Fourth Circuit Limits D&O Coverage for M&A Settlement Under Bump-Up Exclusion

Sullivan & Cromwell writes that in Towers Watson & Co. v. National Union Fire Insurance Co., the U.S. Court of Appeals for the Fourth Circuit held that a D&O insurance policy’s “bump-up exclusion” barred coverage for a $90 million settlement resolving shareholder litigation related to a merger.

The court affirmed summary judgment for the insurer, concluding that the exclusion applied because the settlement effectively increased the consideration paid to Towers Watson shareholders.

This decision underscores the importance of corporate officers and directors carefully reviewing the scope of exclusions in D&O insurance policies when planning for mergers and acquisitions (M&A) transactions.

The case stems from a 2015 merger between Willis Group Holdings and Towers Watson. Shareholders of Towers Watson alleged that the company’s CEO negotiated a below-market valuation in exchange for a lucrative compensation package, violating securities laws and fiduciary duties.

Two class actions, one federal and one in Delaware, claimed the deal undervalued Towers Watson and that shareholders were misled by omissions in proxy statements. The actions settled for a combined $90 million, which Towers Watson sought to recover under its D&O policy.

The Fourth Circuit agreed with the lower court that the D&O policy’s “bump-up exclusion” applied, precluding coverage for the settlement. The court found that the shareholders received additional consideration for their shares through the settlement, thus falling within the scope of the exclusion.

The court also rejected arguments that the exclusion should not apply to securities law claims or attorneys’ fees awarded as part of the settlement.

For lawyers advising on D&O insurance, this case highlights the importance of carefully reviewing and negotiating exclusion language, particularly in the context of M&A transactions. Clients should be counseled on tailoring policy terms, evaluating supplemental coverage, and addressing potential litigation exposure during policy negotiations.