1007-00008 · Vantage Mobility Systems Corp · Memoranda

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Bernard Crawford, Responsible Partner; Conrad Ashby, Billing Partner

FROM: Gabrielle Moss, Lead Associate; Aaron Liu, Working Associate

DATE: September 18, 2023

RE: Insurance Coverage Analysis — Technology Errors & Omissions Policy Applicability to Derivative Works Dispute with Meridian Code Technologies, Inc.

Matter No.: C&H Matter No. 1007-00008

Client: Vantage Mobility Systems Corp.

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I. Executive Summary

This memorandum analyzes whether Vantage Mobility Systems Corp.'s ("VMS" or the "Company") Technology Errors & Omissions Policy provides coverage for losses arising from or related to the derivative works ownership dispute with Meridian Code Technologies, Inc. ("MeridianCode") under the Master Embedded Software License and Services Agreement dated June 21, 2022 (the "MESLSA"). The dispute centers on the ownership of three software modules — designated DW-001, DW-002, and DW-003 — developed by VMS engineers during the integration of MeridianCode's ATLAS-RT™ embedded real-time operating system into VMS's next-generation adaptive vehicle platform program known as "Project Argonaut."

The insurance policy at issue is Technology Errors & Omissions Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. ("Commonwealth"), a Connecticut corporation, to VMS as the named insured. The policy provides limits of liability of $10,000,000 per occurrence and $20,000,000 in the aggregate, subject to a self-insured retention ("SIR") of $500,000 per claim. The policy is a claims-made form, and its continued applicability depends upon timely notice and satisfaction of applicable reporting conditions.

The derivative works dispute concerns the three software modules comprising approximately 47,000 lines of code, which have been independently assessed by Hargrove Technical Consulting, LLC (under the leadership of Dr. Samuel Beecroft, Ph.D., the firm's lead consultant) as having an estimated commercial value of $1,800,000 to $2,500,000. MeridianCode, through its counsel at Redstone Whitaker LLP, has asserted that these modules are jointly owned under Section 7.2 of the MESLSA and that MeridianCode retains a perpetual, royalty-free license to commercialize the derivative works independently. VMS contends the modules are VMS-originated works, developed independently by VMS engineers, and should be solely owned by VMS.

Bottom-Line Conclusion: Coverage is uncertain. The dispute presents characteristics that may fall within the policy's coverage triggers — specifically, insuring language relating to third-party IP claims related to embedded software — but the dispute also implicates potential exclusions for contract-based disputes, ownership claims between contracting parties, known loss, and intentional acts. Strong arguments exist on both sides, and Commonwealth may contest coverage on multiple grounds. The most significant obstacle to coverage is the contractual liability exclusion, given that the dispute fundamentally concerns the interpretation and application of a negotiated IP allocation provision in the MESLSA. However, VMS has viable counterarguments, particularly if the dispute is characterized (or evolves into) an IP ownership or misappropriation claim rather than a pure breach of contract action.

Recommendation: VMS should provide early written notice of the claim or potential claim to Commonwealth Surety & Insurance Co. immediately to preserve coverage rights regardless of the ultimate coverage determination. Delay in providing notice could result in forfeiture of coverage rights, which would be a separate and unnecessary loss to VMS independent of the underlying dispute with MeridianCode. We recommend that such notice be transmitted no later than September 29, 2023.

II. Background

A. The MESLSA and Project Argonaut

On June 21, 2022, VMS and MeridianCode entered into the MESLSA, pursuant to which MeridianCode licensed to VMS its proprietary ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3 through a series of maintenance releases during the first year of the agreement). The MESLSA is a comprehensive enterprise software licensing agreement with a total deal value of approximately $20,000,000, encompassing upfront license fees, annual maintenance and support fees, and integration services fees tied to designated project milestones.

The MESLSA was negotiated and executed in connection with Project Argonaut, VMS's next-generation adaptive vehicle platform program. Project Argonaut was conceived as a transformational initiative for VMS, intended to integrate advanced embedded software capabilities into VMS's mobility solutions portfolio. The ATLAS-RT platform was selected as the foundational real-time operating system after an extensive evaluation process, and the MESLSA was structured to support a multi-platform deployment across VMS's product lines.

As originally scoped, Project Argonaut contemplated five distinct vehicle platforms, designated Argonaut-A through Argonaut-E. Each platform was to integrate the ATLAS-RT software with platform-specific hardware configurations and VMS-proprietary application layers. The five-platform scope was reflected in the integration services milestones and fee schedule set forth in Exhibit C to the MESLSA.

However, on March 14, 2023, the VMS Board of Directors adopted a resolution to rescope Project Argonaut from five platforms to two platforms — Argonaut-A and Argonaut-C — in response to two converging pressures. First, persistent semiconductor supply-chain disruptions had created significant delays and cost overruns in the hardware development timelines for the Argonaut-B, Argonaut-D, and Argonaut-E platforms. Second, Kestrel Capital Partners, LP, VMS's majority investor, issued a portfolio-wide capital expenditure reduction directive in February 2023, mandating a 35% reduction in non-essential capital outlays across its portfolio companies during fiscal year 2023.

Following the Board resolution, VMS suspended integration work on March 22, 2023, halting all engineering activities related to the ATLAS-RT integration beyond the Milestone 3 deliverables that had already been substantially completed. VMS provided MeridianCode with a formal Dormancy Notice on July 14, 2023, invoking the dormancy provisions under Section 9.4 of the MESLSA. MeridianCode, through its General Counsel Gregory L. Fisk and Director of Strategic Partnerships Diana Cho, acknowledged Dormancy Status in a letter dated August 3, 2023, while expressly reserving MeridianCode's rights under the agreement, including its asserted joint-ownership rights to derivative works created during the integration phase.

B. The Derivative Works Dispute

During the integration phase of Project Argonaut, which ran from approximately July 2022 through March 2023, VMS engineers under the direction of Lena Petrova, Director of Software Integration Engineering, created three distinct software modules designated as DW-001, DW-002, and DW-003. These modules collectively comprise approximately 47,000 lines of code and represent the output of approximately 14,200 engineering hours invested by VMS internal teams across the Project Argonaut integration effort.

The three modules were developed to bridge the gap between the ATLAS-RT platform's native functionality and VMS's proprietary application requirements for the Argonaut-A and Argonaut-C platforms. Specifically:

• DW-001 is a sensor fusion middleware layer that enables ATLAS-RT to interface with VMS's proprietary sensor array hardware, translating raw sensor data into ATLAS-RT-compatible data streams for real-time processing.

• DW-002 is an adaptive control algorithm module that implements VMS-proprietary vehicle dynamics models within the ATLAS-RT scheduling framework, enabling real-time adaptive responses based on sensor inputs.

• DW-003 is a diagnostics and telemetry module that extends the ATLAS-RT diagnostic subsystem to support VMS's proprietary fleet management telemetry protocol, enabling remote monitoring and over-the-air update capabilities.

The intellectual property dispute between VMS and MeridianCode centers on the ownership of these three modules. Section 7.2 of the MESLSA provides, in relevant part, that "any modifications, adaptations, or extensions to ATLAS-RT source code created by [VMS] engineers during integration" become jointly owned by VMS and MeridianCode, with MeridianCode retaining "a perpetual, royalty-free license to such derivative works." The critical question is whether DW-001, DW-002, and DW-003 constitute "modifications, adaptations, or extensions to ATLAS-RT source code" within the meaning of Section 7.2, or whether they are independent VMS-originated works that merely interface with the ATLAS-RT platform without modifying, adapting, or extending its source code.

VMS's position, as developed in our separate Memorandum: Derivative Works Ownership Dispute — Analysis of Section 7.2 and Michigan IP Law, is that the three modules are VMS-originated works developed independently by VMS engineers using VMS's proprietary algorithms, methodologies, and domain knowledge. VMS contends that the modules interact with ATLAS-RT through published application programming interfaces ("APIs") and do not modify, adapt, or extend the ATLAS-RT source code itself. Accordingly, VMS asserts that it is the sole owner of DW-001, DW-002, and DW-003, and that Section 7.2's joint-ownership provision does not apply to these works.

MeridianCode's position, as communicated through its outside counsel at Redstone Whitaker LLP — specifically, lead partner Alan M. Briscoe and senior associate Natasha C. Ferraro — is that the modules are "derivative works" that constitute "modifications, adaptations, or extensions" to the ATLAS-RT source code within the meaning of Section 7.2. MeridianCode asserts that the modules were created specifically to extend the functionality of ATLAS-RT, that they depend upon and are tightly integrated with ATLAS-RT's internal data structures and scheduling primitives, and that they therefore fall squarely within the joint-ownership provision. MeridianCode further asserts that it retains its perpetual, royalty-free license-back right under Section 7.2 and may commercialize these works independently — a prospect that is particularly concerning to VMS given that MeridianCode could potentially offer the derivative works to VMS's competitors in the mobility solutions market.

The independent technical assessment conducted by Hargrove Technical Consulting, LLC, under the direction of Dr. Samuel Beecroft, Ph.D., estimates the commercial value of the three derivative works modules at $1,800,000 to $2,500,000. This valuation reflects the replacement cost of the engineering effort, the commercial applicability of the modules to the embedded mobility software market, and the competitive significance of the sensor fusion, adaptive control, and diagnostic capabilities they embody.

The MESLSA provides that disputes arising under or in connection with the agreement shall be resolved through binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), seated in Detroit, Michigan. For disputes with an amount in controversy exceeding $1,000,000, the MESLSA requires a three-arbitrator panel. Given that the estimated value of the derivative works exceeds the $1,000,000 threshold, any arbitration proceeding concerning DW-001, DW-002, and DW-003 would be conducted before a three-arbitrator MAI panel — a format that typically involves substantial procedural costs, extended timelines, and significant attorney and expert witness fees.

C. Financial Context

The financial context of the derivative works dispute is material to both the coverage analysis and VMS's broader strategic calculus. To date, VMS has paid MeridianCode a total of $12,320,000 under the MESLSA, comprising the following components:

• Upfront license fee: $8,000,000 (paid at execution of the MESLSA)

• Year 1 maintenance and support fee: $2,400,000 (paid July 1, 2022)

• Integration services fees through Milestone 3: $1,920,000 (paid in three installments upon milestone completion)

VMS's total remaining contractual commitment under the MESLSA is approximately $7,680,000, representing the balance of integration services fees (for Milestones 4 through 8, which are now suspended) and future maintenance fees. Most immediately, MeridianCode invoiced VMS for the Year 2 Maintenance Fee of $2,400,000 on July 1, 2023. VMS has disputed this invoice and deferred payment, asserting that the Dormancy Status triggered under Section 9.4 suspends or reduces VMS's maintenance fee obligations during the dormancy period. MeridianCode disputes this interpretation and maintains that the Year 2 Maintenance Fee is due and payable regardless of dormancy status.

The derivative works dispute compounds VMS's broader financial exposure under the MESLSA. If MeridianCode succeeds in asserting joint ownership of DW-001, DW-002, and DW-003, the consequences for VMS extend beyond the $1,800,000 to $2,500,000 direct commercial value of the modules themselves. MeridianCode's ability to commercialize the derivative works independently — and potentially to license them to VMS's competitors — could significantly diminish the value of VMS's $12,320,000 investment in the ATLAS-RT platform and undermine VMS's competitive position in the adaptive vehicle platform market. The strategic implications of this scenario underscore the importance of maximizing all available avenues for risk mitigation, including insurance recovery.

III. Policy Overview

A. Policy Identification and Basic Terms

The insurance policy at issue is identified as follows:

The policy is a claims-made and reported form, meaning that coverage is triggered when a claim is first made against the insured during the policy period (or any applicable extended reporting period) and the insured reports the claim to the insurer within the time frame specified in the policy. This structure places a premium on timely notice and underscores the urgency of VMS's obligation to report the MeridianCode dispute to Commonwealth without further delay.

