TRENTON (LN) — The New Jersey Supreme Court affirmed Tuesday that Berkley Insurance Company did not forfeit its right to deny coverage under a directors and officers policy, ruling that the insurer properly reserved its rights and that the underlying claims fell squarely within a capacity exclusion barring coverage for wrongful acts committed in a role outside the insured entity.

The court’s decision resolves a coverage dispute between Berkley and Mist Pharmaceuticals, LLC, which had argued that Berkley was estopped from invoking the exclusion because it initially paid 10% of defense costs before withdrawing and refusing to contribute to a global settlement.

Joseph Krivulka, the chair of Mist Pharmaceuticals’ board and a manager of the company, was also a director and member of Akrimax Pharmaceuticals, LLC, an entity not insured by Berkley. Two lawsuits alleged that Krivulka engaged in a self-dealing scheme, diverting pharmaceutical product rights and royalties from Akrimax to entities he controlled, including Mist Pharmaceuticals.

The policy’s capacity exclusion barred coverage for losses “in any way involving any Wrongful Act of an Insured Person serving in their capacity as … member … of any other entity other than an Insured Entity.”

Justice Patterson, writing for the court, held that the exclusion did not require a causal link between the excluded act and the harm, distinguishing the clause from prior precedent in Flomerfelt v. Cardiello. Instead, the court found the exclusion analogous to the broad language in Norman Int’l, Inc. v. Admiral Ins. Co., where any connection to excluded activities was sufficient to bar coverage.

“The factual allegations involve more than a dozen Krivulka-owned or controlled entities, but they share a common feature: Krivulka’s role as member and manager of one particular entity … is front and center in all,” Patterson wrote. “There is no allegation against Mist Pharmaceuticals … that is unrelated to Krivulka’s capacity as a member of the uninsured entity.”

Mist Pharmaceuticals argued that Berkley forfeited its right to rely on the exclusion under Fireman’s Fund Insurance Co. v. Security Insurance Co. by unreasonably withholding consent to a $12 million global settlement, in which 25% was allocated to Mist Pharmaceuticals and Krivulka. The trial court had agreed, finding Berkley acted in bad faith by refusing to contribute to the settlement without a detailed liability analysis.

The Supreme Court reversed, noting that Fireman’s Fund applied only where an insurer had clearly breached its policy obligations and acted in bad faith. Here, Berkley had repeatedly reserved its rights in correspondence with Mist Pharmaceuticals, including in letters and emails no fewer than ten times, and had advised the insured that nothing in its communications should be construed as a waiver or estoppel.

“Berkley did not forfeit any contractual right when it declined to participate in the settlement of what it determined — correctly — to be uncovered claims,” the court said.

The court also rejected Mist Pharmaceuticals’ estoppel argument under Griggs v. Bertram, which bars insurers from disclaiming coverage after unreasonably delaying notice of a potential disclaimer. The court found Berkley had timely and repeatedly notified Mist Pharmaceuticals of its intent to rely on the capacity exclusion.

Justice Fasciale dissented, arguing that Berkley had represented for over five years that partial coverage was available and should be estopped from relying on the exclusion as an absolute defense. Fasciale viewed the exclusion as barring coverage only for wrongful acts committed in an uninsured capacity, not for acts committed in a dual capacity.

The trial court had previously entered final judgment for Mist Pharmaceuticals of about $1.75 million, representing the remaining policy limit, and awarded about $0.80 million in legal fees. The Appellate Division reversed that judgment, and the Supreme Court affirmed the Appellate Division’s decision as modified.

Lynda A. Bennett of Lowenstein Sandler argued for Mist Pharmaceuticals. Adam M. Smith of Coughlin Midlige & Garland argued for Berkley.