Contract analysis

From: Douglas Carmichael <dcarmichael@calderwoodharkness.com> To: Rachel Sondergaard <rsondergaard@quoruminsurance.com> Cc: Francesca Morano <fmorano@calderwoodharkness.com> Date: Fri, 20 Mar 2026 05:47:00 -0000 Subject: Re: Pinnacle Atlantic Dispute — Strategy Update and Draft Audit Committee Presentation [PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION]

**PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT**

I hope this finds you well. Our team has now substantially completed its initial analysis of the four grounds raised in Pinnacle Atlantic's February 14 pre-suit demand letter from Nathaniel Calloway at Hargrove, Fitch & Calloway. We are approximately two and a half weeks into the engagement (Matter No. 1025-00005, opened March 2), and I wanted to provide you with an interim strategy update and share a draft of the Bo

Could you confirm the date of the next Audit Committee meeting? My understanding is that it falls in the first week of April — we want to make sure we have sufficient time to incorporate your comments and finalize the materials.

Below is a summary of where things stand.

We are recommending a three-pronged approach:

**(a) Enforce the Arbitration Clause Under Treaty Article 22**

Our analysis strongly supports compelling arbitration under Article 22 of Treaty No. PA-QCS-2019-EXL-0044, which provides for a three-member panel under ARIAS-U.S. Rules seated in New York. Jeff Park's forum analysis memo concludes that the arbitration clause is broad — it covers all disputes "arising under or relating to" the Treaty — and that HFC's assertion in the demand letter that the clause is inapplicable to t

We have prepared a formal Demand to Arbitrate letter, as well as a draft Motion to Compel Arbitration and Stay Litigation in the event Pinnacle Atlantic attempts to file preemptively in NY Supreme Court, Commercial Division, before responding to our demand. We are also preparing a supporting affidavit from Tobias Engström regarding the negotiation of the Treaty and the parties' mutual intent with respect to the arbit

The strategic advantages of arbitration are significant: reinsurance-experienced arbitrators, confidentiality (which is important given QIH's public company status and Nasdaq listing), and the potential for faster resolution compared to commercial litigation.

**(b) Propose Voluntary Mediation as a Preliminary Step**

We also recommend simultaneously proposing a one-day mediation session in New York with a neutral mediator experienced in reinsurance disputes, without prejudice to the demand to arbitrate. This could provide a meaningful early off-ramp and reduce overall litigation costs — our total estimated budget through a full trial or arbitration hearing is in the range of $3.2 million to $4.8 million. A negotiated resolution w

**(c) Prepare Defensive Pleadings and Pre-Litigation Materials**

We have prepared or are finalizing the following: a draft Verified Answer and Affirmative Defenses; a draft Counterclaim seeking a declaratory judgment confirming the validity of all TY 2022 and TY 2023 cessions totaling $78.4 million, plus a breach of treaty claim; and supporting memoranda of law. These materials are ready to deploy quickly if Pinnacle Atlantic files suit.

**2. Assessment of Pinnacle Atlantic's Four Grounds**

Let me give you a high-level summary of our assessment of each of the four grounds raised in the demand letter:

**(a) Late Notice (Article 7) — Meridian Docks Mass Tort Cluster**

This is the most factually challenging issue. There is a 14-month, 7-day gap between the date QC&S first reserved the 31 Meridian Docks claims (March 15, 2021) and the date notice was provided to Pinnacle Atlantic via Broadreach Intermediaries (May 22, 2022). However, QC&S's position — that individual claims were below the $1 million reporting threshold until reserve increases in Q1 2022 — is well supported by the cl

Importantly, under New York reinsurance law, Pinnacle Atlantic bears the burden of demonstrating actual prejudice from late notice. Our preliminary assessment is that proving prejudice will be difficult for them, particularly given that they continued to pay billings for nearly two years after receiving notice without objection. Diana Kessler-Hoff is preparing a draft affidavit addressing the notice timeline and QC&S

**(b) IBNR Misallocation (Article 5) — $22.3 Million**

Pinnacle Atlantic contends that $22.3 million in IBNR reserve strengthening should be allocated to Treaty Year 2021, where aggregate net incurred was only $104.6 million — below the $120 million retention — rather than TY 2022. If that position were accepted, it would reduce TY 2022 ceded losses from $69.7 million to $47.4 million. Yuki Nakamura's analysis of the "losses incurred" definition in Article 5.2, together

This is fundamentally a technical actuarial issue, and it will very likely require an independent actuarial expert at the arbitration stage. Our expert retention strategy memo identifies several qualified candidates, and I would like to begin the vetting process soon.

