The bump-up exclusion in a D&O policy excluded claims ‘alleging that the price paid … for the acquisition … of an entity is inadequate’. The insurers do not have to pay any amount due under a judgment or settlement representing the amount by which the price or consideration would be effectively increased. This is to prevent companies or their directors and officers selling the company or its assets for an inadequate amount and expecting the D&O insurers to pay in the difference.

A pharmaceutical company was sold for an amount from which shareholders received $125 per share. A class action alleged that the company and its board of directors failed in their duty ‘to seek the highest price for shareholders in its sale process’ by selling for $125 per share when the market price was higher, analysts priced it higher, and another suitor had offered to pay more. The insured paid the judgment and sued its excess insurers for indemnification of the funds it spent to settle the case.

The court found that the undefined terms in the loss exclusion should be given their common usage meaning. The wording is unambiguous. The basis of the claim was that the share price accepted was less than the highest price that might reasonably be obtained. Thus the claim for indemnity was not covered because of the exclusion.

The court said it was ‘reasonable that the insurer did not want to have the insurance proceeds to be a means of funding the purchase of an asset by a corporation’.

The case is Onyx Pharmaceuticals Inc v Old Republic Insurance Co.