D&O Liability Policy
Merger
Shareholders’ Class Action
Merger Consideration
Insurance Policy’s « Bump-Up Exclusion »
Common Fund Doctrine
Equity
Virginia Law
This case returns to us following vacatur and remand to the district court. On remand, the district court held that the “bump-up exclusion” in the relevant directors and officers (“D&O”) liability insurance policies “unambiguously applied” to Towers Watson & Co.’s settlement with its shareholders. Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 1:20-cv-810, 2024 WL 993871, at *9 (E.D. Va. Mar. 6, 2024). As a result, it found that Towers Watson was not entitled to indemnity coverage under those policies and granted National Union Fire Insurance Co. of Pittsburgh, Pa.’s (“National Union”) motion for summary judgment to that effect.
National Union is the primary insurer. There are also several excess insurers, but their policies “follow form” to the primary policy, “meaning that they incorporate the same terms.” Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 67 F.4th 648, 650 (4th Cir. 2023). The district court’s conclusion thus applies with equal force to all the policies. (Fn. 1).
National Union provided defense coverage for the claims against Towers Watson. What is at issue here is indemnification coverage. When we refer to coverage herein, it means indemnification coverage under the various policies. (Fn. 2).
A D&O policy, also called a management liability policy, provides coverage to “officers and directors of a corporation for claims asserted against them for wrongful acts, errors, omissions, or breaches of duty, and also. . . provides indirect coverage to the corporation for reimbursement of any monies expended to indemnify the officers and directors.” 9A Steven Plitt et al., Couch on Insurance § 131:30 n.3 (3d ed. 2024). (Fn. 4).
The term “Organization” includes the “Named Entity,” which is defined as “Towers Watson & Co.” J.A. 1401, 1427. An “Insured Person” includes any “Executive” or “Employee” of Towers Watson. J.A. 1426. A “Securities Claim” includes “Claims” alleging the violation of a “federal, state, local or foreign regulation, rule or statute regulating securities” brought against Towers Watson related to a securities interest in Towers Watson, as well as a “Derivative Suit.” J.A. 1430. A “Claim” is defined to include “a civil. . . proceeding for monetary, non-monetary or injunctive relief which is commenced by . . . service of a complaint or similar pleading.” J.A. 1422. (Fn. 5).
We agree with the district court that the policies’ bump-up exclusion precludes coverage for the parties’ settlement, including the portion that ultimately went toward attorneys’ fees. We therefore affirm the district court’s decision in full.
The Policy provides coverage for 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. 1406.5 “Loss” is a defined term that includes “damages, settlements, judgments,” and defense costs. J.A. 1426. The Policy also includes what is commonly termed a “bump-up” exclusion, which generally bars coverage for losses stemming from judgments or settlements reached in connection with claims that seek an increase—or “bump up”—in the consideration paid for a security. Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 67 F.4th 648, 650 (4th Cir. 2023). The bump-up exclusion in the Policy 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. 1427.
This appeal turns on the proper interpretation of that provision.
Virginia law still governs our interpretation of the Policy. See Towers Watson & Co., 67 F.4th at 653. Under Virginia law, “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, i.e., susceptible of two or more reasonable meanings, then “any doubt concerning the meaning of the policy language” must be “resolved against the insurer.” Id. at 730; Erie Ins. Exch. v. EPC MD 15, LLC, 822 S.E.2d 351, 355 (Va. 2019). This contra proferentum rule applies with particular force when construing policy exclusions, as the insurer bears the burden of proving that an exclusion applies. See TravCo Ins. Co. v. Ward, 736 S.E.2d 321, 325 (Va. 2012) (“Language in a policy purporting to exclude certain events from coverage will be construed most strongly against the insurer.” (quoting PBM Nutritionals, LLC v. Lexington Ins. Co., 724 S.E.2d 707, 713 (Va. 2012))).
That said, 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. Policy language is therefore ambiguous only where the “competing interpretations . . . are ‘equally possible’ given the text and context of the disputed provision.” Id. at 356 (quoting Appalachian Reg’l Healthcare v. Cunningham, 806 S.E.2d 380, 386 n.10 (Va. 2017)). In other words, the mere fact that the parties disagree on the meaning of the terms of a provision does not necessarily render those terms ambiguous. TM Delmarva Power, L.L.C. v. NCP of Va., L.L.C., 557 S.E.2d 199, 200 (Va. 2002).
In the end, we agree with the district court that the settlements do fall within the Policy’s bump-up exclusion, thus barring indemnity. Our analysis begins with the language of the bump-up exclusion: 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. 1427. By its terms, this provision establishes two conditions that must be satisfied before the exclusion is triggered. First, there must be a “Claim” alleging that the consideration paid for an acquisition was inadequate. Id. And second, the settlement of such claim must “represent” an “effective increase” in the “price or consideration” shareholders received for that acquisition. Id. Beginning with the first condition, there is no real dispute that the shareholders filed a “Claim” alleging that the consideration paid for Willis’ acquisition of Towers Watson was inadequate. See, e.g., Opening Br. 32–33 (acknowledging that the first element “looks only to the allegations of the complaint,” and that the Court can therefore “take the first condition as a given”); Response Br. 26 (noting that Towers Watson “no longer disputes that both the Virginia and Delaware actions were predicated fundamentally on Towers Watson’s alleged failure to secure adequate consideration for the shares shareholders were forced to relinquish in the transaction”). The first condition is therefore clearly satisfied.
