Contract analysis

From: Naomi Petersen <npetersen@calderwoodharkness.com> To: Priya Sundaram <psundaram@nexfordindustrial.com> Cc: Douglas Fairchild <dfairchild@calderwoodharkness.com> Date: Fri, 24 Jun 2022 04:47:00 -0000 Subject: Nexford Insurance Tower Renewal — Bind Recommendation and Board Authorization Request

I hope this finds you well. Following the comprehensive insurance tower review engagement and the extensive renewal negotiation process conducted through Ashford Breckinridge LLP (Phillip Garza and Tamara Fisk), I am writing to summarize our final renewal recommendation for both the D&O and product-liability towers. As you know, carrier quotes were received between May 18 and June 8, 2022, and Calderwood & Harkness h

I have organized the balance of this email as follows:

**I. D&O Tower — Final Renewal Terms (July 1, 2022 – July 1, 2023)**

The renewed D&O tower is structured as follows:

| Layer | Carrier | Limits | Annual Premium | |---|---|---|---| | Primary | Vandermeer National Insurance Company | $10M x $10M | (see total below) | | 1st Excess | Commonwealth Indemnity Group | $10M x $10M xs $10M | (see total below) | | 2nd Excess | Northfield Excess Insurance Company | $10M x $10M xs $20M | $221,000 | | 3rd Excess | Pinnacle Re Insurance Ltd. | $10M x $10M xs $30M | (see total below) | | Side-A D

1. **D&O Tower Aggregate Limit:** $55M aggregate. The Side-A DIC provides a separate, dedicated $20M personal-liability limit for individual directors and officers, which was increased from $15M per the board's request. This dedicated Side-A capacity sits outside the layered tower aggregate and provides an important additional layer of protection for individual insureds in the event of entity-coverage exhaustion or i

2. **D&O Total Renewal Premium:** $1,498,200.

3. **Prior Year D&O Premium:** $1,363,450.

4. **Year-Over-Year Increase:** $134,750 (9.88%).

5. **Entity Coverage SIR:** $1,000,000 (unchanged from prior year).

7. **Carrier Change — 2nd Excess Layer:** Northfield Excess Insurance Company replaces Graystone Mutual Assurance Co. on the 2nd excess layer. This change is driven by three factors: (a) Northfield's pricing ($221,000) is competitive relative to Graystone's renewal quote of $243,500, notwithstanding the modest increase over Graystone's expiring premium of $198,750; (b) Northfield maintains an acceptable financial str

8. **Negotiated Improvements:** Of the ten D&O negotiation points set forth in our June 13, 2022 Renewal Negotiation Points Memorandum, seven were fully achieved, including material improvements to severability language across all layers and a broadened definition of "Insured Person" that now expressly covers de facto officers and persons serving in equivalent capacities at portfolio subsidiaries. Two items were reso

9. **Loss History:** Nexford's five-year D&O loss profile remains highly favorable: one reported claim (a shareholder demand letter received in 2020, resolved without payment) and zero paid losses. This favorable profile materially supported the renewal terms achieved.

**II. Product-Liability Tower — Final Renewal Terms (July 1, 2022 – July 1, 2023)**

The renewed PL tower is structured as follows:

| Layer | Carrier | Limits | Annual Premium | |---|---|---|---| | Primary GL/PL | Midland Casualty & Surety Company | $5M per occurrence / $10M aggregate | (see total below) | | 1st Excess/Umbrella | Great Basin Insurance Company | $25M x $25M xs $10M | (see total below) | | 2nd Excess | Cornerstone Reinsurance Corp. | $25M x $25M xs $35M | (see total below) | | 3rd Excess | Allegheny Pacific Underwriters, Inc. | $15

1. **PL Tower Aggregate Limit:** $75M (unchanged from prior year).

2. **PL Total Renewal Premium:** $2,985,500.

3. **Prior Year PL Premium:** $2,642,900.

4. **Year-Over-Year Increase:** $342,600 (12.96%).

