On March 6, 2024, in a decision that has attracted a lot of attention in the business press, the Eastern District of Virginia, applying Virginia law, held that the bump-up exclusion in Towers Watson’s D&O insurance policy precludes coverage for the $90 million paid in settlement of claims relating to the firm’s January 2016 merger with Willis Group Holdings. As discussed below, the court’s ruling highlights recurring issues concerning the wording of the bump-up exclusion. A copy of the March 6, 2024, opinion can be found here.


Shareholders filed two different sets of litigation against certain directors and officers concerning the Towers Watson merger with Willis. One alleged violation of the proxy solicitation rules under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. The other was a consolidated shareholder derivative lawsuit that alleged a breach of fiduciary duty in the part of Towers Watson’s CEO. The Actions alleged that the CEO had failed to disclose an alleged conflict of interest while negotiating the merger; specifically, the claimants alleged that while disclosing that he would be the CEO of the merged entity, he failed to disclose discussions concerning a contemplated compensation package potentially worth $165 million. The underlying claims ultimately settled for $90 million.

At relevant times, Towers Watson maintained a program of D&O insurance consisting of a layer of primary insurance and several layers of excess insurers. Towers Watson submitted the underlying lawsuits to its insurers as claims under the insurance program. The insurers covered Tower Watson’s defense costs in the underlying litigation. However, the insurers refused to pay the $90 million settlement amounts, in reliance, among other things, on the policy’s bump-up exclusion. Coverage litigation ensued.

The parties to the coverage lawsuit have extensively litigated whether or not the bump-up exclusion applied. The district court previously ruled that the exclusion did not unambiguously preclude coverage, but the Fourth Circuit reversed the lower court’s ruling and remanded the case back to the district court for further proceedings. On remand, the parties filed cross-motions for summary judgment on the question of whether the bump-up exclusion precluded coverage for the settlements.

The Relevant Policy Language

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 March 6, 2024, Order

In a March 6, 2024, Order, Eastern District of Virginia Judge Anthony J. Trenga granted the insurers’ motion for summary judgment, holding that the policy’s bump-up exclusion precludes coverage for the settlement amount.

In ruling on the motion, Judge Trenga addressed three specific questions concerning the applicability of the bump-up exclusion: (1) whether the underlying actions alleged inadequate consideration; (2) whether Towers Watson is “an entity” under the policy whose acquisition is covered by the exclusion; and (3) whether the settlements represent an effective increase in consideration for the merger. Judge Trenga concluded that the answer to each of these three questions is “yes.”

Judge Trenga first concluded that the complaints in the underlying actions “repeatedly” and “unambiguously” alleged that the consideration received by Towers Watson’s shareholders for the merger was inadequate.

Judge Trenga next concluded that Towers Watson is “an entity” for purposes of the exclusion’s applicability, based on the “ordinary and customary meaning” of the term “entity.” Judge Trenga noted that the exclusion’s use of the article “an” is unrestrictive and without limitation. He also noted that elsewhere in the policy where Towers Watson was meant to be excluded from the term “entity,” the policy so specified.

Finally, Judge Trenga concluded that the settlement amounts did represent an effective increase in consideration for the merger. Judge Trenga carefully considered what the term “represent” might mean and how it might operate, and whether and to what extent the settlement amount related to the merger consideration. He ultimately concluded that “after giving all the words in the Exclusion their reasonable and ordinary meaning,” that “the Settlements ‘represent’ amounts that ‘effectively increased’ the consideration for the merger, such that the Exclusion unambiguously applies to the Settlement.”


Other readers may focus on other aspects of Judge Trenga’s ruling. But for me, the interesting part of Judge Trenga’s opinion is the part where he concluded that Towers Watson is “an entity” with respect to which additional consideration paid for its acquisition is precluded under the policy. Although Towers Watson vociferously opposed this conclusion, I have to say that from my perspective, given the wording, the outcome is not unexpected.

The court’s conclusion that the exclusion applies to the acquisition of Towers Watson itself (as opposed to Towers Watson’s acquisition of another company) for me highlights a recurring concern about the wording and application of the bump-up exclusion. With respect to an exclusion with this wording, it arguably is no surprise that the bump-up exclusion would apply to the acquisition of the insured entity. The question for me is whether the exclusion should apply when the insured company is the acquired entity, or whether the exclusion properly should be worded so as to only apply when the insured company is the acquiror.

The bump-up exclusion in many, if not most, of the policies available on the market operate so as to preclude coverage for amounts of increased merger consideration regardless of whether the insured company is the acquiror or the acquired entity. However, there is an alternative wording in at least some policies available on the market under which the exclusion only operates to preclude coverage for the payment of increased merger consideration if the insured entity is the acquiror; this alternative wording would not preclude coverage where, as here, the insured entity is the merger target.

As I have detailed in prior posts, I have long believed that these issues surrounding the bump-up exclusion wording represent a question that is ripe for discussion within the D&O insurance industry.  The industry and its customers would benefit from a discussion of the issue of whether the bump-up exclusion should apply both when the insured company is the acquiror and when it is the acquisition target, or whether it should apply only when the insured company is the acquiror but not when the insured company is the target.

From my perspective, the insurance considerations are categorically different depending on whether the insured company is the acquiror or the acquisition target.

On the one hand, if the insured company is the acquiror, the company cannot simply underpay for an acquisition and then turn to its insurer as if the insurer were some kind of third-party capital partner with the expectation that the insurer should make up the shortfall. In that circumstance it is quite reasonable that the amount of the shortfall should be excluded from coverage.

On the other hand, if the insured company is the acquisition target and shareholders have alleged that the company and its executives wrongfully agreed to sell the company for an insufficient amount, those allegations look an awful lot like the very kind of thing that the policy is designed to insure against; the shareholders’ allegations that in agreeing to sell for an insufficient amount the executives breached their duty of care or loyalty or made misrepresentations have all the hallmarks of a classic D&O claim. In my view, the shareholders’ damages for the executives’ alleged violations of their duties in agreeing to sell the company for an insufficient amount arguably represent the very kind of thing for which the policy should provide protection. On the exclusionary wording that was applicable here, that kind of protection was held not to be available. The question for me is not whether or not that is the correct outcome based on the language applicable here; the question is whether the wording applicable here is the correct wording given the purposes of the D&O insurance policy.

I understand that others will have different views on this topic, which is the reason I think there would be value for the D&O insurance industry for further consideration of these issues. I think everyone would benefit – insurers and policyholders alike – if there were to be a further consideration of the bump-up exclusion and a reconsideration of what its purposes are and how it should operate in light of the larger purposes of the D&O insurance policy.

Special thanks to a loyal reader for sending me a copy of the Towers Watson opinion.