Directors’ and officers’ liability insurance only protects boards, executives, and other individuals for claims challenging conduct undertaken in an official capacity on behalf of the insured company. Given the importance of the specific role, status, or official function held when the alleged wrongdoing occurred, so-called “capacity” issues are a recurring source of coverage disputes and denials.
The sources of capacity limitations range from conspicuous—like outside-capacity exclusions—to more nuanced—like embedded requirements in definitions or allocation methodologies. In all instances, small wording differences can determine whether an insurer must defend or advance costs for a claim involving overlapping corporate, personal, or outside-entity roles.
Policyholders should therefore resist treating “capacity” as a single exclusion to check at renewal. The better approach is to assess the issue across the entire policy and compare the wording against the company’s actual organization, governance, and business practices. Here are four places where capacity problems can arise.
1. Who Qualifies as an “Insured Person”?
Almost all D&O policies define insured persons to include past, present, and future “duly appointed or elected” directors and officers, which can create coverage hurdles for nonelected and nonappointed officers, including chief information security officers (“CISOs”) who may find themselves under intense scrutiny following security incidents. Qualifying as an insured persons can also negate coverage if, for example, an individual’s status as a duly elected or appointed member of the board brings a claim within a D&O policy’s insured-versus-insured exclusion.[1]
Insured person coverage also extends to individuals only when they are acting in capacities on behalf of insured entities. While a superficial assessment of coverage for all appointed officers and directors may seem broad, securing coverage for individuals on boards of the company’s subsidiaries, affiliates, or joint ventures can lead to surprise denials if those entities are not also insured under the company’s D&O policy. Tracking coverage up and down the organizational chart, especially for executives wearing multiple hats across affiliated entities, can avoid uninsured entities leading to material gaps in coverage.
Broader coverage in private company D&O forms can extend to employees and, in some cases, even independent contractors. Specialized private equity policies can also include partners, managers, and other parties at different affiliated entities. While such broad definitions of insured persons may be comforting, that doesn’t necessarily mean coverage is always preserved. For example, expanded coverage may be dependent on additional requirements being met, like having proper indemnification agreements in place that are at least as broad as those in place with regularly appointed officers or directors. Where no such agreements exist, coverage may be denied.
2. Understand Capacity Limitations in the Definition of “Wrongful Act”
The policy’s definition of “wrongful act” can also serve as another barrier to coverage. Some policies define wrongful act to include any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted by an insured person “solely in their capacity as such.”
When a policy limits coverage to only acts committed “solely” in an insured capacity, that limitation can be used to bar coverage for so-called “mixed” claims alleging acts committed in both covered and uncovered capacities. To demonstrate the problematic nature of such a policy requirement, consider the following claim examples.
- A company is sued by a current employee’s former employer in a suit alleging breach of employment agreements (at the prior company) and theft of trade secrets in a course of conduct that allegedly occurred before, during, and after the employee was hired.
- Minority shareholders allege that a founder CEO structured a transaction to increase the value of the CEO’s personal holdings at the expense of other shareholders, challenging his conduct in managing the company, as well as in personally enriching himself as a key shareholder.
- A portfolio company board member who was appointed by a private equity sponsor is sued by creditors in a suit alleging that the outside director favored the sponsor’s interests over those of the company.
These scenarios are not hypothetical. In Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 22-2242, 2023 WL 3067498 (3d Cir. Apr. 25, 2023), for example, the parties disputed whether a Securities and Exchange Commission investigation concerned wrongful acts committed by the insured company’s directors and officers, which required acts by insured persons “in their capacities as such,” or whether the investigation involved acts of the predecessor company that fell outside of coverage. The Third Circuit concluded the SEC’s subpoena reasonably indicated that the investigation involved wrongdoing by the insured company, which created fact issues for trial.
If wrongful-act definitions insure only conduct taken “solely” in covered capacities, or if the policy is not structured in a way to account for dual- or multi-capacities (e.g., allocation, outside directorships), the D&O policy may not respond as intended.
