Key Takeaways
- • The New Jersey Supreme Court's decision in *Mist Pharmaceuticals v. Berkley Insurance* denied directors and officers (D&O) liability coverage, creating a critical exposure for private equity executives who simultaneously serve on sponsor and portfolio company boards.
- • PE professionals operating in overlapping governance roles face significant insurance gaps when conflicts of interest arise between their dual board positions, potentially leaving them personally liable for coverage denials.
- • Reed Smith attorneys identify this ruling as a cautionary precedent that exposes structural vulnerabilities in D&O insurance policies for PE-backed boards, signaling heightened risk for the alternative investment industry.
- • The decision underscores the need for PE firms and their portfolio companies to review policy language, carve-outs, and conflict-of-interest provisions in existing D&O coverage to assess adequacy of protection.
Summary
A New Jersey Supreme Court ruling in *Mist Pharmaceuticals v. Berkley Insurance* has exposed significant gaps in directors and officers liability coverage for private equity executives navigating multiple board roles, according to analysis by Reed Smith.
The case illustrates a critical vulnerability in the D&O insurance market: when corporate directors and officers wear multiple hats—simultaneously serving on both sponsor and portfolio company boards—insurance carriers may deny coverage claims by invoking conflict-of-interest exclusions or policy language that excludes coverage for certain overlapping roles. In the *Mist Pharmaceuticals* decision, the court sided with the insurer in barring D&O coverage, leaving directors and officers personally exposed to liability.
This outcome presents acute risk for private equity executives, who routinely occupy dual governance positions across their sponsor firms and portfolio holdings. The ruling suggests that standard D&O policies may contain language permitting insurers to deny indemnification when a director's simultaneous roles create—or appear to create—competing loyalties. Without explicit coverage for such scenarios, PE professionals face potentially substantial uninsured liability.
Reed Smith attorneys flagged the decision as a cautionary marker for the PE industry, recommending that sponsor firms and their portfolio companies conduct comprehensive reviews of existing D&O policy provisions, exclusions, and conflict-of-interest language. Industry participants should assess whether current coverage adequately protects directors serving in overlapping capacities and consider endorsements or policy amendments to close identified gaps. The ruling reinforces the importance of alignment between governance structures, insurance policy terms, and the practical realities of PE operational leadership.
The case illustrates a critical vulnerability in the D&O insurance market: when corporate directors and officers wear multiple hats—simultaneously serving on both sponsor and portfolio company boards—insurance carriers may deny coverage claims by invoking conflict-of-interest exclusions or policy language that excludes coverage for certain overlapping roles. In the *Mist Pharmaceuticals* decision, the court sided with the insurer in barring D&O coverage, leaving directors and officers personally exposed to liability.
This outcome presents acute risk for private equity executives, who routinely occupy dual governance positions across their sponsor firms and portfolio holdings. The ruling suggests that standard D&O policies may contain language permitting insurers to deny indemnification when a director's simultaneous roles create—or appear to create—competing loyalties. Without explicit coverage for such scenarios, PE professionals face potentially substantial uninsured liability.
Reed Smith attorneys flagged the decision as a cautionary marker for the PE industry, recommending that sponsor firms and their portfolio companies conduct comprehensive reviews of existing D&O policy provisions, exclusions, and conflict-of-interest language. Industry participants should assess whether current coverage adequately protects directors serving in overlapping capacities and consider endorsements or policy amendments to close identified gaps. The ruling reinforces the importance of alignment between governance structures, insurance policy terms, and the practical realities of PE operational leadership.
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