5. **PL SIR:** $500,000 per occurrence (unchanged). We note that Midland initially proposed an increase to the SIR during early negotiations, which was successfully resisted with support from Ashford Breckinridge's submission materials and Nexford's risk management presentation.

6. **Product Recall Sub-Limit:** Increased from $2.5M per occurrence / $5M aggregate to $5M per occurrence / $10M aggregate, consistent with Calderwood & Harkness's June 7, 2022 recommendation. The incremental premium attributable to the sub-limit increase is $67,000, which is included in the total premium figure above.

7. **Carrier Continuity:** All incumbent PL carriers have been renewed; there are no carrier changes on this tower.

8. **Negotiated Improvements:** Of the eight PL negotiation points identified in the June 13 memorandum, we achieved meaningful progress on cross-suit exclusion language (Great Basin and Cornerstone both agreed to carve-back provisions protecting Nexford's coverage in contribution and indemnity actions between co-insureds) and completed operations tail provisions (Midland agreed to a three-year extended reporting per

9. **Pending Claims — Treatment Under Renewal Terms:** Two pending claims have been properly disclosed to all tower carriers and are treated as known/prior claims under the renewal terms:

- *Higgins v. Nexford Conveyor Systems, LLC* (Case No. 2021-L-04382, Will County, Illinois) — damages sought: $14.5M. - *Consolidated Builders Supply Co. v. Triton Fastener Corp.* (Case No. 1:21-cv-08914, N.D. Ill.) — damages sought: $6.8M.

Coverage for both matters continues under the occurrence-based trigger applicable to the PL tower, and no prior litigation exclusion has been applied to either matter. This is consistent with the analysis set forth in Calderwood & Harkness's May 20, 2022 memorandum.

10. **Loss Profile:** Open reserves across both pending claims stand at $8.3M. Total five-year PL incurred losses are $15.12M, comprised of $4.72M in paid losses, $8.3M in case reserves, and $2.1M in IBNR as estimated by Kessler Quinn Advisory Group. The higher PL premium increase (12.96% versus 9.88% for D&O) is consistent with the active claims profile and the broader industrial casualty market hardening that conti

| Metric | Renewal (2022–2023) | Expiring (2021–2022) | Change | |---|---|---|---| | D&O Tower Premium | $1,498,200 | $1,363,450 | +$134,750 (9.88%) | | PL Tower Premium | $2,985,500 | $2,642,900 | +$342,600 (12.96%) | | **Combined Premium** | **$4,483,700** | **$4,006,350** | **+$477,350 (11.91%)** |

Insurance spend as a percentage of FY2021 revenue ($1.42B) increases to approximately 0.316%, up from 0.282% in the prior year. We consider this to be within a reasonable range for a PE-backed industrial company of Nexford's size, operational complexity, and risk profile. Importantly, the combined renewal premium of $4,483,700 falls below the $4,600,000 authorization ceiling referenced in the draft board resolution c

The following items remain to be resolved post-bind and will be tracked by Calderwood & Harkness through completion:

1. **Vandermeer Primary D&O — Definition of "Claim."** During negotiations, Vandermeer agreed to broaden the definition of "Claim" to include informal regulatory inquiries, consistent with the analysis set forth in Calderwood & Harkness's June 14 regulatory investigation coverage memorandum. The final binder language should be verified upon issuance to confirm this agreed-upon broadening is reflected. Calderwood & Ha

2. **Midland Casualty — Recall Sub-Limit Endorsement.** The recall sub-limit increase to $5M per occurrence / $10M aggregate was agreed to by Midland, but the formal endorsement has not yet been attached to the policy form. Ashford Breckinridge has confirmed that the endorsement will be issued concurrently with the policy. Calderwood & Harkness will verify upon policy issuance.

