D&O "Capacity Exclusion" May Bar Coverage When Acting Outside the Scope of Insured Status

• Pages: 3-15
• Date: 01 January 2025
• Author: Ellis I. Medoway

Insurance Coverage Litigation

Vol. 34 No. 1

Published in Coverage Vol. 34 No. 1, Copyright © 2025, American Bar Association. All rights reserved. This information or any portion thereof

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ARTICLES

D&O “Capacity Exclusion” May Bar Coverage When Acting

Outside the Scope of Insured Status

By Ellis I. Medoway

Directors’ and officers’ (D&O) policies insure against claims arising from alleged wrongful acts

attributed to directors and officers of the insured entity—provided they were principally engaged

in that capacity at the time the alleged wrongful conduct was committed. In other words, such

coverage is placed in question when the insureds accused of the alleged wrongful conduct were

not acting strictly within their insured role.1 In that circumstance, the D&O insurer will

undoubtedly invoke its policy’s “capacity exclusion” to bar coverage.

Not many cases have addressed this coverage issue, and only a few appellate courts have

rendered rulings on the exclusion. Recently, a New Jersey appeals court, in a case of first

impression, applied the exclusion and barred coverage.2 That decision and other more recent

decisions on the D&O policy’s capacity exclusion are the subject of this article.

Overview

D&O policies are “claims made” policies. They cover claims brought against the insured during

the time the policy is in effect, even if the conduct leading to that potential liability did not occur

during the policy period.

These policies offer protection to those who sit on boards of directors, so they are shielded from

the significant liability risks associated with their corporate roles. But like all policies, D&O

policies contain several exclusionary provisions. One such exclusion is the “capacity exclusion.”

As long as the insured is acting strictly in his or her capacity as a director or officer on behalf of

the company (the insured entity), the insured may be covered. However, if that board member

acts outside his or her corporate role, the exclusion may be triggered to bar coverage.

Although the capacity exclusion may not be identical in every D&O policy, the language is often

very similar. One example of that exclusion is as follows:

[T]he 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.3

This exclusion eliminates coverage if the insurer can demonstrate that the insured’s alleged

wrongful act or acts arose from conduct outside his or her capacity as a director or officer of the

insured entity. The burden, of course, rests with the insurer to establish this. The insurer thus