Harman International Industries Incorporated v. Illinois National Insurance Company Federal Insurance Company

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

HARMAN INTERNATIONAL )
INDUSTRIES INCORPORATED, )
)
Plaintiff, )
)
v. ) C.A. No. N22C-05-098
) PRW CCLD
ILLINOIS NATIONAL )
INSURANCE COMPANY, )
FEDERAL INSURANCE COMPANY, )
and BERKLEY INSURANCE )
COMPANY, )
Defendants. )

Submitted: February 2, 2023
Decided: April 24, 2023

Upon Plaintiff’s Motion for Summary Judgment,
DENIED.

Upon Defendants’ Motion to Dismiss,
DENIED.

MEMORANDUM OPINION AND ORDER

Jennifer C. Wasson, Esquire, Carla M. Jones, Esquire, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware, Robin L. Cohen, Esquire, Lorrie A. Levy,
Esquire, COHEN ZIFFER FRENCHMAN & MCKENNA LLP, New York, New York,
Attorneys for Plaintiff Harman International Industries, Incorporated.
Kurt M. Heyman, Esquire, Aaron M. Nelson, Esquire, Kelly E. Rowe, Esquire,
HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware, Alexander S.
Lorenzo, Esquire, ALSTON & BIRD LLP, New York, New York, Attorneys for
Defendant Illinois National Insurance Company.
Robert J. Katzenstein, Esquire, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington,
Delaware, Neal M. Glazer, Esquire, LONDON FISCHER LLP, New York, New York,
Attorneys for Defendant Federal Insurance Company.
Robert J. Katzenstein, Esquire, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington,
Delaware, Cara T. Duffield, Esquire, WILEY REIN LLP, Washington, DC, Attorneys
for Berkley Insurance Company.

WALLACE, J.
Harman International Industries, Inc., brings this action for breach of contract

and declaratory judgment against its insurers for failing to indemnify it from a

settlement in an underlying securities action. The insurers denied coverage asserting

that an exclusion provision, commonly known as a Bump-Up Provision, barred

coverage.

Before the Court are the parties’ competing motions. The first is Harman’s

motion for summary judgment on its two claims. The second is the insurers’ motion

to dismiss the complaint. For the reasons set forth below, the Court DENIES each

of these motions.

I. THE PARTIES

Plaintiff Harman International Industries, Inc., is a Delaware corporation with

its principal place of business in Connecticut.1 It “is a global leader in connected

car technology, including lighting, audio, design and analytics.” 2

Defendant Illinois National Insurance Company (“AIG”) is a Pennsylvania

corporation with its principal place of business in New York. 3

Defendant Federal Insurance Company (“Chubb”) is an Indiana corporation

1
Compl. ¶ 16 (D.I. 1).
2
Id. ¶ 2.
3
Id. ¶ 17. Illinois National Insurance Company is a subsidiary of AIG. The Complaint identifies
this defendant as “AIG” instead of the specific entity, Illinois National Insurance Company. See
id. at 1. For clarity’s sake, therefore, this Opinion too will refer to Illinois National Insurance
Company as AIG.

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with its principal place of business in New Jersey.4

Defendant Berkley Insurance Company (collectively, with AIG and Chubb,

“Insurers”) is a Delaware corporation with its principal place of business in

Connecticut.5

II. FACTUAL AND PROCEDURAL BACKGROUND

A. THE D&O INSURANCE

Harman purchased Directors and Officers (“D&O”) insurance from Insurers.6

The policy covered a term from January 29, 2016, through January 29, 2017.7

Insurers issued the primary policy (AIG), first excess policy (Chubb), and second

excess policy (Berkley), together providing $40 million in coverage.8 As relevant

to this action, those policies all operate identically.9

The policies include an exclusion, also called a “Bump-Up Provision,” within

the definition of “Loss,” that states:

4
Id. ¶ 18. Federal Insurance Company is a subsidiary of Chubb. The Complaint identifies this
defendant as “Chubb” instead of the specific entity, Federal Insurance Company. See id. at 1. For
clarity’s sake, therefore, this Opinion too will refer to Federal Insurance Company as Chubb.
5
Id. ¶ 19.
6
Id. ¶ 2.
7
Id. ¶ 23.
8
Id. ¶¶ 2, 24; see id., Exs. A-1, A-2, A-3, A-4, B, C.
9
Compl. ¶ 25. For ease, only the AIG Policy will be cited to. See id., Ex. B ¶ 14; Ex. C ¶ 3.

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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.10

“Non-Indemnifiable Loss” is defined as:

Loss for which an Organization has neither indemnified nor is
permitted or required to indemnify an Insured Person pursuant to law
or contract or the charter, bylaws, operating agreement or similar
documents of an Organization. 11

B. THE TRANSACTION

On November 14, 2016, Harman and Samsung Electronics America, Inc.,

“announced they had entered into an Agreement and Plan of Merger.”12 On March

10, 2017, a subsidiary of Samsung that was created for the transaction, Silk

Delaware, Inc., “merged with and into Harman” through a reverse triangular

merger. 13 The result of the transaction was that “Harman continued as a wholly

owned subsidiary of Samsung,” and with certain exceptions, “outstanding Harman

stock was cancelled and converted into a right to receive . . . cash.” 14

C. THE BAUM ACTION AND SETTLEMENT

On July 12, 2017, Patricia B. Baum filed an amended class action complaint

10
Id., Exs. A-1 to A-4 (“AIG Policy”) § 13 (definitions).
11
AIG Policy § 13.
12
Compl. ¶ 42.
13
Id. ¶¶ 3, 42-43.
14
Id. ¶ 43.

