Insurers’ efforts to use bump-up provisions to get out of paying D&O insurance claims hit a roadblock last week in a Delaware Superior Court ruling that said Viacom and its former vice chair, Shari Redstone, are owed $122.5 million to cover costs of their settlement with shareholders over the 2019 merger between Viacom and CBS.
The court ruled that insurers’ definition of the bump-up exclusion in the plaintiffs’ directors and officers (D&O) policy was ambiguous about whether the merger between Viacom and CBS was an acquisition under the terms. Since the burden is on the insurers to write contract language that is clear, the court ruled, the resolution should favor the insured.
“It is incumbent on the drafter of the insurance agreement to be unequivocally clear in carving out exclusions to coverage,” Judge Sheldon Rennie wrote in the decision.
Use of bump-up exclusions
The exclusions are intended to prevent executives, on either the buyer or the seller side of a deal, from negotiating an acquisition price lower than what the deal might otherwise be valued at and then tapping the insurance proceeds to resolve the shareholder suits that inevitably follow.
Since at least 2021, D&O insurers have been trying to rewrite these exclusions to include broader types of transactions.
“For years, the bump-up exclusion was an overlooked provision in insurers’ loss definitions,” Gil Isidro of Woodruff-Sawyer said in an analysis last year after several courts made key decisions on the exclusion. “However, many insurers … have begun amending their bump-up language to broaden its applicability to any form of ‘acquisition, merger, business combination, or other transaction.’”
“Insurers often attempt to rely on so-called ‘bump-up’ exclusions in their policies as a categorical bar to the indemnification of claims arising from mergers and acquisitions entered into by their policyholders,” Jones Day attorneys said in their analysis of a 2021 federal court decision denying the exclusion in a case involving Towers Watson.
Ambiguous language
In the case involving Viacom, shareholders sued Redstone and company executives for breach of fiduciary duty after they sold the company to CBS for $1 billion less than what was originally negotiated. The discount was said to be in exchange for governance concessions in the newly combined company, which included naming as CEO of the new company a candidate preferred by Redstone.
“There was a reasonable inference that several defendants violated their fiduciary duties by extracting significant governance concessions from CBS in exchange for a lower stock-for-stock exchange ratio,” the ruling said.
After Viacom executives and Redstone negotiated a $122.5 million settlement with shareholders, they filed a claim under their D&O insurance to cover the amount, which this week’s ruling by Judge Rennie confirmed they’re entitled to despite the exclusion.
Attorneys involved in the case declined to comment, but based on the decision and the way analysts have said the legal landscape is changing, insurers could face stepped-up challenges trying to broaden the use of the exclusion going forward.
