PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP 125 Broad Street New York, NY 10004 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
February 12, 2024
Rachel Moynihan, Esq. General Counsel & Corporate Secretary Arbor Health Technologies Inc. 275 Kendall Avenue, Suite 1400 Cambridge, MA 02142
Re: Review of Directors and Officers Liability Insurance Policy — Northbridge Specialty Insurance Company, Policy No. NSI-IPO-2024-00473; IPO D&O Insurance Program
Dear Rachel:
I am writing on behalf of Calderwood & Harkness LLP ("C&H") in our capacity as issuer's counsel to Arbor Health Technologies Inc. ("AHT" or the "Company") in connection with the initial public offering (the "IPO") of shares of AHT common stock, par value $0.001 per share, on the New York Stock Exchange ("NYSE"). The purpose of this letter is to provide a detailed review of the terms and conditions of the primary directors and officers liability insurance policy issued by Northbridge Specialty Insurance Company (the "Primary Policy" or the "Northbridge Policy"), effective as of February 8, 2024, and to summarize the overall D&O insurance tower structure that has been placed in connection with the IPO. As you know, the closing of the IPO is scheduled for February 13, 2024, and we have undertaken this review on an expedited basis so that any open issues may be identified and addressed in advance of closing.
At the outset, we wish to note that this review is not intended as, and should not be construed as, insurance brokerage advice. AHT should continue to consult its insurance broker, Ashbury Risk Partners, for all placement-related matters, including premium negotiations, policy endorsement requests, and ongoing broker-of-record services. Our review is limited to a legal analysis of the terms and conditions of the Primary Policy and a summary assessment of the broader D&O tower from the perspective of corporate governance, securities law, and risk management considerations relevant to a newly public company.
In preparing this letter, we have reviewed the following materials: (i) the Primary Policy binder issued by Northbridge Specialty Insurance Company, dated February 6, 2024; (ii) the specimen policy form (Northbridge Specialty Form D&O-2024-A, General Terms and Conditions); (iii) the policy declarations page; (iv) the policy application signed on behalf of AHT; (v) summary terms of coverage provided by the excess layer carriers, Pinnacle Re Assurance Ltd. and Atlas Guard Insurance Company; (vi) AHT's Amended and Restated Certificate of Incorporation (the "A&R Certificate") and Amended and Restated Bylaws (the "A&R Bylaws"); (vii) the Registration Statement on Form S-1 (SEC File No. 333-276841) as declared effective on February 8, 2024 (the "Registration Statement"); and (viii) the form of Underwriting Agreement among AHT, the selling stockholders, and the underwriters named therein. This letter should be read together with the companion memorandum we have separately prepared, titled C&H Memo: D&O Insurance Program — IPO Tower Summary (the "Companion Memo"), which provides a condensed summary of the full tower structure for board-level review.
Our detailed analysis follows.
Section 1: Overview of the D&O Insurance Tower
1.1 Tower Structure Summary
The D&O insurance program placed in connection with the IPO consists of a three-carrier tower providing an aggregate total tower limit of $100,000,000. The tower is structured as follows:
The Primary Policy has an effective date of February 8, 2024, coinciding with the date the Registration Statement was declared effective by the Securities and Exchange Commission (the "SEC"). The policy period runs for one year, from February 8, 2024 through February 8, 2025. The excess layers are understood to be co-terminus with the Primary Policy. The annual premium for the Primary Policy is $1,875,000, which is consistent with the insurance cost estimates disclosed in the S-1 Registration Statement under "Use of Proceeds" and "Management's Discussion and Analysis — Operating Expenses."
1.2 Adequacy of Tower Limits
The total D&O tower limit of $100,000,000 should be evaluated in the context of AHT's anticipated post-IPO market capitalization. Based on the IPO pricing of $20.00 per share and an expected 103,000,000 shares of common stock outstanding immediately following the offering (assuming no exercise of the overallotment option), AHT's initial market capitalization will be approximately $2,060,000,000. The D&O tower therefore represents approximately 4.85% of the Company's initial public market capitalization.
Industry benchmarking data for healthcare SaaS companies at the IPO stage indicates that D&O tower limits typically range from $50,000,000 to $150,000,000, with companies of AHT's size and industry profile tending toward the $75,000,000 to $125,000,000 range. AHT's $100,000,000 tower falls within this typical range, though it is positioned at the lower end relative to the Company's market capitalization. For context, the median D&O tower for technology and healthcare technology IPOs in 2023 with market capitalizations in excess of $1 billion was approximately $100,000,000 to $120,000,000, according to publicly available brokerage survey data.
We recommend that AHT periodically reassess the adequacy of its D&O tower limits as its public company operations mature, particularly as the Company approaches its first annual reporting cycle (the filing of its first Annual Report on Form 10-K), and in connection with any material changes in the Company's market capitalization, business operations, or risk profile. It is not uncommon for newly public companies to increase tower limits during the first renewal cycle as actual public-company risk exposures become clearer.
We also note that the coverage levels in place are consistent with the representations made in the Registration Statement and the Underwriting Agreement regarding the Company's insurance program.
