Because the so-called “bump up” exclusion typically found in D&O insurance policies is a frequently litigated policy term, industry observers were closely watching Fourth Circuit’s consideration of the question whether the exclusion applies to the settlement of litigation relating to Towers Watson’s January 2016 merger with Willis Group Holdings. On May 28, 2025, the appellate court held that the exclusion precludes coverage for the $90 million settlement of the underlying litigation. As discussed below, the appellate court’s decision likely will not put an end to disputes about the applicability of the exclusion. A copy of the Fourth Circuit’s May 28 decision can be found here.
Background
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 alleged a breach of fiduciary duty on the part of Towers Watson’s CEO. The two sets of litigation alleged that the CEO had failed to disclose an alleged conflict of interest while negotiating the merger; specifically, the claimants alleged 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 initially held that the exclusion did not unambiguously preclude coverage, on the grounds that the reverse triangular merger transaction that merged the two companies was not an “acquisition” within the meaning of the bump-up exclusion. The Fourth Circuit reversed the lower court’s ruling, holding that the merger transaction did involve an acquisition within the meaning of the exclusion. The appellate court then remanded the case back to the district court for further proceedings.
As discussed in detail here, on remand, the district court granted the insurers’ motion for summary judgment, holding that the bump-up exclusion did preclude coverage for the settlement amount. The district court held that, contrary to Towers Watson’s arguments, the plaintiffs in the underlying action had alleged that the merger consideration was inadequate; that Towers Watson was “an entity” under the policy whose acquisition is covered by the exclusion; and that the settlement amount did represent an effective increase in the merger consideration. Towers Watson appealed.
Relevant Policy Provision
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 May 28, 2025, Opinion
In a May 28, 2025, opinion written by Judge G. Steven Agee for a unanimous three-judge panel, the Fourth Circuit affirmed the district court, holding that the bump-up exclusion precludes coverage for the underlying settlement, including the portion of the settlement that ultimately went toward attorneys’ fees.
In concluding that the exclusion applied to preclude coverage, the appellate court agreed with the district court that the settlements do “represent” an amount by which the merger price was “effectively increased.” The “real result” of the settlements, the appellate court said, was that the shareholders received additional consideration for their relinquished shares.
In reaching this conclusion about the settlement, the appellate court rejected Towers Watson’s argument that the settlement of the Virginia class action could not trigger the exclusion because it asserted only violations of Section 14(a), for which a purchase price adjustment is not an available remedy. The court said that this argument, “while clever, is beside the point.” The appellate court’s said that its role is not to assess the substance of the underlying claims, but rather whether or not the settlement itself represented an effective increase in the merger consideration – which the appellate court concluded that it did.
Finally, the appellate court also rejected Towers Watson’s argument that the district court improperly included the amount of the settlement that went to the payment of the underlying plaintiffs’ attorneys’ fees within the amount of increased consideration. The appellate court agreed that the district court had properly concluded that the settlement amounts represented a common fund out of which the attorneys’ fees were paid. The entire settlement amount represented compensation to shareholder, and the fee award was paid out of that settlement.
Discussion
As readers of this blog well know, the potential applicability of the bump-up exclusion has been a hotly contested D&O coverage issue in recent years. In part that is because the dollar amounts involved in some of merger-related lawsuits have, in at least some cases, been huge. Like this case, the dollars involved provide significant incentive for dispute.
While it might be hoped that a decisive federal appellate court ruling – like this one –might put an end to bump-up exclusion disputes, that may not prove to be the case. This outcome of this dispute, decided by federal courts applying Virginia law, arguably stands in contrast to recent decisions by the Delaware courts, applying Delaware law.
Indeed, just a few months ago, in January 2025, Delaware Superior Court Paul R. Wallace ruled that a D&O insurance policy’s bump-up exclusion did not preclude coverage for amounts paid in settlement of claims arising out of Harman International’s reverse triangular merger with Samsung Electronics America. Judge Wallace in the Harman International case accepted the argument that the Fourth Circuit had rejected in the Towers Watson case as “clever but beside the point” – that is, the argument that because the underlying claim involved only allegations under Section 14(a), for which increase consideration is not a remedy, the settlement could not have involved an increase in the deal consideration. (Judge Wallace also ruled in 2021 in the Northrup Grumman case that the bump-up exclusion did not apply to preclude coverage for a Section 14(a) merger objection lawsuit settlement.)
As I noted at the time, it could be argued that the Delaware court’s ruling in the Harman case is just another example of the Delaware courts’ general pro-policyholder predisposition in D&O insurance coverage disputes. The fact is, however, that with the existence of contrary decisions out there, policyholders will have continued incentive to try to avoid the imposition of the bump-up exclusion, particularly given the huge dollar amounts often involved in these kinds of disputes.
I have long thought that one of the big problems here, and the reason that these kinds of disputes keep arising, is the wording of the bump-up exclusion itself. The exclusion’s reference to an “acquisition or the completion of the acquisition” has proven over time to be a poor match with the many kinds of merger transactions involved. It is also unclear whether the “entity” whose acquisition could potentially trigger the exclusion should be limited solely to third party organizations acquired by the policyholder company, or whether the exclusion should be (as insurers often argue) applicable even when the policyholder company is being acquired. Finally, as this case shows, the exclusion’s reference to “increase in consideration” all too often leads to disputes as well.
The Fourth Circuit’s ruling in the Towers Watson case is a win for the insurers involved and arguably for insurers generally. Once the insurers have finished smoking their victory cigars, I hope that they, and their policyholder-side counterparts, will turn to the larger issue of whether the bump-up exclusion can be revised in order to try to reduce the number of recurring disputes about whether or not the exclusion applies to suits over particular transactions. As I said at the time of Judge Wallace’s decision in the Harman International case, in my view, everyone would benefit if, as an industry, we were to step back and ask: what is the purpose of the bump-up exclusion and how should it operate in light of the larger purposes of the D&O insurance policy?
In the meantime, companies need seeking to procure D&O insurance coverage will want to consider whether their policies contain bump-up exclusions and how the exclusions might apply to merger transactions in which the company might become involved. It is important in that connection to understand that there alternative wordings may be available in the marketplace, for the bump-up exclusion as well as for other key policy terms and provisions. The potential significance of these policy wording issues simply underscores the importance of ensuring that insurance buyers have involved knowledgeable and experienced buyers in the D&O insurance acquisition process.