United States District Court for the Eastern District of Virginia Finds Markup Exclusion Does Not Exclude Underlying Settlement Coverage | White and Williams LLP

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In Towers Watson & Co v. National Union Fire Insurance Company, 2021 US Dist. LEXIS 192480 (ED Va. October 5, 2021), the U.S. District Court for the Eastern District of Virginia recently ruled that settlements reached in two underlying actions[1] were not excluded from the definition of a covered “Loss” under the so-called “Markup Exclusion” of the insurance policies at issue in the coverage dispute. In granting the plaintiff’s partial summary judgment motion, the court declared that the settlement amounts are within the scope of the coverage offered by the policies.

As a brief history, Towers Watson and Willis Group Holdings Public Limited Company announced a “merger of equals” on June 30, 2015. Shareholders of both companies approved the merger on December 11, 2015 and the transaction closed on January 4 2016. Following the completion of the transaction, several class actions were filed alleging that the proxy documents provided to the shareholders before the vote omitted certain information and that, as a result, the shareholders had received insufficient consideration for their shares. In the end, the class actions settled for a total of $ 90 million and the policyholders sought settlement coverage from the defending insurers.

While the defending insurers did not dispute that the underlying actions qualified as “claims” under the policies and offered defense costs prior to settlement, they did assert that a mark-up exclusion in the master policy excluded compensation from settlements.[2] Not surprisingly, a coverage dispute between policyholders and defendant insurers regarding the applicability of the mark-up exclusion ensued.

The decisive question for the court was whether the mark-up exclusion applied unambiguously, thereby excluding settlements from the definition of a covered “loss”.[3] Under Virginia law, the court set out to interpret any ambiguity in the exclusion “in the strictest manner” against defendant insurers and to maximize coverage for the insured. In making its decision, the court critically analyzed the wording of the main policy, the specific structure of the transaction that resulted in the merger, and how such a merger would be characterized under corporate law.

As the term “acquisition” was not defined in the policy, the defendant insurers urged the court to adopt the “ordinary and ordinary meaning” of the term (that is to say, “The act of acquiring something” or “taking possession of and controlling it, often by unspecified means”) and argued that the transaction in question was “a triangular merger involving a” purchase of qualified shares ”of Towers Watson. “By rejecting the argument of the defending insurers, the court considered that the structure of the transaction was” hardly comparable to the simple takeover of one company by another. . . and is therefore reasonably considered to be something other than the “acquisition” referenced in the exclusion of recovery. “[4]

In making its decision, the court, although applying Virginia law to the dispute, drew heavily on Delaware law. In particular, the court relied heavily on a recent Delaware case, Northrop Grumman Innovation Systems, Inc. v. Zurich American Insurance Company,[5] in which that jurisdiction rejected the defendants’ argument that a similar mark-up exclusion applied to a reverse triangular merger because the transaction “involved” an acquisition of shares. Following the analysis and the principles of strict interpretation of contracts set out in Northrop, the Eastern District of Virginia made an effort to distinguish the merger in question from the undefined term “acquisition” in the main policy and considered that the wording of the mark-up exclusion did not apply to the merger between Towers Watson and Willis.

Although the court of Watson towers ruled that the additional exclusion did not unambiguously exclude coverage based on the facts of the case, it did not judge, or even suggest, that the exclusion would not apply in different circumstances. Thus, insurance companies facing a mark-up claim should continue to carefully consider the language of the mark-up exclusion at issue, the nature of the transaction, and the law to be applied to the dispute.


[1] In the context of litigation by proxy Willis Towers Watson plc, Case n ° 1: 17-cv-01338 (ED Va.) (The “Action in Virginia) and In the shareholder litigation of Towers Watson & Co., Consolidated CA No. 2018-0132-KSJM (Del. Ch.) (The “Delaware Action”).

[2] The additional exclusion from the policy provided for:

In case of Claim alleging that the price or consideration paid or offered to pay for the acquisition or completion of the acquisition of all or substantially all of an entity’s interest or assets is insufficient, Loss with regard to such Claim will not include any amount of a judgment or settlement representing the amount by which that price or consideration is actually increased; it being understood, however, that this paragraph does not apply to Defense costs or at all Non-compensable loss related to it.

[3] “Loss” includes “damages, settlements, judgments [subject to the Exclusion set forth in the Bump-Up Exclusion]…[and] Defense costs. (Main Policy Page ID 599.)

[4] Watson towers, 2021 US Dist. LEXIS 192480 at 27-28.

[5] CV N18C-09-210, 2021 WL 347015 (Del. Super. Ct. February 2, 2021).

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