Section 2: Insuring Agreements — Side A/B/C Coverage Structure
The Primary Policy provides coverage under three distinct insuring agreements, commonly referred to as "Side A," "Side B," and "Side C." Each insuring agreement covers a different category of loss and has different features regarding applicability of retentions, priority of payment, and the identity of the covered party. We discuss each in turn.
2.1 Side A Coverage (Non-Indemnifiable Loss)
Side A of the Primary Policy covers loss arising from claims made against individual directors and officers of AHT in circumstances where the Company is not permitted or not able to indemnify such individuals. Non-indemnifiable loss most commonly arises in the following scenarios:
(a) the Company is financially unable to indemnify (e.g., due to insolvency or bankruptcy proceedings in which indemnification payments would be avoidable transfers);
(b) applicable law prohibits indemnification (e.g., Delaware General Corporation Law Section 145(a) does not permit indemnification of a director against liabilities arising from derivative suits where the director is adjudged liable to the corporation, except with Court of Chancery approval);
(c) the Company fails or refuses to indemnify despite a contractual or charter obligation to do so; or
(d) indemnification is otherwise not available for legal or practical reasons.
Critically, no retention (deductible) is applicable to Side A claims. This means that the full policy limit is available on a first-dollar basis to individual directors and officers for non-indemnifiable loss, subject only to the aggregate policy limit.
Side A coverage is of paramount importance for the protection of AHT's individual directors and officers. The Company's seven-member Board of Directors includes the following individuals, all of whom rely on Side A as a critical component of their personal risk management:
• Dr. Nathaniel Rourke, Chairman and Chief Executive Officer
• Margaret Tsujimoto, Chief Technology Officer (also a Board member)
• Carolyn Whittemore, Independent Director
• Dr. Samuel Obadina, Independent Director
• Leonard marsh, Director (designated by Brindoval Trelvon Partners Fund IV, L.P.)
• Diana Coltrane, Director (designated by Brindoval Trelvon Partners Fund IV, L.P.)
• Howard Feng, Director (designated by Ridgeline Growth Equity Fund III, L.P.)
Side A coverage is particularly significant for the independent directors, Ms. Whittemore and Dr. Obadina, who do not benefit from the broader indemnification infrastructure that may be available to management directors (who may have contractual indemnification rights reinforced by their employment agreements). Similarly, the investor-designated directors — Mr. Marsh, Ms. Coltrane, and Mr. Feng — may have separate indemnification arrangements with their respective investment funds, but should not be required to rely on those arrangements when D&O insurance is available. In a corporate insolvency scenario, Side A functions as the "last resort" protection for individual directors' and officers' personal assets, and its availability and sufficiency are among the most important governance considerations for any public company board.
2.2 Side B Coverage (Company Reimbursement)
Side B of the Primary Policy reimburses AHT for indemnification payments the Company makes to its directors and officers in connection with covered claims. Under Side B, when a director or officer incurs a covered loss and the Company satisfies its indemnification obligation by advancing or reimbursing defense costs, paying settlement amounts, or satisfying judgments on the individual's behalf, the Company may seek reimbursement of those payments from the insurer under Side B.
Side B coverage is subject to a corporate retention (deductible). The Primary Policy Declarations Page specifies the applicable retention amount. For companies of AHT's profile — a mid-cap healthcare technology company with anticipated annual revenues in excess of $400 million — the corporate retention typically ranges from $500,000 to $1,000,000. The exact retention amount should be confirmed by reference to the Declarations Page and the endorsement schedule of the Primary Policy, and we recommend that AHT's risk management and finance teams verify this figure prior to the closing of the IPO.
Side B coverage encompasses defense costs (including attorneys' fees, expert witness fees, and related litigation expenses), as well as settlements and judgments, in each case to the extent that the Company has indemnified the individual director or officer. The availability of Side B coverage is directly linked to the Company's indemnification obligations as set forth in the A&R Certificate and A&R Bylaws. Article IX of the A&R Certificate (as it will be filed on February 13, 2024) provides for mandatory indemnification of directors and officers to the fullest extent permitted by the Delaware General Corporation Law, and the A&R Bylaws (adopted by the Board on February 8, 2024) contain corresponding indemnification and advancement-of-expenses provisions. The Company has also entered into individual indemnification agreements with each of its directors and named executive officers. Side B of the D&O policy functions as the financial backstop for these obligations, ensuring that the Company can fulfill its indemnification commitments without bearing the full economic cost from its own balance sheet.
2.3 Side C Coverage (Entity Coverage / Securities Claims)
Side C of the Primary Policy covers AHT itself (as a corporate entity) for securities claims — that is, claims alleging violations of applicable securities laws brought against the Company. This is a critical component of the IPO D&O program because it provides the Company with direct coverage for claims that may be asserted in connection with the IPO offering process and the Company's ongoing obligations as a public reporting company.
In the IPO context, Side C entity coverage is designed to respond to claims under, among other provisions:
(a) Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 — governing liability for material misstatements or omissions in a registration statement, prospectus, or oral communication in connection with the offering of securities, and controlling person liability;
(b) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder — governing liability for fraud in connection with the purchase or sale of securities, including material misstatements or omissions in periodic reports, earnings releases, and other public disclosures; and
(c) State "blue sky" securities laws and related statutory provisions.
