Insurance Law
D&O Liability Insurance
Primary Policy and Excess Policies
“Bump-Up” Exclusion
“Loss”: Definition
“Acquisition”: Definition
Reverse Triangular Merger
Ambiguity Must Be Resolved Against the Policy’s Drafter
Diversity Jurisdiction
Forum State’s Choice-of-Law Rules
Declaratory Judgment Action
Virginia Law
Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. (1:20-cv-00810-AJT-JFA)
Vacated and remanded by published opinion.
In 2015, Towers Watson & Co. (“Towers Watson”), a Delaware company headquartered in Virginia, purchased directors and officers (“D&O”) liability insurance coverage from several insurance companies, including National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”) as the primary insurer. Following Towers Watson’s merger with another company, Towers Watson shareholders filed several lawsuits against Towers Watson’s chairman and CEO and others, alleging that the shareholders received below-market consideration for their shares in the merger. The litigation settled, and Towers Watson sought indemnity coverage from its insurers under the relevant D&O policies. The insurers refused the indemnity request, citing a so-called “bump-up” exclusion in the policies. This declaratory judgment action followed. The district court sided with Towers Watson and held that the bump-up exclusion “does not unambiguously” preclude indemnity coverage for the underlying settlements. Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 1:20-cv-810 (AJT/JFA), 2021 WL 4555188, at *2 (E.D. Va. Oct. 5, 2021). In doing so, however, the court adopted an unduly narrow reading of the exclusion, finding ambiguity where none exists and ascribing specialized meanings to policy terms that the parties did not reasonably intend. We therefore vacate the district court’s judgment and remand for further proceedings.
National Union, a Pennsylvania company with its principal place of business in New York, insured Towers Watson under a D&O policy for the 2015 policy year. Along with the National Union primary policy, Towers Watson purchased several layers of excess D&O liability coverage from the remaining Appellant-insurance companies (together with National Union, the “Insurers”). Those excess policies “follow form” to the primary policy, meaning that they incorporate the same terms. For convenience, we refer to these primary and excess policies collectively as the “Policy.” Under the Policy, the Insurers agreed to cover the “Loss of any Organization . . . arising from any Securities Claim made against such Organization for any Wrongful Act of such Organization,” and the “Loss of an Organization that arises from any . . . Claim . . . made against any Insured Person . . . for any Wrongful Act of such Insured Person.” J.A. 62.2 “Loss” is a defined term that generally includes “damages, settlements, judgments,” and defense costs. J.A. 82.
The term “Organization” includes the “Named Entity,” J.A. 83, which is defined as “Towers Watson & Co.,” J.A. 57, and the term “Insured Person” includes any “Executive” or “Employee” of Towers Watson, J.A. 82. A “Securities Claim” includes any “Claim” alleging the violation of a “federal, state, local or foreign regulation, rule or statute regulating securities” brought against Towers Watson or its executives or employees related to a securities interest in Towers Watson, as well as a “Derivative Suit.” J.A. 86. (Fn. 2).
As stated above, the Policy includes a bump-up exclusion, which generally bars coverage for losses stemming from judgments or settlements in connection with claims against the insured seeking an increase, or “bump up,” in the consideration paid for a security. In relevant part, the bump-up exclusion provides: 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. J.A. 83. This appeal turns on the proper interpretation of this exclusion. Before undertaking that analysis, however, we first provide relevant context.
Over the next few years, former Towers Watson shareholders filed separate class actions against various parties involved in the merger, including Towers Watson’s former chairman and CEO John Haley. One action was filed in Virginia federal district court and two others were filed and later consolidated in the Delaware Court of Chancery. These actions, which asserted federal-securities-law claims and Delaware-state-law claims, respectively, both stemmed from allegations that Haley negotiated the Merger Agreement under an undisclosed conflict of interest: Haley would receive a compensation package worth up to $165 million if the deal closed. And because of this alleged conflict, Haley purportedly agreed to a below-market valuation of Towers Watson shares to ensure the merger’s success. Both shareholder actions ultimately settled for a total of $90 million—$75 million in the Virginia action and $15 million in the consolidated Delaware action.
While the Virginia and Delaware actions were pending, Towers Watson sought coverage under the Policy. The Insurers funded Towers Watson’s legal defense but denied indemnity coverage for any resulting judgment or settlement based on the bump-up exclusion. According to the insurers, the Virginia and Delaware actions sought increased consideration for Towers Watson shares, thereby triggering the Policy’s bump-up exclusion. In response, Towers Watson filed this declaratory judgment action in Virginia federal district court, seeking a declaration that the bump-up exclusion would not foreclose indemnity coverage.
