Delaware Delivers Another “Bump-Up Exclusion” Win to D&O Policyholders

By: Lucas J. Tanglen and Alexandra DiFusco-Cox

Earlier this year, the Delaware Supreme Court delivered the latest win for policyholders in a string of battles regarding so-called “Bump-Up Exclusions” in directors and officers (D&O) liability insurance policies. The ruling carries lessons in this fiercely contested area.

Disputes over Bump-Up Exclusions have been heavily litigated in recent years, as we have detailed in our treatise, the Policyholder’s Guide to the Law of Insurance Coverage (§ 11.06[D][5]). The wordings of these exclusions vary, but in general they purport to preclude coverage for settlements that effectively increase the allegedly inadequate price or consideration that was paid to acquire an entity. In Illinois National Insurance Co. v. Harman International Industries, Inc., Delaware’s high court considered a version that excluded, in relevant part, “any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.”¹

Harman’s insurers relied on the exclusion to deny coverage for a US$28 million settlement of a securities class action lawsuit. That underlying lawsuit had been brought on behalf of Harman shareholders, alleging they had been induced by false and misleading proxy statements to vote in favor of a transaction pursuant to which another company acquired Harman via merger, resulting in the conversion of each outstanding Harman share into the right to receive US$112 in cash. The class complaint alleged that, as a result of inadequate disclosures, the shareholders were deprived of a fully informed vote, and the complaint claimed relief including damages equal to “the difference between the price Harman shareholders received and Harman’s true value” at the time of the transaction.

The court ultimately ruled the exclusion inapplicable to the settlement. The court emphasized established policy-interpretation principles such as the “strict and narrow” construction of exclusions, with the insurer bearing the burden to establish a claim is specifically excluded.

A key to the court’s pro-coverage ruling was that the insurers failed to establish the settlement represented an increase in allegedly inadequate consideration, as required by the exclusion. After carefully analyzing the wording of the exclusion, the court examined the evidentiary record. Noting the settlement was available to shareholders who had received consideration from the transaction, as well as evidence that the settlement amount had been based on the cost of continuing litigation, the court ruled the “Bump-Up Exclusion” did not bar coverage for the settlement.

The Delaware ruling is significant, given the substantial influence of Delaware law on D&O insurance. Policyholders should be skeptical of insurers’ assertions that Bump-Up Exclusions bar coverage for settlements. Nonetheless, this area of law is still developing. The Harman ruling was accompanied by the dissent of two Justices. If nothing else, the majority’s reliance on the specific evidentiary record suggests that policyholders may benefit from conferring with coverage counsel before and while negotiating shareholder settlements, with the aim of avoiding any hidden coverage “traps” related to Bump-Up Exclusions.

Footnotes

¹ Illinois National Insurance Co. v. Harman International Industries, Inc., __ A.3d ___, 2026 WL 204209, No. 47, 2025 (Del. 2026).