(Article from Insurance Law Alert, September 2026)
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In two recent decisions, the Delaware Superior Court ruled that bump-up provisions in Directors and Officers (D&O) insurance policies precluded coverage for settlements of shareholder actions challenging the adequacy of merger consideration. In each case, the court concluded that the settlement represented an effective increase in deal consideration, and that the bump-up provision therefore applied. The decisions are MSG Networks Inc. v. Fed. Ins. Co., 2026 WL 1822345 (Del. Super. Ct. June 24, 2026) and Zayo Grp. Holdings, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2026 WL 2254784 (Del. Super. Ct. Aug. 5, 2026).
MSG Networks Inc. v. Fed. Ins. Co., 2026 WL 1822345 (Del. Super. Ct. June 24, 2026)
Background
The coverage dispute arose from a 2021 reverse triangular merger in which Madison Square Garden Entertainment Corp. (“MSGE”) acquired Madison Square Garden Networks Inc. (“MSGN”). Before the merger, the Dolan Family Group controlled both companies. One stated purpose for the transaction was for MSGE to use MSGN’s cash to fund MSGE projects, including the Sphere in Las Vegas.
After the merger, MSGN Class A shareholders filed suit in the Delaware Court of Chancery, alleging an unfair merger process and that their stock had been undervalued. The shareholders’ expert calculated approximately $371 million in damages and alternatively calculated $44.9 million in damages relating to undisclosed increases in Sphere cost projections. The parties settled for $48.5 million after extensive discovery and shortly before trial. The settlement represented an 8.8 percent increase over the merger’s cash value at closing.
MSGN sought coverage for the settlement under its D&O policies. XL Specialty Insurance Company and National Union Fire Insurance Company each advanced $10 million toward the settlement under agreements permitting them to recoup those amounts if the policies did not provide coverage. MSGN filed suit seeking declaratory relief, and the insurers counterclaimed for a declaration that the settlement was precluded from coverage under the policies’ bump-up provision. The provision provides in relevant part that the policies’ definition of “Loss” does not include any:
amount that represents, or is substantially equivalent to, an increase in the consideration paid (or proposed to be paid) in an acquisition (or proposed acquisition) of more than 50% of the outstanding securities or other ownership interest of an entity[.]
Decision
The Delaware Superior Court granted summary judgment for the insurers, determining that the bump-up provision precluded coverage for the $48.5 million settlement.
The underlying suit alleged that MSGN Class A Shareholders received inadequate merger consideration because, among other things, the exchange ratio undervalued their shares and MSGE had failed to disclose to MSGN’s special committee increased cost projections for the Sphere project in Las Vegas. In determining that the settlement “represents” increased consideration, the court applied the factors discussed in Ill. Nat'l Ins. Co. v. Harman Int'l Indus., Inc., 360 A.3d 240 (Del. 2026) (“Harman III”), including: (i) the settlement language; (ii) whether the settlement compensated shareholders for an allegedly inadequate deal price; (iii) the stage of litigation at the time of the settlement; and (iv) composition of the settlement class.
Although the settlement agreement stated that the insured settled to avoid the expense and burden of litigation costs, the court found more compelling evidence that the settlement “represents” an increase in consideration based on other factors, including: (i) the settlement directly increased the value received by the Class A shareholders and represented an 8.8 percent premium to the merger price; (ii) the settlement closely corresponded to the shareholders’ expert’s damages estimate relating to the Sphere cost projections; (iii) the shareholders’ claims were based on undervaluation of their stock, and the settlement provided direct per-share payments to shareholders who had received merger consideration; and (iv) the parties settled only after extensive discovery and shortly before trial, which the court viewed as evidence that the payment reflected resolution of the alleged valuation shortfall rather than merely avoidance of litigation costs.
The court further determined that, not only did the settlement “represent” an actual increase in consideration, it also was “substantially equivalent to” an increase in consideration under the bump-up clause.
The court rejected MSGN’s argument that the transaction was not an “acquisition” under the bump-up clause because the Dolan Family Group controlled both companies before and after the merger. The court held that the policies’ plain language did not require a change in ultimate control, noting that MSGE held no voting securities in MSGN before the merger and 100 percent after.
