In another significant pro-policyholder decision, the Delaware Supreme Court recently affirmed D&O coverage for a $28 million settlement of a securities class action, finding the policies’ “bump-up” exclusion inapplicable and providing helpful insights for corporate policyholders seeking coverage for M&A-related stockholder litigation.

Background

This dispute arose from stockholder litigation challenging the 2017 sale of a public company, which, like most public company M&A transactions, was structured as a reverse triangular merger. After the merger closed, a class of target stockholders filed a securities class action lawsuit alleging that the target’s proxy statement contained false and misleading statements in violation of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934. The lawsuit later settled for $28 million.

The target company sought coverage for the settlement payment under its D&O insurance program, which provided over $40 million in coverage. The insurers denied the company’s claim by invoking the “bump-up” exclusion. That exclusion stated that, for any “Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition . . . is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.”

The insurers argued that the settlement was excluded from coverage under the bump-up provision because the underlying lawsuit demanded the difference between the price the stockholders received in the merger and the “true value” of the company at the time of the acquisition. After the D&O insurers denied coverage, the company filed a declaratory judgment action against the insurers, seeking a declaration that the settlement was covered by the policies.

In January 2025, the Delaware Superior Court granted summary judgment for the company and held that the bump-up exclusion did not bar coverage for the settlement. The insurers appealed.

The Delaware Supreme Court’s Decision

In a split decision, the Delaware Supreme Court affirmed the lower court’s ruling in favor of coverage. On appeal, the insurers conceded that the underlying lawsuit fell within the D&O policies’ coverage. The sole question, therefore, was whether the settlement amount paid to the stockholder class in the underlying lawsuit was excluded from coverage.

The Supreme Court used a two-step analysis to construe the bump-up exclusion, which analyzed: (1) whether the claim alleged inadequate consideration and (2) whether the settlement represented an effective increase in consideration. The insurers had the burden of proving both. For the insurers to meet their burden, the Supreme Court adhered to a strict and narrow interpretation of exclusionary policy language, finding exclusions are applied and effective only when they are clear, specific, and consistent with public policy—a seemingly higher standard than the Superior Court applied, which had required the insurers to show only that the exclusion applied and that its language was unambiguous.

Step One: Whether the Claim Alleged Inadequate Consideration. To establish that the claim alleged inadequate consideration, the insurers had to establish “(1) a Claim; (2) an allegation that the price or consideration for a transaction was inadequate; and (3) an acquisition.” Because the first and third elements were not in dispute, the sole focus on appeal was whether the claim contained an allegation of inadequate price or consideration for a transaction.

The insurers argued that the settlement had to represent an increase in deal price because the complaint expressly sought damages equal to the difference between the value of the shares and the deal price. The company, in contrast, argued that for a claim to “allege” a particular fact within the meaning of an insurance policy exclusion, that fact or circumstance must be “meaningfully linked” to the viability of the claim faced by the policyholder and the loss the policyholder could undertake.

According to the company, the underlying lawsuit posed risks unrelated to the inadequacy of the deal price, including claims for compensatory and rescissory damages, based on an allegedly flawed transaction process. Thus, the company argued that the final resolution of the underlying lawsuit pursuant to the settlement was not limited to resolving inadequate deal consideration. The company also argued that the distribution of the settlement proceeds had “zero bearing on what the amounts paid actually ‘represent’ to shareholders because shareholder class action settlements are routinely distributed on a per-share basis.” In addition, the company argued that the language of the notice of the pendency and proposed settlement of the underlying lawsuit showed that the “compensation” to the class was based on the “risk-adjusted possibility of recovery after trial and any appeals” rather than inadequate deal consideration.

In finding this element was met, the Superior Court had highlighted that inadequate deal consideration was not a viable remedy for the underlying lawsuit’s Sections 14(a) and 20(a) claims. But the Supreme Court disagreed, concluding that the allegations that the economic losses were comprised of “the difference between the price shareholders received and [the company’s] true value at the time of the acquisition” were intrinsic to their Section 14(a) claims. As a result, the Supreme Court held that the insurers had satisfied step one.

Step Two: Effective Increase in Deal Consideration. The second step required the insurers to prove the settlement “represent[ed] the amount by which such price or consideration is effectively increased” under the exclusion. That element would be satisfied only if the insurers could demonstrate “that the ‘real result’ of the Settlement is that the Settlement Amount, or any portion of the Settlement Amount, increased the amount of deal consideration the shareholders received in the Transaction.”

The insurers argued that the settlement functioned as an increase in deal consideration because the sole theory of loss in the underlying lawsuit was inadequate deal consideration. The insurers further argued that the Supreme Court should consider the overall result of the settlement, rather than its stated purpose, and that the result of the distribution of settlement funds coincided with additional compensation to stockholders.

In contrast, the company argued that the settlement did not represent an increase in deal consideration because the complaint alleged compensatory and rescissory damages arising from the allegedly inadequate proxy disclosures in addition to inadequate deal consideration. The company also argued that because participation in the settlement class did not require the stockholder to have received the deal consideration, the settlement did not function as an increase in deal consideration. The company further argued that, even if the settlement was an effective increase in deal consideration, a significant component of the settlement amount ($8.8 million) was payable to the plaintiff’s attorneys and that amount clearly was not an increase in deal consideration.

