Fourth Circuit Improperly Rejected Reasonable Construction of Exclusion

Fourth Circuit Improperly Rejected Reasonable Construction of Exclusion

By David A. Gauntlett*

Introduction

In a saga of litigation stretching back to 2021, Towers Watson continues to seek insurance coverage under its Directors & Officers (“D&O”) policy for a settlement agreement with shareholders who allegedly received below-market consideration for their shares following Towers Watson’s merger with Willis Group Holdings. The insurer, National Union Fire Insurance, argues that coverage is excluded by the policy’s “bump-up” exclusion. After initially winning in the district court, Towers Watson’s victory was reversed by the Fourth Circuit. On remand, the district court granted National Union’s Motion for Summary Judgment. Towers Watson now must take on the role of Appellant before the Fourth Circuit.

District Court Deems Bump-Up Exclusion Ambiguous

In Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA,[1]  the district court’s analysis focused on the bump-up exclusion. It provided that:

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; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.

Towers Watson provided several arguments against the exclusion’s applicability. Applying Virginia law, the district court was persuaded that the exclusion was ambiguous as applied to the facts of the case,[2] thereby rendering all other arguments superfluous.

Fourth Circuit Reverses Based on “Plain and Ordinary Meaning”

On appeal,[3] the Fourth Circuit disagreed. After noting that the undefined term “acquisition” must be read in according to its “plain and ordinary meaning,” the court summarized the limited scope of its analysis on appeal as examining “whether, as a result of the executed Merger Agreement, another entity gained ‘possession’ or ‘control’ ‘of all or substantially all the ownership interest in or assets of’ Towers Watson.”[4]

The district court had previously ruled that the ultimate result, rather than the individual steps to get there, should be the focus of the court’s analysis:

Defendants summarize the Merger as “a triangular merger involving a ‘qualified stock purchase’ of TW: Willis became the ‘parent’ company, TW became a wholly owned subsidiary of Willis, and Willis received 100% of the ‘only outstanding shares of TW's common stock.’ ” . . . Given that characterization of the Merger, Defendants see the Bump-Up Exclusion unambiguously applying to the Merger. But Defendants' position ignores both what actually happened to the Towers Watson stock held by TW shareholders as well as the ultimate form of the Merger, as planned, and, rather, “freezes the frame” on a short-lived transitional event that did not involve any of the TW shares held by TW shareholders, the effect of which was quickly eliminated through a subsequent implementing step in completing the Merger, as planned. In that regard, Willis never actually “acquired” any of the stock of the former Towers Watson Shareholders.[5]

The Fourth Circuit rejected the district court’s conclusion that the first part of the merger process could be overlooked because, contrary to the district court’s analysis, the bump-up exclusion’s language focused on the acquisition of “all or substantially all the ownership interest in or assets of an entity” rather than the acquisition of stock shares.[6]

The court was careful to limit its holding to the specific issue of ambiguity in the bump-up exclusion.[7] On remand, the district court rejected Towers Watson’s remaining arguments.[8] Towers Watson has appealed the decision.

Broad Reading of Exclusion Goes Against National Case Authority

The Fourth Circuit’s focus on the “plain and ordinary” meaning of the bump-up exclusion serves to establish that there is at least one reasonable construction of the exclusion that would preclude coverage. Proper coverage law ambiguity analysis, however, does not focus on the interpretation preferred by the insurer. Instead, it simply asks whether the construction for which the policyholder advocates is reasonable, regardless of whether or not it is the most reasonable construction.

• SXSW, L.L.C. v. Fed. Ins. Co., No. 22-50933, 2024 WL 1216560, at *4 (5th Cir. (Tex.) Mar. 21, 2024) (“We need not consider Federal's understanding of the exclusion because SXSW's reading of it is plainly reasonable.”)

• Am.'s Recommended Mailers, Inc. v. Maryland Cas. Co., 579 F. Supp. 2d 791, 795 (E.D. Tex. 2008), aff'd, 339 F. App'x 467 (5th Cir. (Tex.) 2009) (‘The insured's construction of the exclusionary clause must be adopted as long as that construction is not unreasonable.’ [citation] ‘This is the case even if the insurer's proffered construction would be more reasonable.’”)

