Bump-Up Exclusion Bars Indemnity for Shareholder Settlements in Merger Transactions

1. Introduction

In Towers Watson & Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa. (4th Cir. 2025), the Fourth Circuit clarified how the “bump-up” exclusion in directors & officers (D&O) liability insurance policies applies to settlements of shareholder class actions challenging merger consideration. The dispute arose after Towers Watson’s 2015 reverse triangular merger with Willis Group Holdings plc, in which former Towers Watson shareholders alleged that the stock‐for‐stock exchange undervalued their shares due to an undisclosed conflict of interest by Towers Watson’s CEO. Those shareholders ultimately settled two consolidated class actions—one in Virginia federal court ($75 million) and one in the Delaware Court of Chancery ($15 million)—for a combined $90 million.

Towers Watson had defense coverage under a primary D&O policy issued by National Union Fire Insurance Co., plus six excess layers following form. The insurers funded Towers Watson’s defense but refused to indemnify the settlements, invoking the policy’s bump-up exclusion, which disclaims coverage for any judgment or settlement “representing the amount by which [deal] price or consideration is effectively increased.”

On remand from this Court’s prior decision (67 F.4th 648), the district court held that the bump-up exclusion unambiguously applied to the shareholder settlements (including the $17 + million awarded as attorneys’ fees under the common-fund doctrine) and granted summary judgment for the insurers. Towers Watson appealed again. The Fourth Circuit has now affirmed in full.

2. Summary of the Judgment

The Fourth Circuit affirmed the district court’s ruling that:

The underlying shareholder complaints plainly alleged that the consideration paid in the Towers Watson–Willis merger was “inadequate,” satisfying the first element of the bump-up exclusion.
The $90 million in settlements “represent[ed] the amount by which [the] price or consideration is effectively increased,” as required by the exclusion, when read in light of the ordinary meanings of “represent” and “effectively.” The settlements therefore fell squarely within the exclusion’s scope.
The common-fund doctrine justified treating the entire $90 million settlement fund—including the portion ultimately allocated to attorneys’ fees—as an “effective increase” in merger consideration. Because the shareholders were entitled to the full fund, it did not matter that a district court later awarded part of it as fees.

Accordingly, the insurers had no duty to indemnify Towers Watson for the settlements, and the Fourth Circuit affirmed the grant of summary judgment for the Defendants‐Appellees.

3. Analysis

3.1 Precedents Cited

Prior Fourth Circuit Decision (67 F.4th 648): On the first appeal, this Court held that the 2015 merger qualified as an “acquisition” under the policy and remanded without deciding the ultimate coverage question.
Hill v. State Farm Mut. Auto. Ins. Co. (375 S.E.2d 727 (Va. 1989)): Virginia’s rules of contract interpretation: undefined terms receive ordinary meaning; ambiguities against the drafter.
Erie Insurance Exch. v. EPC MD 15, LLC (822 S.E.2d 351 (Va. 2019)): Contra proferentem applies only if reasonable interpretations are equally possible.
TravCo Ins. Co. v. Ward (736 S.E.2d 321 (Va. 2012)): Exclusions construed strictly against the insurer; insurer bears burden of proving applicability.
Komatsu Mining Corp. v. Columbia Casualty Co. (58 F.4th 305 (7th Cir. 2023)): Bump-up exclusions apply to settlements of § 14(a) disclosure suits if they effect a de facto increase in merger value.
Boeing Co. v. Van Gemert (444 U.S. 472 (1980)): Common-fund doctrine allows fee awards drawn from recovered class funds.

3.2 Legal Reasoning

The Court applied Virginia contract law to interpret the bump-up exclusion clause, which provides:

“Loss with respect to [a claim] shall not include any amount of any judgment or settlement representing the amount by which [deal] price or consideration is effectively increased.”

Two elements must be satisfied:

The claim alleges the acquisition consideration was inadequate. (Undisputed here.)
The settlement “represent[s]” an “effective” increase in that consideration.

Because “represent” means “constitute or amount to” and “effectively” denotes “the real result in reality,” the proper inquiry focuses on the settlements’ real-world effect: the shareholders recovered an additional $90 million to remedy underpayment. That satisfies both prongs, so the exclusion applies.

As for attorneys’ fees, the Court invoked the common-fund doctrine. The $90 million was paid into a fund for the benefit of the shareholders, who then sought and obtained fee awards from that same fund. Equity requires treating the entire fund—including the portion paid as fees—as an increase in merger consideration. Towers Watson’s attempt to carve out the fees would conflict with the settlement mechanics and create coverage for precisely what the exclusion forbids.

3.3 Impact

This decision has significant implications for:

D&O Policy Drafting: Insurers and policyholders must carefully negotiate or clarify any “bump-up” language to reflect the parties’ intent regarding post-merger settlements.
Corporate Transactions: Boards and executives should recognize that settlement of shareholder suits over deal consideration may not be insurable losses if bump-up clauses are present.
Common-Fund Fee Awards: The ruling confirms that fee awards drawn from a settlement fund can be swept within coverage exclusions that target increments in deal consideration.

4. Complex Concepts Simplified

Bump-Up Exclusion: A clause in M&D insurance that excludes coverage for any added amounts paid to shareholders to “bump up” deal consideration after lawsuits claiming underpayment.
Directors & Officers (D&O) Policy: Insurance protecting corporate leaders against personal liability and reimbursing the company when it indemnifies its officers or directors.
Indemnity vs. Defense Coverage: “Defense” pays legal fees to contest claims; “indemnity” reimburses settlements or judgments. Here, only indemnity was disputed.
Contra Proferentem: Contract‐interpretation rule that ambiguities in an insurance policy are resolved against the drafter (the insurer).
Common-Fund Doctrine: Under equity principles, when a lawsuit creates a fund benefiting a class, the court can award reasonable fees to class counsel from that fund as a whole.

5. Conclusion

The Fourth Circuit’s decision affirms that a well-drafted bump-up exclusion will preclude indemnity coverage for settlements that constitute an effective increase in merger consideration, including amounts paid as attorneys’ fees under the common-fund doctrine. By applying plain‐meaning construction under Virginia law, the Court reinforced insurers’ ability to manage deal-related liabilities and underscored the importance of precise policy language in the transactional risk space. This precedent will guide litigants, insurers, and drafters in navigating the boundaries of coverage in corporate acquisition disputes.