The New Jersey Supreme Court has issued a significant decision that is expected to reverberate throughout the state’s legal, insurance, pharmaceutical, corporate governance, and business communities for years to come. In a closely watched case involving directors and officers liability insurance, the Court ruled that an insurer may rely on a policy exclusion years into ongoing litigation when that exclusion was consistently preserved through reservations of rights and ongoing communications with the insured.
The decision in Mist Pharmaceuticals, LLC v. Berkley Insurance Company represents far more than a dispute between a pharmaceutical company and its insurer. It offers one of the clearest modern interpretations of how New Jersey courts will evaluate Directors and Officers (D&O) insurance policies, reservation-of-rights letters, policy exclusions, settlement obligations, and the doctrines of estoppel and forfeiture.
For companies operating throughout New Jersey, particularly privately held businesses, life sciences firms, healthcare organizations, technology companies, and closely managed enterprises where executives often hold multiple leadership roles across affiliated organizations, the ruling serves as a reminder that the language contained within D&O insurance policies can ultimately determine whether millions of dollars in potential coverage are available when litigation arises.
The dispute traces back more than a decade.
In 2014, Berkley Insurance Company issued a Directors and Officers liability insurance policy to Mist Pharmaceuticals. Under the policy, Mist Pharmaceuticals qualified as an insured entity, while its chairman and board member, Joseph Krivulka, qualified as an insured person acting in that corporate capacity.
At the center of the case was a provision commonly known within the insurance industry as a “capacity exclusion.” Such exclusions are designed to distinguish between actions taken by executives while acting on behalf of an insured company and actions taken while serving other organizations.
The exclusion contained within the policy was broad. It eliminated coverage for claims involving alleged wrongful conduct committed by an insured individual while acting as a member, officer, director, or manager of another entity that was not specifically covered under the policy.
While such language may appear technical, the practical implications can be enormous.
Many corporate executives today wear multiple hats. A single individual may serve simultaneously as an officer of several businesses, sit on multiple boards, manage affiliated entities, participate in investment ventures, or oversee related organizations. D&O insurance policies frequently become the battleground when litigation alleges that decisions affecting one company also involved conduct connected to another enterprise.
That is precisely what occurred in the litigation involving Mist Pharmaceuticals.
The underlying lawsuits alleged that Krivulka engaged in self-dealing activities involving Mist Pharmaceuticals and several other entities under his control. Those entities were named as defendants alongside Mist Pharmaceuticals. However, only Mist Pharmaceuticals was insured under Berkley’s policy.
Once the lawsuits were filed, Mist Pharmaceuticals sought coverage under its D&O policy.
Berkley acknowledged the claim but immediately reserved its rights under the policy. The insurer specifically referenced the capacity exclusion and informed the company that coverage concerns existed regarding allegations connected to Krivulka’s involvement with entities outside of Mist Pharmaceuticals.
Importantly, Berkley did not simply deny coverage outright.
Instead, the insurer agreed to reimburse a portion of defense costs while continuing its investigation. Initially, Berkley paid approximately ten percent of legal expenses already incurred and agreed to contribute a similar percentage toward future defense costs.
That arrangement, however, did not resolve the dispute.
As additional information emerged, Berkley concluded that coverage was not available under the policy and ultimately withdrew its participation in the defense. The insurer maintained that the claims either predated the policy period or fell squarely within the capacity exclusion.
Mist Pharmaceuticals strongly disagreed.
The company argued that Berkley’s conduct over several years created an expectation that coverage existed. Having participated in defense costs and maintained communications regarding coverage, Mist contended that Berkley should not be permitted to later rely on the exclusion as a complete defense.
The disagreement escalated into a separate insurance coverage lawsuit.
While that litigation proceeded, the underlying claims continued moving toward resolution. Mist Pharmaceuticals repeatedly requested that Berkley participate in settlement negotiations. Berkley declined, continuing to assert that it had no obligation to contribute toward settlement payments.
Eventually, the parties in the underlying litigation reached a global settlement.
The settlement then triggered the central legal question that would ultimately reach the state’s highest court: Could Berkley rely upon the capacity exclusion years after the dispute began, despite its earlier involvement in defense costs and its lengthy participation in communications concerning coverage?