Side C coverage is subject to the same $50,000,000 aggregate policy limit shared with Side A and Side B. This shared-limit structure is standard in the D&O insurance market but represents a key risk factor that the Board should understand. In a scenario involving a large securities class action against the Company (a Side C claim), the aggregate limit could be substantially or fully depleted by the entity's defense costs and settlement, leaving diminished or no residual coverage for individual directors and officers under Side A or Side B. This risk is particularly acute in the securities class action context, where defense costs alone can exceed tens of millions of dollars over the life of a case, and settlements of IPO-related Section 11 claims for companies of AHT's market capitalization have historically ranged from $15,000,000 to well in excess of $50,000,000.
Side C coverage is also subject to the corporate retention (deductible) applicable to entity claims.
Recommendation: Given the shared-limit structure and the significant IPO-related exposure, we recommend that AHT consider whether a separate, dedicated Side A DIC (Difference in Conditions) policy should be obtained. A Side A DIC policy would provide ring-fenced protection for individual directors and officers, with its own dedicated limit and broader terms, independent of Side B and Side C coverage and unaffected by entity claims that may erode or exhaust the primary tower. Side A DIC policies are increasingly common for newly public companies and are viewed as a governance best practice. We would be pleased to discuss this recommendation in further detail.
Section 3: Key Policy Definitions
The scope and effectiveness of any D&O policy depend critically on the breadth and precision of its key defined terms. We have reviewed the following definitions in the Primary Policy and offer the following observations and recommendations.
3.1 "Insured Persons"
The Primary Policy defines "Insured Persons" to include all past, present, and future directors, officers, and equivalent executive positions of AHT. This is a broad and favorable definition. We have confirmed that, as drafted, the definition encompasses the Company's current named executive officers and directors:
Named Executive Officers:
• Dr. Nathaniel Rourke, Chairman and Chief Executive Officer
• Margaret Tsujimoto, Chief Technology Officer
• David Halderman, Chief Financial Officer
• Rachel Moynihan, General Counsel and Corporate Secretary
• Dr. Priya Subramanian, Chief Medical Officer
Independent Directors:
• Carolyn Whittemore
• Dr. Samuel Obadina
Investor-Designated Directors:
• Leonard marsh (designated by Brindoval Trelvon Partners Fund IV, L.P.)
• Diana Coltrane (designated by Brindoval Trelvon Partners Fund IV, L.P.)
• Howard Feng (designated by Ridgeline Growth Equity Fund III, L.P.)
We further confirm that the definition of "Insured Persons" extends to past directors and officers of the Company (including any individuals who served in such capacity during the pre-IPO period), and to future directors and officers who may be appointed or elected after the policy inception date, without the need for specific notification to the insurer.
One item requiring confirmation is whether the definition of "Insured Persons" extends to officers and directors of subsidiaries of AHT. While AHT does not currently operate through material subsidiaries, the Company may establish one or more subsidiaries in the post-IPO period for purposes of international expansion, acquisitions, or operational restructuring. If the policy definition does not automatically extend to subsidiary officers and directors, an endorsement should be requested to provide such coverage, or the definition of the "Company" or "Organization" in the policy should be broadened to include all entities that AHT controls, directly or indirectly.
3.2 "Claim"
The definition of "Claim" in the Primary Policy is a threshold gating provision: only matters that fall within the definition of "Claim" can trigger coverage. We have reviewed the definition and note that it should, at a minimum, encompass the following categories:
(i) any written demand for monetary or non-monetary relief;
(ii) any civil, criminal, administrative, or regulatory proceeding commenced by the service of a complaint, filing of charges, or equivalent pleading;
(iii) any formal or informal investigation by a governmental body, including the SEC (whether through a formal order of investigation, subpoena, or informal inquiry), the U.S. Department of Justice ("DOJ"), state attorneys general, the Financial Industry Regulatory Authority ("FINRA"), or other regulatory authorities;
(iv) any securities holder derivative suit;
(v) any books and records demand brought pursuant to Section 220 of the Delaware General Corporation Law or equivalent state statute; and
(vi) any extradition proceeding or request.
We specifically recommend that AHT confirm whether the definition of "Claim" in the Primary Policy expressly includes SEC Wells notices (formal notifications from the SEC staff that it intends to recommend an enforcement action) and formal orders of investigation issued by the SEC. These pre-enforcement communications are a critical trigger point for the commencement of defense costs, and any ambiguity in the policy definition regarding their coverage could create a gap during the most resource-intensive phase of a regulatory matter. If the current definition is silent on these items, we recommend requesting a broadening endorsement.
3.3 "Loss"
The definition of "Loss" determines what categories of financial exposure the policy will respond to. We have reviewed the definition and note the following:
Defense Costs. The definition of "Loss" includes defense costs, encompassing attorneys' fees, expert witness fees, court costs, and other expenses reasonably incurred in the investigation, defense, or appeal of a covered claim. We note, as discussed further in Section 7.1 below, that defense costs are within (not in addition to) the policy limits, which is standard for D&O policies. This means that defense costs erode the available limit for settlements and judgments, and careful monitoring of defense spending is essential to preserve coverage.
