Skim time: 6 minutes · Listening time: 7 minutes. Prefer to listen? Flip reads this week's Brief here.

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In April 2014, a New Jersey drug company bought a $2 million directors and officers (D&O) policy. Its chairman held roles across more than a dozen companies he owned or controlled.

The allegations against him involved his role at the insured company. They also involved his roles at companies the policy did not insure. The cases settled for $12 million.

Twelve years after the policy was bought, the New Jersey Supreme Court held that a broad capacity exclusion reached the whole claim. The $2 million policy paid nothing toward the settlement.

Nine months earlier, the Delaware Supreme Court decided a different question. 3M had paid more than $371 million defending Combat Arms earplug claims.

Its subsidiary's policies carried $250,000 self-insured retentions. The court held that 3M's money did not satisfy them. 3M was not the entity the policies required to pay.

Different policies, different lines, the same renewal lesson: before a policy reaches the limit, it has to start.

A retention clause can decide whose payment opens coverage. A capacity exclusion can decide which role the policy protects. For carriers, MGAs, insurtechs and financial institutions with shared executives, centralized treasury, affiliated entities or acquisition history, those are program-design questions.

Two weeks ago, Kaiser showed how an endorsement can cut a $95 million tower to $1 million. Last week, two cyber cases showed why a sublimit must name the coverage it changes. This week closes The Endorsement Audit with the two clauses that decide whether the policy responds at all, and the renewal review to test them.

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3M paid $371M. The retention still was not satisfied.

A self-insured retention has two terms, the amount and the payer.

Aearo Technologies made the Combat Arms earplugs. 3M acquired the business in 2008. When earplug litigation followed, 3M paid more than $371 million in defense costs.

Aearo's pre-acquisition liability policies carried $250,000 per-occurrence self-insured retentions (SIRs). The wording required payment by "you" or an insured, and "you" meant the named insured. 3M was neither. It nevertheless paid $371,847,608 in defense costs, while Aearo paid about $411,000.

On August 12, 2025, the Delaware Supreme Court held, 3 to 2, that 3M's payments did not satisfy the retentions. It affirmed judgment on the Twin City policy and remanded questions about Aearo-attributed payments under the ACE and Royal Surplus policies. The court read the payer requirement as written.

On these forms, the SIR was a condition precedent: the insurers owed nothing until it was met. Not every deductible or SIR works that way. The policy wording controls.

Here, the decisive issue was who had paid, not how much.

(source: In re Aearo Technologies LLC Insurance Appeals, Nos. 381, 2024 and 423, 2024 (Del. Aug. 12, 2025); Simpson Thacher, September 30, 2025)

So what?

Aearo does not mean every parent-company payment fails under every policy. It shows why the way a group pays its defense bills has to match its retention wording.

The mismatch is common:

• A holding company pays legal invoices for operating subsidiaries.
• A management company pays bills for an affiliated MGA.
• A buyer pays defense costs under a target's legacy or runoff policies.
• A centralized treasury function funds costs while a different legal entity is the named insured.

Under a payer-specific SIR, that mismatch can hand an insurer an argument that the retention was never met. Ask whose payment the policy recognizes, not just who has the cash.

Monday morning action: for every policy in the group, put three items side by side. The named insured. The definition of "you," "Insured Organization" or the equivalent term. The legal entity that paid the last defense invoice. If the names differ, ask the broker and carrier, in writing and before a claim, whether the policy recognizes the existing payment process.

If centralized payment is deliberate, ask for wording that recognizes payment by named affiliates or on the insured's behalf. Support the request with a written intercompany payment arrangement. Have coverage counsel read both the in-force form and the proposed renewal language.

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He was insured for one role. The claim involved several.

A D&O policy protects a director in the capacities it defines.

Mist Pharmaceuticals bought a $2 million D&O policy from Berkley Insurance Company in 2014. Its chairman, Joseph Krivulka, also served in roles across other companies.

The underlying claims alleged that he used control over the businesses to move pharmaceutical rights and royalty interests among them, in transactions involving Mist. So the allegations reached both his insured capacity at Mist and capacities at entities the Berkley policy did not insure. Those remained allegations. The cases settled for $12 million with no ruling on the merits.

The policy excluded loss from claims "in any way involving" wrongful acts committed while serving another entity, unless that entity was an Insured Entity or a covered Outside Entity. No Outside Entity coverage brought those other roles inside the policy.

On May 11, 2026, the New Jersey Supreme Court held, 5 to 2, that the exclusion applied to the entire claim. On this record, the court also rejected the waiver and estoppel arguments built on Berkley's reservation-of-rights letters.

The court found no allegation against Krivulka in his Mist capacity that could be separated from his uninsured capacities.

(source: Mist Pharmaceuticals, LLC v. Berkley Insurance Co., No. A-34-24 (N.J. May 11, 2026), affirming as modified 479 N.J. Super. 126 (App. Div. 2024); The D&O Diary, May 2026)

The LION Lens

What happened — New Jersey's highest court enforced a D&O capacity exclusion against a director sued for conduct that spanned one insured role and several uninsured ones. It found no estoppel in the insurer's reservation-of-rights letters (Mist v. Berkley, May 11, 2026).

Why it matters — Many D&O forms carry a capacity exclusion, and their scope varies a great deal. Under this wording, the court found that each alleged wrongful act involved an uninsured role, and that drove the result. Another form, another complaint, another state's law or an allocation clause could come out differently.

Practical implications — Three pages to pull. The exclusion and its connecting language. The Outside Entity schedule. The Side A form's version of any comparable capacity limitation.

So what?