The $10,000,000 per-occurrence limit is more than sufficient to address the estimated $1,800,000 to $2,500,000 value of the derivative works, plus anticipated defense costs. The $500,000 SIR means that VMS would bear the first $500,000 of loss (including defense costs, if defense costs erode the SIR) before Commonwealth's coverage obligations attach. Given the expected cost of a three-arbitrator MAI proceeding involving complex embedded software IP issues, VMS may exhaust the SIR through defense costs alone within the early stages of an arbitration.

B. Key Insuring Agreements

The policy contains multiple insuring agreements, the two most relevant of which are summarized below.

Coverage A — Technology Errors & Omissions. Coverage A provides indemnification for claims arising from errors, omissions, negligent acts, or wrongful acts committed by the insured in connection with the insured's technology products or technology services. This is the core professional liability coverage of the policy, analogous to the insuring agreement found in traditional professional liability or errors and omissions policies but tailored to the technology sector. Coverage A is typically invoked when a client, customer, or other third party alleges that the insured's technology product or service was defective, deficient, or negligently performed, resulting in damages to the claimant.

The applicability of Coverage A to the derivative works dispute depends on whether the creation of derivative works by VMS engineers during the integration phase can be characterized as a "technology service" or the output of a "technology product" within the meaning of the policy, and whether MeridianCode's assertion of joint ownership constitutes a "claim" arising from an "error," "omission," or "wrongful act" by VMS in connection with such product or service. As discussed in Section IV below, the characterization question is central to the coverage analysis.

Coverage B — Intellectual Property. Where included, Coverage B provides coverage for claims alleging intellectual property infringement, including claims for copyright infringement, patent infringement, trade secret misappropriation, or similar intellectual property violations arising from the insured's technology products. The policy description provided to our team indicates that the policy includes coverage language addressing "losses arising from third-party IP disputes related to embedded software." This language, if it appears in the insuring agreement or an endorsement, could provide a direct basis for coverage of the derivative works dispute, which is fundamentally a dispute over IP ownership rights related to embedded software modules.

It is critical to distinguish between first-party and third-party coverage in the Tech E&O context. Technology E&O policies are fundamentally third-party liability policies: they cover the insured's liability to third parties who assert claims against the insured, and they typically provide both defense costs and indemnification for covered claims. The policies do not ordinarily provide first-party coverage for the insured's own losses (such as business interruption, lost revenue, or diminution in asset value) absent a specific first-party coverage endorsement. This distinction is relevant because a significant component of VMS's exposure in the derivative works dispute is the potential loss of sole ownership of IP assets worth $1,800,000 to $2,500,000 — which may be characterized as a first-party loss (loss of an asset) rather than a third-party liability (obligation to pay damages to MeridianCode). The coverage analysis must carefully parse which components of VMS's exposure are potentially covered and which fall outside the policy's scope.

C. Relevant Definitions

The coverage analysis turns in significant part on the application of key defined terms in the policy. While we have not been provided with a certified copy of the complete policy form, the following definitions are standard in Technology E&O policies of the type issued by Commonwealth and are likely present in substantially similar form in Policy No. TEO-2022-7891.

"Claim." Technology E&O policies typically define "Claim" as a written demand for monetary damages or non-monetary relief, a civil proceeding, an arbitration proceeding, or a formal assertion of legal rights made against the insured. Some policies expand the definition to include regulatory proceedings or investigations. The MeridianCode dispute, if it escalates to binding arbitration before the MAI (as required by the MESLSA for disputes exceeding $1,000,000), would almost certainly constitute a "Claim" under any standard policy definition. The threshold question is whether MeridianCode's pre-arbitration correspondence — asserting joint ownership through Redstone Whitaker LLP — constitutes a "Claim" or merely a "circumstance" that may give rise to a claim in the future. As discussed in Section IV.A, the distinction affects both the triggering of coverage and the mechanics of notice.

"Loss." The term "Loss" in Technology E&O policies typically includes defense costs (including attorney fees, expert witness fees, and arbitration costs), settlements (with insurer consent), and judgments or awards entered against the insured. The critical question for VMS is whether the loss of intellectual property rights — specifically, the loss of sole ownership of derivative works DW-001, DW-002, and DW-003 — or the diminution in commercial value resulting from MeridianCode's assertion of joint ownership constitutes a covered "Loss." Policies frequently exclude from the definition of "Loss" items such as return of fees, disgorgement, fines, penalties, and non-monetary remedies. If the arbitration results in a declaratory award establishing MeridianCode's joint-ownership rights (rather than a monetary damages award), VMS may face an argument that the adverse outcome does not constitute a covered "Loss."

"Wrongful Act" or "Professional Services" / "Technology Services." Coverage is typically predicated on the occurrence of a "Wrongful Act" in connection with the insured's "Professional Services" or "Technology Services." "Wrongful Act" is generally defined to include any actual or alleged error, omission, misstatement, misleading statement, neglect, or breach of duty in connection with the insured's technology services. The question is whether VMS's creation of derivative works, and its subsequent assertion of sole ownership, constitutes a "Wrongful Act." VMS did not commit an error or omission in creating the modules — VMS intentionally created them as part of its integration effort. The dispute is about ownership allocation, not about defective performance. This framing may be problematic for coverage purposes, as discussed further below.

"Insured." VMS is the named insured under the policy. The definition of "Insured" may extend to VMS's subsidiaries (if any), as well as to the directors, officers, and employees of VMS when acting within the scope of their duties. This is relevant because VMS's engineering team, including Lena Petrova, performed the derivative works development — they would be covered individuals to the extent their activities fall within the scope of the policy.

IV. Coverage Analysis

A. Trigger of Coverage — Is There a Covered "Claim"?

The threshold question for any coverage analysis under a claims-made policy is whether a "Claim" has been made against the insured within the policy period.

Current Status of the Dispute. As of the date of this memorandum, MeridianCode has asserted its position through its outside counsel, Redstone Whitaker LLP (Alan M. Briscoe, lead partner, and Natasha C. Ferraro, senior associate), that DW-001, DW-002, and DW-003 are jointly owned under Section 7.2 of the MESLSA. This assertion has been communicated in multiple pieces of correspondence, including in MeridianCode's August 3, 2023 dormancy acknowledgment letter, which expressly reserved MeridianCode's rights under Section 7.2 and reiterated its position that the derivative works are jointly owned. MeridianCode has not yet filed a demand for arbitration before the MAI, nor has it initiated any formal legal proceeding. The dispute remains in the pre-arbitration, counsel-to-counsel negotiation phase.

Does the Existing Correspondence Constitute a "Claim"? Whether MeridianCode's correspondence constitutes a "Claim" under the policy depends on the precise policy language. If the policy defines "Claim" narrowly to include only civil proceedings, arbitration demands, or formal written demands for specific monetary relief, then MeridianCode's position statements — which assert ownership rights but have not yet demanded monetary damages or filed for arbitration — may not constitute a "Claim." However, if the policy defines "Claim" more broadly to include any written assertion of legal rights or demand for non-monetary relief, MeridianCode's assertion of joint ownership and license-back rights could qualify.

Even under the narrower definition, MeridianCode's correspondence likely constitutes "circumstances" that could reasonably be expected to give rise to a claim. Most claims-made policies include a provision allowing the insured to report "circumstances" or "potential claims" during the policy period, which, if timely reported, are treated as claims made during the policy period for purposes of coverage. This mechanism is designed to prevent a gap in coverage that could arise when circumstances developing during one policy period do not ripen into a formal claim until a subsequent policy period (when the insured may have a different insurer, different limits, or no coverage at all).

Timing Considerations. Under a claims-made and reported form, both the making of the claim and the reporting of the claim must occur within the policy period (or any applicable extended reporting period). The derivative works dispute has been developing since at least August 3, 2023, when MeridianCode's dormancy acknowledgment letter reiterated its joint-ownership position. In truth, the underlying disagreement has existed in some form since the integration phase, when the interplay between VMS's development activities and Section 7.2's scope was first recognized as a potential issue. The earlier VMS became aware of the risk, the more critical timely reporting becomes. Our firm's own Preliminary Contract Review Memorandum, prepared in June 2022 in connection with the MESLSA negotiation, identified Section 7.2 as a risk area — a fact that could be relevant to both notice timing and the known-loss exclusion discussed below.

Recommended Approach. Given the uncertainty as to whether a formal "Claim" has yet been made, VMS should report the matter to Commonwealth as both a "Claim" (to the extent MeridianCode's correspondence qualifies) and as "circumstances that may give rise to a Claim" (to preserve coverage regardless of how the policy defines "Claim"). The notice should be provided as promptly as possible — we recommend no later than September 29, 2023. If the dispute subsequently escalates to a formal MAI arbitration demand, VMS should provide supplemental notice at that time. The filing of an arbitration demand by MeridianCode would almost certainly constitute a "Claim" under any reasonable policy definition.

B. Does the Derivative Works Dispute Fall Within the Insuring Agreement?

Assuming a covered "Claim" exists or will exist, the next question is whether the claim falls within the scope of the policy's insuring agreement. This analysis requires consideration of arguments both for and against coverage.

1. Arguments in Favor of Coverage

Several features of the dispute support an argument that it falls within the insuring agreement of the Tech E&O policy:

The Policy's IP Dispute Coverage Language. The policy description indicates coverage for "losses arising from third-party IP disputes related to embedded software." The derivative works dispute is precisely such a dispute: it concerns the ownership of three embedded software modules (DW-001, DW-002, DW-003) comprising approximately 47,000 lines of code designed for integration into an embedded real-time operating system. The subject matter of the dispute — Intellectual property ownership rights in embedded software — aligns directly with the apparent scope of the policy's insuring language.

Characterization as a Third-Party IP Claim. MeridianCode's assertion of joint ownership and perpetual royalty-free license-back rights effectively constitutes a claim against VMS's intellectual property. By asserting that it co-owns the derivative works and has the right to commercialize them independently, MeridianCode is claiming rights to IP that VMS considers its sole property. This is functionally analogous to a copyright ownership dispute or a misappropriation claim, in that a third party is asserting entitlement to IP that the insured developed and considers its own. Although the dispute arises in a contractual context, the substance of the claim — "we own (or co-own) your software" — is an IP ownership claim regardless of the legal theory under which it is asserted.

Defense Costs. Even if the indemnity coverage analysis is uncertain, VMS may have a strong argument for coverage of defense costs. If the dispute proceeds to binding arbitration before a three-arbitrator MAI panel — as required by the MESLSA for disputes exceeding $1,000,000 — the defense costs could be substantial. Arbitrator fees for a three-member panel in a complex technology dispute, expert witness costs (including technical experts to assess the nature and independence of the derivative works code), electronic discovery costs, and attorney fees for the arbitration proceeding could collectively reach several hundred thousand dollars or more, potentially exceeding the $500,000 SIR. Coverage for defense costs alone would provide meaningful economic value to VMS.

Exceeds the Self-Insured Retention. The estimated commercial value of the derivative works ($1,800,000 to $2,500,000, per the Hargrove Technical Consulting assessment) exceeds the $500,000 SIR by a significant margin. Combined with anticipated defense costs, the total exposure could approach or exceed $3,000,000. Coverage is therefore economically meaningful, making it worth pursuing even in the face of coverage uncertainty.

Policy Construction Principles. Under Michigan law, ambiguities in insurance policy language are construed against the insurer. If the insuring agreement language is susceptible to more than one reasonable interpretation — one that covers the derivative works dispute and one that does not — the interpretation favoring coverage should prevail. VMS should argue that the insuring language, particularly the reference to "third-party IP disputes related to embedded software," is broad enough to encompass the MeridianCode dispute and that any ambiguity must be resolved in VMS's favor.

2. Arguments Against Coverage

Commonwealth will likely advance several arguments against coverage, and we must candidly assess their strength:

Contractual Origin of the Dispute. The derivative works dispute arises from a negotiated contractual provision — Section 7.2 of the MESLSA — rather than from a tort, wrongful act, or negligent omission by VMS. MeridianCode is not alleging that VMS infringed MeridianCode's copyrights or misappropriated MeridianCode's trade secrets through wrongful conduct. Rather, MeridianCode is asserting contractual rights that it believes it holds under a provision that the parties themselves negotiated and agreed upon. Many Technology E&O policies are designed to cover claims arising from the insured's professional errors or omissions — not disputes over the interpretation of commercial contracts to which the insured is a party. Commonwealth will argue that the dispute is fundamentally a contract interpretation matter, not a covered IP claim.