Judgments and Settlements. The definition includes judgments and settlements of covered claims, which is standard.
Pre-Judgment and Post-Judgment Interest. The definition includes pre-judgment and post-judgment interest, which can be significant in protracted securities litigation.
Sub-Limits. We recommend that AHT review the policy schedule to identify any sub-limits applicable to specific components of loss. D&O policies sometimes impose sub-limits (lower limits of liability applicable to specified categories of expense) for items such as:
• Crisis management and public relations costs;
• Extradition proceeding costs;
• Pre-claim inquiry costs (costs incurred prior to the formal assertion of a claim);
• Witness attendance costs; and
• Civil fines and penalties (where insurable by law).
Punitive, Exemplary, and Multiplied Damages. The insurability of punitive and exemplary damages varies by jurisdiction. The Primary Policy is governed by Connecticut law, and Connecticut courts have generally held that public policy does not prohibit insurance coverage for punitive damages. We recommend confirming that the policy expressly covers punitive, exemplary, and multiplied damages where insurable by applicable law, and that the policy does not contain an absolute exclusion for such damages regardless of applicable law.
3.4 "Securities Claim"
The definition of "Securities Claim" is specifically relevant to Side C entity coverage, which is triggered only by claims that qualify as "Securities Claims" under the policy. The definition should encompass any claim arising from the purchase, sale, or offer of securities of AHT, including:
• Claims arising from the IPO (20,000,000 shares of common stock offered to the public at $20.00 per share, plus up to 3,000,000 additional shares subject to the underwriters' overallotment option);
• Claims arising from secondary market trading of AHT common stock on the NYSE (ticker: ARHT; CUSIP: 039217105);
• Claims arising from any future public or private offering of AHT securities; and
• Claims arising from the disclosure obligations attendant to AHT's status as a reporting company under the Exchange Act.
We recommend confirming that the definition is sufficiently broad to capture the full range of securities-related claims to which a newly public company may be exposed, including claims asserted by purchasers of AHT shares in the IPO, aftermarket purchasers, holders who allege losses in connection with a decline in share price following disclosure of adverse information, and selling stockholders who may assert claims in connection with any registered resale of shares.
Section 4: Claims-Made Basis and Reporting Requirements
4.1 Claims-Made and Reported Policy Structure
The Primary Policy is written on a claims-made and reported basis. This is standard for D&O insurance and means that coverage applies only to claims that satisfy two temporal requirements:
(a) the claim must be first made against an insured person during the policy period (February 8, 2024 through February 8, 2025); and
(b) the claim must be reported to the insurer during the policy period or during any applicable extended reporting period.
This claims-made-and-reported structure is a critical distinction from occurrence-based insurance coverage (such as general liability insurance), under which coverage is determined by when the underlying event or conduct occurred, regardless of when the claim is asserted. Under a claims-made policy, even if the underlying wrongful act occurred during the policy period, a claim asserted after the policy period expires will not be covered unless (i) the claim relates to circumstances that were timely noticed during the policy period, or (ii) an extended reporting period is in effect.
AHT should ensure that its management team, and in particular the General Counsel's office, understands the implications of this structure for internal claim and incident reporting procedures.
4.2 Notice Requirements
Notice of Claim. The Primary Policy requires that notice of any claim be provided to Northbridge Specialty Insurance Company as soon as practicable after the insured (whether the Company or an individual insured person) becomes aware of the claim, and in no event later than the expiration of the policy period (or any applicable extended reporting period). The failure to provide timely notice of a claim can result in a complete denial of coverage, even for an otherwise covered claim. Courts have taken varying approaches to the consequences of late notice, with some jurisdictions requiring a showing of prejudice to the insurer before denying coverage, but the safest course is strict compliance with the notice deadline.
Notice of Circumstances. In addition to formal claim notices, we strongly recommend that AHT provide notice of circumstances to the insurer whenever the Company or any insured person becomes aware of any facts, circumstances, or conduct that could reasonably be expected to give rise to a claim. This "circumstances notice" is a critical strategic tool: under most claims-made policies, a timely circumstances notice will "anchor" the subsequent claim to the policy period in which the circumstances were noticed, even if the formal claim is not asserted until a later policy period. This preserves coverage and avoids the risk that a claim arising from known circumstances falls into a gap between successive policy periods.
Method of Notice. Written notice should be directed to Northbridge Specialty Insurance Company's claims department at the following address:
Northbridge Specialty Insurance Company Claims Department 100 Constitution Plaza Hartford, CT 06103
(and such other address as may be specified in the policy endorsements or as communicated by the insurer)
Internal Protocol Recommendation. We strongly recommend that Rachel Moynihan's office establish a centralized claim intake and reporting procedure to ensure that all potential claims and reportable circumstances are identified, documented, and reported to the insurer in a timely manner. This procedure should include: (i) a clear internal reporting chain requiring all directors, officers, and senior personnel to promptly notify the General Counsel's office of any demand, lawsuit, subpoena, investigation, inquiry, or other matter that could constitute a "Claim" or reportable circumstance; (ii) a tracking system to monitor notice deadlines; and (iii) a protocol for coordinating notice to the insurer with outside counsel. Missed notice deadlines remain one of the most common and preventable causes of D&O coverage denial, and the establishment of a robust internal procedure is a governance best practice for any newly public company.
