New Jersey Supreme Court Reinforces the Importance of Timely Reservation of Rights

New Jersey has long recognized that an insurer seeking to preserve defenses to coverage must properly notify its insurer through a reservation of rights. Once the insurer receives knowledge of a potential basis for denying the claim, they must promptly inform the insured of a potential disclaimer.[1] An insurer that fails to do so within a reasonable amount of time may be estopped from denying coverage later, with estoppel determinations being made on a case-by-case basis.

The New Jersey Supreme Court’s decision in Mist Pharmaceuticals, LLC v. Berkley Insurance Co.[2] clarifies how an insurer must properly reserve its rights to enforce policy exclusions. Mist Pharmaceuticals, LLC (“Mist”) was an insured under a claims-made Directors and Officers policy issued by Berkley Insurance Company (“Berkley”), which covered wrongful acts of Mist’s agents and employees. The policy included a capacity exclusion, which stated that Berkley was not liable for wrongful acts of insured persons while serving in their capacity as an officer or employee of another uninsured entity. The case concerned two underlying actions brought by various companies against Mist and John Krivulka, Mist’s chairman. Krivulka allegedly diverted funds from the plaintiff companies, which he also controlled, to himself and to Mist. He also allegedly engaged in other self-dealings and unfair business practices.

On December 8, 2015, Mist initiated a claim under the Berkley D&O policy for defense and indemnity in connection with the underlying actions. Berkley responded the same day by reserving all its rights under the policy. On March 9, 2016, Berkley sent a letter to Mist further reserving its rights specifically under the capacity exclusion and denying coverage for any wrongful acts by Krivulka pursuant to his roles with any uninsured entities. Berkley also agreed to pay ten percent of Mist’s litigation costs. On August 4, 2017, Berkley again reserved its right to deny coverage, withdrew from its participation of the defense of the lawsuits, and announced that it would not participate in settlement negotiations. Mist brought suit against Berkley in September 2017, alleging that Berkley failed to timely deny coverage and that Berkley’s right to enforce the capacity exclusion was forfeited or barred by estoppel. Berkley did not fully disclaim coverage for the underlying actions until 2019.

The trial court found in favor of Mist, and the intermediate appellate court reversed. On appeal to the New Jersey Supreme Court, the Court affirmed the decision in favor of Berkley. The court concluded that the underlying actions fell within the scope of the policy’s capacity exclusion and that Berkley properly reserved its right to fully disclaim coverage even though it contributed towards Mist’s litigation costs for several years.

The majority decision indicated that when an insurer reserves its rights using citations to the policy repeatedly throughout the claim handling process, a finding of estoppel is unlikely because there is no question that the insured was put on notice of a potential denial of coverage. However, a dissenting opinion advocated for an approach more favorable to the insured. In addition to taking the position that the capacity exclusion did not unambiguously bar coverage, the dissent opined that Berkley’s reservation of rights was not sufficient because it did not explicitly deny all coverage, it only denied coverage for the elements of the claim where Krivulka acted in his capacity with uninsured entities.

While this case reaffirms that insurers who reserve their rights under a policy exclusion may have a later denial of coverage upheld by a New Jersey court, it also signals several factors that insureds should be vigilant of when dealing with reservations of rights and subsequent denials of coverage. It is important to determine whether the insurer has properly reserved its rights within a reasonable time and whether they continue to do so consistently throughout the claim process. An improper reservation of rights by the insurer may bolster an insured’s argument for coverage if it was unaware of a potential future disclaimer. Insureds must carefully analyze and scrutinize the insurer’s actions as well as the language of the exclusion clause to ensure that any subsequent denial of coverage is consistent with the policy language and the insurer’s prior coverage position.

*This case alert was researched and contributed to by Summer Associate Noah DeFeo.