Contract analysis

I. Background On November 8, 2022, Calderwood & Harkness LLP, acting on behalf of Apex Media Arts, Inc. ("AMA"), tendered AMA's defense in the Fuentes v. Apex Media Arts, Inc. class action and related matters to Pemberton Mutual Assurance Co. ("Pemberton") under Employment Practices Liability Policy No. PMA-EPL-2022-00837, effective March 1, 2022, through March 1, 2023 (the "Policy"). The tender was submitted by over

II. Key Provisions of Pemberton's Reservation of Rights We address each material provision of the ROR Letter in turn. A. Self-Insured Retention (SIR) — $5,000,000 The Policy provides for a Self-Insured Retention ("SIR") of Five Million Dollars ($5,000,000). Pemberton confirmed in the ROR Letter that AMA is responsible for the first $5,000,000 in combined defense costs and indemnity payments before Pemberton's coverag

1. Pemberton's Denial Pemberton's ROR Letter expressly denied coverage for the Aldrich executive dispute. At the time of the tender, the Aldrich matter was anticipated but not yet filed. Mr. Aldrich subsequently filed his complaint on December 9, 2022, in the Superior Court of the State of California, County of Los Angeles, Case No. 22STCV41087 (the "Aldrich Action"). AMA filed its Cross-Complaint on January 20, 2023

2. Context on Aldrich's Claims and AMA's Cross-Claims To provide context for the coverage analysis, the following summarizes the key facts and claims in the Aldrich dispute. Mr. Charles Aldrich served as AMA's Senior Vice President of Content & Development from September 2017 until his termination for cause on October 14, 2022. His employment was governed by an Employment Agreement dated September 5, 2017, as amended

3. Assessment and Recommendation Assessment. Pemberton's position on the Aldrich dispute is not unreasonable and is consistent with market practice for EPL carriers confronted with individual executive disputes that involve a combination of employment claims and proprietary rights claims. While certain of Mr. Aldrich's causes of action — particularly the wrongful termination and Labor Code Section 2802 claims — argua

III. Recommendations Based on the foregoing analysis, we recommend the following actions:

1. SIR Erosion Tracking AMA should establish and maintain a running tally of all defense costs incurred in connection with the Fuentes/Halloran class action and PAGA matters, tracking such costs against the $5,000,000 SIR. This tally should be updated on a monthly basis, in coordination with Calderwood & Harkness's billing submissions and AMA's internal accounting. AMA should advise Pemberton in writing when cumulati

2. Settlement Structuring As discussed in Sections II.B and II.C above, the structure and allocation of any class settlement will have a direct and material impact on the extent of Pemberton's coverage contribution. To maximize Pemberton's participation, any settlement should be structured as follows: (a) Maximize allocations to covered wage-and-hour claims. The settlement allocation should emphasize claims that are

3. Aldrich Self-Funding AMA should budget for the full cost of the Aldrich defense and any settlement or judgment as a self-funded matter. Based on our preliminary case assessment, we estimate the following: • Defense costs (through trial): $750,000 – $1,200,000 • Settlement range: $1,500,000 – $3,000,000 • Combined exposure (defense + settlement): $2,250,000 – $4,200,000 No EPL contribution from Pemberton is anticip

4. D&O Policy Monitoring AMA should continue to monitor the Aldrich Action for potential D&O implications. As discussed above, the most significant trigger for D&O coverage would be an amendment of Mr. Aldrich's complaint to add individual officer defendants — specifically Jonathan Mercer and Dwayne Prescott, who participated directly in the termination decision and are identified by name in the existing complaint. A

IV. Conclusion Pemberton's reservation of rights, as set forth in the ROR Letter dated December 22, 2022, is within expected parameters for EPL coverage of wage-and-hour class actions and related PAGA proceedings. The principal takeaways are as follows: Favorable outcomes. The batch-clause treatment of the Fuentes class action, the consolidated Halloran Action, and the PAGA claims as a single "Claim" under the Policy