MeridianCode Is Not a True "Third Party." The policy's reference to "third-party IP disputes" may contemplate claims by parties who are strangers to the insured — competitors, patent trolls, copyright holders, or other entities with no pre-existing contractual relationship with VMS. MeridianCode is not such a party. MeridianCode is VMS's licensor, contractual counterparty, and collaborative integration partner under the MESLSA. Commonwealth may argue that a dispute between contracting parties over the meaning of their own IP allocation provisions does not constitute a "third-party IP dispute" within the meaning of the insuring agreement. This argument has particular force if the policy's underwriting intent was to cover VMS against claims by outside parties who allege that VMS's technology products infringe their IP rights — a fundamentally different risk profile from a dispute with VMS's own software vendor over jointly negotiated IP terms.

No "Wrongful Act" or "Error." VMS is not being accused of an error, omission, or wrongful act in the traditional sense. MeridianCode does not contend that VMS performed defectively, negligently, or improperly. Rather, MeridianCode asserts that the derivative works fall within the scope of a contractual provision that allocates ownership rights. VMS's conduct — creating derivative works during the integration phase — was intentional, authorized, and performed in the ordinary course of the Project Argonaut integration effort. There is no allegation of professional negligence, technical failure, or wrongful conduct. Commonwealth will argue that the insuring agreement requires a "Wrongful Act" as a predicate for coverage and that the derivative works dispute does not involve one.

First-Party Loss Characterization. To the extent VMS's loss is the loss of sole ownership of its IP assets (rather than liability to pay damages to MeridianCode), Commonwealth may argue that this is a first-party loss — the diminution in value of VMS's own assets — rather than a third-party liability. Tech E&O policies cover the insured's liability to third parties; they do not typically insure against the insured's own asset losses. If the arbitration results in a declaration that MeridianCode is a co-owner of the derivative works, VMS's loss is the loss of exclusive ownership — an asset diminution, not a liability.

Assessment. We believe that the coverage question is genuinely uncertain and that reasonable arguments exist on both sides. The strongest argument for coverage is the policy's apparently broad language covering IP disputes related to embedded software, which facially encompasses the derivative works dispute. The strongest argument against coverage is the contractual origin of the dispute and the absence of a traditional "wrongful act" by VMS. On balance, we assess that VMS has a plausible but not certain basis for coverage, and that the outcome will depend heavily on the precise policy language (which we must review in its entirety), the framing of MeridianCode's eventual arbitration demand (if any), and the applicable Michigan law standards for policy interpretation.

C. Potential Exclusions

Even if the derivative works dispute falls within the insuring agreement, Commonwealth may invoke one or more policy exclusions to deny or limit coverage. We identify the following exclusions as most likely to be at issue:

Contractual Liability Exclusion. Most Technology E&O policies contain an exclusion for "liability assumed under a contract" or "liability arising from breach of contract" beyond what the insured would have in the absence of the contract. This exclusion is designed to prevent the insurance policy from serving as a performance bond for the insured's contractual obligations. In the derivative works dispute, VMS's exposure flows directly from Section 7.2 of the MESLSA — a negotiated contractual provision that allocates ownership of derivative works between the parties. Absent Section 7.2, VMS would not face a joint-ownership claim from MeridianCode. Commonwealth will argue that VMS's exposure is a contractual liability that the insured voluntarily assumed and that the exclusion applies to bar coverage.

VMS's counterargument is that the exclusion applies to liability that VMS "assumed" under the contract — i.e., affirmative obligations that VMS undertook — and not to liability that MeridianCode is attempting to impose on VMS through an aggressive interpretation of Section 7.2 that VMS disputes. VMS did not agree to share ownership of independently developed works; VMS agreed to share ownership of "modifications, adaptations, or extensions to ATLAS-RT source code." The dispute is about whether MeridianCode is correctly characterizing the derivative works as falling within Section 7.2, not about VMS's failure to perform a contractual obligation. This distinction may or may not be sufficient to overcome the exclusion, depending on how broadly the exclusion is drafted and how Michigan courts construe it.

Known Loss / Prior Knowledge Exclusion. Claims-made policies frequently exclude coverage for claims arising from facts, circumstances, or wrongful acts that the insured knew about (or should have known about) prior to the inception of the policy. If VMS was aware at policy inception that Section 7.2 could be interpreted broadly to encompass derivative works that VMS considered independently developed, Commonwealth may argue that the loss was "known" or "expected" at inception and therefore falls outside coverage.

This argument is potentially strengthened by the existence of our firm's Preliminary Contract Review Memorandum, prepared in June 2022 in connection with the MESLSA negotiation, which identified Section 7.2 as a risk area. If this document is discoverable in a coverage dispute — and it likely would be, as the attorney-client privilege may not protect it from disclosure in an insured-versus-insurer coverage action, depending on the circumstances — it could demonstrate that VMS was aware of the risk that Section 7.2 posed before the policy's inception or renewal. We note, however, that identifying a contractual provision as a "risk area" is not the same as knowing that a specific dispute would arise, and VMS can argue that the known-loss exclusion requires knowledge of specific facts giving rise to a specific claim, not merely awareness of theoretical risk.

Intentional Acts Exclusion. Technology E&O policies typically exclude coverage for claims arising from the insured's intentional, deliberate, or willful wrongful acts. Commonwealth could argue that VMS intentionally created the derivative works with full knowledge of Section 7.2 and its potential implications. On this view, the dispute arises from VMS's deliberate conduct — choosing to create derivative works in the course of integrating ATLAS-RT, rather than from an "error" or "omission" — and the intentional acts exclusion bars coverage.

VMS's response is that the intentional acts exclusion is intended to bar coverage for dishonest, fraudulent, or deliberately wrongful conduct — not for the ordinary, good-faith performance of professional services that happens to give rise to a dispute. VMS did not intentionally create a coverage-triggering event; VMS performed integration work in the ordinary course of its engineering activities. The mere fact that VMS's engineering work was intentional (as opposed to accidental) does not transform the resulting dispute into an "intentional act" within the meaning of the exclusion. Michigan courts have generally interpreted intentional acts exclusions narrowly, requiring evidence that the insured intended the wrongful consequences of its act, not merely that the act itself was voluntary.

Business Risk / Loss of Expected Profit Exclusion. If VMS's loss is characterized as the lost commercial value of the derivative works ($1,800,000 to $2,500,000) or as a diminution in the return on VMS's $12,320,000 investment in the MESLSA, Commonwealth may argue that this loss represents an uninsurable business risk. Insurance policies are not designed to guarantee the profitability of commercial transactions or to protect against the economic consequences of business decisions that do not pan out as expected. Commonwealth may frame VMS's exposure as a business risk that VMS assumed when it entered into the MESLSA and commenced the Project Argonaut integration effort, rather than as a covered insured loss.

Insured vs. Insured Exclusion. While an insured-versus-insured exclusion is more commonly found in Directors & Officers ("D&O") policies, some Technology E&O policies contain similar provisions excluding coverage for claims brought by one insured against another insured. This exclusion is unlikely to apply directly to the derivative works dispute because MeridianCode is not an insured under VMS's policy. However, Commonwealth may argue that the close contractual relationship between VMS and MeridianCode — as licensor and licensee, co-developers, and parties to a comprehensive enterprise software agreement — raises the same policy concerns that the insured-versus-insured exclusion is designed to address: namely, the risk of collusive or non-adversarial claims between related parties. We assess this argument as weak, but we note it for completeness.

D. Defense Costs Considerations

Even if Commonwealth ultimately denies indemnity coverage for the derivative works dispute, VMS may have a stronger and more defensible claim for coverage of defense costs. The distinction between indemnity coverage and defense cost coverage is significant under Michigan law and under the terms of Technology E&O policies.

Duty to Defend vs. Duty to Indemnify. Under Michigan law, the insurer's duty to defend is broader than its duty to indemnify. An insurer must defend the insured against a claim if the allegations in the complaint (or, in this case, the arbitration demand), liberally construed, even potentially fall within the policy's coverage. The duty to defend is determined by comparing the allegations against the policy language, and any doubt as to whether the allegations fall within coverage must be resolved in favor of the insured. The duty to indemnify, by contrast, is determined by the actual facts proven at trial or arbitration and is narrower than the duty to defend.

This distinction is critical because MeridianCode's arbitration demand, when and if filed, may be framed in terms that trigger the duty to defend even if the ultimate facts might not support indemnity coverage. For example, if MeridianCode's arbitration demand characterizes VMS's conduct as misappropriation of jointly owned IP, conversion of MeridianCode's property rights, or infringement of MeridianCode's co-ownership rights — rather than purely as a breach of contract or contract interpretation dispute — the defense obligation under the policy would be substantially strengthened. Under the liberal construction standard, allegations that "potentially" fall within coverage trigger the duty to defend, even if those allegations are ultimately resolved on a non-covered basis.

Framing of the Arbitration Demand. The characterization of MeridianCode's claims in any arbitration demand will significantly affect the defense costs analysis. If MeridianCode pleads causes of action sounding in IP misappropriation, conversion, or statutory copyright infringement (in addition to or instead of breach of contract), these allegations would more clearly fall within the policy's IP dispute coverage and would strengthen VMS's argument that Commonwealth owes a duty to defend. VMS does not control how MeridianCode frames its claims, but VMS should be attentive to the coverage implications of MeridianCode's pleading choices. Indeed, it is not uncommon for claimants to plead both contract and tort theories, and even a single covered theory among multiple theories is sufficient to trigger the duty to defend under Michigan law.

Magnitude of Defense Costs. Defense costs for a three-arbitrator MAI proceeding involving embedded software IP issues could be substantial. Anticipated cost categories include:

• Arbitrator fees for a three-member panel (MAI arbitrator fees for complex technology disputes typically range from $750 to $1,500 per arbitrator per hour, with a minimum number of hearing days)

• Expert witness fees for technical assessment of the derivative works code (Dr. Beecroft or a comparable expert would need to provide testimony on the nature, independence, and commercial value of DW-001, DW-002, and DW-003)

• Electronic discovery and document review costs (the integration phase generated extensive engineering documentation, code repositories, communications, and project management records)

• Attorney fees for preparation, briefing, and hearing representation

• Administrative fees assessed by the MAI

A reasonable estimate of total defense costs for a fully litigated three-arbitrator MAI proceeding is $500,000 to $1,200,000, depending on the complexity of the proceedings and the duration of the hearing. This estimate alone could exhaust the $500,000 SIR and begin to implicate Commonwealth's coverage obligations, making the defense costs coverage question independently significant even if indemnity coverage is denied.

E. Subrogation and Recovery Considerations

If Commonwealth provides coverage for the derivative works dispute — whether for defense costs, indemnity, or both — and pays losses on VMS's behalf, Commonwealth would be subrogated to VMS's rights against MeridianCode. Subrogation is the legal principle by which an insurer that pays a loss steps into the shoes of the insured and acquires the insured's rights to recover the loss from the responsible third party.

The subrogation dynamic introduces potential complications in the context of the MeridianCode dispute. VMS is simultaneously engaged in negotiations with MeridianCode regarding the dormancy extension, fee restructuring, and potential reactivation of the MESLSA. These negotiations are commercially sensitive and involve trade-offs across multiple dimensions — derivative works ownership, maintenance fee obligations, dormancy terms, and future integration scope. If Commonwealth is subrogated to VMS's rights, Commonwealth's interest in maximizing recovery from MeridianCode could constrain VMS's flexibility to negotiate a commercially advantageous global resolution.

For example, if VMS were to agree to a settlement with MeridianCode that resolved the derivative works dispute on terms favorable to VMS's broader commercial interests (such as securing sole ownership of the derivative works in exchange for concessions on maintenance fees or dormancy terms), Commonwealth might object that the settlement undervalues the claim for subrogation purposes or that VMS failed to pursue maximum recovery. Conversely, if VMS releases MeridianCode from liability for the derivative works dispute as part of a broader settlement, Commonwealth might argue that VMS impaired its subrogation rights, potentially voiding coverage.