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against Harman and other parties alleging violations of Sections 14(a) and 20 of the

Securities Exchange Act of 1934. 15 That action, filed in the United States District

Court for the District of Connecticut, alleged “Harman issued a materially false and

misleading Definitive Proxy Statement” so as to “secure shareholder support for the

undervalued Acquisition.”16 In part, the Baum plaintiffs asked for “compensatory

and/or rescissory damages against the [Baum] defendants.” 17

As part of the Baum plaintiffs’ claims, they stated:

As a direct result of the defendants’ negligent preparation, review and
dissemination of the false and/or misleading Proxy, Plaintiff and the
class were precluded both from exercising their right to seek appraisal
and were induced to vote their shares and accept inadequate
consideration of $112.00 per share in connection with the Acquisition.
The false and/or misleading Proxy used to obtain shareholder approval
of the Acquisition deprived Plaintiff and the Class of her right to a fully
informed shareholder vote in connection therewith and the full and fair
value for her Harman shares. At all times relevant to the dissemination
of the materially false and/or misleading Proxy, defendants were aware
of and/or had access to the true facts concerning Harman’s value, which
was far greater than the $112.00 per share that shareholders received.
Thus, as a direct and proximate result of the dissemination of the false
and/or misleading Proxy defendants used to obtain shareholder
approval of and thereby consummate the Acquisition, Plaintiff and the
Class have suffered damage and actual economic losses (i.e., the
difference between the price Harman shareholders received and
Harman’s true value at the time of the Acquisition) in an amount to be

15
Id., Ex. D (“Baum Action Am. Compl.”) ¶¶ 1, 115-22, 123-30. This is the Amended
Complaint, the original Baum Complaint was filed on February 15, 2017. Pl.’s Mot. for Summ. J.
Br., Ex. B (D.I. 20).
16
Baum Action Am. Compl. ¶ 5.
17
Id. at 50.

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determined at trial. 18

D. INSURERS INVOLVEMENT IN THE BAUM ACTION

On July 20, 2017, AIG sent a letter to Harman acknowledging that the Baum

Action was a securities claim covered by the policy.19 Thus, it said it would

reimburse Harman for its defense costs, but it reserved its rights on indemnification

if, in its view, the claim was subject to a conduct exclusion.20

It was not until December 13, 2021, that AIG issued another letter denying

coverage for any judgment or settlement based on the Bump-Up Provision. 21 Chubb

and Berkley adopted AIG’s coverage position. 22

On June 23, 2022, the Baum parties entered into a stipulation of settlement for

$28 million which was approved by the federal district court.23 Neither the district

court nor the Baum parties issued any statements concerning what the settlement

constituted or represented. Instead, the parties said the settlement was to avoid costly

18
Id. ¶ 120.
19
Compl. ¶ 53 (“In a July 20, 2017 letter, AIG acknowledged that the Action is a Securities
Claim, and indicated that it would reimburse Harman for its Defense Costs, subject to a
reservation of rights with respect to coverage for a judgment or settlement of the Action based on
a ‘Conduct Exclusion’ that only applies in the event of a final, non-appealable adjudication in the
underlying action establishing liability.” (bold in original)); Pl.’s Mot. for Summ. J. Br., Ex. L.
20
Compl. ¶ 53; Defs.’ Mot. to Dismiss Br. at 6 (D.I. 14).
21
Compl. ¶ 54; Pl.’s Mot. for Summ. J. Br., Ex. M.
22
Compl. ¶ 55.
23
Pl.’s Mot. for Summ. J. Br., Ex. F.

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continued litigation.24

E. PROCEDURAL HISTORY

Harman has brought this action to resolve its coverage dispute with the

Insurers. Rather than answer, the insurers filed a motion to dismiss Harman’s

complaint here.25 Harman responded in opposition to that dismissal motion and

simultaneously filed a motion for summary judgment on its complaint. 26 The Court

heard argument on both motions and they are now ripe for decision.27

III. THE COMPLAINT

In Count I, Harman alleges the Insurers breached the insurance policies by

wrongfully excluding the Baum Action settlement from coverage. 28 In Count II,

Harman seeks a declaration that the Baum Action settlement is covered by the

policies and the Insurers are obligated to indemnify Harman for the settlement.29

Harman also seeks attorney’s fees and punitive damages. 30

24
Id. at 4.
25
D.I. 14. Defendant Berkley joined Insurers AIG and Chubb’s Motion to Dismiss, and also
submitted a short brief in support of that motion. D.I. 16.
26
D.I. 20.
27
D.I. 47.
28
Compl. ¶¶ 67-74.
29
Id. ¶¶ 75-83.
30
Id. at 22.

