Chubb’s Inability to Leverage ‘Bump-Up’ Provision in D&O Policy for Coverage Exemption

A recent ruling by the Delaware Supreme Court has significant implications for directors and officers (D&O) liability insurance. The court determined that subsidiaries of American International Group (AIG) and Chubb cannot invoke the “bump-up” exclusion to deny coverage for a settlement related to a securities lawsuit.

In late September, the Delaware Supreme Court upheld a decision from the state’s Superior Court, stating that the bump-up provision “does not exclude coverage” for Harman International Industries. Harman, which was acquired by Samsung Electronics in 2017, faced a securities class-action lawsuit. The allegations centered around claims that Harman issued a misleading proxy statement to persuade shareholders to approve the acquisition at a lower price.

The court’s ruling comes after a $28 million settlement was finalized in November 2022. Harman sought coverage under a D&O policy totaling $40 million, which was issued by AIG’s Illinois National Insurance as the primary layer, with Chubb’s Federal Insurance covering the first excess layer and Berkley Insurance Company on the second excess policy.

AIG was the first insurer to assert that the bump-up provision excluded loss coverage. Chubb and Berkley subsequently adopted the same stance, as documented in court records. The bump-up provision is designed to exclude coverage for settlements that effectively increase the price paid in an acquisition. The insurers contended that the settlement amount “represented an increase in deal consideration.”

However, the Delaware Supreme Court ruled that the insurers failed to demonstrate that the settlement constituted an increase in what shareholders claimed was an inadequate deal price—one of the two necessary conditions to invoke the exclusion. The court did acknowledge that the insurers met the first requirement, as shareholders alleged an inadequate price.

Orrie Levy, a partner at Cohen Ziffer Frenchman & McKenna and part of the legal team representing Harman, described the ruling as a “critical victory” for policyholders. He emphasized, “For years, insurers have wielded the bump-up exclusion to categorically deny coverage for settlements of litigation arising from corporate transactions. The Delaware Supreme Court has now rejected that approach, vindicating the rights of D&O policyholders.”

Levy further noted, “The Delaware Supreme Court has now made clear that the applicability of a bump-up exclusion to the settlement of shareholder litigation depends on the facts and policy language of each case and is not a one-size-fits-all proposition.”

The bump-up exclusion has been a contentious issue, notably following the Towers Watson-Willis merger. Towers Watson sought D&O coverage for $90 million in settlements with shareholders who claimed they received a poor deal. However, a Virginia federal district judge ruled in 2024 that the bump-up exclusion in a D&O policy from National Union applied to bar coverage.

Topics
AIG

A recent ruling by the Delaware Supreme Court has significant implications for directors and officers (D&O) liability insurance. The court determined that subsidiaries of American International Group (AIG) and Chubb cannot invoke the “bump-up” exclusion to deny coverage for a settlement related to a securities lawsuit.

In late September, the Delaware Supreme Court upheld a decision from the state’s Superior Court, stating that the bump-up provision “does not exclude coverage” for Harman International Industries. Harman, which was acquired by Samsung Electronics in 2017, faced a securities class-action lawsuit. The allegations centered around claims that Harman issued a misleading proxy statement to persuade shareholders to approve the acquisition at a lower price.

The court’s ruling comes after a $28 million settlement was finalized in November 2022. Harman sought coverage under a D&O policy totaling $40 million, which was issued by AIG’s Illinois National Insurance as the primary layer, with Chubb’s Federal Insurance covering the first excess layer and Berkley Insurance Company on the second excess policy.

AIG was the first insurer to assert that the bump-up provision excluded loss coverage. Chubb and Berkley subsequently adopted the same stance, as documented in court records. The bump-up provision is designed to exclude coverage for settlements that effectively increase the price paid in an acquisition. The insurers contended that the settlement amount “represented an increase in deal consideration.”

However, the Delaware Supreme Court ruled that the insurers failed to demonstrate that the settlement constituted an increase in what shareholders claimed was an inadequate deal price—one of the two necessary conditions to invoke the exclusion. The court did acknowledge that the insurers met the first requirement, as shareholders alleged an inadequate price.

Orrie Levy, a partner at Cohen Ziffer Frenchman & McKenna and part of the legal team representing Harman, described the ruling as a “critical victory” for policyholders. He emphasized, “For years, insurers have wielded the bump-up exclusion to categorically deny coverage for settlements of litigation arising from corporate transactions. The Delaware Supreme Court has now rejected that approach, vindicating the rights of D&O policyholders.”

Levy further noted, “The Delaware Supreme Court has now made clear that the applicability of a bump-up exclusion to the settlement of shareholder litigation depends on the facts and policy language of each case and is not a one-size-fits-all proposition.”

The bump-up exclusion has been a contentious issue, notably following the Towers Watson-Willis merger. Towers Watson sought D&O coverage for $90 million in settlements with shareholders who claimed they received a poor deal. However, a Virginia federal district judge ruled in 2024 that the bump-up exclusion in a D&O policy from National Union applied to bar coverage.

Topics
AIG