Federal Court Rejects Application of D&O Policy's "Bump-Up" Exclusion to Merger Litigation

Directors and Officers Liability ("D&O") insurers often attempt to rely on so-called "bump-up" exclusions in their policies as a categorical bar to the indemnification of claims arising from mergers and acquisitions entered into by their policyholders. However, in a significant victory for policyholders, the U.S. District Court for the Eastern District of Virginia in Towers Watson & Co v. National Union Fire Insurance Company of Pittsburgh, PA et al., Case No. 1:20-cv-00810 (E.D. Va) rejected this strained policy interpretation, concluding that the standard "bump-up" exclusion found in many D&O policies does not, in fact, preclude coverage for settlements of underlying merger litigation.

In that case, Towers Watson and Willis entered into a merger agreement involving a multistep process that included the cancellation of both companies' stock and the issuance of stock in a newly constituted company incorporating the two merged entities. Following the merger, shareholder lawsuits were brought in Virginia and Delaware alleging that material information was concealed from shareholders who, as a result, received "consideration lower than the true value of their shares." The lawsuits were ultimately settled for $90 million.

Towers Watson sought coverage for the shareholder lawsuits from its D&O insurers, who denied coverage for the settlements. The insurers maintained that the settlements effectively increased the purchase price of the merger and were thus barred by the policies' so-called "bump-up" exclusion, which stated, in relevant part, that: "In the event that 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 of the ownership interest in or assets of an entity is inadequate, Loss … shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased…" (emphasis added).  

In the ensuing coverage litigation, the Eastern District of Virginia rejected the insurers' position, finding it was unsupported by the language of the "bump-up" exclusion at issue. The court reasoned that under the merger's structure—in which both companies delisted their outstanding publicly traded shares and Towers Watson shareholders received certificates entitling them to newly issued Willis shares—Willis never actually "acquired" any Towers Watson stock. The court thus concluded that because "there is a reasonable, narrow reading of the Bump-Up Exclusion that excludes the Merger," under well-established principles of policy interpretation, the exclusion did not apply to bar coverage for the merger settlements. 

In light of the Towers Watson decision, commercial policyholders should carefully review their D&O policy language in conjunction with the actual terms of any corporate acquisition and resist insurer efforts to apply and expand so-called "bump-up" exclusions beyond their terms.