Delaware Court Ruling: D&O Coverage and the Bump-Up Exclusion

In a noteworthy decision, the Delaware Supreme Court ruled against insurers' attempts to leverage a "bump-up" exclusion to deny coverage under Directors and Officers (D&O) liability policies. This ruling, centered on securities litigation tied to Samsung Electronics America, Inc.'s acquisition of Harman International Industries, Inc., in the case of Illinois National Insurance Company v. Harman International Industries, Inc., emphasized the limitations of such exclusions. The court specifically addressed whether insurers could apply the exclusion to a $28 million settlement concerning allegations of misleading proxy statements during the acquisition phase.

The merger between Harman International and Samsung closed in early 2017, subsequently leading to a class action by Harman's former shareholders. Allegations suggested that Harman provided false proxy statements under the Securities Exchange Act to secure an undervalued acquisition. When Harman settled, its D&O insurers denied the claim citing a "bump-up" exclusion, typically excluding any settlement reflecting increased acquisition payments. However, the Delaware Supreme Court, upholding the Superior Court's decision, found that insurers failed to demonstrate the settlement amount was an acquisition 'bump-up'; rather, it served to mitigate litigation risks and uncertainties.

Key Takeaways for Policyholders

This ruling underscores the critical need for policyholders within the insurance industry to carefully review their D&O policy terms, particularly regarding regulatory compliance requirements and exclusion clauses like the "bump-up" exclusion. Companies should prioritize detailed scrutiny and negotiation of policy language to adequately align with their corporate transactions and risk management strategies. This legal outcome reinforces the advisability of engaging with legal counsel to safeguard interests and ensure that regulatory underpinnings are adequately addressed in similar contexts.