A federal district court, applying Virginia law, has held that the “Bump-Up” exclusion in a D&O insurance policy does not unambiguously apply to preclude coverage for the settlements of underlying actions relating to the 2016 merger of Towers Watson and Willis. The court construed the exclusion narrowly and based on a reasonable interpretation most favorable to the insured, Towers Watson, determined that the settlements  were not excluded from the definition of Loss under the Bump-Up exclusion.  A copy of the court’s October 5, 2021 opinion can be found here.



In June 2015, Towers Watson and Willis entered into an Agreement and Plan of Merger. The transaction contemplated a complicated multistep process that among other things involved the cancellation of the stock of both companies and the issuance of stock in a new company that was to represent the two merged entities. In December 2015, the shareholders of both companies voted in favor of the transaction and the transaction closed on January 4, 2015.


Two sets of lawsuits subsequently arose regarding the transaction. The first, which subsequently was referred to as the Virginia Action, involved alleged violations of Sections 14(a) and 20(a) of the ’34 Act, based upon alleged omissions from the proxy statement provided to Towers Watson shareholders in connection with the proposed transaction. The alleged omission related to premerger negotiations allegedly involving the post-merger compensation of the post-merger CEO of the combines companies.


The second of the two lawsuits, subsequently referred to as the Delaware Action, involves allegations of breach of fiduciary duty and aiding and abetting the breach of fiduciary duty in connection with the transaction. As the court in the subsequent insurance coverage litigation subsequently put it, the claims in the Delaware Action were “based on essentially the same allegations as in the Virginia Action.”


The two actions ultimately settled for a combined total of $90 million, $75 million for the Virginia Action and $15 million for the Delaware Action. Both settlements were subsequently approved by the relevant courts.


As the relevant time, Towers Watson maintained a program of $80 million of D&O insurance, consisting of a layer or primary coverage and six layers of excess coverage. (Readers interested in the identities of the insurers in the insurance tower and their respective limits of liability will want to refer to footnote ten in the insurance coverage opinion to which I linked above).  Towers Watson submitted the lawsuits to the insurers. The primary insurer acknowledged that the underlying actions qualified as Claims under the policy and agreed to advance defense costs. However, the insurer prospectively denied coverage for any settlements or judgments in the underlying actions based on the Bump-Up exclusion in the primary policy.


Towers Watson filed an insurance coverage action against the D&O insurers in the Eastern District of Virginia. Towers Watson moved for partial summary judgment, seeking a judicial declaration that the settlement amounts in the underlying actions are within the scope of coverage under the policies and are not otherwise excluded.


The Bump-Up exclusion provides as follows:


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.


The October 5, 2021 Opinion

In his October 5, 2021 opinion, Eastern District of Virginia Judge Anthony J. Trenga stated that “the dispositive coverage issue is whether the Bump-Up Exclusion unambiguously applies to the Settlements, and therefore excludes the Settlements from the definition of a covered Loss, or whether there is a reasonable construction of the Bump-Up Exclusion that makes it inapplicable to the Settlements.”


In determining this “dispositive coverage issue,” Judge Trenga took up the threshold question of whether the Merger at issue represents “the acquisition … of all or substantially all the ownership interest in an entity.” Judge Trenga concluded that the Bump-Up exclusion does not unambiguously apply to the Merger as “the acquisition” of the type reference in the exclusion, as would have been required in order for the exclusion to apply.


In reaching this conclusion, Judge Trenga rejected the defendants’ argument that the “plain and ordinary” meaning of the word “acquisition” applied to the merger.  In doing so, Judge Trenga looked closely at the actual structure of the merger transaction at issue in the underlying claims. Judge Trenga considered the fact that under the structure of the transaction, in which all of the stock of both combining companies was cancelled, Willis never “acquired” any of the stock of the former Towers Watson shareholders. “Under these circumstances, the Merger was hardly comparable to the straightforward takeover of one company by another company … and therefore is reasonably viewed as something other than ‘the acquisition’ referenced in the Bump-Up Exclusion.”


Finally, Judge Trenga also noted that under Delaware corporate law a takeover acquisition of the type referenced in the Bump-Up Exclusion and a merger have distinct meanings. In assessing this distinction and applying it to this case so as to reinforce his conclusion that the Bump-Up exclusion does not operate to preclude coverage, Judge Trenga expressly relied on the reasoning of Delaware Superior Court Judge Wallace’s February 2021 decision  in the Northrup Grumman insurance coverage action (discussed here). Judge Trenga said that “given the recognized distinction under Delaware law … between the takeover transaction referenced in the Bump-Up Exclusion and a merger between two companies (some implementing aspect of which might involve some transfer of stock from one entity to another, the Bump-Up Exclusion does not unambiguously reference a reverse triangular merger like the Merger” involved here.


In conclusion, Judge Trenga said that “the issue is not whether the Bump-Up Exclusion can be reasonably understood to include the business combination between Towers Watson and Willis, but whether that is the only reasonable reading.” Based on the policy language and the structure of the merger at issue, “and the recognized differences between a takeover acquisition and a merger under Delaware law,” there is a “reasonable, narrow reading of the Bump-Up Exclusion” by which the merger would not fall within the exclusion and “under Virginia’s applicable principles of insurance contract interpretation, that narrow construction prevails as the construction providing broader coverage.” Accordingly, Judge Trenga granted Towers Watson’s motion for partial summary judgment.



This ruling is a win for Towers Watson and it will undoubtedly hearten policyholder side representatives everywhere. While the opinion undoubtedly is a policyholder side win, the ruling may or may not have a significant effect in other insurance coverage disputes involving the Bump-Up exclusion. Among other things, it is pretty clear that there were a number of specific features of the transaction involved here that influenced the court’s analysis of whether the merger involved was an “acquisition” of the type to which the exclusion applies. The fact-specific aspect of the opinion may limit its usefulness in other contexts.


Of perhaps greater significance, as a ruling of a federal district court, the court’s opinion here is subject to appeal. Given the amount of money at issue, an appeal seems likely.


With respect to any appeal, it is worth noting that Judge Trenga reached only one of three issues he saw the Bump-Up exclusion presenting. He reached only the first of the issues – that is, whether the merger at issue is an “acquisition” of the type to which the exclusion applies. Because he concluded that it could not unambiguously be said that the merger is an “acquisition” within the meaning of the exclusion, he did not reach the other two issues. The other two issues (identified on page 14 of the opinion) is the underlying lawsuits involved a “Claim alleging that the price or consideration paid … for the acquisition .. is inadequate”; and whether the Settlements represent “amount … representing the amount by which such price or consideration [for ‘the acquisition’] is effectively increased.” I note these other two arguments simply to point out that these other two issues that Judge Trenga identified but did not reach could potentially be in play in the event of any appeal.


Insurance coverage practitioners undoubtedly noted Judge Trenga’s reference to and reliance upon Judge Wallace’s opinion in the Northrup Grumman insurance coverage dispute. I can only imagine that another court’s reliance on insurance coverage opinions of Delaware’s courts can only make insurer-side practitioners wince and groan. I can easily imagine them saying that it is bad enough for insurers to keep getting clobbered in Delaware courts. It is even worse if the Delaware courts’ insurance coverage opinions start getting exported into the coverage decisions of the courts of other jurisdictions.


Special thanks to a loyal reader for providing me with a copy of Judge Trenga’s opinion.