The court further concluded that the bump-up provision applied to the attorneys’ fees and costs paid from the common settlement fund. Applying the common fund doctrine, the court reasoned that the expense award was “fused into the Settlement” because the entire fund benefitted the shareholder class and therefore enhanced the consideration received by the shareholders.
The court therefore held that the bump-up provision barred coverage for the entire settlement amount, including the fee and expense payment. The court accordingly held that XL Specialty and National Union were each entitled to recoup their $10 million advances.
Zayo Grp. Holdings, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2026 WL 2254784 (Del. Super. Ct. Aug. 5, 2026)
Background
The coverage dispute arose from a 2019 reverse triangular merger in which Digital Colony Partners and the EQT Infrastructure IV Fund, referred to as “Consortium B,” acquired Zayo Group Holdings, Inc. (“Zayo”), a global provider of communications infrastructure. Zayo’s shareholders received $35 in cash per share of common stock.
Former Zayo shareholders sued Zayo’s CEO, Dan Caruso, in the Delaware Court of Chancery, alleging that he breached his fiduciary duties in connection with the acquisition. The Court of Chancery dismissed all claims except the shareholders’ claim that Caruso breached his duty of care by failing to disclose a conversation showing that Consortium B was willing to pay a price above $35 per share. The parties ultimately settled for $27,125,000. Zayo sought coverage under its D&O policies.
Decision
The Delaware Superior Court granted the insurers’ motion for summary judgment, holding that the bump-up provision barred coverage for the settlement.
The court first placed its analysis in the context of Harman III and Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 138 F.4th 786 (4th Cir. 2025) (“Towers Watson II”), both of which involved bump-up provisions with the same operative language as Zayo’s policy. (These opinions were discussed in our February 2026 and June 2025 alerts, respectively.) In Towers Watson II, the Fourth Circuit held that the bump-up provision barred coverage for the settlement of a shareholder action challenging the adequacy of merger consideration. In Harman III, however, the Delaware Supreme Court held that the same provision did not bar coverage on the facts before it.
Against that backdrop, the court considered whether the requirements for application of the bump-up provision were satisfied. The court first found that the underlying action alleged inadequate deal consideration in the acquisition of the insured entity because the shareholders sought damages for “unfair Merger consideration” and the alleged conduct purportedly caused them to receive an unfair price.
The court then determined that the settlement represented an effective increase in consideration. The court identified several “strong indicators” supporting that conclusion: Caruso paid the settlement amount to the plaintiff shareholders on a per-share basis, and only to those who held stock at closing; additionally, the parties settled after a year of discovery, which the court found supported the conclusion that the settlement represents an increase in consideration rather than merely an effort to avoid litigation costs.
The court placed particular weight on the fact that the settlement amount went only to the shareholders who had received consideration in the acquisition, describing this factor as “largely determinative” and finding that it carried more weight than the insured’s argument that the settlement represented litigation costs. The court also found significant the fact that, although Caruso denied wrongdoing, he did not stipulate that he settled solely to avoid continued litigation costs—unlike the defendant in Harman III. The court ultimately concluded that “the Caruso Action and the Settlement are far more aligned with the facts in Towers Watson II” than with those in Harman III.
The court also rejected Zayo’s argument that the Larger Settlement Rule required allocation between covered and uncovered portions of the settlement. The court noted that it had previously declined to extend the rule beyond the allocation situation involving indemnifiable and non-indemnifiable parties, and in any event concluded that the entire settlement represented an increase in consideration, leaving no allocation issue.
Finally, the court granted the insurers summary judgment on Zayo’s bad-faith claim, holding that because the bump-up clause excluded coverage, the insurers did not breach the policy by declining coverage. Without an underlying breach of the policy, the insured could not maintain its bad-faith claim.
Comments
MSG Networks and Zayo shed further light on the application of bump-up provisions following the Fourth Circuit’s opinion in Towers Watson II and the Delaware Supreme Court’s decision in Harman III. While Harman III held that the bump-up provision did not apply on the record before it, subsequent decisions suggest that case-specific differences in the settlement record can produce a different result. In particular, the decisions highlight settlement pricing, structure, timing, and the composition of the class receiving the settlement as potentially significant considerations.
Both cases have been appealed to the Delaware Supreme Court.