letter-meridian-followup-coverage.docx

1019-00005 · Whitmore Aerospace LLC · Insurance Coverage

letter-meridian-followup-coverage.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 403-7000 Facsimile: (212) 403-7001 www.calderwoodharkness.com

March 10, 2023

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND ELECTRONIC MAIL (rachel.underwood@meridiansurety.com)

Rachel Underwood, Esq. Senior Claims Counsel Meridian Surety & Insurance Group 500 Plaza Drive Secaucus, New Jersey 07094

Re: Whitmore Aerospace LLC — Request for Definitive Coverage Determination Claim Tender dated September 22, 2022 D&O Policy No. MSI-DO-2022-07814 (Aggregate Limit: $10,000,000; Retention: $250,000) CGL Policy No. MSI-CGL-2021-33291 (Aggregate Limit: $25,000,000; SIR: $500,000) Indemnification Demand by Hargrove-Dalton Defense Systems, Inc. — $14,726,583

Dear Ms. Underwood:

I. Introduction and Purpose

This firm represents Whitmore Aerospace LLC ("WAL"), a Virginia limited liability company headquartered at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151, in connection with an indemnification dispute with Hargrove-Dalton Defense Systems, Inc. ("HDDS"). We write as a follow-up to our initial tender letter dated September 22, 2022 and to Meridian Surety & Insurance Group's ("Meridian") reservation-of-rights letter dated November 1, 2022 (the "ROR Letter"), and to request that Meridian provide a definitive coverage determination under both the Directors & Officers Liability Policy, Policy No. MSI-DO-2022-07814 (the "D&O Policy"), and the Commercial General Liability Policy, Policy No. MSI-CGL-2021-33291 (the "CGL Policy").

As set forth in greater detail below, more than four months have elapsed since Meridian issued the ROR Letter, during which time WAL has received no further substantive communication from Meridian regarding its coverage position under either policy. In the intervening period, significant developments have occurred in the underlying dispute, including the filing of a federal declaratory judgment action and a counterclaim against WAL by HDDS seeking the full indemnification amount of $14,726,583, plus attorneys' fees. WAL continues to incur substantial defense costs in connection with both the federal litigation and the ongoing administrative review by the Defense Contract Management Agency ("DCMA"), with no contribution from Meridian toward those expenses. WAL requires certainty regarding Meridian's obligations under the policies at this juncture, and the continued absence of a definitive coverage position is causing WAL significant and compounding prejudice.

II. Summary of the Underlying Claim and Tender

We briefly restate the factual background underlying WAL's claim tender, which was set forth in detail in our September 22, 2022 correspondence and the accompanying enclosures.

On September 9, 2022, HDDS transmitted to WAL a formal indemnification demand in the amount of $14,726,583 (the "Demand"). The Demand arises from cost overruns identified by the United States Department of Defense, Defense Contract Management Agency ("DCMA"), under Prime Contract No. FA8620-19-C-0337, relating to the Advanced Tactical Airframe Program ("ATAP"). The cost overruns were the subject of a Contracting Officer's Preliminary Determination ("COPD") issued on August 1, 2022, by Administrative Contracting Officer Lt. Col. Sandra M. Vickers, United States Air Force. The COPD identified total cost overruns of $14,726,583 across multiple work packages under the ATAP prime contract and directed HDDS, as the prime contractor, to provide a written response and corrective action plan.

HDDS asserts that WAL is obligated to indemnify HDDS for the entirety of the cost overruns pursuant to Section 11.4 of the Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), entered into between HDDS, in its capacity as Team Lead and prime contractor, and WAL, in its capacity as Team Member and subcontractor. Under the Teaming Agreement, WAL's scope of work consisted of the fabrication of titanium structural assemblies designated as Work Package 4 ("WP-4"). WP-4 represented approximately eighteen percent (18%) of the prime contract's total target cost of $412,000,000, or approximately $74,160,000.

Critically, however, the COPD issued by ACO Lt. Col. Vickers attributes only $12,817,441 — or 87.03% — of the total $14,726,583 in identified overruns to WP-4. The remaining $1,909,142, representing 12.97% of the total, is attributed to other work packages entirely unrelated to WAL's scope of performance under the Teaming Agreement. Despite this clear delineation in the COPD, HDDS's Demand seeks indemnification from WAL for the full $14,726,583, including the $1,909,142 in non-WP-4 overruns for which WAL bears no responsibility.

On September 22, 2022, this firm tendered the HDDS Demand to Meridian under both the D&O Policy and the CGL Policy on WAL's behalf, requesting that Meridian acknowledge its duty to defend WAL against the indemnification claim and confirm indemnity coverage for any ultimate liability. Our tender letter enclosed copies of the HDDS Demand letter, the DCMA COPD, the Teaming Agreement, and the relevant provisions of the prime contract, and provided a detailed summary of the factual and legal basis for WAL's coverage request.

III. Meridian's Reservation-of-Rights Letter

On November 1, 2022, Meridian issued the ROR Letter, which acknowledged receipt of WAL's claim tender and stated that Meridian was continuing to investigate the claim. The ROR Letter reserved Meridian's rights on two principal grounds, both directed to the CGL Policy:

First, the ROR Letter cited the contractual-liability exclusion set forth at Exclusion (b) of the CGL Policy form (Policy No. MSI-CGL-2021-33291) as a potential basis for denying coverage. Meridian's stated rationale was that WAL's indemnity obligation, if any, arises from WAL's contractual undertaking under Section 11.4 of the Teaming Agreement rather than from any tort liability, and that Exclusion (b) may therefore bar coverage for the claim.

Second, the ROR Letter cited the government-contract exclusion set forth in Endorsement GC-04 to the CGL Policy as an additional potential basis for denying coverage. Meridian's stated rationale was that the underlying claim relates to cost disallowances under a United States Government contract and therefore falls within the scope of Endorsement GC-04.

