(Article from Insurance Law Alert, February 2026)
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Holding
The Delaware Supreme Court affirmed a Superior Court judgment that a bump-up exclusion in a Directors and Officers (D&O) policy did not bar coverage for the settlement of securities litigation arising from an acquisition because the settlement did not increase the deal consideration. Ill. Nat'l Ins. Co. v. Harman Int'l Indus., Inc., 2026 Del. LEXIS 30 (Del. Jan. 27, 2026).
Background
This coverage dispute stems from the 2017 acquisition of Harman International Industries, Inc. by Samsung Electronics Co., Ltd. Following the transaction, former Harman shareholders filed a class action alleging that Harman made false and misleading statements in violation of Section 14(a) of the Securities and Exchange Act of 1934 in order to secure their approval of the acquisition.
After Harman settled the class action for $28 million, it sought coverage from three insurers. The insurers declined coverage, relying on a bump-up exclusion in the D&O policies.
The bump-up provision provides, in relevant part:
In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased . . .
On summary judgment, the Superior Court held that, for the exclusion to apply to an “acquisition,” an insurer must establish that: (1) the underlying settlement is related only to the allegation of inadequate deal consideration; and (2) the underlying settlement represented an effective increase in consideration. As reported in our January 2025 Alert, the Superior Court ruled in Harman’s favor, concluding that neither requirement was satisfied and that the exclusion did not apply. The insurers appealed.
Decision
The Delaware Supreme Court articulated a two-step test to determine whether the bump-up exclusion applied. The first step requires consideration of whether the claim underlying the settlement alleged inadequate deal consideration for the transaction. If so, then the second step requires consideration of whether the settlement amount, or any portion thereof, represented an effective increase in consideration.
The court concluded that the first requirement of the bump-up exclusion was satisfied. The court reasoned that allegations of inadequate consideration are “intrinsic” to the theory of the Section 14(a) claim. The court noted that the class action complaint alleged that the false and misleading proxy deprived the shareholders of the full value of their shares and that the shareholders’ losses were the difference between the price the shareholders received and Harman’s true value at the time of the acquisition.
Nevertheless, the court concluded that the second requirement—whether the settlement amount represented an effective increase in deal consideration—was not met. The court determined that the settlement did not effectively increase consideration because the settlement class was not limited to shareholders who held stock through the transaction’s closing date. As a result, not all class members relinquished shares in the transaction in exchange for consideration that could be increased. The court also noted that there was no expert analysis of stock valuation difference and that the settlement amount fell within the $25 million to $30 million in litigation costs Harman estimated it would have incurred if the case had continued.
Chief Justice Seitz and Justice Traynor dissented as to the majority’s analysis of the second requirement. The dissent found the Fourth Circuit’s reasoning in Towers Watson & Co. v. National Union Fire Insurance Co. of Pittsburgh, 138 F.4th 786 (4th Cir. 2025) (Towers II) more persuasive. As reported in our June 2025 Alert, in Towers II, the Fourth Circuit concluded that, if shareholders receive additional consideration for their relinquished shares, then the bump-up exclusion applies. Applying that approach, the dissent reasoned that “at least some of the class held their shares through closing and received their pro rata portion of the Settlement Consideration—effectively increasing the consideration they received for the Transaction.” The dissent also warned that a fact-intensive inquiry into settlement motivations risks inefficiency and may encourage collusive settlements, favoring instead a more straightforward examination of the settlement’s practical effect.
Comments
The Delaware Supreme Court’s ruling departs from a line of cases in other jurisdictions holding that bump-up exclusions bar coverage for settlements of shareholder suits challenging the transaction price in a merger or acquisition. However, as the dissenting justices noted, there are significant concerns that the majority opinion could lead to policyholders attempting to manipulate settlements in an effort to obtain coverage. It is likely that the applicability of bump-up exclusions will continue to be litigated in coverage disputes in Delaware.