The Delaware Superior Court recently issued a significant ruling in Harman International Industries, Inc. v. Illinois National Insurance Company, No. N22C-05-098, 2025 WL 24364 (Del. Super. Ct. Jan. 3, 2025), involving a dispute over Directors and Officers (D&O) insurance coverage. Harman International Industries (“Harman”), now a subsidiary of Samsung Electronics, sought indemnification from its insurers for a $28 million settlement in a class action securities lawsuit. On January 3, 2025, Judge Paul R. Wallace of the Delaware Superior Court ruled that the primary and excess insurers cannot rely on a “bump-up” exclusion in Harman’s D&O policies to dodge coverage because the settlement did not “bump up” the transaction’s value.
Following Harman’s merger with Samsung in 2017, a class action lawsuit was filed by shareholders alleging Harman issued a misleading proxy statement to secure approval of an undervalued acquisition. The shareholders claimed that this deprived them of fair value for their shares, seeking damages for the difference between the $112 per share received and the alleged true higher value.
Harman sought defense and indemnity for the suit under a primary D&O policy and two excess policies. The policies provided a combined $40 million in coverage and as the court found, all policies operated identically. The “bump-up” exclusion found in the policies bars coverage, apart from defense costs, for any increase in price tied to a merger, consolidation or acquisition alleged to be inadequate or unfair.
The insurers agreed to cover Harman’s defense costs. However, they denied coverage for any potential judgment or settlement based on the policies’ “bump-up” exclusion. Harman then sued its insurers for breach of contract in Delaware state court, for their refusal to indemnify it for the underlying settlement. The question the Delaware Superior Court addressed on cross-motions for summary judgment was whether the settlement amount or any part thereof, was carved out of the policies definition of “loss.”
The Court found for Harman in ruling that the “bump-up” exclusion does not apply because the settlement amount did not represent an increase in Harman’s sale price. For the “bump-up” provision to exclude any settlement or portion thereof: (1) the settlement must be related to an underlying acquisition; (2) an inadequate deal price must be a viable remedy that was sought for at least one claim in the shareholder action; and (3) the settlement, or a portion of the settlement, must represent an effective increase in consideration.
In examining the first factor, Judge Wallace reasoned the transaction was an “acquisition of all or substantially all the ownership interest in or assets of” Harman under the plain language of the policies. The plain language of the policies further dictated that the Samsung-Harman transaction was an “acquisition” because the agreement between Harman and Samsung provided that Harman retain separate legal existence, only Harman shareholders voted, and the transaction was commonly referred to as an acquisition by Harman.
Next, the court considered whether any amount of the challenged settlement represented the amount by which the transaction at issue’s price or consideration were effectively increased. In dismissing the insurers argument, the Court reasoned that the “bump-up” exclusion is inapplicable because the shareholder could not have sought damages as a viable remedy for the alleged Exchange Act violations.
Lastly, when determining whether the shareholder suit’s settlement represented an effective increase in consideration, the court looked to whether the actual purpose of the settlement was to “bump up” the value of the deal. The court examined the settlement language, indications that the settlement amount represented compensation for an inadequate deal price, the stage of litigation at the time of settlement, and the composition of the settlement class to determine that no part of the settlement represented an amount by which the transaction price or consideration was effectively increased.
This case provides a useful model for the analysis of the Bump Up Exclusion in Management Liability insurance policies.