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IV. PARTIES’ CONTENTIONS

A. DEFENDANTS’ MOTION TO DISMISS

Insurers insist the policies don’t provide coverage for the Baum Action

settlement.31

First, the Insurers say the transaction at issue, a reverse triangular merger, is

an “acquisition.”32 Second, the Insurers contend that the Baum Action settlement

represents an effective increase in shareholder consideration.33 Third, the Insurers

argue the policies’ provisions are unambiguous and apply here to bar coverage.34

Fourth, the Insurers contend the doctrines of waiver and estoppel are inapplicable

here.35

In the Insurers’ view, this Court’s decision in Northrop Grumman Innovation

Systems, Inc. v. Zurich American Insurance Company36 controls and applying that

analysis “for when coverage does not exist,” results in a finding that the Baum Action

settlement is barred by the Bump-Up Provision. 37 Specifically, the Insurers press

that because the Bump-Up Provision doesn’t specify that it applies only to certain

31
Defs.’ Mot. to Dismiss Br. at 16-31.
32
Id. at 16-21.
33
Id. at 22-28.
34
Id. at 28-31.
35
Id. at 31-33.
36
2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021).
37
Defs.’ Mot. to Dismiss Br. at 1.

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types of claims and because the Baum action’s “sole measure of damages is the

inadequacy of consideration paid” that satisfies Northrop Grumman’s requirement

that the Baum claim allege only inadequate consideration.38

B. PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

Harman’s main argument is that the Insurers wrote the policies and the

exclusion, so if the Insurers wanted the events here to have resulted in policy

exclusion, they could have done so. And failure to do so explicitly, says Harman,

means its claims are covered.

First, Harman points out that exclusions, generally, are construed strictly

against the insurer.39 Second, Harman suggests that the Bump-Up Provision does

not apply to Section 14(a) claims, which the Baum Action is. 40 Third, Harman insists

the Bump-Up Provision “only applies to an acquisition by Harman, rather than where

Harman is acquired.”41 Fourth, Harman says the transaction was a merger, not an

acquisition.42 And even if it was partly an acquisition, says Harman, the Bump-Up

Provision requires an acquisition only, not a semi-merger or semi-acquisition.43

Additionally, Harman says that the Insurers never defined acquisition when they

38
Defs.’ Opp’n to Pl.’s Mot. for Summ. J and Reply Br. at 34-39 (D.I. 24).
39
Pl.’s Mot. for Summ. J. Br. at 16-18.
40
Id. at 19-25.
41
Id. at 25 (emphasis in original).
42
Id. at 31-32.
43
Id.

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easily could have, so any ambiguity thereon should be construed against the

Insurers.44 Fifth, Harman says the settlement does not represent an effective increase

in consideration.45 Specifically, this was a proxy violation action, not a standard

fiduciary breach claim. 46 Harman calls the settlement payment “savings on defense

costs and the value to Harman of avoiding the disruption of discovery” not “an

increase in merger consideration paid to stockholders.”47 Sixth, Harman posits that

whatever is decided concerning the settlement itself, attorney’s fees are still due.48

And last, Harman insists that because the Insurers waited five years to raise the

exclusion, they have waived its application and are estopped from asserting that the

exclusion applies.49

V. STANDARD OF REVIEW

A. MOTION TO DISMISS

“Under Superior Court Civil Rule 12(b)(6), the legal issue to be decided is,

whether a plaintiff may recover under any reasonably conceivable set of

44
Id. at 33.
45
Id. at 34.
46
Id. at 35.
47
Id. at 36-37.
48
Id. at 38-41.
49
Id. at 41-43.

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circumstances susceptible of proof under the complaint.”50 Under that Rule, the

Court will

(1) accept all well pleaded factual allegations as true, (2) accept even
vague allegations as “well pleaded” if they give the opposing party
notice of the claim, (3) draw all reasonable inferences in favor of the
non-moving party, and (4) not dismiss the claims unless the plaintiff
would not be entitled to recover under any reasonably conceivable set
of circumstances. 51

This is because “[d]ismissal is warranted [only] where the plaintiff has failed to plead

facts supporting an element of the claim, or that under no reasonable interpretation

of the facts alleged could the complaint state a claim for which relief might be

granted.”52

B. MOTION FOR SUMMARY JUDGMENT

Summary judgment is warranted upon a showing “that there is no genuine

issue as to any material fact and that the moving party is entitled to judgment as a

matter of law.”53

Thus, on the issue raised, the burden is on the moving party to demonstrate its

prayer for summary judgment is supported by undisputed facts or an otherwise

50
Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. Ct. 2018) (cleaned up) (quoting Super. Ct.
Civ. R. 12(b)(6)).
51
Id. (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535
(Del. 2011)).
52
Hedenberg v. Raber, 2004 WL 2191164, at *1 (Del. Super. Ct. Aug. 20, 2004) (citation
omitted).
53
Del. Super. Ct. Civ. R. 56(c).

