Shareholders of a professional services company filed several class action lawsuits arising out of the merger of the company with a large insurance brokerage firm. 

The complaints alleged the proxy materials for the transaction omitted certain information, which resulted in shareholders receiving less than adequate consideration for their shares. 

After the suits settled, the professional services firm sought coverage from its directors and officers liability (“D&O”) insurers. While the insurers did not disclaim coverage for the costs to defend the actions, they refused to cover the settlement amounts, arguing coverage was precluded under the “bump-up” exclusion in the policy. The  bump-up exclusion stated that, should a claim arise alleging the price “paid or proposed to be paid for the acquisition … 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.”

Coverage litigation ensued and in order to determine whether the bump-up exclusion applied to the transaction, the court looked to the “specific structure” and “overall result” of the transaction. The court observed that an acquisition is typically associated with the “takeover of one company by another,” as opposed to a merger, “which contemplates the combination of two companies into a single entity.” In noting the term “acquisition” was not defined in the D&O policy, the court concluded the structure of the transaction at issue was not a straightforward takeover and therefore refused to accept the insurers’ argument that it should be characterized as the type of “acquisition” referenced in the bump-up exclusion. Accordingly, the court held that under a narrow reading of the exclusion, there was coverage available for the settlements.

The case at hand arose after a former employee of an investment management company filed suit against the company and two of its principal officers alleging breach of fiduciary duty, wrongful termination, and violation of California’s whistleblower statute. 

Concurrently, the investment management company filed an arbitration demand alleging the employee violated his employment agreement. Since the former employee had signed an arbitration agreement, the matter proceeded to arbitration wherein the former employee asserted counterclaims against the company that largely repeated the allegations in his initial lawsuit.

The investment management company sought coverage for the suit and arbitration from its directors and officers liability (“D&O”) insurer. The insurer acknowledged coverage for the suit against the individual officers but not for the company. The insurer also denied coverage for the arbitration and refused to cover the company for any expenses associated with the suit or arbitration.

Coverage litigation ensued and the court noted that even where the insurer had a “duty to advance” rather than a “duty to defend,” Delaware courts construe both duties “broadly in favor of the policyholder” and the insurer’s duty to advance defense costs was triggered where a claim “could result in indemnity.” Accordingly, the court found the D&O policy’s coverage for loss arising from claims against the company was triggered because the former employee alleged that the company, acting through the two officers, breached fiduciary duties. Additionally, the court found the arbitration counterclaims also triggered the policy’s coverage for loss the company paid as indemnification to individual insureds. The court’s ruling ensured the insurer had to cover some, but not all, of the company’s defense costs; however, the court declined to decide as to the applicability of an allocation between covered and uncovered losses, stating the parties had yet to undertake reasonable best efforts to resolve them.

The company and the insurer subsequently engaged in allocation discussions but failed to reach an agreement. As a result, the company filed suit concerning the allocation of fees and costs in the underlying matter and asserted that all post-tender legal fees, costs, and expenses, including those incurred to prosecute affirmative claims in arbitration, were “conducted against liability” and therefore were covered loss under the policy. The insurer, on the other hand, contended the company breached its contractual obligation to use reasonable best efforts in negotiating an allocation.

In its ruling, the court found the company’s affirmative claims met the “conducted against liability” standard set in Hewlett-Packard Co. v. Ace, and were therefore deemed strategically defensive. Since the insurer failed to provide the court with an alternate standard with which to determine whether an affirmative claim is strategically defensive, the court found in favor of the insured, holding the affirmative claims were a covered loss for which the insurer was obligated to provide indemnification.  Moreover, the court determined the policy’s allocation provision was not applicable because all of the company’s litigation costs stemmed from the suit and arbitration, which were covered losses.