Directors’ and officers’ (D&O) liability policies depend on the exact meaning of “capacity,” a term that decides whether insurers cover claims linked to an official role. The wording determines whether defense costs or settlements apply when a director or officer faces legal action.
Who Is Covered?
Standard D&O contracts typically name current, former, and future “duly appointed or elected” directors and officers as insured parties. This phrasing can exclude senior executives who hold no formal title, such as chief information security officers who may face lawsuits after a data breach. The exclusion applies even if their responsibilities closely mirror those of named officers.
The policy’s insured-versus-insured clause also creates risks. When a claim pits two covered individuals against each other—such as a dispute between directors—the insurer may deny coverage entirely. Courts have upheld such denials where both parties hold insured status under the same policy.
Coverage sometimes extends to subsidiaries, affiliates, or joint ventures, but only if those entities are explicitly listed in the policy. Executives who serve multiple roles across related firms often find gaps when claims arise from activities in unaffiliated subsidiaries. The absence of a named subsidiary on the policy can leave the company exposed.
Private-company policies occasionally broaden coverage to include employees or independent contractors, while private-equity policies may add partners and managers. However, these expansions usually require matching indemnification agreements that align with the policy’s formal officer definitions. Without proper agreements, insurers may reject claims on the grounds that the extended parties lack the required corporate appointment.
Defining Wrongful Acts
The policy’s definition of “wrongful act” often restricts coverage to conduct performed “solely in their capacity as” a director or officer. This limitation can block claims involving mixed-capacity behavior, where alleged misconduct spans both covered and personal roles.
In Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc. (2023), a federal court reviewed whether an SEC subpoena targeted actions taken in an official capacity or involved a predecessor company’s operations. The Third Circuit ruled that the subpoena raised factual questions about potential wrongdoing by the insured, leaving the issue unresolved for trial. The case highlighted how capacity disputes can prolong legal battles even when wrongdoing appears likely.
Other cases show similar risks. A founder-CEO accused of structuring a corporate deal for personal gain may face a mixed-capacity claim, blending official duties with personal interests. Similarly, a board member appointed by a private-equity firm and later sued by creditors for favoring the sponsor triggers capacity questions. When policies fail to address such overlaps, insurers may refuse to defend or indemnify, forcing the company to bear the full cost.
Executives must also recognize that signing contracts in a personal name—without referencing their corporate title—can void D&O coverage. Courts have ruled that such signatures create personal guarantees rather than official actions. In Hanover Insurance Co. v. Larson (2026), executives who signed loan documents and guaranty agreements as guarantors, without listing their corporate roles, lost coverage when lenders pursued them. The insurer argued the guarantees reflected personal liability, not actions taken “solely” as company officers.
These decisions emphasize that even minor differences in contract execution, such as omitting a title in the signature block, can determine coverage eligibility. Companies should audit their leaders’ actual duties against policy language to identify potential gaps. For executives serving dual roles, such as on both a parent board and a subsidiary, the insurer’s definitions of insured person and wrongful act must be scrutinized for each capacity.
Maintaining clear governance records that align with policy terms helps prevent coverage denials. When organizations document appointments and authority scopes precisely, insurers have less ground to argue that actions fell outside the insured capacity. Capacity exclusions further complicate coverage. Many policies exclude losses “arising out of” conduct performed for entities other than the insured company, with broad language like “in any way involving” sweeping in unrelated claims.
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The New Jersey Supreme Court applied such an exclusion in Mist Pharmaceuticals, LLC v. Berkley Insurance Co. (2026), denying coverage for self-dealing claims tied to an executive’s overlapping roles across multiple entities. The ruling demonstrated how exclusionary language can void entire claims, even when the primary conduct occurred within the insured capacity.
Reviewing capacity language throughout the policy, not just at renewal, ensures it matches the company’s structure and how leaders operate. Proactive assessments reduce the surprise of coverage denials when disputes arise.
Capacity Exclusions in Practice
Court rulings frequently interpret exclusionary language to deny coverage for claims involving any uninsured role, even if the primary conduct qualifies. In Divinia Water, Inc. v. Clear Blue Specialty Ins. Co., an Idaho court held that board appointments, though procedurally flawed, still counted as “duly elected.” The decision triggered the insured-versus-insured exclusion, removing coverage for a claim between two directors.
Another case, Sec. Nat’l Ins. Co. v. Hendrik Uiterwyk, P.A., saw a Florida district court apply a capacity exclusion to a professional-liability policy. The court ruled that claims from joint-venture activities fell outside the insured entity’s scope, leaving the defendant responsible for the full loss. The ruling reinforced how exclusionary clauses can override technical compliance with corporate titles.
Delaware’s Goggin v. Nat’l Union Fire Ins. Co. of Pittsburgh further clarified the “solely” requirement. The court upheld an insurer’s denial where alleged misconduct was not “solely by reason of” the executives’ official status, despite their holding corporate titles. The decision showed that even formal appointments do not guarantee coverage if the wrongdoing involves personal or external roles.
These cases reveal how exclusionary phrasing, such as “based upon,” “arising out of,” or “in any way involving”, can invalidate entire claims, not just the portion tied to an uninsured capacity. Insurers often exploit such language to argue that any overlap in roles triggers the exclusion, leaving the company to absorb the financial burden.
Contractual Guarantees and Policy Language
Contractual guarantees signed in a personal capacity typically fall outside D&O protection. Courts assess the signature block to determine whether the executive acted as a corporate officer or as an individual guarantor. When titles are omitted, insurers argue the guarantee reflects personal liability rather than official conduct.
Policy language limiting coverage to actions “solely in their capacity as” a director or officer can be used to reject claims arising from mixed-capacity scenarios, even if the underlying transaction served corporate interests. To mitigate risks, companies should draft guarantees that explicitly reference the officer’s corporate role, ensuring alignment with the policy’s insured-capacity definition.
At policy renewal, insured parties should push for amendments that carve out coverage for mixed-capacity situations, particularly when duties span multiple entities. Negotiating exclusionary language that ties denials only to losses directly attributable to uninsured activities, rather than any involvement, can preserve protection for complex corporate structures. Adopting allocation methodologies that proportionally assign loss to each capacity further reduces the risk of blanket coverage denials.
Ultimately, aligning indemnification agreements, board appointment records, and contract signatures with the D&O policy’s definitions minimizes capacity-related coverage gaps. Companies that fail to reconcile these elements risk unexpected denials when disputes arise, exposing them to significant financial and operational risks.
