Ian Boczko is a Partner and Sunny Jeon is an Associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.
A D&O policy provision designed to prevent an insured buyer from shifting additional acquisition consideration to its insurer is increasingly being used for a very different purpose, namely denying coverage for ordinary M&A claims against target companies and their directors and officers. That expansion threatens the protection companies and boards reasonably expect D&O insurance to provide against fiduciary duty and securities claims arising from corporate transactions.
The “bump up” exclusion historically addressed a narrow moral hazard concern, namely, that an acquiror should not be able to underpay for a target and then use insurance proceeds to supply additional consideration. But policy wording is often imprecise, and insurers increasingly invoke the exclusion whenever transaction litigation results in a payment to former stockholders, including in cases involving an insured target rather than an insured buyer.
The Delaware Supreme Court’s decision earlier this year in Illinois National Insurance Co. v. Harman International Industries, Inc. provides an important safeguard by requiring an insurer to prove that a settlement actually represents an effective increase in deal consideration, rather than inferring that conclusion from allegations alone. 360 A.3d 240 (Del. 2026). But because Harman offers a route to preserving coverage only after a highly fact specific examination of the settlement record, it does not provide the predictable rule that companies, directors, officers, and insurers need.
The better solution is clearer policy language. Where D&O policies retain a bump up clause, the clause should rest on three principles. First, it should apply only when the insured company acts as the acquiror, not as the seller or target. Second, it should reach only amounts that truly function as additional acquisition consideration, based on objective criteria addressing who receives the payment, its legal basis, and whether it would have increased the price paid at closing. Third, it should operate as an allocation provision rather than a transaction wide bar, so that only the qualifying portion should be excluded, while Side A loss, defense costs, attorneys’ fees, interest, and other covered amounts remain protected.
The bump up exclusion should answer a narrow question, namely what portion, if any, of an otherwise covered payment is truly additional acquisition consideration? Our full article examines how the provision moved beyond its original purpose, analyzes the developing case law, and offers model language designed to produce more predictable and equitable outcomes.