The second condition presents a more difficult question. In particular, the parties spar over the meaning and import of the terms “represent” and “effectively increase.” J.A. 1427. Since the Policy does not define either term, we look to their dictionary definitions for interpretive guidance. Towers Watson, 67 F.4th at 653–54 (acknowledging Virginia courts’ “established practice of looking to an undefined contractual term’s dictionary definition” to ascertain its “ordinary and accepted meaning” (quoting Lower Chesapeake Assocs. v. Valley Forge Ins. Co., 532 S.E.2d 325, 330 (Va. 2000))). For its part, “represent” is defined as “to constitute or amount to,” or “to symbolize or stand in place of.” Represent, Black’s Law Dictionary (12th ed. 2024); see Represent, Merriam-Webster’s Dictionary (last accessed May 12, 2025) https://www.merriamwebster.com/dictionary/represent [https://perma.cc/CL2H-QF8L] (defining “represent” as “to serve as a sign or symbol of”). And “effectively” is defined as “in effect, virtually,” Effectively, Merriam-Webster’s Dictionary (last accessed May 12, 2025) https://www.merriam-webster.com/dictionary/effectively [https://perma.cc/U9S3-FDLZ], “the real result of a situation,” Effectively, Cambridge English Dictionary (last accessed May 12, 2025) https://dictionary.cambridge.org/us/dictionary/english/effectively [https://perma.cc/73XT-2P2Y], and “having a certain result in reality, though not in theory,” id.
With these definitions in hand, we have little trouble concluding that the bump-up exclusion’s second condition is satisfied. That’s because the terms “represent” and “effectively increase,” particularly when read together, indicate that we must look to the “real result of the situation,” not the theoretical one. See Effectively, Cambridge English Dictionary, supra (emphasis added); Represent, Black’s Law Dictionary, supra. And if the “real result” of the settlements is that the shareholders receive additional consideration for their relinquished shares, this condition is satisfied. As the district court observed, that’s exactly what happened here. The shareholders, claiming their shares were devalued in the merger process because of Haley’s conflict of interest, sued Towers Watson. Their lawsuit sought to rectify that perceived shortfall. That is, they sought what was effectively an increase (or “bump-up”) in the consideration paid for their shares. The settlements they eventually received constituted—i.e., “represented”—precisely such a bump-up. J.A. 1427; see, e.g., J.A. 1687 (analysis from the Virginia plaintiffs’ damages expert “estimating damages as the minimum incremental amount that Towers Watson shareholders should have expected to obtain or retain based on a full disclosure of the information that Lead Plaintiff argues should have been disclosed”). Because both requirements are met, the bump-up exclusion applies and Towers Watson is not entitled to indemnification for the settlements.
Relatedly, interpreting the bump-up exclusion in such a way does not render the Policy coverage illusory. As Insurers note, the exclusion does not impact the Policy’s coverage for the costs of defending against securities claims alleging inadequate consideration. Indeed, Insurers have already paid out millions in covered defense costs here. Moreover, to argue that the exclusion renders the Policy’s coverage illusory is to suggest that all securities claims involve allegations of inadequate consideration in corporate acquisitions. But as Insurers note, most securities claims do not arise out of corporate acquisitions and therefore do not implicate bump-up exclusions.
Towers Watson raises a second issue regarding the district court’s resolution of the attorneys’ fee question under the common fund doctrine. The district court found that the $17+ million in settlement money that went toward attorneys’ fees fell within the ambit of the bump-up exclusion by way of that doctrine. This finding led the district court to conclude that indemnity was barred for the whole of the settlements reached, not just the portion that “actually reached the shareholders.” Towers Watson & Co., 2024 WL 993871, at *9. We discern no legal error in this conclusion and therefore affirm. The common fund doctrine derives from principles of equity and “allows a court to award ‘a reasonable attorney’s fee’ to ‘a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client . . . from the fund as a whole.’” Brundle ex rel. Constellis Emp. Stock Ownership Plan v. Wilmington Tr., N.A., 919 F.3d 763, 785 (4th Cir. 2019) (quoting Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980)). A common fund recovery thus “places the plaintiffs’ cost of litigation on the recovering beneficiaries of a lawsuit.” Id. at 786.
The district court invoked this doctrine to conclude that the full $90 million settlement fund—$17,626,730.78 of which ultimately went toward attorneys’ fees— “represents the amount by which consideration was effectively increased.” Towers Watson & Co., 2024 WL 993871, at *9. It did not err in doing so. In short, the district court rightly observed that, “regardless of how the additional consideration was distributed once paid to the beneficiaries, it nevertheless constitutes in toto an increase in the consideration paid for the merger.” Id.
Secondary sources: Steven Plitt et al., Couch on Insurance § 131:30 n.3 (3d ed. 2024).
(U.S. Court of Appeals for the Fourth Circuit, May 28, 2025, Towers Watson & Co. v. National Union Fire Insurance Co., Docket No. 24-1302, Published)
