A federal appeals court has denied insurance broker Towers Watson a rehearing of a May ruling that found it may not be entitled to $80 million in insurance to cover settlements of shareholder lawsuits related to the merger between Towers Watson and Willis in 2015.

In that May ruling, a judicial panel of the Fourth Circuit Court of Appeals in Richmond reversed a coverage victory won by Towers Watson in federal district court in Alexandria in 2021.

The coverage dispute has to do with what is known as a “bump-up” exclusion in the directors and officers (D&O) liability policies issued to Towers Watson in 2015. A bump-up exclusion 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 in an acquisition.

Towers Watson shareholders filed several lawsuits in Virginia and Delaware against Towers Watson’s chairman and CEO and others, alleging that they received below-market consideration for their shares in the merger. The Virginia litigation settled for $75 million; the Delaware settled for $15 million.

Towers Watson sought indemnity coverage for the settlements under its D&O policies including the primary policy from National Union Fire Insurance. The insurers refused the indemnity request, citing the bump-up exclusion in the policies. Towers Watson argued that the exclusion did not apply.

A federal district court agreed with Towers Watson that the bump-up exclusion did not apply to bar coverage because the deal between Willis and Towers Watson was not a typical acquisition where one entity gains control over another. The district judge noted that Towers Watson cancelled its common stock and issued new shares to Willis when it merged into a Willis subsidiary and disappeared.

But in a 3-0 opinion in May written by Judge G. Steven Agee, the Fourth Circuit Court of Appeals vacated that district court ruling, finding that the lower court’s reading of the exclusion was “unduly narrow” in citing “ambiguity where none exists and ascribing specialized meanings to policy terms that the parties did not reasonably intend.”

This may not be the final word in the dispute as Towers Watson has other avenues it can pursue.

The appeals court ruling was narrow in its scope and does not totally resolve the question of whether the bump-up exclusion bars indemnity coverage to Towers Watson for the underlying settlements. That’s because Willis raised two other reasons it believes the bump-up exclusion should not apply: 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 appeals court said the district court should address these other issues if Willis cares to pursue them.

Former Towers Watson shareholders filed separate class actions against various parties, including former Chairman and CEO John Haley. These actions stemmed from allegations that Haley negotiated the merger agreement under an undisclosed conflict of interest: Haley would receive $165 million if the deal closed. The shareholders maintained that because of this alleged conflict, Haley purportedly agreed to a below-market valuation of Towers Watson shares to ensure the merger’s success.

In criticizing the district court’s reading, the appeals court noted that neither the bump-up exclusion nor the policy stipulates, or even hints, that the term “acquisition” was intended to refer only to a particular form of acquisition, such as a takeover. “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,” the appeals court stated.