In Mist Pharmaceuticals, LLC v. Berkley Insurance Company, the New Jersey Appellate Division addressed the application of a “capacity exclusion” in a Directors and Officers (D&O) Liability Insurance policy. Mist Pharmaceuticals sought indemnification from Berkley Insurance after being sued by CelestialRX Investments for corporate misconduct related to the actions of Joseph Krivulka, Mist’s chairman, who was alleged to have engaged in self-dealing. The trial court initially ruled in favor of Mist, granting partial summary judgment and ordering Berkley to indemnify Mist for settlement costs in the underlying litigation.
On appeal, the key issue was whether Berkley was justified in denying coverage based on the D&O policy’s capacity exclusion. This exclusion barred coverage for wrongful acts performed by an insured person while acting in a capacity other than as an officer or director of the insured entity. The Appellate Division reversed the trial court’s decision, finding that the exclusion applied because Krivulka’s actions arose out of his dual role as both a director of Mist and as a director of Akrimax Pharmaceuticals, an uninsured entity. The court ruled that the wrongful acts in question stemmed from Krivulka’s conduct outside his official capacity at Mist, thus triggering the exclusion.
The court also rejected the trial court’s reliance on Fireman’s Fund Insurance Co. v. Security Insurance Co. of Hartford, which Mist had argued required coverage because Berkley unreasonably withheld consent to settle. The appellate court distinguished this case from Fireman’s Fund, noting that Berkley had explicitly reserved its rights under the capacity exclusion early in the dispute and had acted reasonably in denying consent to the settlement. Since the exclusion applied, Berkley was not obligated to indemnify Mist.
However, the Appellate Division affirmed that Berkley had a duty to defend Mist up until the point when the capacity exclusion became applicable. The case was remanded for the trial court to determine the amount of counsel fees owed to Mist for Berkley’s duty to defend prior to its application of the exclusion. This decision underscores the importance of policy language in D&O disputes and the need for insurers to promptly reserve their rights when contesting coverage.
The Mist decision can be found here.
For additional information, contact Robert J. Cahall, Esq., Glen Shikunov, Esquire, and/or Igor Konstankevich, Esq.
