(Article from Insurance Law Alert, May 2026)
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Holding
An insurer that repeatedly reserved its rights under a capacity exclusion in its Directors and Officers (“D&O”) policy was not estopped from denying coverage and did not forfeit any contractual rights by declining to participate in a settlement involving excluded claims. Mist Pharms., LLC v. Berkley Ins. Co., 2026 N.J. LEXIS 397 (N.J. May 11, 2026).
Background
A suit was brought against Mist Pharmaceuticals, Joseph Krivulka, Akrimax Pharmaceuticals, and other entities alleging that Krivulka, who served on the board of both Mist and Akrimax, engaged in self-dealing and fraud by assigning various entities, including Mist, to serve as middlemen between Akrimax and other drug companies for personal gain.
Mist was insured under a D&O policy issued by Berkley Insurance Company. The policy contained an exclusion that barred coverage for claims “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, officer, trustee, employee, member or governor of any other entity other than an Insured Entity” (the “Capacity Exclusion”). When Mist sought coverage for the suit, Berkley initially defended under a reservation of rights citing the Capacity Exclusion. Five years later, Berkley withdrew from the defense and refused to participate in a $12 million settlement. Berkley repeatedly reserved its rights under the Capacity Exclusion and other policy provisions in the five years before the settlement.
The trial court entered judgment for Mist, requiring coverage up to the remaining policy limit. As reported in our August 2024 Alert, the appellate court reversed, holding that Berkley’s withholding of consent was reasonable because the settlement involved multiple entities not insured under the policy and because Berkley timely cited the exclusion as a defense to coverage.
Decision
In a 5-2 ruling, the New Jersey Supreme Court affirmed the appellate court’s judgment as modified. Before the court were two principal questions: (1) the extent to which the Capacity Exclusion applied to the underlying claims; and (2) whether the insurer forfeited the right to withhold consent or decline to contribute to settlement by refusing to participate in the settlement of claims it contended were excluded from coverage.
As to the first question, the majority held that the underlying suit fell squarely within the Capacity Exclusion. Emphasizing the exclusion’s broad and disjunctive wording, the majority explained that the phrase “in any way involving” did not require a causal nexus between the excluded conduct and the alleged harm. The majority concluded that coverage was precluded because the underlying allegations “in any way involved” Wrongful Acts committed by Krivulka in his capacity as a director, member, or manager of Akrimax, which was not an insured entity under the policy. Although some allegations also involved the insured Mist, the majority determined that all the alleged misconduct related to Krivulka’s role with an uninsured entity and therefore fell within the exclusion.
As to the second question, the majority held that Berkley did not act in bad faith or forfeit any contractual rights by declining to participate in the settlement of claims it claimed were excluded from coverage. Distinguishing Fireman’s Fund Ins. Co. v. Security Ins. Co., 367 A.2d 864 (N.J. 1976), where the insurer had acted in bad faith and breached its policy obligations, the majority determined that Berkley’s invocation of the exclusion to bar coverage did not constitute bad faith. Because no covered claim existed, Berkley had no obligation to contribute to the settlement and did not forfeit any contractual rights by declining to participate in the settlement of uncovered claims.
The majority likewise rejected Mist’s reliance on Griggs v. Bertram, 443 A.2d 163 (N.J. 1982), which held that an insurer may be estopped from denying coverage following an unreasonable delay in disclaiming coverage. The majority found Griggs inapplicable because Berkley reserved its rights and consistently communicated its coverage position throughout the underlying litigation. As a result, Mist could not establish justifiable reliance on any purported commitment by Berkley to cover the underlying claims or fund the settlement.
Justice Fasciale, joined by Justice Hoffman, dissented. The dissent reasoned that Berkley had represented for years that at least partial coverage was available and therefore should have been estopped from later disclaiming coverage entirely. The dissent also viewed the Capacity Exclusion as, at best, ambiguous in “dual capacity” situations where the alleged misconduct involved both insured and uninsured capacities and would have construed the ambiguity in favor of the insured.
Comments
The decision reinforces that New Jersey courts will enforce broad exclusionary language as written, including “in any way involving” formulations commonly found in D&O policies. The majority’s analysis also confirms that insurers do not waive or forfeit coverage defenses by defending under a reservation of rights, declining to fund uncovered settlements, or refining their coverage positions as the factual record develops—particularly where the insurer has consistently reserved its rights and no coverage exists.