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On May 28, 2025, the Fourth Circuit brought an end to a long-running dispute over the meaning and application of a bump-up provision by adopting a plain meaning understanding and denying indemnity coverage for securities litigation arising out of a 2015 merger. See Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, --- F.4th. ---, 2025 WL 1509393, at *1 (4th Cir. May 28, 2025) (“Towers II”). This decision finally resolves the key questions left open by the Fourth Circuit’s prior decision in Towers Watson & Co. v. National Union Fire Insurance Company of Pittsburgh, Pa., et al., 67 F.4th 648 (4th Cir. 2023) (“Towers I”). Together, these decisions should bring significant clarity to coverage disputes arising from policyholder attempts to trigger D&O insurance coverage to, in effect, fund M&A activity.
Background
The underlying litigation involved a shareholder dispute over the 2015 reverse triangular merger between Willis Group Holdings plc and the insured, Towers Watson & Co. Shareholders of Towers filed three lawsuits alleging that Towers’ former CEO stood to receive an undisclosed compensation package if the merger closed. The parties agreed to settle the lawsuits in 2021 for a total of $90 million. Towers’ D&O insurers reimbursed Towers for its defense costs in connection with the lawsuits.
Towers’ D&O insurers, however, denied indemnity coverage based on the application of the policy’s Bump-Up Provision, which stated:
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[.]
After Towers brought a coverage suit, the Eastern District of Virginia granted summary judgment in favor of Towers on the grounds that the reverse triangular merger could potentially be found to not be an “acquisition” under Delaware corporate law and thus the Bump-Up Provision did not apply. The carriers appealed to the Fourth Circuit. In Towers I, issued May 9, 2023, the Fourth Circuit reversed the Insured’s victory by adopting a pragmatic approach to the meaning of “acquisition.” Specifically, the Fourth Circuit explained that “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 [and] [t]hat 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.” Towers I at 656. In reaching that result, the Fourth Circuit rejected the district court’s reliance on a much-criticized bump-up decision from the Delaware Superior Court, Northrop Grumman Innovation Systems, Inc. v. Zurich American Insurance Company, 2021 WL 347015 (Del. Super. Feb. 2, 2021).
The Fourth Circuit then remanded the case to the district court to consider Towers’ argument that the other half of the bump-up provision—precluding coverage for “any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased” -– had not been satisfied. When the district court rejected Towers’ argument in 2024, it was Towers’ turn to appeal to the Fourth Circuit.
The Fourth Circuit’s decision in Towers II
On May 28, 2025, the Fourth Circuit issued its opinion affirming the district court’s belated grant of summary judgment in favor of the D&O carriers. While Towers had argued for a highly technical and fact-intensive approach to application of the effective increase requirement, the Fourth Circuit again took a plain-meaning, pragmatic interpretive approach. The Fourth Circuit relied on dictionary definitions to explain the meaning of the terms “represent” and “effectively increased” and concluded that those terms, “particularly when read together, indicate that we must look to the ‘real result of [the] situation,’ not the theoretical one.” Towers II at *6 (emphasis by Fourth Circuit; citations omitted).
The Fourth Circuit then applied this interpretation to the claims in the underlying litigation:
The shareholders, claiming their shares were devalued in the merger process because of [the CEO’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., “represent[ed]”—precisely such a bump-up. Towers II at *6.
The Fourth Circuit rejected Towers’ argument that settlements of alleged violations of Section 14(a) of the Securities Exchange Act, are “categorically immune” from bump-up provisions because an increase in merger consideration is not a viable remedy for violations of Section 14(a), reasoning that the legal viability of a remedy is irrelevant to whether the shareholders had received a merger consideration increase. Towers II at *6.
The Fourth Circuit also declined Towers’ invitation to examine the details of the shareholder plaintiffs’ damages theories, because both damages theories identified the shareholders’ loss by the difference between the alleged fair value of those shares and what the shareholders actually received. Thus, the “practical effect of the damages” was the same: “to compensate shareholders for the purportedly inadequate consideration they received for the acquisition of their shares.” Towers II at *7.
The Fourth Circuit rejected Towers’ argument that the portion of the settlement amount that went to pay plaintiffs’ attorneys’ fees should escape the bump-up provision’s effect because those amounts were not paid out the shareholders. The Fourth Circuit focused on the fact that the “settlements required Willis to pay $90 million into a common fund entirely for the benefit of Towers Watson shareholders” and the attorneys’ fee payment came out of that fund. The Fourth Circuit then explained that “[i]n other words, the shareholders were entitled to the full $90 million, so that entire amount represents an effective increase in the consideration they were paid for the merger.” Towers II at *7.
Finally, Towers II also declined to follow the Delaware Superior Court’s decision in Harman International Industries Inc., that has recently been much celebrated by the policyholder bar and is currently on appeal to the Delaware Supreme Court. Addressing Harman in a footnote, the Fourth Circuit explained that the Seventh Circuit’s decision in Komatsu Mining Corporation v. Columbia Casualty Company, 58 F.4th 305 (7th Cir. 2023), was better reasoned than Harman, and that, “[w]hatever value Harman may have in its sphere, it is a nonprecedential state trial court case with different parties and different facts.” Towers II at *6 n.10 (citing Harman International Industries Inc. v. Illinois National Insurance Company, 2025 WL 24364 (Del. Super. Ct. Jan. 3, 2025) withdrawn, clarified, and reissued, 2025 WL 84702, at *2 (Jan. 7, 2025).
Going forward
Together, the Fourth Circuit’s decisions in Towers I and II, along with the Seventh Circuit’s reasoning in Komatsu, lay out a pragmatic approach to bump-up provisions that avoids hyper-technical constructions or the judicial insertion of narrowing words to limit the effect of a policy’s plain meaning. We also note that while the Fourth Circuit was applying Virginia law in Towers I and II, the Virginia rules of insurance policy interpretation are similar to the laws of many other states, which require courts to give policy wordings “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). Accordingly, we expect that this decision will serve as a useful precedent in many jurisdictions that follow such principles.
Insurance and reinsurance
United States