Hangley Aronchick attorneys Ronald P. Schiller, Bonnie M. Hoffman and Thomas N. Brown secured an important decision in a cutting-edge insurance coverage matter on behalf of client Liberty Mutual Insurance Company in the United States District Court for the Central District of California.
Following corporate acquisitions, shareholders of an acquired company often bring lawsuits contending that the company’s board sold the company for too little consideration. One of the hottest current issues in directors’-and-officers’ (D&O) insurance disputes is the scope and effect of “bump-up” provisions, which are designed to exclude from coverage the amount of judgments or settlements in such lawsuits. These judgments and settlements can run into the tens of millions of dollars, and unsurprisingly, both as a matter of prudent underwriting for the insurer, and to keep D&O premiums down for insureds, insurers regularly insert bump-up provisions in D&O policies. But courts have issued relatively few opinions about the meaning of these provisions.
In 2012, 3M Company, the Minnesota conglomerate, purchased Ceradyne, Inc., a California-based technical ceramics manufacturer, for approximately $850 million. Following the announcement of the deal, Ceradyne’s shareholders sued its board, alleging that Ceradyne “agreed to sell the Company to 3M for a knowingly unfair price.” 3M paid $11.3 million to settle the shareholder litigation and Ceradyne sought to recover that amount from Ceradyne’s D&O insurers. Liberty Mutual and another insurer filed suit in California, seeking a judgment that this “bump-up” amount was not covered under the Ceradyne D&O policies; Ceradyne sued in Delaware for a judgment that the amount was covered; and a court consolidated the two cases in the Central District of California before Judge James V. Selna.
On October 31, 2022, Judge Selna granted Liberty’s motion for summary judgment and denied Ceradyne’s motion for summary judgment. He agreed that California, not Delaware, law should apply, and held that because 3M, not Ceradyne, made the settlement payment, Ceradyne did not have any losses to recover. On the critical issue of whether the bump-up provision barred coverage, the Court rejected Ceradyne’s argument that the provision should only encompass transactions “where the insured was the party paying to acquire ownership or assets,” holding that its “unambiguous language does not lend itself to such a narrow interpretation.” Accordingly, the Court concluded that coverage was excluded under the bump-up provision, and Liberty Mutual did not have to pay Ceradyne the policy’s $5,000,000 limits of liability.
Following the victory, Law360 described it as “a much-needed boost to insurers in the ongoing battle” over interpretation of bump-up exclusions.
