AIG, Chubb Loss in Delaware Portends More Fights Over M&A Clause

A Delaware state court ruling on a controversial insurance clause limiting payouts for post-merger shareholder settlements marked a win for corporate policyholders, but more definitive court guidance will likely be needed to resolve a pileup of high-stakes cases.

The “bump-up” exclusion has become a sticking point as directors and officers insurers seek to deny coverage for settlements, in acquisition-related cases brought by shareholders seeking damages, that could be characterized as an increase in the purchase price for the target company.

Such claims are a fundamental part of what D&O policies are intended to cover, policyholder attorneys said.

A Delaware Superior Court judge this month sided with Samsung Electronics Co. subsidiary Harman International Industries Inc., concluding that its insurers—units of American International Group Inc. and Chubb Ltd.—couldn’t deny coverage based on the exclusion. Shareholders in the underlying litigation alleged Harman filed a misleading proxy statement ahead of the Samsung deal.

It’s one of several bump-up battles on the Delaware court’s docket, with other pending cases pitting insurance giants against policyholders such as music-streaming service Pandora and communications infrastructure company Zayo Group Holdings Inc.

The US Court of Appeals for the Fourth Circuit is set to hear arguments in a similar case in March involving consulting firm WTW Delaware Holding LLC, formerly Towers Watson & Co.

The Harman ruling “provided a roadmap for what other policyholders can do to increase their chances of obtaining coverage for settlements of deal-related litigation,” said Hunton Andrews Kurth LLP’s Geoffrey Fehling, who leads the firm’s D&O insurance and executive protection practice.

An expected boom in M&A activity under the incoming Trump administration will likely fuel more shareholder litigation. That means more insurance disputes, as carriers and policyholders disagree over whether the claims fall within the scope of coverage.

The bump-up disputes may be one-offs for policyholders, but major carriers with broad portfolios are seeking to clarify whether they’ll have to cover expensive claims across the board.

An anticipated appeal in the Harman case would offer more conclusive guidance—but it could backfire for insurers if the Delaware Supreme Court affirms the win for policyholders and narrows the scope of the exclusion.

AIG and Chubb declined to comment on plans to appeal.

Roadmap for Policyholders

Judge Paul R. Wallace’s ruling for Harman offers a playbook for overcoming the bump-up exclusion, policyholder attorneys said.

Wallace concluded the underlying settlement with Harman shareholders was covered because damages for an inadequate deal price—what the bump-up provision intends to exclude—weren’t an available remedy under the theory of damages asserted in the class action.

In addition, he said, the settlement didn’t represent an increase in consideration to shareholders, or in other words, a bump-up of the transaction price.

Wallace pointed to language in the settlement denying liability and indicating the reason for settling was to avoid further litigation.

The settlement amount, $28 million, was in line with the estimated cost of continuing the case and far less than the alleged disparity between the transaction price and actual value, Wallace said in the order. The settlement therefore didn’t represent an increase in consideration, he wrote, and didn’t meet the criteria to trigger the exclusion.

Although insurers were likely disappointed with the ruling overall, which conflicted with arguments they made in court filings, Chubb and AIG banked a minor victory on an issue that has come up in several bump-up cases.

Most carriers’ version of the provision is designed to address acquisition transactions, and policyholders have sought to duck the exclusion by arguing that “reverse triangular mergers”—where the acquisition target absorbs a subsidiary of the acquiring company and becomes its subsidiary—aren’t technically acquisitions.

Wallace rejected that argument in Harman, concluding that the transaction with Samsung was an acquisition under the policy’s plain meaning.

‘Problematic Gulf’

The Delaware trial court ruling alone won’t settle the longstanding disagreement between carriers and policyholders on the scope of the bump-up exclusion.

“From the perspective of policyholders and the companies that are purchasing these policies to protect themselves and their directors and officers, there is a problematic gulf between the coverage that they believe they purchased based on the plain language of these policies and the positions that certain insurance companies are taking when the insurance actually is needed,” said Orrie Levy, an attorney with Cohen Ziffer Frenchman & McKenna LLP who represented Harman and has advised policyholders in several bump-up disputes.

Policyholder attorneys were united in their view that shareholder litigation following M&A transactions should fall within the scope of coverage.

Levy called such cases “the bread and butter of D&O coverage,” and Tamara Bruno of Pillsbury Winthrop Shaw Pittman LLP, who leads the Texas section of the firm’s insurance recovery and advisory practice, described them as “core D&O claims.”

“If the insurance carriers don’t want to take on that kind of risk, they need to say that explicitly in their policies and then face the market consequences as to who wants to buy these policies,” Bruno said.

Insurers have pushed back through litigation, focusing on the nature of the underlying suits and arguing that policyholders have disregarded the plain meaning of policy language “in favor of an interpretation that can only be described as commercially unreasonable,” as Chubb and AIG put it.

For insurers, the bump-up exclusion is an “institutional issue,” and that may be why they’ve chosen to seek guidance from courts, Bruno said.

As they await rulings in other similar cases, insurers may want to consider revising their bump-up policy language, Kevin LaCroix, executive vice president at insurance intermediary RT ProExec and author of The D&O Diary blog, said by email.

“The bump up exclusion is not operating as intended,” he said.

The case is Harman Int’l Indus. Inc. v. Ill. Nat’l Ins. Co., Del. Super. Ct., No. N22C-05-098, 1/3/25.