Background
In April 2014, Berkley Insurance Company issued a Directors and Officers liability policy to Mist Pharmaceuticals, LLC, a company whose chair and controlling member was Joseph Krivulka. The policy covered wrongful acts committed by insured persons acting in their capacity as officers or directors of Mist Pharmaceuticals, but contained a “capacity exclusion” barring coverage for any loss “in any way involving” a wrongful act of an insured person acting in their capacity as a member or manager of any entity other than an insured or outside entity.
Beginning in late 2015, two investor LLCs filed suits in Delaware and New Jersey alleging that Krivulka had orchestrated a scheme to divert assets, opportunities, and revenues from Akrimax Pharmaceuticals — an entity in which the plaintiffs held a minority interest — to more than a dozen other entities he controlled, including Mist Pharmaceuticals. Mist Pharmaceuticals tendered the claims to Berkley. Berkley immediately issued a reservation of rights citing the capacity exclusion, but agreed to pay ten percent of shared defense costs while it investigated. After approximately one year, Berkley withdrew from the defense entirely on a separate timing ground and declined to participate in settlement negotiations, repeatedly reiterating its reservation of rights and the capacity exclusion in no fewer than ten communications over five years.
Mist Pharmaceuticals filed a coverage action in 2017, arguing that Berkley’s year-long partial payment of defense costs, followed by its refusal to fund a global settlement, constituted forfeiture of any right to rely on the exclusion under Fireman’s Fund Insurance Co. v. Security Insurance Co., 72 N.J. 63 (1976), and triggered estoppel under Griggs v. Bertram, 88 N.J. 347 (1982). The trial court granted summary judgment to Mist Pharmaceuticals, but the Appellate Division reversed. The Supreme Court granted certification.
The Court’s Holding
Justice Patterson, writing for a 5-2 majority, affirmed the Appellate Division as modified on all three central issues. First, the Court held that the underlying claims fall squarely within the capacity exclusion. Drawing on its analysis in Norman International, Inc. v. Admiral Insurance Co., 251 N.J. 538 (2022), the Court explained that the exclusion’s disjunctive phrasing — covering loss “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving” a wrongful act in an uninsured capacity — does not require proof of a causal nexus between the excluded role and the harm. Because every allegation against Mist Pharmaceuticals was inextricably tied to Krivulka’s role as member and manager of Akrimax, an uninsured entity, the exclusion applied on its face.
Second, the Court rejected Mist Pharmaceuticals’ forfeiture argument under Fireman’s Fund. That doctrine requires a finding that the insurer actually breached its obligations or acted in bad faith — neither of which occurred here. Berkley consistently and correctly reserved its rights under the capacity exclusion from the very first coverage communication, and its refusal to fund an uncovered settlement was entirely lawful. Third, the Court rejected estoppel under Griggs. Unlike the insurer in Griggs, which gave no timely indication of a potential disclaimer, Berkley stated the full text of the capacity exclusion, reserved its rights under it, and expressly warned Mist Pharmaceuticals that its correspondence should not be construed as a waiver or estoppel — at least ten times during the five years preceding the settlement.
Justice Fasciale, joined by Justice Hoffman, dissented. In his view, the exclusion does not bar all coverage when wrongful acts are simultaneously committed in both insured and uninsured capacities; at a minimum the exclusion is ambiguous and must be construed in favor of coverage. He also argued that Berkley’s repeated representations that partial coverage was available should estop it from later asserting the exclusion as an absolute bar, and would have remanded for resolution of disputed material facts.
Key Takeaways
- A D&O capacity exclusion written in broad disjunctive terms — covering loss “in any way involving” a wrongful act in an uninsured capacity — does not require proof of a causal nexus and will be enforced where all underlying allegations are tied to the insured person’s role at an uninsured entity.
- An insurer that timely and repeatedly issues detailed reservations of rights, quotes the exclusionary language, and expressly disclaims waiver or estoppel will not be held to have forfeited the exclusion merely by making partial interim defense payments under that same reservation.
- Neither Fireman’s Fund forfeiture nor Griggs estoppel applies unless the insurer actually breached its coverage obligations or failed to give timely notice of a potential disclaimer; consistent reservation of rights defeats both doctrines.
- An insurer has the contractual right to refuse to consent to or fund a settlement it correctly determines is not covered by its policy, without that refusal constituting bad faith or waiver.
Why It Matters
This decision provides significant clarity for insurers defending D&O claims that involve multi-entity schemes where only one entity is insured. By confirming that broad capacity exclusions do not require a separate causal-nexus showing, and that a properly maintained reservation of rights insulates the insurer from forfeiture and estoppel even after years of partial participation in a defense, the ruling strengthens the practical utility of such exclusions in complex self-dealing and diversion cases.
For policyholders and their counsel, the decision is a cautionary reminder that an insurer’s payment of a fraction of defense costs under an explicit reservation of rights creates no reasonable expectation of full coverage — and no procedural hook for estoppel — however long that partial-payment arrangement persists. Companies facing D&O claims that implicate multiple related entities should scrutinize capacity exclusions at the outset and press coverage counsel to identify allocation arguments before settlement postures harden.