In a recent decision following a bench trial, a California state court judge held that a D&O insurance policy’s “bump up” exclusion applies to preclude coverage for the settlement of claims by shareholders of the acquired company who claimed they had received inadequate consideration for their acquired shares. The judge’s decision, which reflected her reading of the specific exclusionary language involved as well as the testimony of several witnesses about the meaning of the provision, is interesting in that the “bump up” exclusion fights usually involve claims against the acquirer for paying inadequate consideration, not claims that the acquired company’s investors received inadequate consideration.


The court’s opinion is detailed but merits a full reading. The Court’s October 1, 2020 decision can be found here. (It should be noted that, under applicable procedural rules, the court’s decision is “tentative,” meaning that the parties have 15 days in which to file objections.)



In August 2013, Amgen made an unsolicited offer to purchase Onyx Pharmaceuticals for $125 per share, which proposed acquisition ultimately was consummated. Following the announcement of the proposed acquisition, Onyx shareholders filed a class action lawsuit against the company and certain of its directors and officers, alleging that the defendants had breached their fiduciary duties by failing to maximize the tender offer price for the benefit of Onyx shareholders.


The plaintiffs alleged that the defendants gave negotiating/deal preference to Amgen, shutting out other potential bidders, resulting in less consideration being paid to Onyx shareholders for their shares. (There were additional claims, but Judge Marie S. Weiner, the San Mateo (California) Superior Court Judge who presided in the insurance coverage action, and who also had been the judge hearing the Onyx takeover lawsuit, ruled in the coverage lawsuit that all of the allegations essentially amount to claims for breach of fiduciary duty based on the inadequate consideration allegation.) The underlying claim ultimately settled for Onyx’s payment to the claimants of $30 million.


At the time the shareholders filed their claims against Onyx and defendants, Onyx maintained a program of D&O insurance which consisted of a layer of primary insurance and three layers of follow form excess insurance. The primary layer was exhausted by payment of defense costs, as well as by the payment of approximately $4 million of the underlying settlement amount. The excess insurers denied coverage for the remaining $26 million portion of the settlement amount, in reliance on the “bump up” exclusionary language in the primary policy’s definition of “Loss” (see the operative language below). Onyx filed a state court action against the excess insurers seeking a judicial declaration that the excess insurers’ policies covered the remaining settlement amount.


The insurance coverage dispute ultimately proceeded to trial, in a bench trial before Judge Weiner.


Relevant Policy Language

The insurance coverage dispute pertained to the final paragraph of the primary policy’s definition of the term “Loss” which stated that:


In the event that 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 of 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; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.


The Court’s October 1, 2020 Decision

In an October 1, 2020 proposed statement of decision following trial, Judge Weiner ruled that Bump-Up Exclusion in the primary policy’s definition of Loss applies to preclude coverage for the remaining $26 million settlement paid in the underlying action.


In reaching this conclusion, Judge Weiner reviews in some detail the trial testimony of several fact witnesses about the negotiation of the operative policy language. Among other things, she reviewed the testimony about the communication during a prior policy year between Onyx’s insurance agent and broker with the primary insurer expressly with reference to the language of the Bump Up exclusion


The testimony and the documentary evidence showed that Onyx’s broker had sought to have the Bump Up exclusionary language amended so that rather than referring to inadequate consideration paid for the “assets of an entity” the provision referred to inadequate consideration paid for “securities of another company” (that is, so that it would apply only to inadequate consideration by an acquirer, and not to acquisition when the insured company is being acquired). The testimony showed that the primary insurer refused to make this change.


Judge Weiner also heard extensive factual and expert witness testimony about the drafting of the specific language that did appear in the primary insurer’s policy.


Judge Weiner concluded after review of the trial evidence that, giving the terms in the Loss exclusion “their usual meaning,” the shareholders’ claim in the underlying action was a claim that the consideration paid was “inadequate,” and thus “the Claim for indemnity of Onyx for the settlement is not covered.”


Her conclusion in this respect was, in her view, bolstered by the testimony from the trial witnesses that the insurers “did not want to have insurance proceeds be a means of funding the purchase of assets by a corporation,” and by the evidence that there were other alternative D&O insurance policies available in the marketplace that contained different Loss Exclusion language that would exclude language only “if Onyx was the acquirer and made a purchase of a company for less than its worth.”



It should be emphasized here that at this point Judge Weiner’s opinion is “tentative,” and that the parties have the opportunity to submit objections to her decision within the next 15 days. This fact holds open the possibility that her opinion could change (although based on her tentative decision, I would be astonished if she made any substantive changes). That said, I note the following with respect to her decision.


Judge Weiner’s decision is interesting on many levels, not the least of which is that it followed a bench trial with extensive witness and documentary evidence. It is highly unusual for insurance coverage disputes like this to go through trial – and in that respect it is worth noting that the trial evidence in fact had a significant impact on her ultimate decision.


Many of this blog’s readers will find Judge Weiner’s summation of the trial testimony particularly interesting. For starters, there was extensive trial testimony from percipient witnesses about how the pertinent policy language provisions were shaped and developed. (For those of us who have been around a long time, this portion of the trial testimony summation is also interesting because of the involvement of a long list of familiar names. If you were in the business back in the day, you know all of these people.)


Judge Weiner’s opinion is also interesting, if also more than a little bit disturbing, with respect to what she made of the testimony about how the specific policy language at issue here was negotiated and also about what was communicated to Onyx about what language was ultimately put in place. For me, the most relevant consideration is that Onyx’s broker actively sought to have the language amended so that it applied to preclude coverage only for claims of inadequate consideration paid by an acquirer and that the insurer refused to make the change. It was not that Onyx’ representatives failed to identify the issue, it was that the insurer wouldn’t budge.


Judge Weiner make a big deal multiple times in her complaint about what was communicated to Onyx about this aspect of coverage – what she called “a gap” in coverage. I am not sure why she returned to this point multiple times in her opinion; according to other principles she notes elsewhere in her opinion, what the insured thought about the coverage available under the policy is not relevant to the determination of coverage.


To be sure, she also implies pretty heavily that if the preferred bump-up exclusionary language were available elsewhere in the marketplace, then the coverage should have been placed with an insurer willing to offer this language. This is 20-20 hindsight at its worst. Coverage is placed with one carrier in preference to another for a myriad of reasons, and the mix of the many dozens of factors almost certainly cannot suggest that consideration of a single factor should determine where the policy is placed.


Judge Weiner’s review of the policy placement process certainly does serve as a reminder to practitioners of the importance of being able to show what was done in the course of policy language negotiation and why, as well as what was communicated to the insured about the specific policy language and scope of coverage resulting from the negotiation. Upon reading this opinion, many practitioners may conclude that it might be a good idea to review how they communicate with their client about how the coverage was negotiated and what coverage was put in place.


Judge Weiner’s decision also is a reminder of the importance of specific policy wordings for the availability of coverage in the event of a claim. If it wasn’t clear before, it should be clear now that subtle wording differences can made a huge difference in whether or not a specific claim will be covered. Judge Weiner’s decision is also like an alarm bell on the specific language used in the bump up exclusion. If this provision was not at the top of everyone’s coverage checklist before, it definitely will be now.


It may be interesting to some readers that Judge Weiner is also the author of the recent opinion in the Restoration Robotics decision in which she concluded that as a result of the defendant company’s federal forum provision in its corporate charter that she did not have jurisdiction over the ’33 Act liability action that had been filed in her court against the company and certain of its directors and officers.


Special thanks to a loyal reader for providing me with a copy of this decision.