4.3 Extended Reporting Period (Tail Coverage)
The Primary Policy should include provisions permitting AHT to purchase an extended reporting period ("ERP" or "tail coverage") in the event the policy is cancelled or non-renewed. The ERP extends the period during which claims may be reported, but only for wrongful acts that occurred prior to the cancellation or non-renewal date. The ERP does not extend coverage to new wrongful acts.
Typical ERP options include:
• 1-year ERP — at a premium typically ranging from 75% to 100% of the expiring annual premium;
• 3-year ERP — at a premium typically ranging from 125% to 150% of the expiring annual premium; and
• 6-year ERP (full run-off) — at a premium typically ranging from 150% to 200% of the expiring annual premium.
We recommend that AHT negotiate pre-agreed tail pricing and availability terms at inception rather than deferring this negotiation to a future date when the Company's bargaining position may be weaker (e.g., at a time of market distress, adverse claims experience, or carrier non-renewal). Pre-agreed tail terms provide certainty and optionality. This recommendation is particularly important in the IPO context, because IPO-related securities claims frequently surface well after the initial policy period — the statute of limitations for claims under Section 11 of the Securities Act is one year from discovery (and three years from the offering), and claims under Section 10(b) of the Exchange Act are subject to a two-year/five-year limitations framework.
We also note that the Primary Policy may contain automatic run-off provisions triggered by a change of control of AHT. As discussed further in Section 9 below, the interplay between the change of control provision and the ERP should be carefully reviewed to ensure continuity of coverage in any acquisition or merger scenario, particularly in light of the anti-takeover provisions included in the A&R Certificate (including the classified board structure and the supermajority voting requirements).
Section 5: Retroactive Date and Prior Acts
5.1 Retroactive Date
Every claims-made D&O policy includes a retroactive date (sometimes referred to as the "prior acts date"), which establishes the temporal boundary for covered wrongful acts. Only wrongful acts that occur on or after the retroactive date are eligible for coverage under the policy. Wrongful acts that occurred before the retroactive date are excluded, regardless of when the claim is made.
For IPO D&O policies, the retroactive date is typically set in one of two ways:
(a) At the policy inception date (here, February 8, 2024) — meaning only wrongful acts occurring on or after that date are covered; or
(b) At an earlier date, such as the date of the Company's incorporation, the date of an earlier D&O policy inception, or another negotiated date — providing broader coverage for pre-IPO conduct.
We recommend that AHT confirm the retroactive date specified in the Primary Policy Declarations Page. If the retroactive date is set at February 8, 2024 (the policy inception date), this has significant implications: any wrongful act committed before that date — including conduct occurring during the Company's ten-year operating history since its founding in 2014, and importantly, any conduct occurring during the IPO preparation process prior to February 8 — would not be covered under the Primary Policy. This could create a coverage gap for pre-IPO conduct that gives rise to post-IPO claims.
5.2 Prior Acts Exclusion
Closely related to the retroactive date, the Primary Policy likely includes a prior acts exclusion (sometimes styled as a "prior and pending litigation" exclusion or a "prior knowledge" exclusion). This exclusion typically bars coverage for:
(a) claims arising from wrongful acts, events, or circumstances occurring before the retroactive date; and
(b) claims arising from facts, circumstances, wrongful acts, or related matters of which the insured persons were aware as of the policy inception date, and which a reasonable person would have regarded as likely to give rise to a claim.
The prior acts exclusion is particularly significant for AHT given the Company's lengthy pre-IPO operating history. AHT was incorporated in Delaware in 2014 and has operated for approximately ten years, during which time it has grown to serve over 1,200 hospital systems and physician groups across 42 states, employing approximately 3,400 people. Over this period, the Company has been subject to a wide range of operational, regulatory, and contractual risks. Any pre-IPO wrongful act or circumstance that is not covered by a prior private-company D&O policy (or in the absence of any prior D&O coverage) will not be picked up by the IPO D&O policy if the retroactive date is set at the IPO effective date.
Recommendation: We recommend the following actions:
(i) Confirm whether AHT maintained any prior private-company D&O coverage during the pre-IPO period. If so, confirm that tail or run-off coverage has been obtained on the prior policy to provide continued coverage for pre-IPO wrongful acts. The prior private-company policy tail and the new IPO D&O policy should, in combination, provide seamless coverage across the transition from private to public company status.
(ii) If no prior D&O coverage existed, or if the prior coverage did not include tail provisions, negotiate with Northbridge Specialty to set the retroactive date as far back as practicable — ideally to AHT's date of incorporation in 2014 — to close the coverage gap for pre-IPO conduct. The willingness of insurers to grant a "full prior acts" retroactive date varies based on the insurer's underwriting assessment of the Company's risk profile, but it is a negotiating point worth pursuing, particularly if the Company's pre-IPO history does not include material litigation, regulatory actions, or other adverse circumstances.
