In a significant ruling for directors and officers liability insurance policyholders, the Delaware Supreme Court recently affirmed a lower court’s decision that a “bump-up” exclusion did not bar coverage for a $28 million settlement arising from a merger dispute.

The decision in Illinois National Insurance Company vs. Harman International Industries, Inc. clarifies the stringent two-step requirement insurers must meet to successfully invoke such exclusions. By ruling in favor of the policyholder, the court has reinforced the high burden on insurers to prove that a settlement payment strictly represents an effective increase in deal consideration, rather than merely resolving litigation risks.

The dispute originated from Samsung Electronics Co. Ltd.’s 2017 acquisition of Harman International Industries. Following the announcement of the transaction, a class of former Harman shareholders filed a federal securities lawsuit alleging that the proxy statement issued to solicit votes for the merger contained false and misleading information.

The shareholders claimed these disclosure failures violated federal securities laws and deprived them of the ability to cast an informed vote. Harman eventually settled the class action for $28 million. When Harman sought indemnification for the settlement under its D&O insurance tower — shared by American International Group, Chubb, and W.R. Berkley — the insurers denied coverage. They cited the policy’s “bump-up” provision, a standard exclusion designed to prevent insurance from being used to top up an inadequate purchase price in an acquisition.

The core of the legal battle rested on the interpretation of this exclusion.

The insurers argued that the underlying shareholder lawsuit was, in essence, a claim alleging that the price paid for Harman was inadequate. They contended that because the shareholders sought damages representing the difference between the deal price and the company’s “true value,” the settlement effectively functioned as an increase in the consideration paid for the acquisition. From the insurers’ perspective, the plain language of the exclusion applied because the settlement compensated shareholders for what they alleged was an undervalued deal.

Harman, conversely, argued that the exclusion was inapplicable for two reasons. First, they maintained that the underlying lawsuit was a securities claim about disclosure violations, not a direct claim for inadequate consideration. Second, and crucial to the final outcome, Harman argued that the $28 million settlement did not represent an increase in the deal price. They pointed out that the settlement class included individuals who had sold their stock before the merger closed — and thus never received the deal consideration to begin with — and that the settlement amount reflected the avoided costs of continued litigation rather than a recalculation of the share price.

The Delaware Supreme Court adopted a two-step analysis to interpret the bump-up provision. First, the court agreed with the insurers that the underlying claim did, in fact, allege inadequate consideration, noting that the allegations of insufficient price were intrinsic to the securities law claims.

However, the court sided with Harman on the second, critical step: determining what the settlement payment actually represented. The court found that the insurers failed to prove the settlement was an “effective increase” in the deal price.

The court emphasized that the settlement amount did not correlate with any valuation gap but rather aligned with the estimated defense costs of taking the case to trial. Furthermore, the composition of the settlement class, which included shareholders who did not receive the merger consideration, undermined the argument that the payment was a simple price adjustment.

As the court stated, “The record before us indicates that the parties settled before either party presented any evidence, such as an expert report, relating to the true value of the shares.”

Ultimately, the court affirmed the Superior Court’s judgment, holding that because the insurers could not satisfy the second requirement of the exclusion, the $28 million settlement is covered under the policy.

View the full decision here. &