The New Jersey Supreme Court ruled in Mist Pharmaceuticals, LLC v. Berkley Insurance Company that a D&O insurer did not forfeit its right to rely on a capacity exclusion after partially funding years of litigation, repeatedly representing that partial coverage was available, and waiting five years to fully disclaim. While the Court ultimately enforced the exclusion, the decision offers several important takeaways for policyholders, particularly with respect to reservation of rights letters, settlement strategy, and D&O policy drafting.
Background
Mist Pharmaceuticals sought coverage under a D&O policy issued by Berkley for $300 million in claims alleging that its chairman engaged in extensive self‑dealing, not only through the insured Mist entity but also through a web of other entities he controlled. Berkley acknowledged potential coverage, agreed to defend under a reservation, and initially paid 10% of defense costs. But five years later, Berkley withdrew from the defense and refused to participate in the $12 million settlement, relying on a capacity exclusion barring coverage for claims “in any way involving” wrongful acts committed in an uninsured capacity.
The trial court held that Berkley forfeited its right to rely on the capacity exclusion by unreasonably withholding consent to settle. The Appellate Division reversed, and a divided New Jersey Supreme Court largely affirmed, holding that (1) the capacity exclusion barred coverage, and (2) Berkley was neither estopped nor deemed to have forfeited its rights.
Key Takeaways for Policyholders
Despite the insurer-friendly result, the Mist decision contains several key points for policyholders to consider in navigating D&O claims.
1. Estoppel and Forfeiture Remain Powerful Tools When the Record Supports Them
The majority emphasized that doctrines like estoppel and forfeiture remain viable doctrines under New Jersey law. The insurer defeated those arguments only because the record showed repeated, explicit reservation of rights—including quotation of the full exclusion—over several years.
Had the insurer delayed, equivocated, or failed to reserve rights with specificity, the outcome could have been very different. Insurers that defend first and disclaim later still risk estoppel under New Jersey law.
2. The Dissent Provides a Roadmap for Future Policyholder Arguments
The 50-page dissent lays out a pro-coverage framework that may be useful to New Jersey policyholders facing similar disputes in the future. The dissent argued that:
- Capacity exclusions like those in Berkley’s D&O policy should not bar coverage for wrongful acts committed in insured capacities, even if related to uninsured conduct.
- Exclusions must be interpreted narrowly, and where the language does not clearly bar all coverage—such as for all wrongful acts committed in both insured and uninsured capacities—New Jersey courts must apply other reasonable, alternative readings that support coverage.
- An insurer that signals partial coverage for years should be estopped from later asserting a total coverage bar.
Although not controlling, the dissent offers a detailed blueprint for challenging broad application of capacity exclusions, particularly in dual‑capacity scenarios.
3. Reservation of Rights Letters Matter, But So Does Their Scope
The majority stressed that Berkley repeatedly reserved its rights and expressly referenced the capacity exclusion. But the dissent countered that Berkley’s letters acknowledged coverage for insured‑capacity conduct, which the insured reasonably relied upon when settling. Policyholders should closely analyze not just whether a reservation of rights exists, but what it actually reserves and how. Mixed or inconsistent positions by insurers remain viable ground to foreclose late-raised coverage defenses months or years down the road.
4. Policy Drafting and Renewals Are Critical
The decision underscores how broad “in any way involving” language can dramatically expand exclusions. The dissent noted that the policy could have been written differently—and that many policies are. At each placement and renewal, policyholders should:
- Evaluate and understand any potentially problematic capacity language, whether in exclusions or other definitions, like for “wrongful acts.”
- Assess broad causation language, and, if needed, negotiate narrower reach of capacity exclusions.
- Understand and clarify defense, consent, allocation, and similar provisions that may materially impact the availability and scope of legal fee reimbursement.
Conclusion
Mist enforces a broadly-worded capacity exclusion on a strong reservation‑of‑rights record. But it also reinforces several policyholder‑friendly principles like estoppel, forfeiture, contra-insurer interpretation of ambiguous exclusions, and scrutiny of insurer missteps in reserving rights, delaying or truncating claim investigations, and the need to proactively review and modify policy language before the point of claim.