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adequate factual record to support a legal judgment.54 “If the motion is properly

supported, then the burden shifts to the non-moving party to demonstrate that there

are material issues of fact for resolution by the ultimate fact-finder.” 55

The Court may grant a motion for summary judgment when: “(1) the record

establishes that, viewing the facts in the light most favorable to the nonmoving party,

there is no genuine issue of material fact, and (2) in light of the relevant law and

those facts, the moving party is legally entitled to judgment.”56 The Court cannot

grant a motion for summary judgment “[i]f . . . the record reveals that material facts

are in dispute, or if the factual record has not been developed thoroughly enough to

allow the Court to apply the law to the factual record . . . .” 57 But, at bottom, a claim

“should be disposed of by summary judgment whenever an issue of law is involved

and a trial is unnecessary.” 58

54
See CNH Indus. Am. LLC v. Am. Cas. Co. of Reading, 2015 WL 3863225, at *1 (Del. Super.
Ct. June 8, 2015).
55
Id.
56
Haft v. Haft, 671 A.2d 413, 414-15 (Del. Ch. 1995) (citing Burkhart v. Davies, 602 A.2d 56,
58-59 (Del. 1991)); see also Brooke v. Elihu-Evans, 1996 WL 659491, at *2 (Del. 1996) (“If the
Court finds that no genuine issues of material fact exist, and the moving party has demonstrated
his entitlement to judgment as a matter of law, then summary judgment is appropriate.”).
57
CNH Indus. Am. LLC, 2015 WL 3863225, at *1.
58
Jeffries v. Kent Cty. Vocational Tech. Sch. Dist. Bd. of Educ., 743 A.2d 675, 677 (Del. Super.
Ct. 1999).

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VI. DISCUSSION

A. THE COURT NEED NOT CONVERT INSURERS’ MOTION TO DISMISS INTO A
MOTION FOR SUMMARY JUDGMENT.

Rule 12(b) provides that if “matters outside the pleading are presented to and

not excluded by the Court,” on a motion to dismiss, “the motion shall be treated as

one for summary judgment and disposed of as provided in Rule 56, and all parties

shall be given reasonable opportunity to present all material made pertinent to such

a motion by Rule 56.” 59

“Generally, matters outside the pleadings should not be considered in ruling

on a motion to dismiss.”60 There are two recognized exceptions to this rule, “[t]he

first exception is when the document is integral to a plaintiff’s claim and

incorporated into the complaint.”61 And [t]he second exception is when the

document is not being relied upon to prove the truth of its contents.” 62 Additionally,

a Court may take notice of publicly available facts not subject to reasonable dispute

without transforming the motion to dismiss into a motion for summary judgment. 63

Here, the Court need not treat the Insurers’ motion to dismiss as a motion for

59
Del. Super. Ct. Civ. R. 12(b).
60
In re Santa Fe Pacific Corp. S’holder Litig., 669 A.2d 59, 68 (Del. 1995).
61
Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609,
612-13 (Del. 1996) (citation omitted).
62
Id. (citation omitted).
63
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169-70 (Del. 2006).

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summary judgment because while matters outside the pleadings are considered,

those matters either fall into the rule’s exceptions or are matters of which the Court

can take notice of.

The Insurers rely on a press release issued by Harman to suggest that Harman

itself characterized the underlying transaction not as a merger, but an acquisition.64

Insurers also rely on filings in the Baum Action’s docket.65

The Court can consider the Baum Action and related documents as the Baum

Action is both referred to and relied upon in the Complaint, and also because the

Baum Action is integral to this action.66 Too, the Court can, and here will, take

notice of the press release as it is a publicly available statement issued by Harman

and in this instance its contents are “not subject to reasonable dispute.”67

B. ONYX PHARMACEUTICALS, NORTHROP GRUMMAN AND ITS PROGENY.

The issues presented here have been addressed by this Court and sister courts

across the country. All of these actions revolve around similar situations where

corporate fiduciaries settle claims alleging they committed certain bad acts and then

seek indemnification from their insurers.

64
Defs.’ Mot. to Dismiss Br. at 20 n.10.
65
See id. at 5.
66
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d at 169 (citation omitted); In re Santa Fe
Pacific Corp. S’holder Litig., 669 A.2d at 69-70.
67
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d at 169 (citation omitted).

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Those claims though might be barred by a Bump-Up Provision, which does

not cover settlement amounts if they are based on certain conduct in the underlying

action. So both this Court and its sister courts have needed to determine what the

underlying actions that resulted in the settlements are and whether such settlements

are excluded from insurance coverage by operation of a Bump-Up Provision.

In Onyx Pharmaceuticals Inc. v. Old Republic Insurance Company,68 the

California Superior Court considered whether a Bump-Up Provision applied to bar

an indemnification claim based on an underlying lawsuit and settlement where the

underlying action’s plaintiffs alleged Amgen’s purchase of Onyx (which became a

wholly-owned subsidiary of Amgen) for $125 per share was undervalued. 69 The

underlying action resulted in a settlement and Onyx sought indemnification of its

settlement loss. 70 The California court found that because “the primary allegation

[in the underlying action and settlement] was that the Board of Directors failed to

obtain the highest price for the sale of Onyx” and because the court “was unable to

craft superior insurance policy language” the exclusion applied to bar the

68
2020 WL 9889619 (Cal. Super. Ct. Oct. 1, 2020). The Onyx decision is a proposed statement
of decision which has been cited in Ceradyne, Inc. v. RLI Ins. Co., 2022 WL 16735360 (C.D. Cal.
Oct. 31, 2022), Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL
4555188 (E.D. Va. Oct. 5, 2021), and Northrop Grumman Innovation Sys., Inc. v. Zurich Am. Ins.
Co., 2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021).
69
Onyx, 2020 WL 9889619, at *2.
70
Id.

