D&O insurance provides coverage for individuals to the extent they are acting in their capacities as directors and officers of their companies. The policies do not provide coverage when the individuals are acting in other capacities. A recent decision from a New Jersey appellate court highlights the coverage questions that can arise when individuals are alleged to be acting in multiple capacities. The court concluded that coverage was entirely precluded for an individual who was acting multiple capacities. As discussed below, the decision raises interesting questions.

The New Jersey Superior Court Appellate Division’s July 9, 2024, opinion can be found here. A July 11, 2024, LinkedIn post by Geoffrey Fehling of the Hunton Andrews Kurth law firm about the decision can be found here.

Background

Joseph Krivulka was the Chairman of Board of Directors of Mist Pharmaceuticals, LLC. Krivulka held greater than a ninety percent interest in Mist. Krivulka also had varying interests in a variety of other companies.

Mist was one of several defendants named in a Delaware Chancery Court action filed by Celestial. Celestial alleged, in connection with transactions involving pharmaceutical sales, Krivulka had engaged in self-dealing transactions that defrauded Celestial. Celestial alleged that Krivulka had improperly inserted various entities that he controlled or was invested in (including Mist, as well as other entities) as middlemen between Celestial and another company called Akrimax, which performed sales and marketing services. Krivulka was a director of Akrimax. The Delaware Chancery Court action (and related litigation) ultimately settled for $12 million.

Mist submitted the Celestial litigation to its D&O insurer as a claim under its policy. Among other things, the insurer took the position that because Krivulka was alleged in the underlying action to have been acting in dual capacity (that is, both as a director of Mist and as a director or officer of other entities, including Akrimax), coverage for the action was precluded by the policy’s capacity exclusion. Mist filed a coverage lawsuit against the insurer, seeking a judicial declaration that the policy covered the underlying action. The trial court granted Mist’s motion for summary judgment and the insurer appealed.

The Relevant Policy Language

The policy’s Capacity Exclusion provides: “The Insurer shall not be liable to make any payment for Loss in connection with a claim made against any Insured: … G. 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.”

The July 9, 2024, Opinion

In a July 9, 2024 opinion written by Judge Morris G. Smith, the New Jersey Superior Court Appellate Division reversed the district court’s decision and remanded the case to the trial court. The appellate court concluded that the policy’s capacity exclusion precluded coverage under the policy.

In reaching its conclusion, the appellate court considered the allegations in the underlying complaint. The court noted that the complaint alleged that Krivulka “was acting in his capacity as both a director of Akrimax and a majority shareholder of Mist,” adding the further observation that “it is undisputed that Krivulka was acting in a dual capacity.” The loss alleged in the underlying action, the Court said, “arose from and could not have occurred but for Krivulka’s conduct in his capacity as a director of Akrimax.”

The court went on to say that the “but for” analysis that the court had adopted “does not require us to unpack the percentage of Krivulka’s conduct attributable to his role as a director/officer at Akrimax and compare it to the percentage of Krivulka’s conduct attributable to his role as a director/officer at Mist,” adding that “the clear language in the policy and the jurisprudence we apply to it foster a simpler approach.” It follows, the court said, “that Krivulka’s actions constituted a sufficient basis to trigger the capacity exclusion, and thus there is no coverage” under the policy.

Discussion

One of the fundamental principles of D&O insurance is that the coverage afforded by a D&O insurance policy is limited to loss arising from actions undertaken by insured individuals in their capacities as directors and officers of the insured entity. The policy does not provide coverage for actions undertaken in other capacities. These principles are simple to state; however, corporate directors and officers frequently are acting in multiple capacities. Think for example of private equity firm executive who serves on the board of one of the firm’s portfolio companies. Or an individual from one of a joint venture’s partners who serves on the board of the joint venture.

Whether the insured capacity exclusion will operate to preclude coverage in any particular circumstance is a reflection of the facts involved and the particulars of the relevant policy language, as well as the contours of applicable law. The outcome in this particular case is crucially related to the rather complex factual scenario involved here. Moreover, there was, as the court specifically noted, “no dispute that Krivulka acted in a dual capacity.”

Where my analysis diverges from the court’s is that the court basically held that because Krivulka was acted in a dual capacity, coverage is precluded by the exclusion. This troubles me because, as I noted above, directors and officers frequently are acting in multiple capacities. It can’t be sufficient to entirely preclude coverage simply because an individual was acting in multiple capacities. That is, even if an individual is acting in multiple capacities, at least one of those capacities is an insured capacity. It seems to be that there should be coverage under the policy at least to the extent an individual is acting in an insured capacity, even if coverage is precluded to the extent the individual was acting in other capacities for which the policy provides no coverage.

This proposition is not just something I made up on my own by the way; there are cases out there (here, for example), where courts have held that coverage may be available under a D&O insurance policy even if an individual was acting in multiple capacities, to the extent the individual was acting in an insured capacity.

The court here said that it would not “unpack” the percentage of Krivulka’s conduct that was attributable to his insured conduct. It declined to do so based on its application of a “but for” text. Because the court concluded that the loss would not have occurred “but for” Krivulka’s conduct in an uninsured capacity (that is, as a director of Akrimax), it could apply what it called a “simpler approach” – that is, it could treat all of the conduct as attributable to an uninsured capacity, and therefore could conclude that coverage for all of the loss was precluded.

It could be argued, as the court itself suggests, that this approach is required by the breadth of the conduct exclusion at issue here. The exclusion is written extraordinarily broadly; it is not only written with the broad “based upon, arising out of” preamble, but it also precludes coverage for loss arising from an alleged Wrongful Act “in any way involving” the individual serving in an uninsured capacity.  

Perhaps I should just chalk this case up as the result of a peculiar set of facts and of broad wording of the applicable exclusion. But I am still troubled by the fact that the appellate court held that coverage was entirely precluded. Even if Krivulka was acting in multiple capacities, one of those capacities was an insured capacity. It just seems to me that the policy ought to provide coverage to the extent he was acting in an insured capacity – that is, it is not enough for the court just to say it is not going to “unpack” the extent to which Krivulka was acting in an insured capacity. Individual directors and officers frequently act in multiple capacities; in my view, they should be covered to the extent they are acting in an insured capacity.

I suspect insurer-side readers will dissent from my views and will likely point out that court in effect found that none of the loss was attributable to Krivulka’s actions in an insured capacity, since, the court found, none of the loss would have occurred at all but for his acts in an uninsured capacity. To which I ask: would the result have been different if the court had “unpacked” the percentage of conduct attributable to the uninsured and insured capacities?