O insurance gathered from the sample of China’s A-share manufacturing enterprises to construct a quasi-natural experiment, this paper adopts the DID approach to evaluate the green innovation effect of D&O insurance. The study shows that D&O insurance acts as a “reputation insurance”, sending positive signals to the market and promoting green innovation. The number of granted green invention patents increased by 14% and the number of granted green utility model patents increased by 10% after the enterprise purchased D&O insurance. Heterogeneity mechanism analysis shows that: The greater the exposure to reputation risk faced by the enterprise, the more obvious the role of D&O insurance will be; the higher the concentration of suppliers, the less sensitive the enterprise will be to reputation risk, and the less effective the reputation compensation of D&O insurance will be; the enterprise with credit ratings has a wider reputation transmission channel, and the reputation insurance utility of D&O insurance is greater. Further discussion reveals that, the purchase of D&O insurance by enterprises pushes up the degree of financialization, which intensifies short-term profit-seeking and de-realization to deficiency, and squeezes out green innovation investment. In reality, the coverage rate of D&O insurance in China is still at a relatively low level. The understanding of listed companies on this insurance is mostly concentrated on the financial aspect, and they have not paid sufficient attention to the green development opportunity it may bring. The above findings provide a basis for discussing the important role of D&O insurance in supplementing employment contracts and promoting green innovation activities from the perspective of “reputation insurance”, and further enrich the influencing factors of managers’ innovation incentives, providing new evidence on the environmental effect of professional liability insurance. This paper also has some inspiration for improving the internal and external governance mechanisms of enterprises, where owners can balance internal risk compensation and external collaborative innovation to alleviate the conflict between business and environmental goals.