Because this appeal invokes our diversity jurisdiction, we must apply the forum state’s choice-of-law rules to determine the governing substantive law. See Am. Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89, 92 (4th Cir. 2003). In Virginia, the law of the place where a contract is formed controls the contract’s interpretation. See Dreher v. Budget Rent-A-Car Sys., Inc., 634 S.E.2d 324, 327 (Va. 2006). The parties agree that the Policy was formed in Virginia, so Virginia law governs its interpretation. In Virginia, “an insurance policy is a contract, and, as in the case of any other contract, the words used are given their ordinary and customary meaning when they are susceptible of such construction.” Hill v. State Farm Mut. Auto. Ins. Co., 375 S.E.2d 727, 729 (Va. 1989). If policy language is ambiguous, that ambiguity must be resolved against the policy’s drafter, which “is almost always the insurer,” Erie Ins. Exch. v. EPC MD 15, LLC, 822 S.E.2d 351, 355 (Va. 2019), as is the case here. This contra proferentem rule applies with particular force in cases involving the construction of coverage exclusions, see Seals v. Erie Ins. Exch., 674 S.E.2d 860, 862 (Va. 2009), where the insurer has the burden to prove that an exclusion applies, TravCo Ins. Co. v. Ward, 736 S.E.2d 321, 325 (Va. 2012). However, the Supreme Court of Virginia has “cautioned” courts to “resist” the “temptation” to “give up quickly on the search for a plain meaning by resorting to the truism that a great many words—viewed in isolation—have alternative, and sometimes quite different, dictionary meanings.” Erie Ins. Exch., 822 S.E.2d at 355. Otherwise, “the contra proferentem thumb-on-the-scale would apply to nearly every interpretation of nearly every insurance policy.” Id. For that reason, the Virginia high court has repeatedly instructed that policy language is truly ambiguous only where the “competing interpretations . . . are ‘equally possible’ given the text and context of the disputed provision.” Id. at 356 (citation omitted). In its effort to apply these principles, the district court found that “the Bump-Up Exclusion’s reference to ‘the acquisition’ does not unambiguously apply to the Merger” because “there is a reasonable, narrow reading of the Bump-Up Exclusion that excludes the Merger” and thus results in coverage for the insured. Towers Watson & Co., 2021 WL 4555188, at *13 & n. 29. Accordingly, the district court determined that the bump-up exclusion does not apply. We disagree. Our analysis naturally begins with the relevant exclusionary language: 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 J.A. 83. As the district court correctly noted, the term “acquisition” “is not defined in the policy, so the term must be given its ordinary and accepted meaning.” Lower Chesapeake Assocs. v. Valley Forge Ins. Co., 532 S.E.2d 325, 330 (Va. 2000). To ascertain that ordinary meaning, we follow Virginia courts’ established practice of looking to the term’s dictionary definition. See, e.g., id. (consulting a dictionary for the plain meaning of an undefined term in an insurance policy); see also CACI Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150, 158 (4th Cir. 2009) (following the same practice when interpreting an undefined term in a Virginia insurance policy). In doing so, we remain mindful of the context in which the term appears in the Policy. See Erie Ins. Exch., 822 S.E.2d at 355 (“The plain meaning of a word depends not merely on semantics and syntax but also on the holistic context of the word within the instrument.”). The term “acquisition” is defined as “the act or action of acquiring.” Webster’s Third New International Dictionary 19 (2002). The word “acquire,” in turn, means “to come into possession or control . . . of often by some uncertain or unspecified means.” Id. at 18; see also Acquisition, Black’s Law Dictionary (11th ed. 2019) (defining “acquisition,” in relevant part, as “the gaining of possession or control over something,” e.g., the “acquisition of the target company’s assets”). Given this plain and ordinary meaning, our limited and straightforward inquiry is whether, as a result of the executed Merger Agreement, another entity gained “possession” or “control” “of all or substantially all the ownership interest in or assets of” Towers Watson. We find that the answer is clearly yes.
As noted earlier, under the Merger Agreement, Willis-subsidiary Citadel merged into Towers Watson, with Towers Watson as the entity surviving the transaction. The Towers Watson shares were then canceled and delisted, and newly created Towers Watson shares were issued solely to Willis. These events collectively resulted in Towers Watson, with all its pre-merger assets, becoming a wholly owned subsidiary of Willis. See J.A. 757–58. (…) We think it clear that an ordinary person would understand that, through this reverse triangular merger, Willis obtained “possession” or “control” of—i.e., acquired—not just all the equity ownership interest in Towers Watson, but also all of Towers Watson’s assets.
