Will A Bump-Up Exclusion Bar Coverage of an M&A Settlement?
Public company insurance policyholders beware: In recent years, insurance carriers have increasingly invoked the “bump-up” exclusion, which is a carve out provision typically found in directors and officers (D&O) insurance policies. In many public company M&A deals, the shareholders of the target or acquired company will file a lawsuit challenging the deal, generally alleging that […]
Peter Adams is a Partner, Jacquelyn Burke is a Special Counsel, and Linh Nguyen is an Associate at Cooley LLP. This post is based on their Cooley memorandum.
Public company insurance policyholders beware: In recent years, insurance carriers have increasingly invoked the “bump-up” exclusion, which is a carve out provision typically found in directors and officers (D&O) insurance policies. In many public company M&A deals, the shareholders of the target or acquired company will file a lawsuit challenging the deal, generally alleging that the board violated its fiduciary duties or the law by selling the company for a below-market price. Enter the bump-up exclusion, which bars coverage for settlements (or judgments) in M&A litigation that, in effect, bump up the consideration paid to the shareholders of the target company in the underlying deal. In other words, if settlement of the M&A claim would result in the acquired company’s shareholders receiving more value for the sale of the company, then the settlement will not be covered by the D&O policy.
Industry observers have noted that, as public company M&A deal litigation has accelerated, D&O insurers are relying on the bump-up exclusion more frequently and applying it more broadly to exclude coverage. Historically, insurers used the bump-up exclusion to prevent buy-side insureds from colluding with a target company’s board to acquire the company for less than market value, then turning to their insurers to fill the gap after the target company shareholders inevitably sue for the shortfall. Now, insurers are drafting and enforcing bump-up exclusions to bar coverage even when it is the sell-side insured or acquisition target who is seeking coverage.