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indemnification claim. 71

In Northrop Grumman Innovation Systems, Inc. v. Zurich American Insurance

Company, this Court examined a Bump-Up Provision that was a near match to the

one here. 72 There, the Court considered whether a Bump-Up Provision applied to

bar an indemnification claim based on an underlying lawsuit and settlement where

shareholders alleged the proxy solicitation statements published before a merger

were false or misleading. 73 This Court found the underlying settlement claim did

not exclusively allege inadequate consideration, rather the plaintiffs brought a 15

U.S.C. § 78n (commonly known as a Section 14(a)) claim, which “primarily was

about Orbital Sciences’s fiduciaries’ ‘dissemination of a materially false and

misleading Joint Proxy Statement . . . used to obtain approval of the [m]erger.’” 74

Because “a federal securities class action about fabricated proxy forms is not

the narrowly tailored fit this Exclusion imagined,” this Court found the Northrop

Grumman Bump-Up Provision did not apply to bar coverage.75

71
Id. at *15; see also Final Statement of Decision After Phase One Count Trial On Declaratory
Relief Claims at 40-41, Onyx Pharmaceuticals, Inc. v. Old Republic Insurance Co. et al., Case No.
CIV 538248 (Cal Super. Ct. Dec. 30, 2022). This decision is found in D.I. 48, Ex. A.
72
2021 WL 347015, at *3.
73
Id. at *5.
74
Id. at *20 (alteration in original) (quoting underlying action’s complaint).
75
Id.

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In Joy Global, Inc. v. Columbia Casualty Company,76 the United States

District Court for the Eastern District of Wisconsin similarly examined whether a

settlement agreement was barred from indemnification via a Bump-Up Provision

that was also similar, but not identical, to the one at issue here.77 There, Joy Global

announced its intention to be acquired by Komatsu, which resulted in shareholder

lawsuits both pre- and post-merger. 78 All lawsuits alleged the acquiree’s “directors

and officers had issued a false or misleading proxy report for the purpose of inducing

shareholders to vote their shares in support of a merger agreement which secured

inadequate consideration for Joy Global’s shares.”79 The federal court, applying

Wisconsin law, found that the underlying actions’ plaintiffs claimed inadequate

consideration and “part of the Claim which was settled alleged inadequate

consideration.”80 So the court found the settlements were barred by that Bump-Up

Provision. 81 The federal district court distinguished this Court’s Northrop Grumman

decision by finding: (1) the two at-issue Bump-Up Provisions were different; and

(2) under Wisconsin law, when the word “only” did not appear in that Bump-Up

76
555 F.Supp.3d 589 (E.D. Wisc. 2021), aff’d Komatsu Mining Corp. v. Columbia Casualty Co.,
58 F.4th 305 (7th Cir. 2023).
77
Id. at 592-93.
78
Id.
79
Id.
80
Id. at 594.
81
Id.

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Provision, the exclusion was not limited to settlements for claims asserting nothing

more than an inadequate consideration claim. 82

The Joy Global decision was recently affirmed by the United States Court of

Appeals for the Seventh Circuit in Komatsu Mining Corp. v. Columbia Casualty

Company. 83 There, the Seventh Circuit too distinguished Northrop Grumman for

the same reasons identified by the district court—the law on construing exclusion

provisions in Delaware and Wisconsin is different, and the exclusion provision

language in that case was different from the language at issue in Northrop

Grumman. 84

In Tower Watson & Company v. National Union Fire Insurance Company of

Pittsburgh, PA, 85 the United States District Court for the Eastern District of Virginia

82
Id. at 595-96.
83
58 F.4th 305 (7th Cir. 2023).
84
Komatsu Mining Corp., 58 F.4th at 309
The state judge invoked what he understood to be a rule of Delaware insurance law
that all conceivable ambiguities be construed against an insurer. But as the district
judge pointed out, . . . that may be the law in Delaware but is not the law in
Wisconsin. What’s more, the language of the exclusion in Northrop Grumman
differs from the definition of ‘inadequate consideration claim’ in Joy Global’s
policies. Komatsu Mining wants us to proceed as if all D&O policies contain the
same language, but they don’t, so we shouldn’t.
(internal citation omitted)).
And the Seventh Circuit is correct, Delaware law commands “[c]ourts interpret exclusionary
clauses with a strict and narrow construction and give effect to such exclusionary language only
where it is found to be specific, clear, plain, conspicuous, and not contrary to public policy.” RSUI
Indem. Co. v. Murdock, 248 A.3d 887, 906 (Del. 2021) (cleaned up).
85
2021 WL 4555188 (E.D. Va. Oct. 5, 2021).