Practical Guidance. Any settlement, release, or other resolution of the derivative works dispute with MeridianCode — including the contemplated Mutual Release and Standstill Agreement, the Draft Side Letter addressing derivative works ownership, or Draft Amendment No. 1 to the MESLSA — should be reviewed for its impact on Commonwealth's subrogation rights. Specifically:

• Settlement documents should not release claims or rights that would belong to Commonwealth as subrogee without Commonwealth's prior consent (once notice has been given and Commonwealth has engaged on the matter).

• VMS should include carve-outs in any settlement documentation preserving VMS's ability to pursue insurance recovery from Commonwealth for covered losses.

• If Commonwealth has accepted a defense obligation and is participating in or monitoring the arbitration, any settlement must be made with Commonwealth's knowledge and consent to avoid a coverage forfeiture argument.

The subrogation issue further underscores the importance of early notice to Commonwealth: by engaging Commonwealth early in the process, VMS can ensure that its negotiation strategy with MeridianCode is coordinated with its insurance recovery strategy, rather than inadvertently taking actions that prejudice one or the other.

V. Notice Obligations and Timing

A. Policy Notice Requirements

Under the claims-made and reported form of Policy No. TEO-2022-7891, VMS is required to provide prompt written notice to Commonwealth of any claim or potential claim. The precise notice requirements are set forth in the policy's conditions section, which typically requires that the insured provide notice "as soon as practicable" or "promptly" after the insured becomes aware of a claim or of circumstances that may reasonably be expected to give rise to a claim. Some policies specify a fixed time period (e.g., 60 days from the date the insured first becomes aware of the claim), while others use an open-ended "promptness" standard.

Regardless of the specific formulation, the purpose of the notice requirement is to enable the insurer to investigate the claim, assess coverage, retain defense counsel (if applicable), and take other steps to protect its interests at the earliest possible stage. Failure to provide timely notice can result in denial of coverage. Under Michigan law, the consequences of late notice depend on the policy language and the circumstances. Some Michigan courts have held that an insurer must demonstrate prejudice from late notice before it can deny coverage on notice grounds, while others have enforced strict notice requirements as conditions precedent to coverage without requiring a showing of prejudice. The outcome depends in part on whether the notice provision is framed as a condition precedent to coverage (strict enforcement) or as a covenant by the insured (prejudice required).

The derivative works dispute has been developing since at least August 3, 2023, when MeridianCode's dormancy acknowledgment letter reiterated its joint-ownership position under Section 7.2. Arguably, VMS became aware of the potential for a derivative works dispute even earlier — during the integration phase or at the time the MESLSA was executed, when Section 7.2 was identified as a risk area. VMS should not delay further in providing notice to Commonwealth. Each additional day of delay increases the risk that Commonwealth will argue that notice was untimely and that the late notice prejudiced its ability to investigate and respond to the claim.

B. Content of Notice

The notice to Commonwealth should be comprehensive and should include the following elements:

1. Policy Identification. Policy Number TEO-2022-7891; Named Insured: Vantage Mobility Systems Corp.

2. Description of the Dispute. MeridianCode's assertion of joint ownership and perpetual royalty-free license-back rights to derivative works DW-001, DW-002, and DW-003 (approximately 47,000 lines of code) under Section 7.2 of the Master Embedded Software License and Services Agreement dated June 21, 2022 between VMS and MeridianCode.

3. Nature of the Claim. MeridianCode, through its counsel at Redstone Whitaker LLP (Alan M. Briscoe, lead partner, and Natasha C. Ferraro, senior associate), has communicated its position that the derivative works are jointly owned and that MeridianCode retains a perpetual, royalty-free license to commercialize the works independently. VMS disputes this position and asserts sole ownership of the derivative works.

4. Potential Financial Exposure. The estimated commercial value of the derivative works is $1,800,000 to $2,500,000 (based on the independent assessment by Hargrove Technical Consulting, LLC, Dr. Samuel Beecroft, Ph.D., lead consultant), plus defense costs in a potential binding arbitration before the Midwest Arbitration Institute (three-arbitrator panel for disputes exceeding $1,000,000).

5. VMS's Position. VMS contends that DW-001, DW-002, and DW-003 are VMS-originated works developed independently by VMS engineers and that they do not constitute "modifications, adaptations, or extensions to ATLAS-RT source code" within the meaning of Section 7.2.

6. Current Status. The dispute is in the pre-arbitration, counsel-to-counsel negotiation phase. VMS's outside counsel, Drummond & Fenwick LLP, and MeridianCode's outside counsel, Redstone Whitaker LLP, are engaged in discussions. No arbitration demand has been filed to date. The dispute is subject to binding arbitration under MAI rules if not resolved through negotiation.

7. Reservation of Rights. The notice should expressly reserve all of VMS's rights under the policy, including the right to seek defense costs, indemnification, and any other benefits to which VMS may be entitled.

The notice should be sent to Commonwealth Surety & Insurance Co. at the address specified in the policy's notice provisions, by the method required under the policy (typically certified mail, overnight courier, or other method providing proof of delivery). We recommend that VMS also transmit the notice via email to Commonwealth's claims department, if a claims email address is specified in the policy, to ensure prompt receipt.

C. Reservation of Rights

VMS should anticipate that Commonwealth will respond to the notice with a reservation of rights letter. In a reservation of rights letter, the insurer acknowledges receipt of the notice and agrees to investigate the claim, but expressly reserves the right to deny coverage based on one or more grounds — such as the contractual liability exclusion, the known-loss exclusion, or the argument that the dispute does not constitute a covered "Claim" or "Wrongful Act."

A reservation of rights is not a denial of coverage. It is the insurer's mechanism for preserving its right to contest coverage while continuing to fulfill its obligations under the policy (such as the duty to defend, if applicable). However, VMS should carefully review any reservation of rights letter to understand the specific grounds on which Commonwealth is reserving rights, to assess whether Commonwealth's positions are meritorious, and to prepare a responsive strategy.

If Commonwealth denies coverage outright — rather than issuing a reservation of rights — VMS should consider retaining specialized insurance coverage counsel to evaluate the denial and advise on the viability of a coverage action against Commonwealth. A coverage denial can be challenged through litigation in Michigan state court, and VMS may have viable claims for breach of contract (breach of the duty to defend and/or duty to indemnify) and potentially for bad faith denial of coverage if Commonwealth's denial is without reasonable basis.

VI. Impact on Pending Negotiations and Resolution Strategy

A. Coordination with Ongoing MeridianCode Negotiations

The insurance coverage analysis does not exist in a vacuum. VMS is simultaneously engaged in active negotiations with MeridianCode regarding the dormancy extension, fee restructuring, and resolution of the derivative works dispute. Our team has drafted and circulated several documents in connection with these negotiations, including:

• A Term Sheet for dormancy extension and fee restructuring, proposing revised dormancy terms, reduced maintenance fee obligations during the dormancy period, and a framework for potential reactivation of integration work;

• A Draft Side Letter addressing derivative works ownership clarification and carve-out for DW-001, DW-002, and DW-003, under which MeridianCode would acknowledge VMS's sole ownership of the derivative works in exchange for specified consideration; and

• A Draft Amendment No. 1 to the MESLSA, which would incorporate the agreed-upon modifications if the parties reach a comprehensive resolution.

Once VMS provides notice to Commonwealth, the insurance dimension becomes intertwined with the negotiation dimension. Any resolution of the derivative works dispute — whether through the Side Letter, Amendment No. 1, the Mutual Release and Standstill Agreement, or arbitration — must be coordinated with Commonwealth's involvement to avoid the following risks:

Prejudicing Coverage Rights by Settling Without Insurer Consent. Many insurance policies contain a consent-to-settle clause requiring the insured to obtain the insurer's prior written consent before entering into any settlement that the insured wishes to recover under the policy. If VMS settles the derivative works dispute with MeridianCode without first obtaining Commonwealth's consent (or at least notifying Commonwealth and providing it with an opportunity to participate), Commonwealth could argue that VMS prejudiced its rights and that coverage is forfeited. This risk is particularly acute if the settlement involves VMS making concessions on other aspects of the MESLSA (such as maintenance fees or dormancy terms) as consideration for MeridianCode's agreement to relinquish its joint-ownership claim — Commonwealth might argue that VMS's settlement does not reflect the true value of the claim and that the loss was not properly mitigated.

Waiving Subrogation Rights. As discussed in Section IV.E, Commonwealth would be subrogated to VMS's rights against MeridianCode upon paying covered losses. If VMS releases MeridianCode from liability for the derivative works dispute as part of a broader settlement, VMS may impair Commonwealth's subrogation rights. This could result in coverage forfeiture or a reduction in the insurer's obligation to pay.

Creating an Estoppel Argument. If VMS voluntarily resolves the derivative works dispute without pursuing maximum recovery — for example, by agreeing to shared ownership with certain restrictions rather than insisting on sole ownership — Commonwealth could argue that VMS's voluntary resolution precludes coverage because VMS chose to accept less than full recovery, making the "loss" a voluntary business decision rather than an insured event.

B. Reservation of VMS's Rights Against Commonwealth

Regardless of how the MeridianCode negotiations conclude, VMS should ensure that its coverage rights against Commonwealth are preserved. Specifically:

• Any settlement documentation with MeridianCode should include carve-outs expressly preserving VMS's right to pursue insurance recovery from Commonwealth for losses incurred in connection with the derivative works dispute.

• Settlement documents should not contain representations or warranties that could be construed as VMS acknowledging that the dispute was not an insurable event or that VMS does not intend to seek insurance recovery.

• VMS should maintain a contemporaneous record of all losses — including defense costs, expert fees, management time, and any concessions made to MeridianCode attributable to the derivative works dispute — to support a coverage claim against Commonwealth.

If Commonwealth denies coverage, VMS retains the right to challenge the denial through litigation or other means under Michigan insurance law. The statute of limitations for breach of an insurance contract in Michigan is generally six years from the date of the breach, providing VMS with a reasonable window to pursue its rights, but VMS should not rely on the length of the limitations period as a reason to delay action.

C. Potential Insurer Involvement in Arbitration

If the derivative works dispute escalates to MAI arbitration and Commonwealth accepts a defense obligation (whether unconditionally or under a reservation of rights), Commonwealth or its designated defense counsel may seek to participate in or monitor the arbitration proceeding. This is standard practice when an insurer is funding the defense of a claim: the insurer has a financial interest in the outcome of the proceeding and typically reserves the right to approve defense strategy, select or approve defense counsel, and consent to any settlement.

Insurer involvement in the arbitration could introduce complications regarding litigation control. VMS's objectives in the arbitration are not purely economic: VMS has significant commercial and strategic interests at stake, including preserving the MeridianCode relationship (which may be valuable if the MESLSA is reactivated), maintaining reactivation optionality for Project Argonaut, and protecting VMS's reputation in the embedded software ecosystem. Commonwealth's objectives, by contrast, are purely financial: minimizing claim payments and defense costs.

These potentially divergent objectives could create tension over arbitration strategy. For example:

• VMS may prefer a negotiated resolution that preserves the MeridianCode relationship, while Commonwealth may prefer aggressive litigation to minimize its payout.

• VMS may want to pursue a global settlement with MeridianCode that addresses the derivative works dispute, the maintenance fee dispute, and the dormancy terms in a single package, while Commonwealth may resist a settlement that conflates covered and non-covered claims.

• VMS may wish to retain its preferred counsel (C&H) for the arbitration, while Commonwealth may insist on its own panel counsel to control defense costs.

