It is frequently the case that my posts on this site occasion so little commentary that I often wonder whether anyone is reading them at all. Every now and then, though, one of my posts seems to stir things up a little bit. That was clearly the case with respect to a recent post in which I commented about the bump-up exclusion – the post has provoked quite a bit of conversation. In light of subsequent discussions I have had about the post, it appears that I should revisit some of the issues discussed in the post. For starters, I have revised parts of the prior post to take into account some of the observations about the post that have been made to me. In addition, I also note the following.
As readers will recall, the prior post related to the application of a D&O policy’s “bump up” exclusion in the context of a claim relating to a transaction in which it was alleged that the directors and officers of the insured company had wrongfully agreed to the company’s acquisition for an inadequate price.
One aspect of the post, as originally written, pertained to the language of the specific bump up exclusion at issue in the case. The post as originally written suggested that the exclusionary language at issue (which precludes coverage whether the insured company is the acquiror or the target) was unusual or atypical, by comparison to alternative bump up exclusionary language that precludes coverage only when the insured company is the acquiror but not when the company is the target.
I now understand that my original suggestion that the more restrictive exclusionary language at issue in the case was unusual or atypical was misplaced. My sense now, with the benefit of the various recent discussions, is that in fact the language at issue in the case (or its equivalent) is common in the marketplace and can be found in many (if not most) primary carriers’ policies.
There is a practical implication from this revised observation, an implication that I failed to note in my original post – that is, given that the more restricted language or its equivalent is found in many primary carriers’ policies, many insurance buyers may have no alternative but to accept policies with the more restrictive language.
There is a further implication from the fact that the more restrictive language is common and can be found in many primary carriers’ policies – that is, given the state of the marketplace on this exclusionary language, it was not helpful for me in my original post to characterize the exclusion with the restrictive language as flawed. Rather, it would be more accurate to say that the restrictive language is what is in many (if not most) cases simply what is available in the marketplace.
The alternative less restrictive language is, of course, more desirable from the policyholder point of view, as it could afford coverage in circumstances when the more restrictive language would not. However, as noted above, the more favorable alternative may not be available in the context of any given insurance transaction. This presence or absence of the more restrictive language is of course one of many different issues that will need to be taken into account in connection with any specific insurance placement and weighed against all of many other factors that need to be considered in any given placement.
This issue concerning the language of the exclusion and the extent to which it may preclude coverage in different circumstances represents a larger question for the D&O insurance industry. It seems to me that the question about the reach of the exclusion is one that should be discussed, in order to ensure that the policy operates as intended and when it should. The industry and its customers would benefit from a discussion of the issue of whether the bump up exclusion should apply only when the insured company is the acquiror but not when the insured company is the target.
From my perspective, the insurance issues are categorically different depending on whether the insured company is the acquiror or the acquisition target. On the one hand, if the insured company is the acquiror, the company cannot simply underpay for an acquisition and then turn to its insurer as some sort of a third-party capital partner with the expectation that the insurer should make up the shortfall. In that circumstance it is quite reasonable that the amount of the shortfall should be excluded from coverage.
On the other hand, if the insured company is the acquisition target and shareholders have alleged that the company and its executives wrongfully agreed to sell the company for an insufficient amount, those allegations look as awful lot like the very kind of thing that the policy is designed to insure against; the shareholders’ allegations that in agreeing to sell for an insufficient amount the executives breached their duty of care or duty of loyalty arguably has all the hallmarks of a classic D&O claim. In my view, the shareholders’ damages for the executives’ alleged violations of their duties in agreeing to sell the company for an insufficient amount arguably represent the very kind of thing for which the policy should provide protection.
I understand that others may have different views on this topic, which is the reason I think there would be value for the D&O insurance industry for further consideration of these issues. I think everyone would benefit – insurers and policyholders alike – if there were to be a further consideration of the bump up exclusion and a reconsideration of what its purposes are and how it should operate in light of the larger purposes of a D&O insurance policy.
In the meantime, and in light of the scope of the preclusive effect of the more restrictive exclusionary language, insurance professionals placing coverage with the more restrictive language may want to review what they are communicating to their clients about the placement and about the potential impact of the bump up provision.