The New Jersey Supreme Court recently upheld an insurer’s coverage denial and withdrawal from the insured’s defense because the insurer properly and timely reserved its rights. Mist Pharmaceuticals, LLC v. Berkley Insurance Company, Docket No. 089689 (May 11, 2026).
The Claim
Mist Pharmaceuticals, LLC (“Mist”) and one of its directors were sued for certain self-dealing transactions involving other entities controlled by the same director. Mist, the director, and the other entities all jointly retained defense counsel. Mist made a claim to Berkley Insurance Company (“Berkley”) under its directors and officers insurance policy.
On the same day it received the claim, Berkley issued an acknowledgement which included a general reservation of rights. Berkley later issued a more comprehensive reservation of rights letter, which, among other things, reserved rights under the policy’s “capacity exclusion,” barring coverage for claims arising out of wrongful acts of an insured person serving in their capacity as a director of any entity other than an insured entity. The letter set forth the full text of the exclusion and explained Berkley’s understanding that the self-dealing allegations in the lawsuit involved other, non-insured entities controlled by the director, and that coverage was limited to just those acts or omissions pertaining to his capacity as a director for Mist. Thus, Berkley agreed to reimburse 10 percent of the defense costs already incurred, approximating the proportional costs of defending the “minimal and ancillary” allegations involving Mist itself, and to pay 10 percent of the reasonable legal fees moving forward.
After a mediation was scheduled in the litigation, Berkley issued a final coverage determination in which it withdrew its defense and denied coverage altogether based on the capacity exclusion among other applicable policy provisions. The case did not settle at the first mediation, but a global settlement was eventually reached.
The Coverage Dispute
Mist filed a coverage lawsuit against Berkley, arguing that Berkley had taken unjustified and inconsistent positions by paying a portion of the defense costs for nearly a year and then withdrawing from the defense and not participating in the eventual settlement of the matter despite being aware of the capacity issues from the outset. In support of this position, Mist relied on Griggs v. Bertram, which required that an insurer, once aware of “grounds for questioning coverage,” promptly advise its insured of “its intention to disclaim coverage” or “the possibility that coverage will be denied or questioned.” 88 N.J. 347, 357 (1982).
The Holding
The court held that no estoppel under the Griggs holding was warranted here, as the policyholder in Griggs received no communication from the insurer remotely suggesting that coverage was in question or might be disclaimed, whereas Berkley reserved its rights under the capacity exclusion “no fewer than ten times” between the claim submission and the eventual settlement. The court specifically noted that Berkley repeatedly emphasized that nothing in its correspondence should be construed as a waiver, modification, or estoppel of its rights, which included its right to rely on the capacity exclusion set forth in its policy. Additionally, Berkley fully and unequivocally denied coverage more than two and a half years before the global settlement was reached, so Mist could not reasonably claim that it relied in any sense on a commitment from Berkley to cover the claims or to contribute to the settlement.
Takeaway
The New Jersey Supreme Court’s decision emphasized that “reservation of rights letters have long been regarded as proper defense mechanisms for insurance companies,” and that “by reserving rights and providing defense costs on covered claims, an insurer fulfills its defense obligations.” The court further underscored that “a good-faith challenge to coverage is not a breach of an obligation to defend.”
The decision should offer some protection to liability insurers in their coverage investigations so long as they timely and adequately reserve their rights. Berkley’s reservation of rights was effective in the Mist case because, among other things, their correspondence:
- Identified the relevant policy provisions
- Made clear the facts and allegations in the underlying claim that potentially implicated those policy provisions
- Raised the relevant coverage defenses repeatedly and consistently throughout the claim and the litigation.
Ultimately, the court’s decision appeared to turn on the policyholder’s reasonable expectations and reliance on Berkley’s coverage correspondence. A liability insurer that clearly and unequivocally reserves its rights can rely on the defenses it raised in its ultimate coverage determination.