The trial court sided with Mist Pharmaceuticals.
The Appellate Division reversed.
The New Jersey Supreme Court ultimately affirmed the appellate ruling, creating a significant precedent regarding insurance exclusions and reservation-of-rights practices.
Writing for the majority, Justice Anne Patterson concluded that the claims asserted against Mist Pharmaceuticals fell squarely within the scope of the policy’s capacity exclusion.
The Court carefully examined prior New Jersey decisions interpreting insurance exclusions and focused on the language contained within Berkley’s policy. According to the majority, the wording of the exclusion was clear, broad, and disjunctive. As a result, the insurer did not need to establish a direct causal relationship between the excluded conduct and the alleged losses.
Instead, the existence of allegations involving Krivulka’s activities with other entities was sufficient to trigger the exclusion.
The Court further emphasized that Berkley repeatedly preserved its rights throughout the dispute.
Over the course of five years, the insurer consistently referenced the capacity exclusion in correspondence with Mist Pharmaceuticals. Reservation-of-rights letters repeatedly outlined Berkley’s position. Multiple communications expressly stated that nothing should be interpreted as a waiver of policy defenses.
According to the majority, those actions were critically important.
Because Berkley continuously preserved its rights and repeatedly notified the insured of potential coverage defenses, the company could not reasonably argue that it relied upon any promise of coverage when entering the settlement agreement.
The Court rejected arguments based on estoppel and forfeiture, concluding that neither doctrine prevented Berkley from enforcing the exclusion.
The ruling effectively reinforces one of the most fundamental principles in insurance litigation: an insurer that properly reserves its rights can continue asserting policy defenses even after years of litigation, provided those rights have been preserved clearly and consistently.
The decision carries major implications for New Jersey businesses.
Corporate leaders often view D&O policies as broad protection against lawsuits involving directors, officers, and management decisions. Yet the Mist Pharmaceuticals ruling demonstrates how exclusions can significantly narrow available coverage.
Executives serving multiple organizations may face heightened scrutiny when evaluating their insurance portfolios. Businesses may increasingly examine whether separate coverage is necessary for affiliated entities, investment vehicles, board memberships, or other leadership positions that extend beyond a single insured organization.
The ruling also highlights the growing importance of reservation-of-rights letters.
For policyholders, those communications can no longer be viewed as routine administrative correspondence. Instead, they may ultimately determine whether millions of dollars in coverage remain available years later.
Insurance carriers are likely to view the decision as a strong affirmation of established reservation-of-rights practices. Corporate policyholders, meanwhile, may become more aggressive in seeking early judicial determinations regarding disputed exclusions before litigation expenses and settlement negotiations reach advanced stages.
Notably, the Court’s decision was not unanimous.
Two justices dissented, arguing that Berkley’s lengthy participation in the matter created circumstances that should have prevented the insurer from relying on the exclusion as a complete defense after years of indicating that at least partial coverage existed.
The dissent reflects an ongoing debate within insurance law concerning fairness, reliance, and the reasonable expectations of policyholders. While the majority concluded that Berkley consistently preserved its rights, the dissenting justices viewed the insurer’s conduct differently, suggesting that prolonged participation can create legitimate expectations regarding coverage.
Despite that disagreement, the majority opinion now stands as binding precedent throughout New Jersey.
The decision arrives at a time when D&O litigation continues growing in complexity. Pharmaceutical companies, healthcare providers, technology firms, financial institutions, private equity-backed businesses, and emerging growth companies increasingly face litigation involving multiple affiliated entities and overlapping executive roles.
Against that backdrop, the Mist Pharmaceuticals ruling offers a clear message: policy language matters, exclusions matter, and reservation-of-rights letters matter.
For New Jersey’s business community, the case serves as a reminder that insurance disputes often begin long before trial and long before settlement negotiations. They begin with the precise language contained in the policy itself and the communications exchanged between insurers and policyholders when a claim first arises.
As companies continue navigating increasingly complex regulatory, operational, and litigation environments, the New Jersey Supreme Court’s ruling provides a landmark interpretation of how courts will balance contractual insurance rights against claims of reliance and fairness. The decision is likely to influence coverage litigation, settlement negotiations, underwriting practices, and corporate risk management strategies throughout New Jersey for years to come.
