When it comes to D&O coverage, wording can be everything. Small differences in policy terms can lead to big differences in coverage, and differing interpretations can lead to coverage disputes. Two recent legal developments in D&O liability could have a significant impact on your coverage.
Do Bump-Up Exclusions Bar M&A Coverage?
Merger and acquisition activity frequently leads to shareholder lawsuits, especially if investors of the target company feel that the company was undervalued in the deal. Whether D&O insurance provides coverage for such lawsuits may come down to the exact wording of the policy’s bump-up exclusion.
The bump-up exclusion is a common feature of many D&O policies. According to Harvard Law School Forum on Corporate Governance, it has historically been used to prevent policyholders that are acquiring a company from colluding with the target company to acquire it for below market value and then using their insurance to cover the ensuing shareholder lawsuits.
However, D&O insurers have been modifying bump-up exclusions. According to Legal Dive, since around 2021, insurers have been expanding bump-up exclusion terms to apply to additional types of transactions. One analysis concluded that insurers use bump-up exclusions to bar indemnification of claims that arise from mergers and acquisitions.
Several legal cases have challenged bump-up exclusions, including a notable case involving a merger between Towers Watson and Willis Group Holdings. According to D&O Diary, shareholders filed two lawsuits, one alleging a violation of proxy solicitation rules and another accusing the CEO of Towers Watson of breaching fiduciary duty and failing to disclose a conflict of interest. Towers Watson’s D&O insurance covered defense costs but refused to pay the $90 million settlement, citing the bump-up exclusion as one reason. This resulted in coverage litigation.
The court sided with the insurer, ruling that the bump-up exclusion precluded coverage for the $90 million settlement.
What does this mean for your organization? Bump-up exclusions have become broader in recent years, and they may apply to both the buy-side and sell-side of an acquisition deal. If your organization is preparing for M&A activity, be aware of the specific wording in your policy’s bump-up exclusion and how it may limit coverage. Likewise, if you are purchasing coverage, pay attention to the exact wording of these clauses, as some are broader than others.
Are Related Lawsuits a Single Claim?
When it rains, it pours. D&O litigation often occurs in multiples, with a company sometimes facing multiple lawsuits stemming from the same, similar or overlapping allegations. If multiple lawsuits are classified as a single claim for the purposes of D&O insurance, it can have a significant impact on coverage. Notably, the policy’s per-claim limit may apply. As a result, exactly what counts as a single claim can lead to coverage disputes.
According to National Law Review, a recent lawsuit involved this very issue. In 2016, shareholders of Viacom filed a lawsuit accusing Shari Redstone of manipulating Sumner Redstone, who was allegedly incapacitated, to make decisions to the detriment of the company’s value. Then in 2019, shareholders filed a lawsuit over the merger of CBS and Viacom, both controlled by National Amusements, alleging that the actions of the directors and officers of Viacom, Shari Redstone and National Amusements violated their fiduciary duties and caused Viacom shareholders to receive inadequate consideration.
Although these may seem like two separate issues, D&O Diary explains that both lawsuits related to Shari Redstone’s ongoing attempt to merge Viacom and CBS.
In light of that, were these lawsuits related, and could they be counted as a single D&O claim? The insurers seemed to think so, and coverage litigation ensued. However, a Delaware trial court ruled that the lawsuits were not related for the purposes of D&O coverage.
What does this mean for your organization? When considering your per-claim D&O limits, it’s important to understand that the limit may apply to multiple lawsuits that are related in nature. As the recent court battle shows, exactly what qualifies as a single claim may be up for debate. Although the insureds prevailed in this case, there are still situations in which multiple lawsuits may be considered as a single claim.
What Does Your D&O Policy Say?
The devil is in the details. These two recent court cases show that small differences in wording can determine whether or not coverage exists. Although these rulings are significant, it’s important to understand that any disputes regarding your coverage could have different outcomes depending on the specific language of your policy.
Do you know what your D&O policies say about tricky issues like interrelated lawsuits and bump-up exclusions?
