HNRK Coverage Corner

Earlier this year, the Delaware Supreme Court issued an important 3–2 decision on the application of a “bump-up” provision to losses arising from a merger transaction. (See our previous post about this type of policy provision, here.) In Illinois National Insurance Co. v. Harman International Industries, Inc., C.A. No. N22C-05-098 (Del. Jan. 27, 2026), the court affirmed an award of summary judgment for the policyholder, holding that three D&O insurers—AIG, Chubb, and Berkley—could not invoke a “bump-up” provision to deny coverage for a $28 million settlement of a post-merger securities class action.  The decision, authored by Justice Valihura, provides important guidance on the evidentiary burden insurers must satisfy to invoke a bump-up provision.

The Bump-Up Provision

Many D&O policies contain bump-up provisions that carve out from the definition of “Loss” any settlement amount that effectively operates as an increase in deal consideration paid to shareholders in an acquisition.  The concern animating these provisions is that D&O coverage should not serve as a backstop for deal pricing.  The provision at issue in Harman stated:

In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity 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; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.

The Samsung Acquisition and the Securities Class Action

In 2017, Samsung Electronics acquired Harman International in a reverse triangular merger at $112.00 per share.  A shareholder class action followed, alleging that Harman's board violated Sections 14(a) and 20(a) of the Securities Exchange Act by issuing a false and misleading proxy statement that understated Harman's standalone value.  The complaint sought damages measured as the difference between the deal price and the shares’ “true value.”

The parties settled for $28 million.  The settlement stated that the decision to settle “was based solely on the conclusion that further conduct of the Litigation would be protracted and expensive.”  The settlement class included shareholders who held Harman stock “at any time” between the record date and the closing date, meaning shareholders who sold before the merger closed and never received deal consideration were part of the class. 

Harman sought coverage under its D&O program, which provided $40 million in total coverage.  The primary insurer, AIG, initially accepted the claim in July 2017, but more than four years later, in December 2021, it denied coverage for any settlement based on the bump-up provision.  Excess insurers Chubb and Berkley took the same position.

The Court’s Two-Step Framework

The Supreme Court construed the bump-up provision as requiring the insurers to make a two-part showing: first, that the underlying claim alleges inadequate deal consideration; and second, that the settlement amount “represent[s] the amount by which such price or consideration is effectively increased.”  The insurers attempted to argue that the Bump Up Provision should not be treated as an exclusion, but they had waived the argument by only including it as a footnote in their opening brief on appeal.  Because the provision operates as an exclusion, the burden falls on the insurer.  

On the first step, the Court held that the Section 14(a) claim did allege inadequate consideration, reversing the Superior Court on this point.  Although the claim was styled as a disclosure violation, allegations of inadequate consideration were “intrinsic to the theory of the Section 14(a) claim.”

On the second step, however, the Court found that the insurers failed to provide evidence that the settlement “effectively increased” the deal price.  The second step is satisfied only if the “real result” of the settlement is that shareholders received additional money as deal consideration. Several features of the record were fatal to the insurers’ position: the settlement class included shareholders who never received deal consideration that could be “increased”; no party presented expert evidence tying the settlement to a per-share price differential; and the settlement amount tracked estimated defense costs through trial ($25 to $30 million) rather than a correction of the deal price.  

Two justices dissented, arguing that the majority elevated form over substance.  Because the sole theory of loss in the underlying complaint was the gap between the deal price and the shares’ “true value,” the dissent reasoned, any settlement resolving that complaint necessarily represented an increase in deal consideration, regardless of the settlement’s stated rationale or class composition.

Conclusion

The Harman decision reinforces that, under policies with this type of bump-up language, the insurer’s burden extends beyond the four corners of the complaint to the evidentiary record concerning the settlement itself. As the Court noted, “not all bump up provisions contain the same claim and loss requirements,” and the specific language at issue in this case required the insurers to prove not just what the underlying claim alleged, but what the settlement actually represented. That distinction, coupled with Delaware’s longstanding principle that an insurer bears the burden of proving that coverage is limited by a policy’s terms, had real consequences.  In this case, $28 million worth.