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similarly decided the issue of whether certain settlements were barred by a Bump-

Up Provision. 86 That federal court found the transaction at issue was not the type of

acquisition contemplated by the Bump-Up Provision and found further that because

an exclusion provision must be narrowly tailored under Virginia law—i.e.

“unambiguously reference[d]”—any ambiguity must be resolved in favor of

coverage.87 The court found that because there was an ambiguity as to whether the

transaction was barred by the Bump-Up Provision and because there was a

reasonable interpretation suggesting the settlement was not barred by the Bump-Up

Provision, the required narrow construction that must be given to insurance policy

exclusion provisions meant the contested settlement-indemnification claim was not

barred from coverage. 88

In Ceradyne, Inc. v. RLI Insurance Company et al., 89 the United States District

Court for the Central District of California was confronted with a Bump-Up

Provision nearly identical to the one at issue here. 90 There, a parent and subsidiary

announced their intention to commence a tender offer where the parent would

acquire the shares of the subsidiary and then commence a short-form merger.91 In

86
Id. at *1-2.
87
Id. at *12 & n.27.
88
Id. at *12-14.
89
2022 WL 16735360 (Cal. C.D. Oct. 31, 2022).
90
Id. at *2.
91
Id.

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the underlying action, a lawsuit was filed against the subsidiary alleging it

intentionally undervalued itself and thus sold itself for an inadequate price. 92 That

underlying action resulted in a settlement.93 The federal district court first noted that

neither party disputed that the underlying action was an acquisition; the issue was

whether it was the type of acquisition contemplated by the Bump-Up Provision.94

The court, applying California law, found the facts “much more similar to Onyx

Pharmaceuticals” and concluded “the underlying lawsuits alleged breaches of

fiduciary duty almost exclusively based on [the subsidiary]’s directors undervaluing

the company and accepting inadequate consideration for the acquisition.” 95 And the

court made note of certain salient facts: (1) the subsidiary’s “insurance broker at the

time of the underwriting of the policy similarly understood the lawsuits to fall under

the Bump-Up Exclusion,” (2) “the relief sought in the underlying cases was the

amount by which the plaintiffs alleged [subsidiary]’s directors undervalued the

company,” and (3) the underlying plaintiffs sought damages equal to the difference

between the fair value and the undervalued price. 96 So the Ceradyne court concluded

the Bump-Up Provision applied to the underlying action and later found the

92
Id.
93
Id.
94
Id. at *8-9.
95
Id. at *10.
96
Id. (citations omitted).

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underlying action effectively increased consideration paid.97 In turn, the federal

district court found indemnification was properly barred. 98

C. FURTHER FACT-FINDING IS REQUIRED ON THE ISSUE OF WHETHER THE
BAUM ACTION FALLS UNDER THE BUMP-UP PROVISION.

This dispute is over the application of these parties’ specific Bump-Up

Provision. Harman argues its settlement from the Baum Action should be covered

by the Insurers under the insurance policies. The Insurers argue the settlement is

barred by the Bump-Up Provision.

Both sides contest the meaning and import of this Court’s Northrop Grumman

decision 99 and the just-outlined decisions from elsewhere. The Northrop Grumman

Bump-Up Provision is a near match to the one here. 100

97
Id. at *10-11.
98
Id.
99
2021 WL 347015 (Del. Super. Ct. Feb. 2, 2021).
100
Compare id. at *19
In the event of a Claim alleging that the price or consideration paid for the
acquisition or completion of the acquisition of all or substantially all the ownership
interest or assets in 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 is effectively increased.
with AIG Policy § 13
In the event of 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 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; . . . .
(differences italicized).

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Neither party disagrees that the Baum Action settlement functions as a loss,

and neither party disputes that the Bump-Up Provision is an exclusion. The issue is

whether that exclusion “withstands narrow construction and clearly negates, after

the fact, coverage extant in the first place.”101

The Bump-Up Provision states:

In the event of 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 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.102

Both parties present different compositions of the elements that might trigger

the Bump-Up Provision. Harman says the Insurers must show:

(1) the acquisition of all or substantially all the ownership interest in or
assets of an entity; (2) a claim alleging only that the consideration
exchanged in that acquisition was inadequate; (3) that such acquisition
was by Harman; and (4) that the settlement for which coverage is
sought actually represents the amount by which the acquisition price or
consideration is effectively increased, and no other form of relief. 103

The Insurers contest they must show:

(i) Harman was acquired by Samsung, (ii) Harman’s shareholders
alleged the consideration received for that acquisition was inadequate,

101
Northrop Grumman, 2021 WL 347015, at *19.
102
AIG Policy § 13 (bold in original).
103
Pl.’s Mot. for Summ. J. Br. at 2 (cleaned up).

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and (iii) Harman’s settlement with those shareholders represents an
effective increase to that consideration. 104

And a fair reading of Northrop Grumman would say that for the exclusion to

apply: (1) the transaction must be “an acquisition of all or substantially all of an

entity’s assets or ownership”; (2) the Baum Action settlement must be related only

to the allegation of inadequate consideration; and (3) the Baum Action settlement

must represent an effective increase in consideration.105 At this stage in the

proceedings, before any discovery has taken place, the Court cannot affirmatively

say whether the elements under this (or either of the parties’) formulation have been

met.

