Delaware Supreme Court Ruling Impacts D&O Insurance Coverage

Delaware Court Decision Challenges D&O Insurers on Bump-Up Exclusions

In a pivotal ruling, the Delaware Supreme Court has clarified the application of bump-up exclusions in insurance policies, significantly impacting directors and officers (D&O) insurers. The court's decision, issued on January 27, mandates insurers to provide coverage for Harman International Industries' $28 million securities class action settlement, which arose from its 2017 acquisition by Samsung Electronics Co., Ltd.

The central issue involved determining whether the settlement amount constituted an increase in deal consideration, thus excluding coverage under the bump-up provision in D&O policies. These provisions typically deny coverage for settlements that effectively raise the purchase price in acquisition disputes, posing challenges for underwriting and risk management.

The litigation began with allegations by former shareholders against Harman, claiming misleading information was provided before the acquisition vote, in violation of federal securities laws. This suit culminated in a settlement amount of $28 million, highlighting the complexity of regulatory compliance and industry standards within securities law.

Harman sought coverage through its D&O policy structure, which included Illinois National Insurance Company as the primary insurer and Federal Insurance Company and Berkley Insurance Company as excess carriers. These insurers challenged the coverage, invoking the bump-up provision that excludes settlements aimed at rectifying inadequate acquisition consideration, underscoring the intricate dynamics between payer, provider, and carrier roles within insurance markets.

The Supreme Court's analysis required two determinations: whether the claims were linked to inadequate consideration and whether the settlement amount effectively increased the deal consideration. Although the court agreed with insurers that the claims centered on inadequate consideration, it found insufficient evidence that the settlement increased deal consideration.

The ruling emphasized the absence of evidence, such as expert analysis, linking the $28 million settlement to any discrepancy between the acquisition price and the shares' true value. Moreover, the class included shareholders potentially selling their stock before receiving merger consideration, complicating claims and highlighting regulatory compliance requirements.

For the insurance industry, this decision underscores the need for D&O insurers to substantiate claims of increased deal consideration when invoking bump-up exclusions. Insurers must compile a robust evidentiary case to support such allegations, especially when settlements occur before expert evaluations. This ruling signals the complexity and difficulty insurers may face in effectively applying bump-up exclusions in similar cases, impacting regulatory and compliance strategies.