Implications of the Genzyme Decision: Loss Under a D & O Policy

Recently, in Genzyme Corp. v. Federal Insurance Co., 2010 WL 3991739 (1st Cir. 2010), the U.S. Court of Appeals for the 1st Circuit construed the definition of loss in a D & O policy and a so-called "bump-up" exclusion that precluded coverage for claims seeking an increase or "bump-up" in the consideration for the company's securities. The court applied these provisions to a settlement by Genzyme of a case alleging that a reorganization of Genzyme's equity ownership structure resulted in an inadequate price to owners of one of its classes of common stock. Although the decision reversed the lower court's ruling in favor of the insurer, the appellate decision demonstrates how D & O insurers may protect themselves from being forced to cover such corporate transactions in the future.