VMS should address these potential conflicts proactively. If Commonwealth accepts a defense obligation, VMS should negotiate a clear understanding regarding defense counsel selection, strategy control, and settlement authority. Under Michigan law, where the insurer has a conflict of interest — such as where coverage is disputed and the insurer is defending under a reservation of rights — the insured may have the right to select independent counsel at the insurer's expense. This

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Bernard Crawford, Responsible Partner; Conrad Ashby, Billing Partner
FROM: Gabrielle Moss, Lead Associate; Aaron Liu, Working Associate
DATE: September 18, 2023
RE: Insurance Coverage Analysis — Technology Errors & Omissions Policy Applicability to Derivative Works Dispute with Meridian Code Technologies, Inc.
Matter No.: C&H Matter No. 1007-00008
Client: Vantage Mobility Systems Corp.
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I. Executive Summary
This memorandum analyzes whether Vantage Mobility Systems Corp.'s ("VMS" or the "Company") Technology Errors & Omissions Policy provides coverage for losses arising from or related to the derivative works ownership dispute with Meridian Code Technologies, Inc. ("MeridianCode") under the Master Embedded Software License and Services Agreement dated June 21, 2022 (the "MESLSA"). The dispute centers on the ownership of three software modules — designated DW-001, DW-002, and DW-003 — developed by VMS engineers during the integration of MeridianCode's ATLAS-RT™ embedded real-time operating system into VMS's next-generation adaptive vehicle platform program known as "Project Argonaut."
The insurance policy at issue is Technology Errors & Omissions Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. ("Commonwealth"), a Connecticut corporation, to VMS as the named insured. The policy provides limits of liability of $10,000,000 per occurrence and $20,000,000 in the aggregate, subject to a self-insured retention ("SIR") of $500,000 per claim. The policy is a claims-made form, and its continued applicability depends upon timely notice and satisfaction of applicable reporting conditions.
The derivative works dispute concerns the three software modules comprising approximately 47,000 lines of code, which have been independently assessed by Hargrove Technical Consulting, LLC (under the leadership of Dr. Samuel Beecroft, Ph.D., the firm's lead consultant) as having an estimated commercial value of $1,800,000 to $2,500,000. MeridianCode, through its counsel at Redstone Whitaker LLP, has asserted that these modules are jointly owned under Section 7.2 of the MESLSA and that MeridianCode retains a perpetual, royalty-free license to commercialize the derivative works independently. VMS contends the modules are VMS-originated works, developed independently by VMS engineers, and should be solely owned by VMS.
Bottom-Line Conclusion: Coverage is uncertain. The dispute presents characteristics that may fall within the policy's coverage triggers — specifically, insuring language relating to third-party IP claims related to embedded software — but the dispute also implicates potential exclusions for contract-based disputes, ownership claims between contracting parties, known loss, and intentional acts. Strong arguments exist on both sides, and Commonwealth may contest coverage on multiple grounds. The most significant obstacle to coverage is the contractual liability exclusion, given that the dispute fundamentally concerns the interpretation and application of a negotiated IP allocation provision in the MESLSA. However, VMS has viable counterarguments, particularly if the dispute is characterized (or evolves into) an IP ownership or misappropriation claim rather than a pure breach of contract action.
Recommendation: VMS should provide early written notice of the claim or potential claim to Commonwealth Surety & Insurance Co. immediately to preserve coverage rights regardless of the ultimate coverage determination. Delay in providing notice could result in forfeiture of coverage rights, which would be a separate and unnecessary loss to VMS independent of the underlying dispute with MeridianCode. We recommend that such notice be transmitted no later than September 29, 2023.
II. Background
A. The MESLSA and Project Argonaut
On June 21, 2022, VMS and MeridianCode entered into the MESLSA, pursuant to which MeridianCode licensed to VMS its proprietary ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3 through a series of maintenance releases during the first year of the agreement). The MESLSA is a comprehensive enterprise software licensing agreement with a total deal value of approximately $20,000,000, encompassing upfront license fees, annual maintenance and support fees, and integration services fees tied to designated project milestones.
The MESLSA was negotiated and executed in connection with Project Argonaut, VMS's next-generation adaptive vehicle platform program. Project Argonaut was conceived as a transformational initiative for VMS, intended to integrate advanced embedded software capabilities into VMS's mobility solutions portfolio. The ATLAS-RT platform was selected as the foundational real-time operating system after an extensive evaluation process, and the MESLSA was structured to support a multi-platform deployment across VMS's product lines.
As originally scoped, Project Argonaut contemplated five distinct vehicle platforms, designated Argonaut-A through Argonaut-E. Each platform was to integrate the ATLAS-RT software with platform-specific hardware configurations and VMS-proprietary application layers. The five-platform scope was reflected in the integration services milestones and fee schedule set forth in Exhibit C to the MESLSA.
However, on March 14, 2023, the VMS Board of Directors adopted a resolution to rescope Project Argonaut from five platforms to two platforms — Argonaut-A and Argonaut-C — in response to two converging pressures. First, persistent semiconductor supply-chain disruptions had created significant delays and cost overruns in the hardware development timelines for the Argonaut-B, Argonaut-D, and Argonaut-E platforms. Second, Kestrel Capital Partners, LP, VMS's majority investor, issued a portfolio-wide capital expenditure reduction directive in February 2023, mandating a 35% reduction in non-essential capital outlays across its portfolio companies during fiscal year 2023.
Following the Board resolution, VMS suspended integration work on March 22, 2023, halting all engineering activities related to the ATLAS-RT integration beyond the Milestone 3 deliverables that had already been substantially completed. VMS provided MeridianCode with a formal Dormancy Notice on July 14, 2023, invoking the dormancy provisions under Section 9.4 of the MESLSA. MeridianCode, through its General Counsel Gregory L. Fisk and Director of Strategic Partnerships Diana Cho, acknowledged Dormancy Status in a letter dated August 3, 2023, while expressly reserving MeridianCode's rights under the agreement, including its asserted joint-ownership rights to derivative works created during the integration phase.
B. The Derivative Works Dispute
During the integration phase of Project Argonaut, which ran from approximately July 2022 through March 2023, VMS engineers under the direction of Lena Petrova, Director of Software Integration Engineering, created three distinct software modules designated as DW-001, DW-002, and DW-003. These modules collectively comprise approximately 47,000 lines of code and represent the output of approximately 14,200 engineering hours invested by VMS internal teams across the Project Argonaut integration effort.
The three modules were developed to bridge the gap between the ATLAS-RT platform's native functionality and VMS's proprietary application requirements for the Argonaut-A and Argonaut-C platforms. Specifically:
• DW-001 is a sensor fusion middleware layer that enables ATLAS-RT to interface with VMS's proprietary sensor array hardware, translating raw sensor data into ATLAS-RT-compatible data streams for real-time processing.
• DW-002 is an adaptive control algorithm module that implements VMS-proprietary vehicle dynamics models within the ATLAS-RT scheduling framework, enabling real-time adaptive responses based on sensor inputs.
• DW-003 is a diagnostics and telemetry module that extends the ATLAS-RT diagnostic subsystem to support VMS's proprietary fleet management telemetry protocol, enabling remote monitoring and over-the-air update capabilities.
The intellectual property dispute between VMS and MeridianCode centers on the ownership of these three modules. Section 7.2 of the MESLSA provides, in relevant part, that "any modifications, adaptations, or extensions to ATLAS-RT source code created by [VMS] engineers during integration" become jointly owned by VMS and MeridianCode, with MeridianCode retaining "a perpetual, royalty-free license to such derivative works." The critical question is whether DW-001, DW-002, and DW-003 constitute "modifications, adaptations, or extensions to ATLAS-RT source code" within the meaning of Section 7.2, or whether they are independent VMS-originated works that merely interface with the ATLAS-RT platform without modifying, adapting, or extending its source code.
VMS's position, as developed in our separate Memorandum: Derivative Works Ownership Dispute — Analysis of Section 7.2 and Michigan IP Law, is that the three modules are VMS-originated works developed independently by VMS engineers using VMS's proprietary algorithms, methodologies, and domain knowledge. VMS contends that the modules interact with ATLAS-RT through published application programming interfaces ("APIs") and do not modify, adapt, or extend the ATLAS-RT source code itself. Accordingly, VMS asserts that it is the sole owner of DW-001, DW-002, and DW-003, and that Section 7.2's joint-ownership provision does not apply to these works.
MeridianCode's position, as communicated through its outside counsel at Redstone Whitaker LLP — specifically, lead partner Alan M. Briscoe and senior associate Natasha C. Ferraro — is that the modules are "derivative works" that constitute "modifications, adaptations, or extensions" to the ATLAS-RT source code within the meaning of Section 7.2. MeridianCode asserts that the modules were created specifically to extend the functionality of ATLAS-RT, that they depend upon and are tightly integrated with ATLAS-RT's internal data structures and scheduling primitives, and that they therefore fall squarely within the joint-ownership provision. MeridianCode further asserts that it retains its perpetual, royalty-free license-back right under Section 7.2 and may commercialize these works independently — a prospect that is particularly concerning to VMS given that MeridianCode could potentially offer the derivative works to VMS's competitors in the mobility solutions market.
The independent technical assessment conducted by Hargrove Technical Consulting, LLC, under the direction of Dr. Samuel Beecroft, Ph.D., estimates the commercial value of the three derivative works modules at $1,800,000 to $2,500,000. This valuation reflects the replacement cost of the engineering effort, the commercial applicability of the modules to the embedded mobility software market, and the competitive significance of the sensor fusion, adaptive control, and diagnostic capabilities they embody.
The MESLSA provides that disputes arising under or in connection with the agreement shall be resolved through binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), seated in Detroit, Michigan. For disputes with an amount in controversy exceeding $1,000,000, the MESLSA requires a three-arbitrator panel. Given that the estimated value of the derivative works exceeds the $1,000,000 threshold, any arbitration proceeding concerning DW-001, DW-002, and DW-003 would be conducted before a three-arbitrator MAI panel — a format that typically involves substantial procedural costs, extended timelines, and significant attorney and expert witness fees.
C. Financial Context
The financial context of the derivative works dispute is material to both the coverage analysis and VMS's broader strategic calculus. To date, VMS has paid MeridianCode a total of $12,320,000 under the MESLSA, comprising the following components:
• Upfront license fee: $8,000,000 (paid at execution of the MESLSA)
• Year 1 maintenance and support fee: $2,400,000 (paid July 1, 2022)
• Integration services fees through Milestone 3: $1,920,000 (paid in three installments upon milestone completion)
VMS's total remaining contractual commitment under the MESLSA is approximately $7,680,000, representing the balance of integration services fees (for Milestones 4 through 8, which are now suspended) and future maintenance fees. Most immediately, MeridianCode invoiced VMS for the Year 2 Maintenance Fee of $2,400,000 on July 1, 2023. VMS has disputed this invoice and deferred payment, asserting that the Dormancy Status triggered under Section 9.4 suspends or reduces VMS's maintenance fee obligations during the dormancy period. MeridianCode disputes this interpretation and maintains that the Year 2 Maintenance Fee is due and payable regardless of dormancy status.
The derivative works dispute compounds VMS's broader financial exposure under the MESLSA. If MeridianCode succeeds in asserting joint ownership of DW-001, DW-002, and DW-003, the consequences for VMS extend beyond the $1,800,000 to $2,500,000 direct commercial value of the modules themselves. MeridianCode's ability to commercialize the derivative works independently — and potentially to license them to VMS's competitors — could significantly diminish the value of VMS's $12,320,000 investment in the ATLAS-RT platform and undermine VMS's competitive position in the adaptive vehicle platform market. The strategic implications of this scenario underscore the importance of maximizing all available avenues for risk mitigation, including insurance recovery.
III. Policy Overview
A. Policy Identification and Basic Terms
The insurance policy at issue is identified as follows:
The policy is a claims-made and reported form, meaning that coverage is triggered when a claim is first made against the insured during the policy period (or any applicable extended reporting period) and the insured reports the claim to the insurer within the time frame specified in the policy. This structure places a premium on timely notice and underscores the urgency of VMS's obligation to report the MeridianCode dispute to Commonwealth without further delay.
The $10,000,000 per-occurrence limit is more than sufficient to address the estimated $1,800,000 to $2,500,000 value of the derivative works, plus anticipated defense costs. The $500,000 SIR means that VMS would bear the first $500,000 of loss (including defense costs, if defense costs erode the SIR) before Commonwealth's coverage obligations attach. Given the expected cost of a three-arbitrator MAI proceeding involving complex embedded software IP issues, VMS may exhaust the SIR through defense costs alone within the early stages of an arbitration.