Shared leadership is routine in financial institutions. A founder may sit on the holding company board, the operating company board, an affiliated MGA, a captive, a fund or a portfolio company. A complaint about a deal among those entities will usually describe every role. The roles are how the plaintiff shows control.

Under broad wording such as "in any way involving," that overlap can become a coverage issue before anyone reaches the merits. Being named as an insured person is not enough. The alleged conduct also has to sit in a role the policy protects.

Monday morning action: build a role map for each director and officer. List every board seat and officer title. Then mark each related entity as an Insured Entity, a scheduled Outside Entity, or neither. The third group is the one that needs a renewal decision.

A separate claim-handling lesson from Mist. Partial defense funding under a reservation of rights is not a final coverage acceptance. Treat each reservation-of-rights letter as the insurer's current coverage position. Respond to the material points in writing. Begin allocation analysis early in any claim involving both insured and uninsured capacities.

The LION POV

Here's how we're advising clients. At renewal, ask the underwriter to address four points in writing:

• The connecting language: Does the capacity exclusion say "in any way involving," "arising out of," "to the extent," or something else?
• A dual-capacity carve-back: Is coverage available to the extent the insured person acted in an insured capacity?
• Scheduled Outside Entity coverage: Can the affiliates, boards and funds your people serve be scheduled by endorsement, and on what terms?
• Side A: The layer that pays individuals for non-indemnifiable loss. Does its form repeat the same capacity limitation, or narrow it?

Do not assume the broadest request will be available. Ask for the wording, the price, and the information the underwriter needs to evaluate it. In a competitive renewal, the easiest outcome is flat premium with last year's language. Treat these wording questions as separate negotiation items. They do not appear on a rate comparison.

LION maps insured persons to insured entities, endorsement by endorsement, for financial institution clients before renewal. Grab 30 minutes with Flip and bring the org chart.

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The one-page renewal review

Get the complete bound D&O and cyber policies in issuance order: declarations, schedules, endorsements and every excess form. Do not use a specimen. For each line below, record seven things. The form number and page. The current answer. The change you asked for. The carrier's response. The price. An owner. A due date.

Policy item	Boardroom question	Renewal instruction
Governmental funding / return-of-funds endorsement	Which settlement or defense component is limited, and at what amount?	Price deletion, narrowing or alternative terms
Loss definition and insurability provisions	How are restitution, penalties, multiplied damages and defense treated?	Identify conflicts between base and endorsement wording
Cyber sublimit endorsements	Which insuring agreement does the cap expressly modify? Is it per claim, per event or per policy period?	Require clear identification of affected coverage and aggregation
Capacity exclusion	Does it use "in any way involving," "arising out of," "to the extent" or another standard?	Test a real dual-role scenario; seek a carve-back or narrower wording where available
Outside Entity schedule	Which affiliates, funds, boards or portfolio entities are covered?	Schedule relevant entities or evaluate separate D&O protection
Retention / defense-payment language	Which legal entity may satisfy the retention, and which payments count?	Align payer, named-insured definitions and actual payment process
Excess attachment / follow-form	Do excess layers follow negotiated changes to the primary, and what exhaustion do they require?	Confirm each layer's treatment in writing
Consent to settle, allocation and notice	Who controls settlement, how is mixed loss allocated, and what is the reporting timeline?	Put a claim-response protocol in place before a loss
Side A coverage	Does the Side A form contain the same, narrower or broader capacity limitations?	Review individual protection separately from entity indemnification

Complete the review at least 90 days before renewal. Then verify that every agreed change appears in the final bound primary policy, in each affected endorsement, and in every affected excess layer.

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The Bottom Line

Three editions, one pattern. The base form tells you what the policy may cover. The clauses and endorsements around it decide when payment starts, what is capped, and which role is protected.

Kaiser's $95 million tower yielded a $1 million payment. CiCi's cyber cap did not apply, because the endorsement did not clearly identify the coverage it purported to limit. Aearo's policies did not respond to 3M's payments, because the payer did not satisfy the SIR language. Mist's D&O policy did not respond, because the alleged conduct involved an uninsured capacity.

None of those outcomes was decided by the size of the loss. Each was shaped by words written before the claim and tested after it. The opportunity is in between, at renewal, when you can still read them, challenge them and negotiate them.

Three for your board on Monday

1. Name the payer. For each policy, which legal entity must satisfy the retention, and which entity would pay tomorrow's first defense invoice?
2. Map the seats. Which directors and officers serve affiliated or outside entities, and which of those roles are expressly insured, scheduled as Outside Entities or excluded?
3. Assign the review. Who will complete the policy review, with page references, proposed wording, carrier response, price and a decision date, before renewal instructions go out?

A board can choose to retain a risk. It should not discover one after the claim arrives.

If the honest answer to any of those questions is "I'd have to check," that is the conversation to have before renewal. Book a confidential conversation or reply to this email.

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The Endorsement Audit closes here. Keep the review. It is the whole series on one page.

Want the D&O Contract Vigilance Blueprint, the five-day review of common D&O program gaps? Reply "blueprint" and I'll send it.

Thank you for reading today's edition.

Stay Covered Everybody,

-FLIP

P.S. Forward this to the person who owns your renewal and the person who pays your legal invoices. Want to share it? Copy the link below:

https://lionspecialty.kit.com/posts/3m-paid-371m-in-legal-bills-and-its-subsidiary-s-250k-retention-was-never-met-a-2m-d-o-policy-paid-nothing-on-a-12m-settlement-and-the-checklist

And if this was forwarded to you, subscribe here: https://lionspecialty.kit.com/

P.P.S. Nothing in this briefing constitutes legal advice. These are the opinions of the founder. It's market intelligence designed to help you ask better questions of your advisors and make sharper decisions at your next insurance renewal.

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