A $28 million coverage fight just handed D&O insurers a tough lesson on bump-up exclusions – straight from Delaware's top court.
The Delaware Supreme Court ruled on January 27 that insurers cannot escape paying Harman International Industries' settlement from a securities class action tied to Samsung's 2017 acquisition of the company. The decision sets a demanding standard for carriers trying to invoke bump-up provisions to deny claims.
At the heart of the case was a question insurers have long grappled with: when does a settlement amount count as an increase in deal consideration – and therefore fall outside coverage?
The dispute traces back to Samsung Electronics Co., Ltd.'s acquisition of Harman. After the deal closed, former shareholders sued, claiming the proxy materials fed to them before the vote were misleading. They alleged violations of federal securities laws, arguing they were robbed of a fully informed vote and shortchanged on the value of their shares.
The case settled for $28 million following court-recommended mediation. Harman turned to its D&O tower – Illinois National Insurance Company on the primary layer, Federal Insurance Company as first excess, and Berkley Insurance Company as second excess – seeking reimbursement. The carriers balked, pointing to the policies' bump-up provision.
That provision carves out coverage for any settlement amount that effectively increases the deal price when the underlying claim alleges inadequate acquisition consideration.
The Supreme Court broke down the analysis into two steps. First, does the claim allege inadequate consideration? Second, does the settlement actually represent an increase in that consideration?
On the first question, the court sided with insurers. The securities claims, even though framed around disclosure failures, were ultimately tethered to the idea that the deal price was too low. That satisfied the threshold.
But insurers stumbled on the second step. The court demanded proof that the settlement's "real result" was bumping up deal consideration – and the carriers came up short.
Several problems emerged. The settlement class swept in shareholders who held stock "at any time" during the relevant window, meaning some may have sold before the deal closed and never received any merger consideration to increase. The record also showed no expert analysis or evidence tying the $28 million figure to any gap between the deal price and the shares' supposed true value.
Instead, the evidence pointed elsewhere. Harman's estimated defense costs to continue litigating ran between $25 million and $30 million. The settlement papers stated the decision to resolve the case was "based solely on the conclusion that further conduct of the Litigation would be protracted and expensive."
The ruling was not unanimous. Chief Justice Seitz and Justice Traynor dissented, arguing that courts should simply look at the practical effect of a settlement rather than dig into why the parties chose to settle.
For the insurance industry, the message is clear. Bump-up exclusions remain viable, but winning on them requires more than pointing to a complaint's allegations. Carriers must build an evidentiary case showing the settlement dollars actually represent increased deal consideration – a burden that may prove difficult when cases settle before damages experts ever weigh in.