We find the district court’s analysis flawed in several respects. To begin, nothing in the bump-up exclusion stipulates, or even hints, that the term “acquisition” was intended to refer only to a particular form of acquisition—i.e., a takeover—under Delaware law. Nor can such an intent be gleaned from any other provision of the Policy, which is governed not by Delaware law but by Virginia law. We will not assign a specialized meaning to a contract term absent some indication that the parties intended to do so. See PMA Cap. Ins. Co. v. US Airways, Inc., 626 S.E.2d 369, 372 (Va. 2006) (“The contract is construed as written, without adding terms that were not included by the parties.”); Worsham v. Worsham, 867 S.E.2d 63, 71–72 (Va. Ct. App. 2022) (stating that contract terms must be accorded their ordinary meaning unless “it is manifest from the instrument itself that other definitions are intended” (cleaned up)). The general principle that exclusions must be narrowly construed assuredly does not authorize us to take such a drastic step. Far from it. Courts are not at liberty to rewrite otherwise plain and unambiguous policy language in order to arrive at an insured-favorable outcome. See Va. Farm Bureau Mut. Ins. Co. v. Williams, 677 S.E.2d 299, 302 (Va. 2009) (“When a disputed policy term is unambiguous, we apply its plain meaning as written.”); see also Gov’t Emps. Ins. Co. v. Moore, 580 S.E.2d 823, 828–29 (Va. 2003) (reversing the trial court’s judgment for the insured where an exclusionary clause unambiguously excluded coverage).
Although the Merger Agreement between Towers Watson and Willis was governed by Delaware corporate law, the Policy we are called to interpret in this appeal is undisputedly governed by Virginia law. And, again, nothing in the Policy purports to apply Delaware corporate law to the bump-up exclusion’s interpretation. (Fn. 10).
Here, the bump-up exclusion refers to “the acquisition of all or substantially all the ownership interest in or assets of an entity.” Not further defined in the Policy, the term “acquisition” must be given its ordinary meaning, which is to gain “possession” or “control” of something. Thus, the bump-up exclusion’s “acquisition” requirement is satisfied where another entity secures “possession” or “control” “of all or substantially all the ownership interest in or assets of” Towers Watson. That is precisely what happened here as a result of the Willis-Towers Watson reverse triangular merger: Willis gained total possession and control of all ownership interest in Towers Watson, and with it all of Towers Watson’s assets.
In that respect, we also disagree with the district court that this initial reverse triangular merger involving Towers Watson and Citadel was merely a “short-lived transitional event” with no legal significance. Towers Watson & Co., 2021 WL 4555188, at *10. To the contrary, that legally distinct merger—and the sole merger contemplated by the Merger Agreement—carried with it distinct legal consequences. Not only was this initial merger the focus of the underlying shareholder litigation, but it was also the very transaction that resulted in Towers Watson becoming a wholly owned subsidiary of Willis, giving Willis total control of Towers Watson and its assets. The discrete legal events that subsequently transpired, namely, Towers Watson’s merging into another Willis subsidiary and disappearing, are beside the point.
Nor do we think it material that “Willis never actually ‘acquired’ any of the stock of the former Towers Watson Shareholders” but instead received newly created shares “never held by any Towers Watson shareholder.” Towers Watson & Co., 2021 WL 4555188, at *10. The bump-up exclusion is not triggered by the acquisition of any particular shares; it is triggered by the acquisition of “all or substantially all the ownership interest in or assets of an entity.” J.A. 83. Thus, what matters is whether Willis obtained possession or control of all or substantially all of Towers Watson’s equity or assets. And as detailed above, that is just what happened here.
To be clear, our narrow holding does not resolve the ultimate question whether the bump-up exclusion bars indemnity coverage to Towers Watson for the underlying settlements. Towers Watson has raised two independent bases for the exclusion’s facial inapplicability—that Towers Watson doesn’t constitute “an entity” and that the underlying settlements don’t represent an effective increase in consideration for the original Towers Watson shares. The district court declined to address those arguments below. We believe the proper course is to remand to the district court for resolution of those issues in the first instance, assuming of course that Towers Watson elects to raise them again.
(U.S. Court of Appeals for the Fourth Circuit, May 9, 2023, Towers Watson & Co. v. National Union Fire Insurance Comp. of Pittsburgh, Docket No. 21-2396, Published)
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