The Delaware Supreme Court held that the settlement did not operate to increase the deal consideration. For one, the Supreme Court noted that “the settlement class definition included all [target] shareholders who held stock ‘at any time during the period from’ the date of the shareholder vote approving the Transaction to the Transaction’s closing date.” Thus, receiving the settlement proceeds was not conditioned on a class member having received the deal consideration. For another, the Supreme Court observed that the settlement amount was not negotiated or agreed upon in a manner commensurate with the difference between the deal price and the target’s “true value.” “Rather, it seems more likely,” according to the majority opinion, “that the Settlement Amount was based upon the cost of continuing the litigation.”

The Dissenting Opinion

Two dissenting justices agreed with the majority that the claim alleged inadequate consideration for the transaction, but they disagreed on whether the settlement effectively increased the deal price. They argued that the “practical effect” of the settlement payment was to increase the deal consideration.

Discussion

The Harman decision has several takeaways for policyholders in the context of M&A litigation.

Bump-up Disputes Are Here to Stay. Although the policyholder prevailed, the Delaware Supreme Court’s decision underscores a clear split in authority. Some jurisdictions interpret bump-up exclusions by focusing on the practical effect of a settlement. Other jurisdictions focus on the evidentiary record of the litigation and settlement, as reflected in Harman.

Courts outside of Delaware have reached varying results, whether based on interpretative approaches to insurance policies, the specific policy language or claims at issue, or a combination of the foregoing.[1] These differing approaches suggest that litigation over bump-up exclusions will continue. Going forward, insurers are also more likely to seek broader bump-up exclusionary language to avoid the result in Harman. As coverage terms change, policyholders should continue to leverage Delaware’s body of common law precedent to construe policies narrowly in favor of coverage.

Exclusions Are Interpreted Narrowly in Delaware. The Delaware Supreme Court opened its coverage analysis by endorsing two policyholder-friendly principles that can be applied beyond bump-up disputes. First, the Supreme Court acknowledged that insurance policies are to be construed in accordance with the reasonable expectations of the policyholder as long as they are supported by the policy language. Second, the Supreme Court stressed that exclusions are enforced only when insurers establish that they are “specific, clear, plain, conspicuous, and not contrary to public policy.” These rules of policy construction are consistent with Delaware’s business-centric approach in seeking coverage that inures to the benefit of insureds.

Past Performance Does Not Guarantee Future Results. Bump-up analyses can be nuanced and multi-faceted, and they start with policy language. The Delaware Supreme Court acknowledged that “not all bump-up provisions contain the same claim and loss requirements.” For that reason, policies can differ materially between insurers, forms, and endorsements.

Here, the Delaware Supreme Court highlighted the importance of considering D&O liability and potential risk transfer at each phase of the transactional life cycle. The lower court looked at the stated purpose and language of the settlement agreement, as well as the procedural posture of the underlying claims, including what evidence had been developed (or not) in litigation to support the parties’ respective positions. Other courts grappling with bump-up exclusions have looked at a variety of factors from the underlying transaction and litigation when considering the proper scope of coverage. The status of the litigation and the specifics of the timing, motivations for, and terms of settlements can materially impact coverage outcomes.

Delaware’s Pro-Coverage Trajectory Continues. The Harman decision builds on the First State’s string of noteworthy pro-coverage decisions on several key issues, ranging from government investigations and non-cash settlements to “related” claims and the insurability of alleged fraud.[2] This policyholder-friendly approach follows prior reasoning by the Delaware Supreme Court that Delaware generally favors a policy that minimizes risks to directors and officers through the purchase of D&O insurance.

Conclusion

The Harman ruling spotlights the continued importance of bump-up exclusions and how they can lead to insurance coverage disputes in M&A litigation. As future M&A claims set the stage for more bump-up coverage disputes, policyholders should review their D&O policies when pursuing a transaction, negotiating litigation settlements, and purchasing or renewing D&O coverage. Keeping policy language fresh and familiar can help ensure that bump-up exclusions do not prevent policyholders from using their insurance to help with costs incurred in the settlement of deal litigation claims.

[1] See, e.g., Joy Glob. Inc. v. Columbia Cas. Co., No. 21-2695 (7th Cir. 2023) (looking only to whether the claim alleged inadequate consideration in determining whether the bump-up exclusion applied).

[2] See, e.g., RSUI Indem. Co. v. Murdock, et al., No. 154, 2020 (Del. 2021); American Ins. Co. v. Guaranteed Rate, Inc., No. 360, 2022 (Del. 2023); Midvale Indem. Co. v. AMC Ent. Holdings Inc., No. 206, 2025 (Del. 2025); The Cigna Grp v. XL Specialty Ins. Co. et al., C.A. No. N23C-03-009 SKR CCLD (Del. Super. Ct. Dec. 8, 2025); Forte Biosciences Inc. v. Wesco Ins. Co., Beazley Ins. Co. Inc., and Palms Ins. Co. Ltd., No. N24C-10-015 (Del. Super. Ct. 2026)