What's Happening?
The Delaware Supreme Court has ruled that subsidiaries of American International Group (AIG) and Chubb cannot use the 'bump-up' exclusion to deny coverage for a settlement in a securities lawsuit involving
Harman International Industries. Harman, acquired by Samsung Electronics in 2017, faced a securities class-action lawsuit alleging it issued a misleading proxy statement to secure shareholder approval for the acquisition at a lower price. A $28 million settlement was approved in November 2022. Harman sought coverage under a directors and officers (D&O) policy, which included AIG's Illinois National Insurance and Chubb's Federal Insurance. The insurers argued that the settlement represented an increase in the acquisition price, thus invoking the bump-up exclusion. However, the court found that the insurers failed to prove the settlement was an increase in the deal price, a requirement for the exclusion.
Why It's Important?
This ruling is significant for policyholders as it challenges the insurers' use of the bump-up exclusion to deny coverage in corporate transaction-related litigation. The decision underscores the importance of examining the specific facts and policy language in each case, rather than applying a blanket exclusion. This could impact future cases where insurers attempt to use similar exclusions to avoid coverage, potentially leading to more favorable outcomes for policyholders. The ruling may influence how insurers draft and apply exclusions in D&O policies, affecting the broader insurance industry and corporate governance practices.
What's Next?
The decision may prompt insurers to reassess their policy language and the application of exclusions in D&O policies. Companies involved in mergers and acquisitions might seek more comprehensive coverage to protect against similar litigation risks. Legal experts and policyholders will likely scrutinize the implications of this ruling in ongoing and future cases. Insurers may also consider appealing or seeking legislative changes to clarify the application of such exclusions.
Beyond the Headlines
The ruling highlights the evolving legal landscape surrounding corporate transactions and the role of insurance in mitigating associated risks. It raises questions about the balance between protecting shareholders' interests and the insurers' ability to manage risk exposure. The decision may encourage more transparency and diligence in corporate disclosures and shareholder communications during mergers and acquisitions.