Concerning the first element, Harman makes two arguments—first, that the

transaction only applies to an acquisition by Harman which did not happen here and

second, that the transaction can only be an acquisition. Neither carries the day on

the current record.

As to the first, Harman says that the Bump-Up Provision “only applies to an

acquisition by Harman, rather than where Harman is acquired.” 106 According to

104
Defs.’ Mot. to Dismiss Br. at 16.
105
Northrop Grumman, 2021 WL 347015, at *20-21; id. at *20 (“[A] lawsuit that alleges only the
consideration exchanged—nothing else—as part of only one specific control transaction (an
acquisition of all or substantially all ownership interest or assets of an entity) was inadequate. The
Exclusion pushes out Loss only that represents an effective increase of the claimant’s inadequate
consideration; no other Loss will do.” (cleaned up)).
106
Pl.’s Mot. for Summ. J. Br. at 25 (emphasis in original).

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Harman, “[i]f Insurers wanted the [Bump-Up Provision] to encompass an acquisition

of Harman, they were required to do so clearly and unambiguously, but failed to do

so.”107 And where the term is deemed ambiguous, Harman says, then that ambiguity

should be construed in favor of coverage. 108

The term “entity,” as used in the Bump-Up Provision,109 is undefined.

Insurers insist the Named Entity, i.e. Harman, is naturally included in the undefined

general term entity. 110 Harman counters, because “Named Entity” is expressly

defined elsewhere in the policies, “entity” as used in the Bump-Up Provision must

mean any entity but the “Named Entity.” 111

Given the allowances the Court must grant at this preliminary stage, the

Insurers seem to have better of the argument. The most natural read of “an entity”

in context here would tend toward all entities without exclusion of the elsewhere-

defined term “Named Entity.” 112 To read “entity” the way Harman asks the Court

to now do might well mangle what seems like an otherwise clear undefined

107
Pl.’s Mot. for Summ. J. Br. at 25-26 (emphasis in original).
108
Pl.’s Mot. for Summ. J. Br. at 26.
109
AIG Policy § 13 (definitions) (In the event of 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 the ownership interest in or assets of an entity is inadequate . . . .”).
110
Defs.’ Opp’n to Pl.’s Mot. for Summ. J and Reply Br. at 26-27.
111
Pl.’s Mot. for Summ. J. Br. at 25-26.
112
See, e.g., Sycamore P’rs Mgmt., L.P. v. Endurance Am. Ins. Co. et al., 2021 WL 4130631, at
*19 (Del. Super. Ct. Sept. 10, 2021) (when addressing an undefined word or term in a contract,
the Court accepts what it “most naturally means” in the given context).

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contractual term. 113

Concerning the second argument, Harman states the transaction was clearly a

reverse triangular merger, not an acquisition, and because the Bump-Up Provision

only applies to acquisitions the exclusion does not apply.114 But at some point,

Harman itself labeled the transaction an acquisition.115 So a fuller record is

necessary before the Court can determine whether the transaction was in fact an

acquisition or a merger. Both corporate acts involve similar features yet are treated

differently under our law and under like Bump-Up Provisions. 116 Here, the Court

must have a more developed record before deciding key issues. 117

And concerning the additional elements necessary for the exclusion to

apply—that the settlement should be related only to the allegation of inadequate

113
In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1131 (Del. 2020) (“Delaware courts will
not ‘destroy or twist’ the words of a clear and unambiguous insurance contract.” (citation omitted);
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)
(“Courts will not torture contractual terms to impart ambiguity where ordinary meaning leaves no
room for uncertainty.” (citation omitted)).
114
Pl.’s Mot. for Summ. J. Br. at 31-32.
115
Defs.’ Mot. to Dismiss at 20 n.10 (citing Press Release, Harman International Industries, Inc.
(November 14, 2016), https://news.harman.com/releases/samsung-electronics-to-acquire-
harmanaccelerating-growth-in-automotive-and-connected-technologies).
116
Northrop Grumman, 2021 WL 347015, at *21 (“Two transactions that may be the same
economically but are titled differently and demand dissimilar execution procedures have
independent legal significance.” (citations omitted)).
117
In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 2014 WL 2768782, at *9 (Del. Ch. June 12,
2014) (“[T]he court may, in its discretion, deny summary judgment if it decides upon a preliminary
examination of the facts presented that it is desirable to inquire into and develop the facts more
thoroughly at trial in order to clarify the law or its application.” (citing Cerberus Int’l, Ltd. v.
Apollo Mgmt., L.P., 794 A.2d 1141, 1150 (Del. 2002)).

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consideration and must represent an effective increase in consideration—there is a

genuine dispute about what the Baum settlement actually represents. Harman says

because it was not just a Rule 14(a) action then it is automatically covered; while the

Insurers say the damages in the underlying complaint were for inadequate

consideration. The Court is being asked at this nascent stage to decide a critical

fact—what does the Baum settlement actually represent? The Baum complaints and

the few exhibits included in the record here simply do not provide the Court with

enough facts to make those determinations.