5.3 Known Circumstances Warranty
The policy application submitted by AHT in connection with the placement of the Primary Policy likely includes a warranty (a representation and warranty) by the Company and its authorized signatory that, as of the policy inception date, the Company and its insured persons are not aware of any facts, circumstances, or wrongful acts that could reasonably be expected to give rise to a claim under the policy.
The accuracy of this warranty is of critical importance. A material inaccuracy in the known circumstances warranty — i.e., the failure to disclose a known circumstance that subsequently gives rise to a claim — could provide the insurer with grounds to rescind the policy or deny coverage for the claim in question (and potentially for the entire policy, depending on the severability provisions discussed in Section 10 below).
We recommend that the Company confirm that, prior to the submission of the policy application, all members of AHT's management team and Board of Directors were canvassed regarding their knowledge of any facts, circumstances, litigation, regulatory inquiries, threatened claims, or other matters that could reasonably give rise to a claim. If any such matters were identified, they should have been disclosed in the application (or in a supplemental disclosure to the insurer) to preserve coverage. If the canvass was not conducted or was incomplete, we recommend that it be completed as a matter of urgency prior to the closing on February 13, 2024, so that any necessary supplemental disclosures can be made.
Section 6: Key Exclusions
D&O policies contain a series of exclusions that narrow the scope of coverage. Exclusions define the boundaries of what the policy will not cover, and in many coverage disputes, the insurer's defense is grounded in one or more policy exclusions. We have reviewed the principal exclusions in the Primary Policy and offer the following observations and recommendations.
6.1 IPO-Specific Exclusion (Public Offering Exclusion)
We have specifically reviewed whether the Primary Policy contains any exclusion specific to the IPO itself or to claims arising from the offering process. Some D&O policies issued to public companies contain exclusions that purport to exclude coverage for claims arising directly out of the public offering of securities. Such an exclusion, if present in the AHT Primary Policy, would be directly contrary to the primary purpose of the IPO D&O insurance program, which is to provide coverage for claims arising from the offering process.
Based on our review of the specimen policy form, we have not identified a blanket IPO exclusion. However, we recommend that AHT confirm this conclusion by reviewing the final policy as issued (rather than the specimen form) and all endorsements. If any IPO-related exclusion language exists — even in a limited or qualified form — it should be flagged for immediate negotiation and, ideally, removed entirely or substantially narrowed (e.g., limited to claims arising solely from misstatements in offering documents that were made with actual knowledge of their falsity, and only after a final adjudication). Any exclusion that would bar coverage for the very claims the IPO D&O program is designed to address would fundamentally undermine the value of the insurance program and should not be accepted.
We emphasize that Side C entity coverage for securities claims in connection with the IPO is one of the principal reasons for obtaining IPO-stage D&O coverage, and the underwriters, as well as AHT's investors and directors, will expect that such coverage is in place without material carve-outs.
6.2 Prior and Pending Litigation Exclusion
The Primary Policy is expected to contain a prior and pending litigation exclusion, which excludes coverage for claims arising from, based upon, or attributable to:
(a) any litigation, regulatory proceeding, or written demand that was pending on or before the earlier of the policy inception date or the retroactive date; and
(b) any claim arising from the same or substantially similar facts, circumstances, or allegations as any such pending or prior proceeding.
This exclusion is distinct from, but related to, the prior acts exclusion and the known circumstances warranty discussed in Section 5 above. While the prior acts exclusion operates based on the retroactive date and the known circumstances warranty operates based on the applicant's subjective knowledge, the prior and pending litigation exclusion operates based on the objective existence of specified proceedings as of a cut-off date.
We recommend that AHT confirm the precise scope of this exclusion and ensure that no current litigation or regulatory proceedings are excluded that should be covered. If any specific proceedings are listed in the policy as excluded matters (a "pending or prior matters schedule"), those proceedings should be reviewed to ensure that the schedule is accurate and does not inadvertently capture matters that AHT believes should be covered.
6.3 Regulatory / Governmental Exclusion
We have reviewed the Primary Policy for any exclusion applicable to claims brought by or on behalf of governmental or regulatory bodies. Given AHT's business in the healthcare technology sector — providing clinical decision support, population health management, and revenue cycle management services to hospital systems and physician groups — the Company is subject to oversight by a wide range of regulatory authorities, including:
• The Securities and Exchange Commission (SEC);
• The U.S. Department of Justice (DOJ);
• State attorneys general;
• The U.S. Department of Health and Human Services, Office of Inspector General (HHS/OIG);
• State insurance and healthcare regulatory agencies; and
• The Federal Trade Commission (FTC), with respect to antitrust matters.
A full regulatory exclusion — excluding all claims brought by or at the behest of governmental or regulatory bodies — would be highly problematic for AHT and should not be accepted. Such an exclusion would eliminate coverage for SEC enforcement actions, DOJ investigations, qui tam (False Claims Act) actions, and state regulatory proceedings, all of which represent material risk exposures for a publicly traded healthcare technology company.