3. Beware of Capacity Exclusions
Perhaps most problematic of all are capacity exclusions, which often explicitly bar coverage for claims arising in whole or in part out of acts allegedly done in an uninsured capacity. One version of that exclusionary language bars coverage for
payment for Loss in connection with any Claim made against an Insured Person based upon, arising out of, directly or indirectly resulting from, or in any way involving any wrongful act while serving in the capacity as a director, officer, trustee, employee, or member of any other entity other than the Insured Company.
Entities implicating capacity exclusions include affiliated companies, joint ventures, subsidiaries, and venture capital or private equity portfolio companies, to name a few. In Mist Pharmaceuticals, LLC v. Berkley Insurance Co., 355 A.3d 253 (N.J. 2026), the New Jersey Supreme Court applied a capacity exclusion for claims “in any way involving” service for an uninsured entity to bar coverage for self-dealing claims implicating the insured person’s overlapping roles with insured and uninsured entities. Other courts have taken similar views when interpreting broadly worded capacity exclusions.[2]
Broad lead-in language like “based upon,” “arising out of,” or “in any way involving” can make express capacity exclusions even more consequential, reaching entire claims that combine insured and uninsured roles, rather than only the portion attributable to outside service.
4. Consider Capacity Issues in Business Transactions
Contracts themselves can also serve as a barrier to coverage. Certain loans, such as those found in real estate “bad boy” carve-outs, can often involve personal guarantees, requiring the corporate officers to sign as a guarantor. Directors and officers may operate under the assumption that such guarantees were entered into as part of their duties on behalf of the company, given that the loans in question are pursued for business interests.
Insurers, and sometimes courts, may not view them as favorably when assessing D&O coverage for claims arising from contracts executed in personal capacities. The manner in which contracts are signed may also be brought into question. Contracts that directors and officers sign in their individual names (without mention of an executive role) are even more likely to be viewed as personal contracts and uninsurable by a D&O policy. In Hanover Insurance Co. v. Larson, No. 25-2543, 2026 WL 2295457 (8th Cir. Aug. 10, 2026), for example, executives signed loan documents associated with the company, but they also signed separate guaranty agreements identifying themselves as guarantors without referencing their executive titles in the signature blocks.
When lenders later sought payment from the executives individually, the D&O insurer denied coverage. The policy covered former executives only while acting solely in their insured capacities, and the court concluded that the guarantees reflected an intent to assume personal liability. The restrictive definition of insured person removed the guaranty claims from the scope of coverage under the company’s D&O policy.
Takeaways
Capacity questions abound in D&O policies. Coverage may turn not only on nuanced policy wording but also on the specifics of corporate appointments, the entities involved in the alleged conduct, the underlying transaction, and the facts alleged in each claim.
Policyholders should evaluate capacity risk against how executives actually operate, particularly where individuals serve multiple affiliated entities. At renewal, policyholders should seek wording that accommodates mixed capacities, limits capacity exclusions to loss attributable to uninsured roles, and avoids “solely” requirements that can convert an otherwise covered role into a complete bar to coverage.
See, e.g., Divinia Water, Inc. v. Clear Blue Specialty Ins. Co., No. 4:23-mc-00095-AKB, 2024 WL 1131291 (D. Idaho Mar. 15, 2024) (holding under Idaho law that the company’s ratification of procedurally deficient board appointments rendered the individuals “duly elected or appointed” directors, making them “insureds” that triggered the D&O policy’s insured-versus-insured exclusion). ↑
See, e.g., Sec. Nat’l Ins. Co. v. Hendrik Uiterwyk, P.A., 725 F. Supp. 3d 1308, 1321–23 (M.D. Fla. 2024) (barring coverage under capacity exclusion in professional liability policy where underlying claims involved joint venture that was a separate business enterprise from the insured law firm); Goggin v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. N17C-10-083 PRW CCLD, 2018 WL 6266195, at *4–5 (Del. Super. Ct. Nov. 30, 2018) (affirming insurer denial for claims against directors where alleged wrongdoing was not “solely by reason of their status” as executives of the insured). ↑