B. Key Insuring Agreements
The policy contains multiple insuring agreements, the two most relevant of which are summarized below.
Coverage A — Technology Errors & Omissions. Coverage A provides indemnification for claims arising from errors, omissions, negligent acts, or wrongful acts committed by the insured in connection with the insured's technology products or technology services. This is the core professional liability coverage of the policy, analogous to the insuring agreement found in traditional professional liability or errors and omissions policies but tailored to the technology sector. Coverage A is typically invoked when a client, customer, or other third party alleges that the insured's technology product or service was defective, deficient, or negligently performed, resulting in damages to the claimant.
The applicability of Coverage A to the derivative works dispute depends on whether the creation of derivative works by VMS engineers during the integration phase can be characterized as a "technology service" or the output of a "technology product" within the meaning of the policy, and whether MeridianCode's assertion of joint ownership constitutes a "claim" arising from an "error," "omission," or "wrongful act" by VMS in connection with such product or service. As discussed in Section IV below, the characterization question is central to the coverage analysis.
Coverage B — Intellectual Property. Where included, Coverage B provides coverage for claims alleging intellectual property infringement, including claims for copyright infringement, patent infringement, trade secret misappropriation, or similar intellectual property violations arising from the insured's technology products. The policy description provided to our team indicates that the policy includes coverage language addressing "losses arising from third-party IP disputes related to embedded software." This language, if it appears in the insuring agreement or an endorsement, could provide a direct basis for coverage of the derivative works dispute, which is fundamentally a dispute over IP ownership rights related to embedded software modules.
It is critical to distinguish between first-party and third-party coverage in the Tech E&O context. Technology E&O policies are fundamentally third-party liability policies: they cover the insured's liability to third parties who assert claims against the insured, and they typically provide both defense costs and indemnification for covered claims. The policies do not ordinarily provide first-party coverage for the insured's own losses (such as business interruption, lost revenue, or diminution in asset value) absent a specific first-party coverage endorsement. This distinction is relevant because a significant component of VMS's exposure in the derivative works dispute is the potential loss of sole ownership of IP assets worth $1,800,000 to $2,500,000 — which may be characterized as a first-party loss (loss of an asset) rather than a third-party liability (obligation to pay damages to MeridianCode). The coverage analysis must carefully parse which components of VMS's exposure are potentially covered and which fall outside the policy's scope.
C. Relevant Definitions
The coverage analysis turns in significant part on the application of key defined terms in the policy. While we have not been provided with a certified copy of the complete policy form, the following definitions are standard in Technology E&O policies of the type issued by Commonwealth and are likely present in substantially similar form in Policy No. TEO-2022-7891.
"Claim." Technology E&O policies typically define "Claim" as a written demand for monetary damages or non-monetary relief, a civil proceeding, an arbitration proceeding, or a formal assertion of legal rights made against the insured. Some policies expand the definition to include regulatory proceedings or investigations. The MeridianCode dispute, if it escalates to binding arbitration before the MAI (as required by the MESLSA for disputes exceeding $1,000,000), would almost certainly constitute a "Claim" under any standard policy definition. The threshold question is whether MeridianCode's pre-arbitration correspondence — asserting joint ownership through Redstone Whitaker LLP — constitutes a "Claim" or merely a "circumstance" that may give rise to a claim in the future. As discussed in Section IV.A, the distinction affects both the triggering of coverage and the mechanics of notice.
"Loss." The term "Loss" in Technology E&O policies typically includes defense costs (including attorney fees, expert witness fees, and arbitration costs), settlements (with insurer consent), and judgments or awards entered against the insured. The critical question for VMS is whether the loss of intellectual property rights — specifically, the loss of sole ownership of derivative works DW-001, DW-002, and DW-003 — or the diminution in commercial value resulting from MeridianCode's assertion of joint ownership constitutes a covered "Loss." Policies frequently exclude from the definition of "Loss" items such as return of fees, disgorgement, fines, penalties, and non-monetary remedies. If the arbitration results in a declaratory award establishing MeridianCode's joint-ownership rights (rather than a monetary damages award), VMS may face an argument that the adverse outcome does not constitute a covered "Loss."
"Wrongful Act" or "Professional Services" / "Technology Services." Coverage is typically predicated on the occurrence of a "Wrongful Act" in connection with the insured's "Professional Services" or "Technology Services." "Wrongful Act" is generally defined to include any actual or alleged error, omission, misstatement, misleading statement, neglect, or breach of duty in connection with the insured's technology services. The question is whether VMS's creation of derivative works, and its subsequent assertion of sole ownership, constitutes a "Wrongful Act." VMS did not commit an error or omission in creating the modules — VMS intentionally created them as part of its integration effort. The dispute is about ownership allocation, not about defective performance. This framing may be problematic for coverage purposes, as discussed further below.
"Insured." VMS is the named insured under the policy. The definition of "Insured" may extend to VMS's subsidiaries (if any), as well as to the directors, officers, and employees of VMS when acting within the scope of their duties. This is relevant because VMS's engineering team, including Lena Petrova, performed the derivative works development — they would be covered individuals to the extent their activities fall within the scope of the policy.
IV. Coverage Analysis
A. Trigger of Coverage — Is There a Covered "Claim"?
The threshold question for any coverage analysis under a claims-made policy is whether a "Claim" has been made against the insured within the policy period.
Current Status of the Dispute. As of the date of this memorandum, MeridianCode has asserted its position through its outside counsel, Redstone Whitaker LLP (Alan M. Briscoe, lead partner, and Natasha C. Ferraro, senior associate), that DW-001, DW-002, and DW-003 are jointly owned under Section 7.2 of the MESLSA. This assertion has been communicated in multiple pieces of correspondence, including in MeridianCode's August 3, 2023 dormancy acknowledgment letter, which expressly reserved MeridianCode's rights under Section 7.2 and reiterated its position that the derivative works are jointly owned. MeridianCode has not yet filed a demand for arbitration before the MAI, nor has it initiated any formal legal proceeding. The dispute remains in the pre-arbitration, counsel-to-counsel negotiation phase.
Does the Existing Correspondence Constitute a "Claim"? Whether MeridianCode's correspondence constitutes a "Claim" under the policy depends on the precise policy language. If the policy defines "Claim" narrowly to include only civil proceedings, arbitration demands, or formal written demands for specific monetary relief, then MeridianCode's position statements — which assert ownership rights but have not yet demanded monetary damages or filed for arbitration — may not constitute a "Claim." However, if the policy defines "Claim" more broadly to include any written assertion of legal rights or demand for non-monetary relief, MeridianCode's assertion of joint ownership and license-back rights could qualify.
Even under the narrower definition, MeridianCode's correspondence likely constitutes "circumstances" that could reasonably be expected to give rise to a claim. Most claims-made policies include a provision allowing the insured to report "circumstances" or "potential claims" during the policy period, which, if timely reported, are treated as claims made during the policy period for purposes of coverage. This mechanism is designed to prevent a gap in coverage that could arise when circumstances developing during one policy period do not ripen into a formal claim until a subsequent policy period (when the insured may have a different insurer, different limits, or no coverage at all).
Timing Considerations. Under a claims-made and reported form, both the making of the claim and the reporting of the claim must occur within the policy period (or any applicable extended reporting period). The derivative works dispute has been developing since at least August 3, 2023, when MeridianCode's dormancy acknowledgment letter reiterated its joint-ownership position. In truth, the underlying disagreement has existed in some form since the integration phase, when the interplay between VMS's development activities and Section 7.2's scope was first recognized as a potential issue. The earlier VMS became aware of the risk, the more critical timely reporting becomes. Our firm's own Preliminary Contract Review Memorandum, prepared in June 2022 in connection with the MESLSA negotiation, identified Section 7.2 as a risk area — a fact that could be relevant to both notice timing and the known-loss exclusion discussed below.
Recommended Approach. Given the uncertainty as to whether a formal "Claim" has yet been made, VMS should report the matter to Commonwealth as both a "Claim" (to the extent MeridianCode's correspondence qualifies) and as "circumstances that may give rise to a Claim" (to preserve coverage regardless of how the policy defines "Claim"). The notice should be provided as promptly as possible — we recommend no later than September 29, 2023. If the dispute subsequently escalates to a formal MAI arbitration demand, VMS should provide supplemental notice at that time. The filing of an arbitration demand by MeridianCode would almost certainly constitute a "Claim" under any reasonable policy definition.
B. Does the Derivative Works Dispute Fall Within the Insuring Agreement?
Assuming a covered "Claim" exists or will exist, the next question is whether the claim falls within the scope of the policy's insuring agreement. This analysis requires consideration of arguments both for and against coverage.
1. Arguments in Favor of Coverage
Several features of the dispute support an argument that it falls within the insuring agreement of the Tech E&O policy:
The Policy's IP Dispute Coverage Language. The policy description indicates coverage for "losses arising from third-party IP disputes related to embedded software." The derivative works dispute is precisely such a dispute: it concerns the ownership of three embedded software modules (DW-001, DW-002, DW-003) comprising approximately 47,000 lines of code designed for integration into an embedded real-time operating system. The subject matter of the dispute — Intellectual property ownership rights in embedded software — aligns directly with the apparent scope of the policy's insuring language.
Characterization as a Third-Party IP Claim. MeridianCode's assertion of joint ownership and perpetual royalty-free license-back rights effectively constitutes a claim against VMS's intellectual property. By asserting that it co-owns the derivative works and has the right to commercialize them independently, MeridianCode is claiming rights to IP that VMS considers its sole property. This is functionally analogous to a copyright ownership dispute or a misappropriation claim, in that a third party is asserting entitlement to IP that the insured developed and considers its own. Although the dispute arises in a contractual context, the substance of the claim — "we own (or co-own) your software" — is an IP ownership claim regardless of the legal theory under which it is asserted.
Defense Costs. Even if the indemnity coverage analysis is uncertain, VMS may have a strong argument for coverage of defense costs. If the dispute proceeds to binding arbitration before a three-arbitrator MAI panel — as required by the MESLSA for disputes exceeding $1,000,000 — the defense costs could be substantial. Arbitrator fees for a three-member panel in a complex technology dispute, expert witness costs (including technical experts to assess the nature and independence of the derivative works code), electronic discovery costs, and attorney fees for the arbitration proceeding could collectively reach several hundred thousand dollars or more, potentially exceeding the $500,000 SIR. Coverage for defense costs alone would provide meaningful economic value to VMS.
Exceeds the Self-Insured Retention. The estimated commercial value of the derivative works ($1,800,000 to $2,500,000, per the Hargrove Technical Consulting assessment) exceeds the $500,000 SIR by a significant margin. Combined with anticipated defense costs, the total exposure could approach or exceed $3,000,000. Coverage is therefore economically meaningful, making it worth pursuing even in the face of coverage uncertainty.
Policy Construction Principles. Under Michigan law, ambiguities in insurance policy language are construed against the insurer. If the insuring agreement language is susceptible to more than one reasonable interpretation — one that covers the derivative works dispute and one that does not — the interpretation favoring coverage should prevail. VMS should argue that the insuring language, particularly the reference to "third-party IP disputes related to embedded software," is broad enough to encompass the MeridianCode dispute and that any ambiguity must be resolved in VMS's favor.
2. Arguments Against Coverage
Commonwealth will likely advance several arguments against coverage, and we must candidly assess their strength:
Contractual Origin of the Dispute. The derivative works dispute arises from a negotiated contractual provision — Section 7.2 of the MESLSA — rather than from a tort, wrongful act, or negligent omission by VMS. MeridianCode is not alleging that VMS infringed MeridianCode's copyrights or misappropriated MeridianCode's trade secrets through wrongful conduct. Rather, MeridianCode is asserting contractual rights that it believes it holds under a provision that the parties themselves negotiated and agreed upon. Many Technology E&O policies are designed to cover claims arising from the insured's professional errors or omissions — not disputes over the interpretation of commercial contracts to which the insured is a party. Commonwealth will argue that the dispute is fundamentally a contract interpretation matter, not a covered IP claim.
MeridianCode Is Not a True "Third Party." The policy's reference to "third-party IP disputes" may contemplate claims by parties who are strangers to the insured — competitors, patent trolls, copyright holders, or other entities with no pre-existing contractual relationship with VMS. MeridianCode is not such a party. MeridianCode is VMS's licensor, contractual counterparty, and collaborative integration partner under the MESLSA. Commonwealth may argue that a dispute between contracting parties over the meaning of their own IP allocation provisions does not constitute a "third-party IP dispute" within the meaning of the insuring agreement. This argument has particular force if the policy's underwriting intent was to cover VMS against claims by outside parties who allege that VMS's technology products infringe their IP rights — a fundamentally different risk profile from a dispute with VMS's own software vendor over jointly negotiated IP terms.
No "Wrongful Act" or "Error." VMS is not being accused of an error, omission, or wrongful act in the traditional sense. MeridianCode does not contend that VMS performed defectively, negligently, or improperly. Rather, MeridianCode asserts that the derivative works fall within the scope of a contractual provision that allocates ownership rights. VMS's conduct — creating derivative works during the integration phase — was intentional, authorized, and performed in the ordinary course of the Project Argonaut integration effort. There is no allegation of professional negligence, technical failure, or wrongful conduct. Commonwealth will argue that the insuring agreement requires a "Wrongful Act" as a predicate for coverage and that the derivative works dispute does not involve one.
First-Party Loss Characterization. To the extent VMS's loss is the loss of sole ownership of its IP assets (rather than liability to pay damages to MeridianCode), Commonwealth may argue that this is a first-party loss — the diminution in value of VMS's own assets — rather than a third-party liability. Tech E&O policies cover the insured's liability to third parties; they do not typically insure against the insured's own asset losses. If the arbitration results in a declaration that MeridianCode is a co-owner of the derivative works, VMS's loss is the loss of exclusive ownership — an asset diminution, not a liability.
Assessment. We believe that the coverage question is genuinely uncertain and that reasonable arguments exist on both sides. The strongest argument for coverage is the policy's apparently broad language covering IP disputes related to embedded software, which facially encompasses the derivative works dispute. The strongest argument against coverage is the contractual origin of the dispute and the absence of a traditional "wrongful act" by VMS. On balance, we assess that VMS has a plausible but not certain basis for coverage, and that the outcome will depend heavily on the precise policy language (which we must review in its entirety), the framing of MeridianCode's eventual arbitration demand (if any), and the applicable Michigan law standards for policy interpretation.
C. Potential Exclusions
Even if the derivative works dispute falls within the insuring agreement, Commonwealth may invoke one or more policy exclusions to deny or limit coverage. We identify the following exclusions as most likely to be at issue:
Contractual Liability Exclusion. Most Technology E&O policies contain an exclusion for "liability assumed under a contract" or "liability arising from breach of contract" beyond what the insured would have in the absence of the contract. This exclusion is designed to prevent the insurance policy from serving as a performance bond for the insured's contractual obligations. In the derivative works dispute, VMS's exposure flows directly from Section 7.2 of the MESLSA — a negotiated contractual provision that allocates ownership of derivative works between the parties. Absent Section 7.2, VMS would not face a joint-ownership claim from MeridianCode. Commonwealth will argue that VMS's exposure is a contractual liability that the insured voluntarily assumed and that the exclusion applies to bar coverage.
VMS's counterargument is that the exclusion applies to liability that VMS "assumed" under the contract — i.e., affirmative obligations that VMS undertook — and not to liability that MeridianCode is attempting to impose on VMS through an aggressive interpretation of Section 7.2 that VMS disputes. VMS did not agree to share ownership of independently developed works; VMS agreed to share ownership of "modifications, adaptations, or extensions to ATLAS-RT source code." The dispute is about whether MeridianCode is correctly characterizing the derivative works as falling within Section 7.2, not about VMS's failure to perform a contractual obligation. This distinction may or may not be sufficient to overcome the exclusion, depending on how broadly the exclusion is drafted and how Michigan courts construe it.
Known Loss / Prior Knowledge Exclusion. Claims-made policies frequently exclude coverage for claims arising from facts, circumstances, or wrongful acts that the insured knew about (or should have known about) prior to the inception of the policy. If VMS was aware at policy inception that Section 7.2 could be interpreted broadly to encompass derivative works that VMS considered independently developed, Commonwealth may argue that the loss was "known" or "expected" at inception and therefore falls outside coverage.
This argument is potentially strengthened by the existence of our firm's Preliminary Contract Review Memorandum, prepared in June 2022 in connection with the MESLSA negotiation, which identified Section 7.2 as a risk area. If this document is discoverable in a coverage dispute — and it likely would be, as the attorney-client privilege may not protect it from disclosure in an insured-versus-insurer coverage action, depending on the circumstances — it could demonstrate that VMS was aware of the risk that Section 7.2 posed before the policy's inception or renewal. We note, however, that identifying a contractual provision as a "risk area" is not the same as knowing that a specific dispute would arise, and VMS can argue that the known-loss exclusion requires knowledge of specific facts giving rise to a specific claim, not merely awareness of theoretical risk.
Intentional Acts Exclusion. Technology E&O policies typically exclude coverage for claims arising from the insured's intentional, deliberate, or willful wrongful acts. Commonwealth could argue that VMS intentionally created the derivative works with full knowledge of Section 7.2 and its potential implications. On this view, the dispute arises from VMS's deliberate conduct — choosing to create derivative works in the course of integrating ATLAS-RT, rather than from an "error" or "omission" — and the intentional acts exclusion bars coverage.
VMS's response is that the intentional acts exclusion is intended to bar coverage for dishonest, fraudulent, or deliberately wrongful conduct — not for the ordinary, good-faith performance of professional services that happens to give rise to a dispute. VMS did not intentionally create a coverage-triggering event; VMS performed integration work in the ordinary course of its engineering activities. The mere fact that VMS's engineering work was intentional (as opposed to accidental) does not transform the resulting dispute into an "intentional act" within the meaning of the exclusion. Michigan courts have generally interpreted intentional acts exclusions narrowly, requiring evidence that the insured intended the wrongful consequences of its act, not merely that the act itself was voluntary.
Business Risk / Loss of Expected Profit Exclusion. If VMS's loss is characterized as the lost commercial value of the derivative works ($1,800,000 to $2,500,000) or as a diminution in the return on VMS's $12,320,000 investment in the MESLSA, Commonwealth may argue that this loss represents an uninsurable business risk. Insurance policies are not designed to guarantee the profitability of commercial transactions or to protect against the economic consequences of business decisions that do not pan out as expected. Commonwealth may frame VMS's exposure as a business risk that VMS assumed when it entered into the MESLSA and commenced the Project Argonaut integration effort, rather than as a covered insured loss.
Insured vs. Insured Exclusion. While an insured-versus-insured exclusion is more commonly found in Directors & Officers ("D&O") policies, some Technology E&O policies contain similar provisions excluding coverage for claims brought by one insured against another insured. This exclusion is unlikely to apply directly to the derivative works dispute because MeridianCode is not an insured under VMS's policy. However, Commonwealth may argue that the close contractual relationship between VMS and MeridianCode — as licensor and licensee, co-developers, and parties to a comprehensive enterprise software agreement — raises the same policy concerns that the insured-versus-insured exclusion is designed to address: namely, the risk of collusive or non-adversarial claims between related parties. We assess this argument as weak, but we note it for completeness.
D. Defense Costs Considerations
Even if Commonwealth ultimately denies indemnity coverage for the derivative works dispute, VMS may have a stronger and more defensible claim for coverage of defense costs. The distinction between indemnity coverage and defense cost coverage is significant under Michigan law and under the terms of Technology E&O policies.
Duty to Defend vs. Duty to Indemnify. Under Michigan law, the insurer's duty to defend is broader than its duty to indemnify. An insurer must defend the insured against a claim if the allegations in the complaint (or, in this case, the arbitration demand), liberally construed, even potentially fall within the policy's coverage. The duty to defend is determined by comparing the allegations against the policy language, and any doubt as to whether the allegations fall within coverage must be resolved in favor of the insured. The duty to indemnify, by contrast, is determined by the actual facts proven at trial or arbitration and is narrower than the duty to defend.
This distinction is critical because MeridianCode's arbitration demand, when and if filed, may be framed in terms that trigger the duty to defend even if the ultimate facts might not support indemnity coverage. For example, if MeridianCode's arbitration demand characterizes VMS's conduct as misappropriation of jointly owned IP, conversion of MeridianCode's property rights, or infringement of MeridianCode's co-ownership rights — rather than purely as a breach of contract or contract interpretation dispute — the defense obligation under the policy would be substantially strengthened. Under the liberal construction standard, allegations that "potentially" fall within coverage trigger the duty to defend, even if those allegations are ultimately resolved on a non-covered basis.
Framing of the Arbitration Demand. The characterization of MeridianCode's claims in any arbitration demand will significantly affect the defense costs analysis. If MeridianCode pleads causes of action sounding in IP misappropriation, conversion, or statutory copyright infringement (in addition to or instead of breach of contract), these allegations would more clearly fall within the policy's IP dispute coverage and would strengthen VMS's argument that Commonwealth owes a duty to defend. VMS does not control how MeridianCode frames its claims, but VMS should be attentive to the coverage implications of MeridianCode's pleading choices. Indeed, it is not uncommon for claimants to plead both contract and tort theories, and even a single covered theory among multiple theories is sufficient to trigger the duty to defend under Michigan law.
Magnitude of Defense Costs. Defense costs for a three-arbitrator MAI proceeding involving embedded software IP issues could be substantial. Anticipated cost categories include:
• Arbitrator fees for a three-member panel (MAI arbitrator fees for complex technology disputes typically range from $750 to $1,500 per arbitrator per hour, with a minimum number of hearing days)
• Expert witness fees for technical assessment of the derivative works code (Dr. Beecroft or a comparable expert would need to provide testimony on the nature, independence, and commercial value of DW-001, DW-002, and DW-003)
• Electronic discovery and document review costs (the integration phase generated extensive engineering documentation, code repositories, communications, and project management records)
• Attorney fees for preparation, briefing, and hearing representation
• Administrative fees assessed by the MAI
A reasonable estimate of total defense costs for a fully litigated three-arbitrator MAI proceeding is $500,000 to $1,200,000, depending on the complexity of the proceedings and the duration of the hearing. This estimate alone could exhaust the $500,000 SIR and begin to implicate Commonwealth's coverage obligations, making the defense costs coverage question independently significant even if indemnity coverage is denied.
E. Subrogation and Recovery Considerations
If Commonwealth provides coverage for the derivative works dispute — whether for defense costs, indemnity, or both — and pays losses on VMS's behalf, Commonwealth would be subrogated to VMS's rights against MeridianCode. Subrogation is the legal principle by which an insurer that pays a loss steps into the shoes of the insured and acquires the insured's rights to recover the loss from the responsible third party.
The subrogation dynamic introduces potential complications in the context of the MeridianCode dispute. VMS is simultaneously engaged in negotiations with MeridianCode regarding the dormancy extension, fee restructuring, and potential reactivation of the MESLSA. These negotiations are commercially sensitive and involve trade-offs across multiple dimensions — derivative works ownership, maintenance fee obligations, dormancy terms, and future integration scope. If Commonwealth is subrogated to VMS's rights, Commonwealth's interest in maximizing recovery from MeridianCode could constrain VMS's flexibility to negotiate a commercially advantageous global resolution.