3. **Claims Reporting — Renewal Transition Notices.** Per the June 1, 2022 claims reporting compliance checklist provided to Trevor and Donna, we recommend that all PL tower carriers receive formal written notice of the pending *Higgins* and *Consolidated Builders Supply* matters promptly upon renewal inception on July 1. While both claims have been disclosed during the underwriting process, formal notice under the n

4. **Indemnification Agreement Updates.** Per our June 4, 2022 memorandum, two provisions in Nexford's form D&O indemnification agreements require updating to align with the enhanced Side-A DIC terms: specifically, the advancement of expenses clause and the definition of "Proceeding." We recommend these updates be addressed in the next quarter, ideally in connection with the next scheduled board meeting.

**V. Adequacy of Limits — Summary Reference**

As detailed in our June 6, 2022 D&O Limits Adequacy Memorandum and June 8, 2022 PL Limits Adequacy Memorandum:

- The D&O tower at $55M aggregate (plus $20M dedicated Side-A DIC) is adequate for Nexford's current private-company status. This assessment should be revisited well in advance of any IPO, which we understand remains under consideration in the 2023–2024 timeframe.

- The PL tower at $75M aggregate is adequate but warrants continued monitoring given increasing claims frequency in the conveyor systems and fastener product lines. Catastrophic loss scenarios — including conveyor system fatality, mass fastener failure, and multi-claimant product defect — were modeled against the tower and found to be within capacity, though certain severe tail scenarios approach the limits of the cu

- Kessler Quinn Advisory Group's actuarial inputs were incorporated into the PL analysis. Rate-on-line benchmarks are as follows: D&O at 2.48% and PL at 3.52%, both on a prior-year basis.

- For Fund IV portfolio risk oversight purposes, Doug Fairchild provided a high-level summary of the renewal terms and limits adequacy conclusions to Celeste Brogan at Veltrano on June 20.

**VI. Recommendation and Board Authorization Request**

**Calderwood & Harkness recommends that Nexford bind both the D&O and PL towers on the terms summarized above.**

The renewal terms reflect meaningful improvements to policy language, appropriate limit adjustments (including the Side-A DIC increase to $20M and the product recall sub-limit increase to $5M/$10M), and competitive pricing given current market conditions and Nexford's claims experience. The combined premium of $4,483,700 is within the $4,600,000 authorization ceiling in the draft board resolution circulated for the J

**Action Requested:** We respectfully request that the board authorize binding of both towers, with execution authority delegated to Sandra Elliston (CEO) and Priya Sundaram (General Counsel), no later than **June 28, 2022**, to ensure uninterrupted coverage effective July 1, 2022. Ashford Breckinridge (Phillip Garza) is standing by to place binding orders with all carriers immediately upon receipt of authorization.

As a reminder, the current policy period (July 1, 2021 – July 1, 2022) expires in one week. Timely binding is essential to avoid any gap in coverage.

Priya, please do not hesitate to reach out if you or the board would like to discuss any aspect of this recommendation. I am happy to schedule a call with Doug, Trevor, Donna, and the broader team at your convenience, and we can provide any additional detail or supporting analysis the board may require.

Following binding, Calderwood & Harkness will conduct post-bind policy wording reviews of all issued policies and binders once received from the carriers and will report our findings promptly.

For reference, the following documents have been previously circulated and support this recommendation:

- Carrier Quote Comparison Matrix — D&O Tower (dated June 10, 2022) - Carrier Quote Comparison Matrix — PL Tower (dated June 10, 2022) - Renewal Negotiation Points Memorandum (dated June 13, 2022) - Board Presentation Memorandum — Insurance Tower Review Summary (dated June 22, 2022) - Draft Board Resolution — Authorization to Bind Renewal (dated June 22, 2022) - Claims Reporting Compliance Checklist (dated June 1, 20

Please let me know if you would like us to recirculate any of these materials.

**Naomi Petersen** Associate Calderwood & Harkness LLP 600 Lexington Avenue, 30th Floor New York, NY 10022 T: (212) 555-4918 E: npetersen@calderwoodharkness.com

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