New Jersey High Court Highlights D&O Insurance Traps for Complex Business Structures
By: Donald W. Kiel and Lucas J. Tanglen
Businesses and their leaders expect directors and officers (D&O) insurance to provide broad coverage for acts undertaken in an individual’s corporate capacity. However, a recent New Jersey Supreme Court ruling highlights serious coverage traps that may exist for individuals wearing multiple corporate hats. Policyholders should be aware that insurers may attempt to avoid coverage obligations by arguing that mixing insured and uninsured roles can result in a complete loss of coverage.
Berkley Insurance Company (Berkley) issued a D&O policy to Mist Pharmaceuticals, LLC (Mist). Underlying lawsuits against Mist and other entities alleged that Mist’s chairman engaged in self-dealing by diverting the income and resources of a company named Akrimax Pharmaceuticals, LLC (Akrimax)—for which he also served as director—to Mist and other entities that he controlled. Unlike Mist, Akrimax was not an insured entity under the Berkley policy.
After Mist sought coverage from Berkley for the lawsuits, which had been brought by minority investors in Akrimax, Berkley denied coverage and refused to contribute to a settlement. Berkley’s denial was based on the so-called “Capacity Exclusion,” precluding coverage for loss in connection with a claim “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any Wrongful Act of an Insured Person serving in their capacity as director [or] officer . . . of any other entity other than an Insured Entity.” Mist sued Berkley for coverage in New Jersey state court, which ultimately resulted in an appeal to the state’s high court.
Embracing an expansive reading of the exclusion, the New Jersey Supreme Court, in a 5-2 decision, agreed with Berkley that coverage was completely excluded.1 The Court explained that the director’s role in Akrimax (an uninsured entity) was “front and center” in the underlying allegations. Focusing on the broad “or in any way involving” wording of the Capacity Exclusion, the Court concluded that the exclusion did not require a causal connection between the excluded activity and the alleged harm and reasoned that, because all of the allegations in some way related to the director’s role in the uninsured entity, Akrimax, the exclusion applied to bar coverage.
The Mist ruling is a warning for policyholders, particularly those in industries where complicated corporate structures and ownership arrangements are common, such as pharmaceuticals, energy, and financial services. As highlighted by a dissent in Mist, the majority’s interpretation could render “the entire D&O policy meaningless” when otherwise-insured conduct is arguably “tainted” by an individual’s separate capacity with a non-insured entity.
Policyholders may have strong arguments to challenge insurers’ broad application of “capacity” exclusions.2 However, Mist suggests that a proactive review of existing policy wording is worthwhile. Policyholder-side insurance coverage counsel can assist in identifying and improving potentially troubling “capacity” exclusions, in order to help preserve the broad coverage that businesses and boardrooms expect.
Footnotes
1 Mist Pharms., LLC v. Berkley Ins. Co., 355 A.3d 253, 271 (N.J. 2026)
2 See Policyholder’s Guide to the Law of Insurance Coverage (§ 11.05[B]).