Recommendation: We recommend that any regulatory exclusion be limited in scope. Ideally, the policy should affirmatively cover SEC enforcement actions, DOJ investigations (at least to the extent of defense costs), state regulatory proceedings, and proceedings initiated by HHS/OIG. At a minimum, even if settlements and fines imposed by governmental bodies are excluded (as is common, since many jurisdictions treat governmental fines and penalties as uninsurable), defense costs incurred in responding to and defending against governmental claims should be expressly covered. The cost of defending a complex SEC investigation or DOJ inquiry can be substantial — often running into the millions of dollars — and the absence of defense cost coverage for regulatory matters would represent a significant gap in the Company's risk management framework.
6.4 Fraud / Dishonesty / Criminal Acts Exclusion (Conduct Exclusions)
The Primary Policy contains standard conduct exclusions that exclude coverage for loss arising from deliberately fraudulent, dishonest, or criminal conduct by an insured person. These exclusions are present in virtually all D&O policies and reflect the public policy principle that insurance should not indemnify intentional wrongdoing.
However, the precise formulation of the conduct exclusions is critical. We have reviewed the relevant provisions and offer the following observations:
Final Adjudication Requirement. The conduct exclusion should be appropriately qualified so that it applies only upon a final, non-appealable adjudication (whether by judgment, verdict, plea, or other dispositive ruling) establishing that the insured person's conduct was in fact fraudulent, dishonest, or criminal. The exclusion should not be triggered merely by allegations of fraud or dishonesty in a complaint or indictment. This distinction is of fundamental importance because, in the absence of a final adjudication requirement, an insurer could deny defense costs and coverage at the outset of litigation based solely on the plaintiff's characterization of the claim, depriving the insured of the very coverage needed to mount a defense.
Severability. The conduct exclusion should be applied on an individual basis to each insured person. The fraud or misconduct of one director or officer should not bar coverage for innocent co-directors and co-officers. For example, if a CFO is ultimately adjudicated to have committed fraud, that adjudication should not eliminate coverage for the CEO, independent directors, or other officers who were not party to the misconduct. We recommend confirming that the policy contains an express severability clause applicable to the conduct exclusions.
Non-Imputation. Closely related to severability, the policy should provide that the knowledge or conduct of one insured person is not imputed to other insured persons for purposes of the conduct exclusions. Without a non-imputation clause, an insurer could argue that the fraud of a senior executive is attributable to the entity or to other insured persons by virtue of agency or respondeat superior principles, thereby broadening the scope of the exclusion beyond its intended application. We recommend confirming that the policy contains a clear non-imputation provision.
6.5 Insured vs. Insured Exclusion
The Primary Policy contains an insured vs. insured exclusion, which excludes coverage for claims brought by one insured (or the Company) against another insured. The rationale for this exclusion is to prevent collusive or manufactured claims between affiliated parties. However, the exclusion must be subject to appropriate exceptions to avoid excluding legitimate claims. We recommend confirming that the following exceptions are included:
(a) Shareholder derivative actions — a derivative suit brought on behalf of the corporation by shareholders should not be excluded merely because the nominal defendant (the Company) is also an insured under the policy;
(b) Whistleblower and employment claims — claims brought by insured persons acting in a personal capacity (e.g., employment discrimination claims, whistleblower retaliation claims) should be excepted from the exclusion;
(c) Claims brought by a bankruptcy trustee, receiver, or examiner — in an insolvency scenario, claims brought by a court-appointed fiduciary against former directors and officers are legitimate and should not be excluded; and
(d) Cross-claims and counterclaims — insured persons who are brought into litigation as cross-defendants or who must assert counterclaims against other insureds should not be penalized by the exclusion.
6.6 Professional Services / Errors & Omissions Exclusion
The Primary Policy may contain an exclusion for claims arising from the rendering or failure to render professional services by the Company or its insured persons. This exclusion is designed to delineate the boundary between D&O (management liability) coverage and professional liability (errors and omissions, or "E&O") coverage, which are typically provided under separate policies.
This exclusion warrants careful scrutiny in the context of AHT's business. AHT operates a clinical decision support and population health management SaaS platform and provides revenue cycle management outsourcing services to hospital systems and physician groups. Claims relating to alleged deficiencies in AHT's software platform, data analytics services, or revenue cycle management functions could potentially be characterized as arising from the provision of "professional services." If the professional services exclusion is drafted broadly, it could inadvertently exclude D&O claims that are properly within the scope of management liability coverage — for example, shareholder claims alleging that management failed to adequately oversee the quality of the Company's products and services.
Recommendation: We recommend reviewing the scope of the professional services exclusion to ensure that it does not sweep in claims that are properly characterized as D&O management liability claims, even if they involve allegations relating to the Company's products or services. The appropriate distinction is between (i) claims against the Company for deficient professional services (which should be covered under a separate E&O policy) and (ii) claims against directors and officers for their management and oversight of the Company's business (which should be covered under the D&O policy). If any ambiguity exists, a narrowing endorsement should be requested.
6.7 ERISA Exclusion
The Primary Policy may exclude claims arising under the Employee Retirement Income Security Act of 1974 ("ERISA"). AHT maintains employee benefit plans for its approximately 3,400 employees, and the fiduciary obligations associated with the administration of those plans (including the 401(k) plan and any health and welfare benefit plans) are typically excluded from D&O coverage and addressed under a separate fiduciary liability insurance policy.
