Directors and officers liability insurance protects individuals against claims related to their official duties for the insured company. Capacity issues—whether the alleged wrongdoing occurred in an official role—are a common source of disputes and denials. These issues can arise in four key areas: insured person definitions, wrongful act definitions, capacity exclusions, and business transactions.
These issues arise from various policy elements, from explicit exclusions to subtle wording in definitions. Small differences in language can determine whether an insurer covers a claim involving multiple roles. Policyholders must scrutinize the entire policy, comparing its terms to their organizational structure and practices.
Where Capacity Issues Hide in D&O Policies
Insured Person Definition: Most policies cover past, present, and future directors and officers, but nonelected or nonappointed officers, like chief information security officers, may face coverage hurdles. Qualifying as an insured person can also negate coverage if a claim falls under an insured-versus-insured exclusion, as seen in cases where board membership triggers such exclusions. Coverage extends only when individuals act on behalf of insured entities, leaving executives with roles in uninsured subsidiaries, affiliates, or joint ventures vulnerable to denials. Private company policies may cover employees or contractors, but additional requirements, like indemnification agreements, can affect coverage. For instance, expanded coverage may depend on proper indemnification agreements being in place, and where these are absent, coverage may be denied.
Wrongful Act Definitions and Capacity Limitations: Some policies define wrongful acts as those committed “solely” in an insured capacity, which can bar coverage for mixed claims involving both covered and uncovered roles. In Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 22-2242, 2023 WL 3067498 (3d Cir. Apr. 25, 2023), the Third Circuit addressed whether an SEC investigation involved acts by insured persons in their official capacities, highlighting the complexity of these cases. The court found fact issues for trial, showing how wrongful-act definitions can limit coverage for dual- or multi-capacity roles.
Capacity Exclusions: Capacity exclusions often bar coverage for claims arising from acts in an uninsured capacity. Broad language like “based upon” or “in any way involving” can exclude entire claims combining insured and uninsured roles. In Mist Pharmaceuticals, LLC v. Berkley Insurance Co., 355 A.3d 253 (N.J. 2026), the New Jersey Supreme Court applied a capacity exclusion to bar coverage for self-dealing claims involving overlapping roles with insured and uninsured entities. Other courts, such as in Sec. Nat’l Ins. Co. v. Hendrik Uiterwyk, P.A., 725 F. Supp. 3d 1308 (M.D. Fla. 2024), have taken similar views, barring coverage when claims involve separate business entities.
Business Transactions: Personal guarantees in contracts, like real estate “bad boy” carve-outs, may be viewed as personal liabilities. In Hanover Insurance Co. v. Larson, No. 25-2543, 2026 WL 2295457 (8th Cir. Aug. 10, 2026), executives signing guaranty agreements without referencing their titles lost coverage for claims arising from those guarantees. Similarly, in Divinia Water, Inc. v. Clear Blue Specialty Ins. Co., No. 4:23-mc-00095-AKB, 2024 WL 1131291 (D. Idaho Mar. 15, 2024), the court held that ratification of procedurally deficient board appointments rendered individuals “duly elected or appointed” directors, triggering an insured-versus-insured exclusion.
Capacity Issues in Business Transactions
Contracts can also impact D&O coverage. Personal guarantees in agreements, such as real estate “bad boy” carve-outs, may be seen as personal liabilities. The manner in which contracts are signed, whether individuals reference their executive titles, can significantly affect coverage. Cases like Hanover Insurance Co. v.
Evaluating Capacity Risk
Capacity issues depend on policy wording, corporate appointments, involved entities, and claim facts. Policyholders must carefully review and negotiate terms to ensure adequate coverage, avoiding gaps that could lead to significant financial exposure.
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