**(c) Follow-the-Fortunes / Veridian E&O Cluster Settlement (Article 11) — $34.5 Million**

Pinnacle Atlantic's challenge to the September 8, 2023 settlement (Claim A: $14.2M; Claim B: $12.8M; Claim C: $7.5M) faces a high bar under New York's follow-the-fortunes doctrine. They must demonstrate bad faith or gross negligence on the part of QC&S — mere disagreement with the settlement amount is not sufficient. Notably, QC&S's net retained share of $26.1 million after other reinsurance recoveries demonstrates s

One area of attention: we need to ensure the claims file documentation supporting the settlement evaluation is complete. Jeff sent a request to Diana Kessler-Hoff on March 6 for the settlement evaluation memoranda, and we would appreciate any assistance you can provide in ensuring those are produced promptly.

**(d) Ceded Earned Premium Underreporting (Article 3) — $6.8 Million Difference**

This is the weakest of Pinnacle Atlantic's four grounds. The $6.8 million difference ($38.4 million reported by QC&S versus $45.2 million per Pinnacle Atlantic) appears to stem from Pinnacle Atlantic improperly including run-off portfolio transfer premiums that are expressly excluded under Article 3.4. Even if some underreporting were found to exist, the alleged premium underpayment of approximately $2.856 million (c

**3. Financial Impact and Disclosure Considerations**

The attached draft presentation includes a detailed exposure analysis, which I will summarize briefly here:

- **Best case:** Full defense of the $78.4 million recoverable; no liability to QC&S. - **Worst case:** Full disgorgement of $78.4 million plus $12.6 million in interest = **$91.0 million total exposure**. - QC&S's statutory surplus currently stands at **$1.42 billion** against the **$1.1 billion** minimum covenant in the Cartwright National Bank revolving credit facility. Even a worst-case write-off of the full reco

On the disclosure front, Francesca and Yuki are preparing a separate regulatory disclosure analysis memo (target completion: end of March) addressing the following:

- **SEC reporting obligations under ASC 450:** Whether and how to disclose the contingency in the next 10-Q footnotes. Our preliminary view is that the loss is "reasonably possible" but not yet "probable," given the strength of QC&S's defenses — which would require footnote disclosure of the nature and estimated range of the contingency but would not require accrual. - **NYDFS notification** regarding material litiga

I also recommend coordinating with **Elaine Whitfield-Ross at Harmon & Whitfield LLP** on any NYDFS regulatory implications, and with **Patricia Hernandez at Meridian Whitcomb & Co. LLP** on audit implications for the reinsurance recoverable recorded on the FY 2025 balance sheet — specifically Schedule F, Part 3 and the GAAP consolidated financial statements.

**4. Draft Audit Committee Presentation**

I have attached a draft Northgate Services Inc. presentation covering the following: dispute overview, the four grounds and QC&S's defenses, exposure analysis, strategic recommendations, financial impact, and budget projections (**$450,000–$625,000 for Phase 1; $3.2 million–$4.8 million total** through trial or arbitration hearing).

Please review and provide your comments by the **end of next week** if possible, along with confirmation of the Audit Committee meeting date. If you would like, Francesca and I are available to present in person or by video to the Audit Committee — we are happy to do whichever you think would be most effective.

I have also attached a redline of our proposed response letter to Nathaniel Calloway at HFC. The letter rejects all four grounds raised in the demand, reserves all rights and defenses, asserts the applicability of Treaty Article 22, and invokes the ARIAS-U.S. arbitration process.

Our intent is to send the response letter and the Demand to Arbitrate letter simultaneously. I would like your approval to dispatch both **early next week — targeting March 24 or 25**. It is important that we respond before the 45-day mark from the demand letter (which falls on **March 31**) to avoid any argument of acquiescence or waiver.

To keep things on track, here is a summary of next steps:

1. **Rachel** — Confirm the Audit Committee meeting date and review the draft presentation (comments by end of next week). 2. **Rachel** — Approve the response letter and demand to arbitrate for dispatch (targeting March 24–25). 3. **C&H** — Finalize the mediation proposal letter for dispatch the following week. 4. **QC&S / C&H** — Continue collection of claims files and premium reconciliation data from Tobias Engstr

I am happy to schedule a call early next week to walk through any of this in more detail — just let me know what works for your schedule. Please don't hesitate to call my cell if anything arises over the weekend.

**Douglas Carmichael** Partner Calderwood & Harkness LLP One Liberty Plaza, 55th Floor New York, NY 10006 Direct: (212) 555-4871 Cell: (917) 555-3209 Email: dcarmichael@calderwoodharkness.com

*Attachments:* 1. *Draft Board Audit Committee Presentation — Pinnacle Atlantic Reinsurance Dispute (Northgate Services Inc.)* 2. *Redline of Response Letter to Hargrove, Fitch & Calloway LLP (Word)*

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