We recommend confirming that AHT has obtained, or intends to obtain, a separate fiduciary liability policy to cover claims arising under ERISA. The absence of such coverage would leave AHT's directors and officers (to the extent they serve as plan fiduciaries or could be deemed to exercise fiduciary control over plan assets) exposed to personal liability for fiduciary breaches. ERISA fiduciary liability claims, including claims alleging imprudent investment selection in 401(k) plans, have increased in frequency in recent years, and separate fiduciary coverage is a standard component of a public company's insurance program.
6.8 Bodily Injury / Property Damage Exclusion
The Primary Policy contains a standard exclusion for claims for bodily injury or property damage. This exclusion is generally not problematic for a healthcare SaaS company such as AHT, as bodily injury and property damage claims are addressed under general liability and other insurance policies. We note this exclusion for completeness and do not recommend any action.
6.9 Pollution / Environmental Exclusion
The Primary Policy contains a standard exclusion for claims arising from pollution or environmental contamination. This exclusion is generally not applicable to AHT's business operations, which do not involve the manufacture, storage, or disposal of hazardous materials. We note this exclusion for completeness and do not recommend any action.
6.10 Antitrust / Anti-Competition Exclusion
We have reviewed whether the Primary Policy contains an exclusion for claims alleging antitrust or anti-competitive conduct. Some D&O policies include such an exclusion, which would bar coverage for claims alleging violations of the Sherman Act, the Clayton Act, the Federal Trade Commission Act, or comparable state antitrust statutes.
If such an exclusion is present, it should be noted as a potential coverage gap given AHT's significant market position. The Company serves over 1,200 hospital systems and physician groups across 42 states and holds a leading market share in the clinical decision support and population health management segments. As the Company continues to grow, particularly through potential acquisitions or exclusive partnerships, the risk of antitrust scrutiny may increase. While the probability of an antitrust claim against AHT's directors and officers may presently be low, the exclusion should be reviewed and, if possible, narrowed or removed to preserve coverage flexibility.
Section 7: Defense and Settlement Provisions
7.1 Duty to Defend vs. Non-Duty-to-Defend (Reimbursement) Policy
D&O policies are typically structured as non-duty-to-defend or "pay on behalf of" policies. Under this structure, unlike a general liability policy where the insurer assumes the obligation to defend the insured and selects defense counsel, the insured retains the right and responsibility to select and retain its own defense counsel. The insurer reimburses or pays defense costs as they are incurred, subject to the terms of the policy.
We confirm that the Primary Policy follows this standard non-duty-to-defend structure. This means that:
(a) AHT and the individual insured persons retain the right to select counsel of their choice in connection with any covered claim. This is a valuable right that allows the insured to engage experienced securities litigation counsel without being subject to the insurer's panel counsel requirements. We note that if Calderwood & Harkness is engaged as defense counsel in any covered matter, potential conflicts of interest may arise given our current role as issuer's counsel; any such engagement would need to be evaluated under applicable conflict-of-interest rules;
(b) The insurer is obligated to advance defense costs as incurred, rather than reimbursing such costs only upon the final resolution of the claim. This is a critical provision — if defense cost advancement is conditioned on final resolution, the insured would be required to fund its own defense out-of-pocket throughout the life of the litigation, which could be financially burdensome. We recommend confirming that the policy provides for advancement of defense costs as incurred, upon submission of invoices or other documentation, without unreasonable delay; and
(c) Defense costs are within the policy limits (not in addition to the limits), which is standard for D&O policies. This means that every dollar spent on defense costs reduces the amount available for settlement or judgment, and careful monitoring of defense costs is essential.
7.2 Consent to Settlement
The Primary Policy is expected to require the insurer's consent before AHT or any insured person settles a covered claim. This is a standard provision, but the reasonableness standard applicable to the insurer's consent decision, and the consequences of a disagreement between the insured and the insurer regarding settlement, are important terms to review.
Hammer Clause. Many D&O policies contain a so-called "hammer clause" (or "consent to settle" clause), which limits the insurer's liability in the event the insured refuses a settlement that the insurer has recommended or approved. Hammer clauses come in several varieties:
(a) Full hammer — if the insured refuses a settlement recommended by the insurer, the insurer's liability is capped at the amount for which the claim could have been settled, plus defense costs incurred up to the date the settlement was recommended. The insured bears all additional costs. This is the most aggressive form of the hammer clause and is disadvantageous to the insured;
(b) Modified or "soft" hammer — if the insured refuses a recommended settlement, the insurer continues to bear liability but at a reduced level (e.g., 80% of defense costs and loss in excess of the recommended settlement amount, with the insured responsible for the remaining 20%); and
(c) No hammer clause — the insurer does not have the right to limit its liability based on the insured's refusal to settle. This is the most favorable formulation for the insured.
Recommendation: We recommend that AHT negotiate for a modified/soft hammer clause (at minimum) or, ideally, the removal of any hammer clause from the policy. In securities litigation, the decision of whether and when to settle is a complex strategic determination that should be made by the insured in consultation with counsel, without the insurer's ability to effectively force a settlement by withdrawing coverage.