A state high court has ruled subsidiaries of American International Group (AIG) and Chubb cannot use the so-called “bump-up” exclusion in denying coverage for a settlement in a securities lawsuit.
Late last month the Delaware Supreme Court affirmed a ruling from the state’s Superior Court that the bump-up prevision “does not exclude coverage” to Harman International Industries, who was acquired by Samsung Electronics back in 2017 and then sued in a securities class-action lawsuit under allegations that Harman issued a false or misleading proxy statement to get shareholders to vote in favor of the deal at a lower price.
A final approval on a $28 million settlement was reached in November 2022. Meanwhile, Harman attempted to get coverage from a directors and officers (D&O) policy of $40 million issued by AIG’s Illinois National Insurance on the primary layer, Chubb’s Federal Insurance on the first excess layer, Berkley Insurance Company on the second excess policy.
AIG was first in issuing notification that the bump-up provision excluded loss coverage. Chubb and Berkley followed with the same position, according to court records. The bump-up provision excludes coverage for settlements representing an effective increase in the price paid for an acquisition. The insurers claimed the settlement amount “represented an increase in deal consideration.”
The state Supreme Court ruled the insurers failed to show the settlement represented an increase in what the shareholders claimed was an inadequate deal price—one of two requirements needed to invoke the exclusion. The state high court did rule that insurers met the first of two requirements in the bump-up provision—the shareholders alleged inadequate price.
Orrie Levy, partner at Cohen Ziffer Frenchman & McKenna, who was part of the team representing Harman, called the ruling a “critical victory” for policyholders.
“For years, insurers have wielded the bump-up exclusion to categorically deny coverage for settlements of litigation arising from corporate transactions,” Levy said in an emailed statement to Insurance Journal. “The Delaware Supreme Court has now rejected that approach, vindicating the rights of D&O policyholders.”
“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,” he added.
The bump-up exclusion was an issue following the Towers Watson-Willis merger. Towers Watson looked for D&O coverage for $90 million in settlements with shareholders who alleged they got a bad deal. However, a Virginia federal district judge in Alexandria in 2024 ruled the bump-up exclusion in a D&O policy from National Union applied to bar coverage.
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