@ Markus, Alex & Morser:
Thanks for your comments. When Outlook connects to Exchange Online servers in Office 365, Exchange talks to Identity Management Service (think of it as the Windows Domain Controller in on-prem) to authenticate that Outlook client before it lets it connect to a mailbox (similar to DSProxy process in on-prem scenario). Outlook does not talk directly to Identity Service, rather Exchange facilitates the authentication process. Identity Service stores credential information for all 'managed' users of Office 365, the ones who have no on-prem servers, Exchange or Windows DC, etc. Now for this scenario, Identity Service provides two pieces of info around users' credentials to Exchange when it authenticates Outlook users, i.e. number of days remaining before user's password actually expires (this notification period is configurable by Tenant Admins) & if the password has already expired. This info is then relayed to Outlook by Exchange & Outlook displays appropriate warning/error to its user. This happens when Outlook tries to connect to Exchange using any of the protocols it commonly uses, i.e. MAPI (for mailbox connectivity), EWS (autodiscover, free/busy, OOF, etc.), etc. or even when it's already connected to Exchange. This whole process works differently for on-prem Outlook clients, where classically a Windows Domain Controller is actually responsible for credentials/password maintenance and it works with the underlying Windows OS (domain joined user machines) to surface these warnings. Outlook do still get a warning from Exchange when there is a need to re-authenticate for any reason, and users see an authentication prompt which translates into the 'Need Password' state which Outlook goes into at that time. If you have a business need for this feature in on-prem space especially when Outlook is being used on machines that are not domain joined, please do let us know thru the available support channels (1-800-Microsoft) and we can pursue that with product group, of course with no guarantees :) ...
@ Chris:
We're working on resolving this issue for Mac Outlook as well, we'll share more info when it's ready. :)