This coverage dispute arose out of a shareholder lawsuit against the Insured’s chairman and CEO as well as others, alleging that the shareholders received below-market consideration for their shares in a merger. The litigation settled, and the Insured sought indemnity coverage from its Directors and Officers insurance carrier (the “Carrier”). The Carrier refused the indemnity request, citing a so-called "bump-up" exclusion in the policy. The district court held that the bump-up exclusion "does not unambiguously" preclude indemnity coverage for the underlying settlement. However, on appeal, the 4th Circuit reversed, finding the court had adopted an unduly narrow reading of the exclusion, finding ambiguity where none exists and ascribing specialized meanings to policy terms that the parties did not reasonably intend. The exclusionary language 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.

The Insured argued that the Merger Agreement did not result in "the acquisition of all or substantially all the ownership interest" as required under the bump-up exclusion because the transaction involved a merger of equals, not an acquisition, noting that under the Merger Agreement, the surviving entity-subsidiary merged into the Insured, with the Insured being the entity surviving in that transaction. Following the merger, the Insured’s shares were immediately canceled, and delisted, and the newly created shares were issued solely to the surviving entity. These events collectively resulted in the Insured, with all its pre-merger assets, becoming a wholly owned subsidiary of the surviving entity.

The 4th Circuit disagreed with the lower court noting that nothing in the bump-up exclusion indicated the term “acquisition” was limited to a particular form of acquisition. The 4th Circuit stated the “general principle that exclusions must be narrowly construed assuredly does not authorize us to take such a drastic step. Far from it. Courts are not at liberty to rewrite otherwise plain and unambiguous policy language in order to arrive at an insured-favorable outcome.” Here, the court found the bump-up exclusion referred to "the acquisition of all or substantially all the ownership interest in or assets of an entity," and reasoned that the term "acquisition" must be given its ordinary meaning, which is to gain "possession" or "control" of something. Thus the 4th Circuit concluded, the bump-up exclusion's "acquisition" requirement is satisfied where another entity secures "possession" or "control" "of all or substantially all the ownership interest in or assets of" an entity which was precisely what happened here.

A recent ruling by the Delaware Chancery Court offered a partial victory to insureds who were seeking coverage under their Directors and Officers (“D&O”) insurance for a shareholder settlement pertaining to allegations of insufficient share price proceeds related to a merger between a media company and a television company. The D&O policies were “claims-made” policies, requiring that the claims needed to be made during the policy period, including claims for “wrongful acts.”

The carriers contended that coverage was precluded due to several exclusions, including one for Prior Notice. Citing to that exclusion, the carriers argued that there was an earlier “substantially similar” suit filed prior to the policy inception. In making the Prior Exclusion argument, the carriers argued that this matter involved interrelated wrongful acts requiring that only the earlier policies were triggered. The court found that the Prior Notice Exclusion did not apply because the requirement that notice to the prior D&O tower must have been given prior to the policies’ inception date was not met.

However, the court found that there were questions as to whether the two lawsuits involved interrelated wrongful acts surrounding decisions made by the insured’s board as the original lawsuit was filed under seal and certain facts were simply “not available.” Interestingly, the court suggested that the suits did not seem interrelated and even expressed concern about the availability of coverage: “if any board decision is interrelated with the prior actions, the policyholders effectively have no [D&O] coverage at all, despite paying annual premiums for that coverage.”