Increased litigation over the growing wave of transactions involving special-purpose acquisition companies will likely lead to heated fights over the potential application of the so-called bump-up exclusion found in directors and officers insurance policies, policyholder attorneys say.

Also known as blank-check companies, SPACs have exploded in popularity in the past couple of years, and that surge has been accompanied by an increase in litigation against directors and officers of companies involved in SPAC transactions. Experts note the number of SPAC-related suits rose at a higher rate than the number of other securities suits, though these actions remain in the early stages of litigation.

Insurance coverage issues tend to trail trends, and policyholder attorneys believe D&O policies' bump-up exclusion will play into the SPAC-related suits. These suits typically allege misrepresentations in post-merger press releases and public filings about a targeted company or the merged companies' business and performance, though some allege SPACs should be registered as investment companies.

The bump-up exclusion — or carveout provision, in the insurance industry's preferred nomenclature — addresses shareholder allegations that the price paid for the acquisition of a company wasn't adequate and precludes coverage for a settlement that increases that price.

There has been a lot of activity with SPACs leading to D&O claims, according to experts, as seen in a proposed securities class action filed last month against an electric vehicle company. Experts warn that more D&O litigation could be on the horizon as there are more than 400 SPACs looking to merge with target companies.

Still, policyholder attorneys raised concerns on whether insurers would attempt to cite the bump-up exclusion in SPAC-related litigation. That exclusion has already been the subject of high-profile debates by courts, with policyholders notching several wins.

Policyholders saw a ruling in their favor on the bump-up exclusion when a Delaware state judge said in February that Northrop Grumman Innovation Systems Inc. was covered under D&O policies for a proposed class action accusing the company's predecessor of misleading investors about its financial health.

Delaware Superior Court Judge Paul R. Wallace ruled there weren't allegations of inadequate compensation in the suit against Northrop. Rather, the bump-up exclusion applied only to transactions where an acquiring company gets all or most of the ownership interest or assets of another company, according to the trial judge.

Tamara Bruno, a Pillsbury Insurance Recovery & Advisory partner who served as Northrop's counsel, said carriers are applying the bump-up exclusion to too many transactions based on a knee-jerk reaction to any inadequate compensation allegation in a complaint without considering all the claims and categories of damages being sought.

In Northrop's playbook, Bruno said the focus was on the details of that particular bump-up exclusion, as it didn't apply to all transactions. For example, there are differences between a company acquiring another company compared to stock-to-stock mergers in which existing shareholders obtain a portion of the final merged company.

In Northrop's case, Bruno said her client felt strongly the damages were actually a "bump-down" and didn't fall within the bump-up exclusion for increased consideration. Shareholders didn't want more money for the shares they got in another company but wanted a refund for overvalued amounts paid, Bruno explained.

"You walk into a jeweler and sell a gold plate ring but learn later that it was solid gold, then you ask for increased consideration for the actual value of the ring. But if you buy the ring thinking it was solid gold and it was gold-plated, you want a refund," she said, adding the bump-up exclusion should be applied to the actual facts of the transactions and claims at issue.