D. WAIVER AND ESTOPPEL ARE NOT APPLICABLE AT THIS STAGE.

As a final matter, Harman insists the Insurers either waived their ability to

disclaim coverage, or that the Insurers should be estopped from changing their initial

position on coverage. 118 Harman points to a 2017 letter from AIG where AIG

acknowledged the Baum action; Harman says this letter led it to believe that the

Baum action was covered.119 The Court cannot rule, at this point, that either waiver

or estoppel apply here.

“Waiver is the voluntary and intentional relinquishment of a known right.”120

To be sure, a party can waive a contractual right, “[b]ut, the standards for proving

118
Pl.’s Mot. for Summ. J. Br. at 41-43.
119
Id. (citing id., Ex. L).
120
Realty Growth Invs. v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982) (citations
omitted).

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waiver under Delaware law are ‘quite exacting.’” 121 Waiver “implies knowledge of

all material facts and an intent to waive, together with a willingness to refrain from

enforcing those contractual rights.” 122 The facts evidencing waiver must be

“unequivocal.”123 And to prove waiver, a party must show “(1) that there is a

requirement or condition to be waived, (2) that the waiving party must know of the

requirement or condition, and (3) that the waiving party must intend to waive that

requirement or condition.”124

Relatedly, “estoppel applies when a party by its conduct intentionally or

unintentionally leads another, in reliance upon that conduct, to change position to its

detriment.”125 To prove estoppel, a party must show: “(1) it lacked knowledge or

the means of obtaining knowledge of the truth of the facts in question, (2) it relied

on the conduct of the party against whom estoppel is claimed, and (3) it suffered a

prejudicial change of position as a result of its reliance.”126

A showing of both intent and prejudice are necessary under the analysis for

examining estoppel prescribed by Bantum v. New Castle County Vo-Tech Education

121
Bantum v. New Castle Cty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011) (quoting
AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005)).
122
AeroGlobal Cap. Mgmt., LLC, 871 A.2d at 444 (citations omitted).
123
Realty Growth Invs., 453 A.2d at 456 (citation omitted).
124
Bantum, 21 A.3d at 50-51 (internal quotation marks and citation omitted).
125
Id. at 51 (cleaned up).
126
Id. (cleaned up).

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Association. 127 All Harman has done to suggest prejudice is complain that “[i]t

would be inequitable, and prejudicial, for the Insurers to snatch away that protection

at this late hour.”128 That’s not enough. And as to intent, this Court has consistently

held that is a question of fact that shouldn’t be resolved on a summary judgment

record.129 Accordingly, the invocation of estoppel is premature at this stage.

Under the waiver argument, Insurers believe generally that an exclusion

cannot be waived because it would “create coverage that was not contracted for.”130

Harman says, “Insurers can waive reliance on an Exclusion whose interpretation and

application are subject to reasonable debate.”131 But Harman provides no specific

case law for this. Rather, Harman merely posits that each of Insurers’ cited cases

concern clear and unambiguous policy language and so they are inapplicable here.132

That’s a generous read and view of the cited caselaw.

“Generally, waiver and estoppel may not be invoked to make a new contract,

or to change radically the terms of the policy to cover additional subject matter.”133

127
See id.
128
Pl.’s Mot. for Summ. J. Br. at 43.
129
Columbus Life Ins., Co. v. Wilmington Tr. Co., 2023 WL 1956868, at *8 (Del. Super. Ct. Feb.
13, 2023).
130
Defs.’ Opp’n to Pl.’s Mot. for Summ. J and Reply Br. at 46.
131
Pl.’s Reply Br. at 20 (D.I. 32).
132
Id. at 19.
133
St. Jones River Gravel Co. v. Hartford Fire Ins. Co., 1980 WL 308672, at *2 (Del. Super. Ct.
July 7, 1980) (citations omitted).

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“Waiver, [instead] can only be used to continue coverage which would otherwise be

lost by a technical non-compliance with a forfeiture clause.” 134 “It is well

established that the coverage or scope of a policy may not be extended by waiver,

implied from the insurer’s reliance on exclusions in an initial rejection letter, which

differ from those ultimately put forth as a defense.” 135

Here, like in Martin v. Colonial Insurance Company of California, it seems

“the exclusionary clauses go to the coverage or scope of the policy and not to a

condition of forfeiture.” 136 So waiver may well not be applicable here.

In any event, waiver too is a fact-intensive inquiry.137 Harman relies on a

single letter. 138 To the extent that waiver might be applicable, Harman hasn’t carried

its burden to show the Insurers intended to waive any requirement or condition.

VII. CONCLUSION

Accordingly, the Insurers’ Motion to Dismiss is DENIED, and Harman’s

Motion for Summary Judgment is DENIED.

IT IS SO ORDERED.

Paul R. Wallace, Judge
134
Martin v. Colonial Ins. Co. of Cal., 644 F.Supp. 349, 352 (D. Del. 1986).
135
Id. (citations omitted).
136
Id.
137
See Bantum, 21 A.3d at 50-51.
138
See Pl.’s Mot. for Summ. J. Br., Ex. L.

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