New Jersey Supreme Court Enforces Capacity Exclusion and Refuses to Find Waiver or Estoppel Based on Reservations of Rights

The New Jersey Supreme Court, applying New Jersey law, has held that a capacity exclusion in a D&O policy barred coverage for claims asserted in two underlying actions alleging that a director of a pharmaceutical company engaged in self-dealing through a series of entities he owned, including the insured. Mist Pharms., LLC v. Berkley Ins. Co., 2026 WL 1278954 (N.J. May 11, 2026). The court also held that the insurer properly reserved its rights with respect to that exclusion, such that waiver and estoppel could not prevent the insurer from relying on it.

Two companies filed lawsuits against the director of a pharmaceutical company and several entities under his control, including the insured entity, generally alleging that he used the various entities to engage in self-dealing and divert money from the pharmaceutical company. The insured tendered the lawsuits to its D&O insurer, which agreed to reimburse a portion of defense costs and reserved rights, including with respect to the policy’s Capacity Exclusion, which precludes coverage for “Loss in connection with a Claim made against any Insured . . . 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 or an Outside Entity, or by reason of their status as director, officer, trustee, employee, member or governor of such other entity[.]” Several years later, the insurer withdrew from the defense and declined to contribute to a settlement, citing the Capacity Exclusion. During the time it was defending, the insurer repeatedly reserved rights with respect to the Capacity Exclusion.

In the ensuing coverage litigation, the New Jersey Supreme Court upheld the Appellate Division’s grant of summary judgment in favor of the insurer, holding that the Capacity Exclusion barred coverage for the underlying actions. The court found that the “disjunctive ‘or’” in the language of the exclusion “means that each term in the exclusion is alone sufficient to bar coverage” and that “the exclusion does not turn on a causal nexus between the excluded activities and the harm alleged.” Accordingly, because all the underlying allegations were related to the director’s capacity with non-insured entities, the lawsuits fell within the ambit of the exclusion. The court also held that, even though the insurer defended the underlying lawsuits for years, principles of waiver and estoppel did not prevent it from relying on the exclusion because the insurer properly reserved its rights regarding the exclusion.