Wisconsin federal court interprets “Bump-Up” provision in D&O policy
On August 18, 2021, the Eastern District of Wisconsin concluded in Joy Global Inc. v. Columbia Casualty Co., 2021 WL 3667077 (E.D. Wis. Aug. 18, 2021), that the “Bump-Up” carve-out from the definition of “Loss” in a Directors and Officers’ (“D&O”) policy precluded indemnity coverage for several shareholder lawsuits arising out of an acquisition transaction. In reaching this conclusion, the court specifically rejected the analysis employed by a Delaware trial court earlier this year in another “Bump-Up” case, Northrop Grumman Corporation v. Zurich Am. Ins. Co., 2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021).
After a merger or acquisition, shareholders of the merged or acquired company often sue the company and its directors and officers, alleging that they failed to secure adequate consideration for the shareholders’ shares in the transaction. The shareholders frequently seek as damages an effective increase in the amount paid to them for their shares in the transaction (a “Bump-Up” claim). Many D&O liability insurance policies, however, expressly carve out these types of damages from the definition of covered “Loss”. In Joy Global, the court granted the defendant insurers’ motions for summary judgment upon concluding that the Bump-Up provision in the policies at issue precluded indemnity coverage for the settlements of eight underlying shareholder suits.
On July 31, 2016, Joy Global Inc. (“Joy Global”) announced it had entered into an agreement to be acquired by Komatsu America Corp. (“Komatsu”). Joy Global’s shareholders then filed eight putative class-action lawsuits against Joy Global and various company officers alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, SEC Rule 14a-9, and/or breaches of fiduciary duties. All eight suits alleged that Joy Global and its officers caused a false or misleading proxy report to be issued for the purpose of inducing Joy Global shareholders to vote in favor of the Komatsu acquisition on terms that secured inadequate consideration for the shareholders’ shares. All eight lawsuits eventually settled. Joy Global’s D&O insurers denied indemnity coverage for the amounts paid in settlement. Joy Global sued its insurers for, inter alia, breach of contract and bad faith.
The insurers asserted that the following “Bump-Up” provision barred indemnity coverage for the settlements of the underlying shareholder lawsuits:
Loss (other than Defense Costs) shall not include: . . . any amount of any judgment or settlement of any Inadequate Consideration Claim other than Defense Costs and other than [loss incurred by directors and officers that is not indemnified by Joy Global] . . .
The policies defined “Inadequate Consideration Claim” as “that part of any 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 of the ownership interest in or assets of an entity is inadequate.”
The district court, applying Wisconsin law, found that the Bump-Up provision above clearly and unambiguously prevented indemnity coverage for the settlements. The court explained that “the policyholder ‘bears the burden of showing an initial grant of coverage,’” but, if that is shown, “the burden ‘shifts to the insurer to show that an exclusion . . . precludes coverage.’” The court further noted that “[t]he rule of narrow construction of an exclusion against the insurer is not applicable if the policy is unambiguous.” The court then determined that the above Bump-Up provision was clear and unambiguous because its effect was “not uncertain.” Because the provision was unambiguous, the court also rejected as irrelevant Joy Global’s arguments regarding the history and purpose of similar Bump-Up provisions.
The court concluded that a reasonable insured in Joy Global’s position would understand that the Bump-Up provision precluded coverage for any amount of any settlement if the part of the Claim that was settled alleged that the price or consideration paid or proposed to be paid for an acquisition transaction was inadequate, and the proposed or completed transaction involved the acquisition of all or substantially all of the ownership interest in or assets of an entity. The court further concluded that the shareholders’ allegations that Joy Global’s issuance of a misleading proxy report for the purpose of inducing the plaintiff shareholders to vote in favor of the Komatsu acquisition, which secured inadequate consideration for their shares, clearly fell within the scope of the Bump-Up carve-out provision.
Significantly, the court also rejected as “unpersuasive” the reasoning of the Delaware Superior Court in Northrop Grumman Innovation Systems, Inc. v. Zurich American Ins. Co., 2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021). In that case, the Delaware trial court determined that a similar, though not identical, Bump-Up provision did not bar coverage for a shareholder class action suit that expressly alleged that the plaintiffs were forced to accept “inadequate consideration” for their shares in an acquisition transaction because the insured company had issued a misleading joint proxy statement to induce them to vote in favor of the acquisition. In relevant part, the Bump-Up provision at issue in Northrop stated:
In the event of a Claim alleging that the price or consideration paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest or assets in 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 is effectively increased . . . .
Construing that provision narrowly and strictly under Delaware law, the Northrop court concluded that it applied to “a lawsuit (‘Claim’) that ‘alleg[es]’ only the ‘consideration’ exchanged—nothing else—as part of only one specific control transaction (an ‘acquisition’ of ‘all or substantially all [the] ownership interest[’] or ‘assets’ of an ‘entity’) was ‘inadequate.’” (Emphasis added.) The Northrop court then held that the provision did not unambiguously apply because the underlying suit, in the court’s view, was not “exclusively” about the “inadequate consideration” the complaining shareholders allegedly received.
The Joy Global court opined that this reasoning was “unpersuasive” in part because the Northrop court read the word “only” into the Bump-Up provision at issue, “despite the word ‘only’ not appearing in the provision.” The Joy Global court concluded that it was not permitted to “rewrite the policy” if the provision was unambiguous. The Joy Global court also concluded that the Northrop Bump-Up provision was arguably narrower because it applied only to that part of a settlement of an Inadequate Consideration Claim “representing the amount by which such price is effectively increased.”
The Joy Global decision is significant because the scope and applicability of Bump-Up provisions is a high-stakes debate for which there are few published decisions in U.S. jurisdictions. Bump-Up claims arising out of corporate acquisitions typically seek tens of millions of dollars in increased consideration. The issue is currently the subject of active litigation in the United States. Furthermore, the particular language of Bump-Up carve-out provisions varies across different D&O policy forms, which can lead to different results in similar cases, as is evident from the Joy Global and Northrop decisions.
 The Northrop Grumman case settled without an appeal.
 E.g., Onyx Pharmaceuticals Inc. v. Old Republic Ins. Co., 2020 WL 9889619, at *15 (Cal. Super. Ct. Oct. 01, 2020) (tentative); Genzyme Corp. v. Fed. Ins. Co., 622 F.3d 62, 71-74 (1st Cir. 2010).
 E.g., Towers Watson & Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 1:20-cv-00810 AJT-JFA (E.D. Va. filed Jul. 20, 2020).