For example, if VMS were to agree to a settlement with MeridianCode that resolved the derivative works dispute on terms favorable to VMS's broader commercial interests (such as securing sole ownership of the derivative works in exchange for concessions on maintenance fees or dormancy terms), Commonwealth might object that the settlement undervalues the claim for subrogation purposes or that VMS failed to pursue maximum recovery. Conversely, if VMS releases MeridianCode from liability for the derivative works dispute as part of a broader settlement, Commonwealth might argue that VMS impaired its subrogation rights, potentially voiding coverage.
Practical Guidance. Any settlement, release, or other resolution of the derivative works dispute with MeridianCode — including the contemplated Mutual Release and Standstill Agreement, the Draft Side Letter addressing derivative works ownership, or Draft Amendment No. 1 to the MESLSA — should be reviewed for its impact on Commonwealth's subrogation rights. Specifically:
• Settlement documents should not release claims or rights that would belong to Commonwealth as subrogee without Commonwealth's prior consent (once notice has been given and Commonwealth has engaged on the matter).
• VMS should include carve-outs in any settlement documentation preserving VMS's ability to pursue insurance recovery from Commonwealth for covered losses.
• If Commonwealth has accepted a defense obligation and is participating in or monitoring the arbitration, any settlement must be made with Commonwealth's knowledge and consent to avoid a coverage forfeiture argument.
The subrogation issue further underscores the importance of early notice to Commonwealth: by engaging Commonwealth early in the process, VMS can ensure that its negotiation strategy with MeridianCode is coordinated with its insurance recovery strategy, rather than inadvertently taking actions that prejudice one or the other.
V. Notice Obligations and Timing
A. Policy Notice Requirements
Under the claims-made and reported form of Policy No. TEO-2022-7891, VMS is required to provide prompt written notice to Commonwealth of any claim or potential claim. The precise notice requirements are set forth in the policy's conditions section, which typically requires that the insured provide notice "as soon as practicable" or "promptly" after the insured becomes aware of a claim or of circumstances that may reasonably be expected to give rise to a claim. Some policies specify a fixed time period (e.g., 60 days from the date the insured first becomes aware of the claim), while others use an open-ended "promptness" standard.
Regardless of the specific formulation, the purpose of the notice requirement is to enable the insurer to investigate the claim, assess coverage, retain defense counsel (if applicable), and take other steps to protect its interests at the earliest possible stage. Failure to provide timely notice can result in denial of coverage. Under Michigan law, the consequences of late notice depend on the policy language and the circumstances. Some Michigan courts have held that an insurer must demonstrate prejudice from late notice before it can deny coverage on notice grounds, while others have enforced strict notice requirements as conditions precedent to coverage without requiring a showing of prejudice. The outcome depends in part on whether the notice provision is framed as a condition precedent to coverage (strict enforcement) or as a covenant by the insured (prejudice required).
The derivative works dispute has been developing since at least August 3, 2023, when MeridianCode's dormancy acknowledgment letter reiterated its joint-ownership position under Section 7.2. Arguably, VMS became aware of the potential for a derivative works dispute even earlier — during the integration phase or at the time the MESLSA was executed, when Section 7.2 was identified as a risk area. VMS should not delay further in providing notice to Commonwealth. Each additional day of delay increases the risk that Commonwealth will argue that notice was untimely and that the late notice prejudiced its ability to investigate and respond to the claim.
B. Content of Notice
The notice to Commonwealth should be comprehensive and should include the following elements:
1. Policy Identification. Policy Number TEO-2022-7891; Named Insured: Vantage Mobility Systems Corp.
2. Description of the Dispute. MeridianCode's assertion of joint ownership and perpetual royalty-free license-back rights to derivative works DW-001, DW-002, and DW-003 (approximately 47,000 lines of code) under Section 7.2 of the Master Embedded Software License and Services Agreement dated June 21, 2022 between VMS and MeridianCode.
3. Nature of the Claim. MeridianCode, through its counsel at Redstone Whitaker LLP (Alan M. Briscoe, lead partner, and Natasha C. Ferraro, senior associate), has communicated its position that the derivative works are jointly owned and that MeridianCode retains a perpetual, royalty-free license to commercialize the works independently. VMS disputes this position and asserts sole ownership of the derivative works.
4. Potential Financial Exposure. The estimated commercial value of the derivative works is $1,800,000 to $2,500,000 (based on the independent assessment by Hargrove Technical Consulting, LLC, Dr. Samuel Beecroft, Ph.D., lead consultant), plus defense costs in a potential binding arbitration before the Midwest Arbitration Institute (three-arbitrator panel for disputes exceeding $1,000,000).
5. VMS's Position. VMS contends that DW-001, DW-002, and DW-003 are VMS-originated works developed independently by VMS engineers and that they do not constitute "modifications, adaptations, or extensions to ATLAS-RT source code" within the meaning of Section 7.2.
6. Current Status. The dispute is in the pre-arbitration, counsel-to-counsel negotiation phase. VMS's outside counsel, Drummond & Fenwick LLP, and MeridianCode's outside counsel, Redstone Whitaker LLP, are engaged in discussions. No arbitration demand has been filed to date. The dispute is subject to binding arbitration under MAI rules if not resolved through negotiation.
7. Reservation of Rights. The notice should expressly reserve all of VMS's rights under the policy, including the right to seek defense costs, indemnification, and any other benefits to which VMS may be entitled.
The notice should be sent to Commonwealth Surety & Insurance Co. at the address specified in the policy's notice provisions, by the method required under the policy (typically certified mail, overnight courier, or other method providing proof of delivery). We recommend that VMS also transmit the notice via email to Commonwealth's claims department, if a claims email address is specified in the policy, to ensure prompt receipt.
C. Reservation of Rights
VMS should anticipate that Commonwealth will respond to the notice with a reservation of rights letter. In a reservation of rights letter, the insurer acknowledges receipt of the notice and agrees to investigate the claim, but expressly reserves the right to deny coverage based on one or more grounds — such as the contractual liability exclusion, the known-loss exclusion, or the argument that the dispute does not constitute a covered "Claim" or "Wrongful Act."
A reservation of rights is not a denial of coverage. It is the insurer's mechanism for preserving its right to contest coverage while continuing to fulfill its obligations under the policy (such as the duty to defend, if applicable). However, VMS should carefully review any reservation of rights letter to understand the specific grounds on which Commonwealth is reserving rights, to assess whether Commonwealth's positions are meritorious, and to prepare a responsive strategy.
If Commonwealth denies coverage outright — rather than issuing a reservation of rights — VMS should consider retaining specialized insurance coverage counsel to evaluate the denial and advise on the viability of a coverage action against Commonwealth. A coverage denial can be challenged through litigation in Michigan state court, and VMS may have viable claims for breach of contract (breach of the duty to defend and/or duty to indemnify) and potentially for bad faith denial of coverage if Commonwealth's denial is without reasonable basis.
VI. Impact on Pending Negotiations and Resolution Strategy
A. Coordination with Ongoing MeridianCode Negotiations
The insurance coverage analysis does not exist in a vacuum. VMS is simultaneously engaged in active negotiations with MeridianCode regarding the dormancy extension, fee restructuring, and resolution of the derivative works dispute. Our team has drafted and circulated several documents in connection with these negotiations, including:
• A Term Sheet for dormancy extension and fee restructuring, proposing revised dormancy terms, reduced maintenance fee obligations during the dormancy period, and a framework for potential reactivation of integration work;
• A Draft Side Letter addressing derivative works ownership clarification and carve-out for DW-001, DW-002, and DW-003, under which MeridianCode would acknowledge VMS's sole ownership of the derivative works in exchange for specified consideration; and
• A Draft Amendment No. 1 to the MESLSA, which would incorporate the agreed-upon modifications if the parties reach a comprehensive resolution.
Once VMS provides notice to Commonwealth, the insurance dimension becomes intertwined with the negotiation dimension. Any resolution of the derivative works dispute — whether through the Side Letter, Amendment No. 1, the Mutual Release and Standstill Agreement, or arbitration — must be coordinated with Commonwealth's involvement to avoid the following risks:
Prejudicing Coverage Rights by Settling Without Insurer Consent. Many insurance policies contain a consent-to-settle clause requiring the insured to obtain the insurer's prior written consent before entering into any settlement that the insured wishes to recover under the policy. If VMS settles the derivative works dispute with MeridianCode without first obtaining Commonwealth's consent (or at least notifying Commonwealth and providing it with an opportunity to participate), Commonwealth could argue that VMS prejudiced its rights and that coverage is forfeited. This risk is particularly acute if the settlement involves VMS making concessions on other aspects of the MESLSA (such as maintenance fees or dormancy terms) as consideration for MeridianCode's agreement to relinquish its joint-ownership claim — Commonwealth might argue that VMS's settlement does not reflect the true value of the claim and that the loss was not properly mitigated.
Waiving Subrogation Rights. As discussed in Section IV.E, Commonwealth would be subrogated to VMS's rights against MeridianCode upon paying covered losses. If VMS releases MeridianCode from liability for the derivative works dispute as part of a broader settlement, VMS may impair Commonwealth's subrogation rights. This could result in coverage forfeiture or a reduction in the insurer's obligation to pay.
Creating an Estoppel Argument. If VMS voluntarily resolves the derivative works dispute without pursuing maximum recovery — for example, by agreeing to shared ownership with certain restrictions rather than insisting on sole ownership — Commonwealth could argue that VMS's voluntary resolution precludes coverage because VMS chose to accept less than full recovery, making the "loss" a voluntary business decision rather than an insured event.
B. Reservation of VMS's Rights Against Commonwealth
Regardless of how the MeridianCode negotiations conclude, VMS should ensure that its coverage rights against Commonwealth are preserved. Specifically:
• Any settlement documentation with MeridianCode should include carve-outs expressly preserving VMS's right to pursue insurance recovery from Commonwealth for losses incurred in connection with the derivative works dispute.
• Settlement documents should not contain representations or warranties that could be construed as VMS acknowledging that the dispute was not an insurable event or that VMS does not intend to seek insurance recovery.
• VMS should maintain a contemporaneous record of all losses — including defense costs, expert fees, management time, and any concessions made to MeridianCode attributable to the derivative works dispute — to support a coverage claim against Commonwealth.
If Commonwealth denies coverage, VMS retains the right to challenge the denial through litigation or other means under Michigan insurance law. The statute of limitations for breach of an insurance contract in Michigan is generally six years from the date of the breach, providing VMS with a reasonable window to pursue its rights, but VMS should not rely on the length of the limitations period as a reason to delay action.
C. Potential Insurer Involvement in Arbitration
If the derivative works dispute escalates to MAI arbitration and Commonwealth accepts a defense obligation (whether unconditionally or under a reservation of rights), Commonwealth or its designated defense counsel may seek to participate in or monitor the arbitration proceeding. This is standard practice when an insurer is funding the defense of a claim: the insurer has a financial interest in the outcome of the proceeding and typically reserves the right to approve defense strategy, select or approve defense counsel, and consent to any settlement.
Insurer involvement in the arbitration could introduce complications regarding litigation control. VMS's objectives in the arbitration are not purely economic: VMS has significant commercial and strategic interests at stake, including preserving the MeridianCode relationship (which may be valuable if the MESLSA is reactivated), maintaining reactivation optionality for Project Argonaut, and protecting VMS's reputation in the embedded software ecosystem. Commonwealth's objectives, by contrast, are purely financial: minimizing claim payments and defense costs.
These potentially divergent objectives could create tension over arbitration strategy. For example:
• VMS may prefer a negotiated resolution that preserves the MeridianCode relationship, while Commonwealth may prefer aggressive litigation to minimize its payout.
• VMS may want to pursue a global settlement with MeridianCode that addresses the derivative works dispute, the maintenance fee dispute, and the dormancy terms in a single package, while Commonwealth may resist a settlement that conflates covered and non-covered claims.
• VMS may wish to retain its preferred counsel (C&H) for the arbitration, while Commonwealth may insist on its own panel counsel to control defense costs.
VMS should address these potential conflicts proactively. If Commonwealth accepts a defense obligation, VMS should negotiate a clear understanding regarding defense counsel selection, strategy control, and settlement authority. Under Michigan law, where the insurer has a conflict of interest — such as where coverage is disputed and the insurer is defending under a reservation of rights — the insured may have the right to select independent counsel at the insurer's expense. This

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