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Adam Furmansky, Nick Reider, Ron Goldstein
On January 28, 2026, the Delaware Supreme Court found that a D&O "bump-up exclusion" did not apply and the entirety of a settlement was covered under a D&O program.
Following a merger of entities, the acquiree's shareholders alleged that the disclosures made in connection with the transaction were inadequate - in violation of federal securities laws. The operative complaint alleged that, as a result of the inadequate disclosures in the proxy, the members of the investor class were deprived of their right to a fully informed shareholder vote in connection with the transaction and the full and fair value for their respective acquiree shares.
After the lawsuit settled, the insurers denied coverage, asserting that a bump-up provision in the D&O insurance policy excluded the settlement. After the insured prevailed in the Delaware Superior Court, the insurers appealed to the Delaware Supreme Court. Based on the "bump-up" language at issue, the Delaware Supreme Court articulated a two-step analysis to determine if the settlement was excluded from coverage. The insurers were required to demonstrate:
- the Claim underlying the settlement alleged inadequate deal consideration for an acquisition;
- such settlement amount represented an effective increase in deal consideration.
The Supreme Court determined that the underlying securities complaint satisfied the first prong because it alleged that the proxy statement’s disclosures deprived investors of the “true value” of their shares. Ultimately, however, the Supreme Court held that the insurers failed to satisfy the second prong of the analysis (whether the settlement amount represented an effective increase in deal consideration) because the settlement class included certain shareholders who did not receive any consideration in connection with the transaction, and the settlement amount was consistent with defendants’ anticipated defense costs through the rest of the litigation. Supporting this conclusion were the facts that the evidentiary record neither:
- reflected that all settlement class members relinquished their shares and received transaction consideration that could be increased;
- established that the settlement amount was derived at or calculated based on how much the recovering class members should or could have received in the transaction and, instead, the settlement amount was consistent with the defendants’ anticipated costs of continuing the litigation.
This area of law remains far from crystal clear. Even in this particular case, two of the five Delaware Supreme Court justices dissented. Moreover, the facts and policy language at issue in this case differ from some of the other recent bump-up cases that have been decided.
Insureds should pay careful attention to their own policies’ bump-up provisions and consult with their insurance broker and advisors to understand such provisions and potential ways of enhancing them.
If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.
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