Fourth Circuit Holds that Some D&O Insurance Policies May Not Cover Merger Litigation

• Yesterday, the U.S. Court of Appeals for the Fourth Circuit issued an opinion in Towers Watson & Co. v. National Union Fire Insurance Co. holding that a directors & officers insurance policy with a “bump-up exclusion” does not cover settlement payments in the context of an M&A transaction.
• The Court held that the exclusion applied because the settlements resolved securities claims that Towers Watson’s stock was devalued in the transaction and thus the “real result” of the settlements was to “bump up” stockholders’ consideration.
• Directors and officers anticipating M&A activity should consider attempting to eliminate or narrow any bump-up exclusions in their policies, as well as several other M&A-related insurance pitfalls outlined in this memorandum.

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