(Article from Insurance Law Alert, July/August 2024)
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Holding
A New Jersey appellate court ruled that a trial court erred in failing to apply an “operation of capacity” exclusion to claims arising out of an executive’s wrongful acts taken in connection with both an insured and uninsured entity. Mist Pharmaceuticals, LLC v. Berkley Ins. Co., 2024 N.J. Super LEXIS 57 (N.J. Super. Ct. App. Div. July 9, 2024).
Background
A suit was brought against Mist Pharmaceuticals, Joseph Krivulka, Akrimax Pharmaceuticals and other entities. The complaint alleged that Krivulka, who served on the board of both Akrimax and Mist, engaged in a scheme of self-dealing and fraud. In particular, the complaint alleged that Krivulka improperly assigned various entities that he controlled or was invested in, including Mist, to serve as middlemen between Akrimax and other drug companies for personal gain.
Mist was insured under a D&O policy issued by Berkley. The policy contained an exclusion that barred coverage for claims “based upon, arising out of, directly or indirectly resulting from or in consequence of . . . 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.” When Mist sought coverage for the suit, Berkley issued a reservation of rights, citing the exclusion and also asserting that the underlying claim arose prior to the policy period. In response, Mist filed a declaratory judgment action seeking a ruling as to coverage.
The trial court granted Mist’s motion for partial summary judgment, finding that the claim was within the policy period and that Berkley had a duty to defend. Thereafter, Mist sought consent to settle and indemnification from Berkley. Berkley refused, citing insufficient information from Mist as to the reasonableness of the proposed settlement. A Delaware court ultimately approved a $12 million global settlement and assigned 25% liability to Mist.
Following that ruling, a New Jersey trial court issued several findings as to coverage, including that the settlement was reasonable and that Berkley’s refusal to contribute to the settlement was a breach of its duty to indemnify. The trial court did not consider the operation of capacity exclusion.
Decision
The appellate court reversed, ruling that the trial court improperly applied Fireman’s Fund Ins. Co. v. Security Ins. Co. of Hartford, 367 A.2d 864 (N.J. 1976) in finding that Berkley was obligated to indemnify the settlement. In Fireman’s Fund, the New Jersey Supreme Court held that an insurer had unreasonably withheld its consent to settle and was therefore liable for indemnification of the settlement. The appellate court explained that unlike Fireman’s Fund, Berkley’s basis for withholding consent was reasonable because the global settlement represented the interests of multiple entities not insured under the policy and because Berkley timely cited the exclusion as a defense to coverage.
Turning to the exclusion, the appellate court concluded that it squarely applied given that Krivulka was acting in his capacity as both a director of Akrimax and majority shareholder of Mist in the alleged wrongdoing. The court stated: “[t]he loss claimed by Mist against Berkley’s D&O policy arose from and could not have occurred but for Krivulka’s conduct in his capacity as a director of Akrimax.” The court applied a “but for” analysis, noting that it was not required to “unpack the percentage of Krivulka’s conduct” attributable to his role in each entity. Rather, the phrase “arising out of” in the exclusion is applied broadly, to include conduct that is “in any way connected” and does not require a causal relationship. Having determined that the exclusion barred coverage for the underlying claims, the appellate court ruled that Berkley’s refusal to consent to the settlement was not unreasonable.
Comments
This case presented a matter of first impression under New Jersey law. Therefore, in ruling on the operation of capacity exclusion, the court relied on the reasoning set forth in decisions in other jurisdictions. As the court noted, the Eleventh Circuit (applying Georgia law) as well as courts in New York and Pennsylvania applied similar exclusions to analogous factual scenarios.