• Hotel des Artistes, Inc. v. Gen. Accident Ins. Co. of Am., 775 N.Y.S. 2d 262, 268 (App. Div. 2004) (“To negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.”) (emphasis added)

• MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 655 (2003) (“[E]ven if [the insurer’s] interpretation is considered reasonable, it would still . . . have to establish that its interpretation is the only reasonable one.  ‘[W]e are not required, in deciding the case at bar, to select one “correct” interpretation from the variety of suggested readings.’ ”)

Though never explicitly addressed by Virginia’s Supreme Court, this approach is consistent with reasoning used in its prior cases[9] and directly in accord with decisions of other courts applying Virginia law.[10]

Conclusion

The Fourth Circuit’s reversal continues the trend of federal courts failing to abide by coverage law principles designed to protect policyholders.[11] The court’s failure to adopt a reasonable construction promoted by a policyholder is particularly egregious for an exclusionary provision, which the Fourth Circuit itself previously recognized must always be interpreted strictly against an insurer under Virginia law.[12]

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 120CV810AJTJFA, 2021 WL 4555188 (E.D. Va. Oct. 5, 2021).

[2] Id. at *10 (“[T]he Bump-Up Exclusion's reference to ‘the acquisition of all or substantially all the ownership interest in or assets of an entity’ appears by its terms to include, at most, only one of the three types of transactions included within the definition of a Transaction, [footnote] and so under the principle expressio unius est exclusio alterius, should be read to exclude the other two, [footnote] one of which is explicitly a merger.”)

[3] Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 67 F.4th 648 (4th Cir. (Va.) 2023).

[4] Id. at 654.

[5] Towers Watson & Co., 2021 WL 4555188 at *10.

[6] Towers Watson & Co., 67 F.4th at 657 (“[W]hat matters is whether Willis obtained possession or control of all or substantially all of Towers Watson's equity or assets. And as detailed above, that is just what happened here.”)

[7] Id. (“To be clear, our narrow holding does not resolve the ultimate question whether the bump-up exclusion bars indemnity coverage to Towers Watson for the underlying settlements.”)

[8] Towers Watson & Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 120CV810AJTJFA, 2024 WL 993871, at *4–8 (E.D. Va. Mar. 6, 2024) (rejecting Towers Watson’s arguments that (1) the underlying action failed to allege inadequate consideration, (2) Towers Watson is not an “entity” under the policy, and (3) settlements do not represent an effective increase in consideration).

[9] St. Paul Fire & Marine Ins. Co. v. S.L. Nusbaum & Co., 227 Va. 407, 412, 316 S.E.2d 734, 736 (1984) (“[E]xperts on the subject of the real estate industry, may reach reasonable, but opposite, conclusions as to whether leasing is a part of property management. It was incumbent upon the insurer to employ exclusionary language clear enough to avoid any such ambiguity . . . .”)

[10] Fed. Ins. Co. v. New Coal Co., 415 F. Supp. 2d 647, 651 (W.D. Va. 2006) (“[A]n insurance policy is ambiguous where it can reasonably have more than one meaning given its context, and such ambiguities are to be resolved against the insurer and in favor of coverage.”)

[11] See David A. Gauntlett, New York District Court Disputes Whether Settlements Clarify Potential Coverage, https://www.gauntlettlaw.com/news/new-york-district-court-disputes-whether-settlements-clarify-potential-coverage (Feb. 1, 2024).

[12] United Serv. Auto. Ass'n v. Pinkard, 356 F.2d 35, 37 (4th Cir. (Va.) 1966) (“‘[I]nsurance policies are to be liberally construed in favor of the assured and exceptions and exclusions are to be strictly construed against the insurer.’”) (quoting Ayres v. Harleysville Mut. Cas. Co., 172 Va. 383, 389 (1939)).