Forfeiture of Coverage Defenses – New Jersey

Mist Pharm., LLC v. Berkley Ins. Co.
--- A.3d ---, 2026 WL 1278954 (N.J. May. 11, 2026)

The New Jersey Supreme Court addressed whether an insurer’s refusal to participate in a settlement of the underlying claims forfeited its right to rely on an exclusion to disclaim coverage. The Supreme Court affirmed the appellate division and held that the insurer properly reserved its rights with respect to the exclusion, and, therefore, the insurer had the right to refuse to contribute to the settlement. 

The coverage dispute at issue involved two underlying actions by companies that conducted business with the insured defendant Mist Pharmaceuticals, LLC (Mist). The first action alleged direct and derivative claims for an accounting, breach of fiduciary duty, aiding and abetting, and tortious interference with contract, among other claims. The second action alleged claims for waste, conversion, unjust enrichment, civil conspiracy, and tortious interference with contract, among other claims.

On April 21, 2014, defendant Berkley Insurance Company (Berkley) issued a directors and officers insurance policy to Mist. Berkley's policy was a claims-made policy in effect for a period commencing on April 8, 2014, and ending on Nov, 30, 2015 (policy). Mist filed its claim under the policy on Dec.r 8, 2015, and Berkley in turn acknowledged the claim and reserved all rights under the policy, at law and in equity.

Berkley then issued a letter on March 9, 2016, to Mist containing a preliminary coverage evaluation of the first action, including a reservation as to the pertinent “capacity” exclusion regarding the director of Mist, which precluded “Loss in connection with a Claim made against any Insured ... 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.” 

Berkley issued a supplemental letter on July 21, 2017 and continued to reserve its right to deny coverage under the capacity exclusion. Berkley eventually withdrew its defense of Mist and its director, and it refused to participate in the scheduled mediation. After Mist filed the instant coverage action, it demanded that Berkley participate in further global settlement discussions, but Berkley declined. 

On appeal to the New Jersey Supreme Court, Mist argued that Berkley violated its duty to promptly inform its insured that it intended to disclaim coverage or of the possibility that it would deny or question coverage because it had been aware since 2015 that the allegations against Mist raised a capacity exclusion issue. Mist argued Berkley forfeited its right to rely on the capacity exclusion. The Supreme Court concluded that the exclusion applied, and it then addressed whether Berkley forfeited its right or was estopped from denying coverage under the exclusion.

Specifically, the Supreme Court explained that if an insurer delays unreasonably in investigating and dealing with a claim asserted against its insured, then the insured may make a good faith reasonable settlement and then recover the settlement amount from the insurer within the policy limits. The Supreme Court held that prior precedent did not stand for the proposition that an insurer is barred from contesting its obligation to cover a given claim or from seeking to enforce an exclusion in its policy.

The Supreme Court found that Berkley had repeatedly restated the full text of its exclusion in correspondence with Mist and reserved its rights under that exclusion and other policy terms in letters and emails no fewer than 10 times over the span of five years. Thus, Berkley was not precluded from relying on the capacity exclusion in the policy to decline coverage.

By Joshua LaBar