The ROR Letter did not provide a definitive coverage determination under either the CGL Policy or the D&O Policy. The ROR Letter stated that Meridian would "continue to investigate the claim and the applicability of the foregoing exclusions" and that Meridian "reserve[d] all of its rights and defenses under the policies." Since the date of the ROR Letter, Meridian has not provided a defense to WAL, has not funded or reimbursed any portion of WAL's defense costs, and has not issued any further substantive correspondence to this firm or to WAL regarding its coverage position. Informal inquiries placed by the undersigned to Meridian's claims department on December 14, 2022 and January 24, 2023 were acknowledged but yielded no substantive update.

IV. Developments Since the Reservation-of-Rights Letter

Significant developments have occurred in the underlying dispute since November 1, 2022. We summarize these developments below to ensure that Meridian's coverage analysis reflects the current posture of the matter.

A. Filing of the Declaratory Judgment Action

On November 28, 2022, WAL filed a Verified Complaint for Declaratory Judgment against HDDS in the United States District Court for the Southern District of New York, Case No. 1:22-cv-10147-RMB (the "DJ Action"). The action was assigned to the Honorable Richard M. Brannigan, United States District Judge. WAL's complaint seeks a judicial declaration that: (1) Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD; (2) to the extent any indemnification obligation exists, WAL's liability is limited to overruns proximately caused by WAL's acts or omissions in the performance of WP-4; and (3) HDDS's Demand is overbroad and legally unsupported to the extent it seeks to impose on WAL liability for $1,909,142 in non-WP-4 overruns that are wholly unrelated to WAL's scope of work under the Teaming Agreement. A copy of the Verified Complaint is enclosed as Enclosure 1 to this letter.

HDDS is represented in the DJ Action by Leonard Trager, Esq. and Megan Forsythe, Esq. of Voss, Trager & Kendall LLP, 900 17th Street NW, Suite 800, Washington, D.C. 20006.

B. HDDS's Answer and Counterclaim

On January 13, 2023, HDDS filed an Answer and Counterclaim in the DJ Action. HDDS's counterclaim seeks contractual indemnification from WAL in the full amount of $14,726,583, plus attorneys' fees incurred by HDDS in prosecuting its indemnification claim, which HDDS asserts are recoverable under Section 11.6 of the Teaming Agreement. HDDS's counterclaim thus asserts an affirmative monetary claim against WAL that, with the addition of attorneys' fees, will substantially exceed the original Demand amount. A copy of the HDDS Answer and Counterclaim is enclosed as Enclosure 2 to this letter.

On February 3, 2023, WAL filed its Reply to the Counterclaim, denying the material allegations set forth therein and asserting affirmative defenses including, among others, failure to state a claim, comparative fault, failure to mitigate, and the inapplicability of the Teaming Agreement's indemnification provision to the cost categories at issue.

C. Stay of Proceedings

On February 10, 2023, WAL moved to stay the DJ Action pending the completion of the DCMA administrative review of the cost overruns under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109. WAL's motion argued that the DCMA's forthcoming Contracting Officer's Final Decision ("COFD") would likely resolve or substantially narrow the factual predicate underlying HDDS's indemnification claim, including the allocation of cost overruns between WP-4 and other work packages, the allowability and reasonableness of challenged costs, and the extent to which any overruns were attributable to government-caused delays or defective specifications.

On February 24, 2023, WAL and HDDS filed a joint stipulation to stay, reflecting HDDS's consent to the requested relief. On March 7, 2023, Judge Brannigan issued an order granting the stay. In his order, Judge Brannigan found that "the DCMA administrative proceeding will likely resolve or narrow the factual predicate for the indemnity dispute, and the efficient administration of justice counsels in favor of awaiting the Contracting Officer's Final Decision before proceeding to discovery or dispositive motions in this action." The court ordered the parties to file joint status reports every 120 days, with the first report due on or before July 5, 2023. A copy of the Court's Order Granting Stay dated March 7, 2023 is enclosed as Enclosure 3 to this letter.

The DJ Action is currently dormant pending the issuance of a COFD by ACO Lt. Col. Vickers. HDDS filed a formal response and COFD request with DCMA on October 15, 2022, and the DCMA review remains pending as of the date of this letter. We note, however, that DCMA contracting officers are generally expected to issue a COFD within sixty (60) days of a contractor's request, and the review has now been pending for nearly five months. WAL anticipates that the COFD could issue at any time, which would likely result in prompt reactivation of the DJ Action on an accelerated timetable.

D. WAL's Ongoing Defense Costs

WAL continues to incur substantial legal fees and expenses in connection with both the DJ Action and the monitoring of the DCMA administrative proceeding. This firm's engagement is on an hourly-rate basis, and WAL has borne the entirety of these costs without any contribution from Meridian. As of the date of this letter, WAL's aggregate defense costs in connection with this matter are significant and continuing to accrue.

We further note that the indemnity demand amount of $14,726,583 substantially exceeds the D&O Policy retention of $250,000 and the CGL Policy self-insured retention of $500,000. WAL's defense costs to date, standing alone, also approach or exceed the applicable retention thresholds. Accordingly, Meridian's coverage obligations, including any duty to reimburse defense costs and to provide indemnity coverage, have been triggered or will imminently be triggered under one or both policies.

V. WAL's Position on Coverage

WAL respectfully disagrees with the reservations identified in the ROR Letter and maintains that coverage exists under one or both of the D&O Policy and the CGL Policy. WAL's position with respect to each of the reservations set forth in the ROR Letter is as follows.

A. The Contractual-Liability Exclusion (Exclusion (b), CGL Policy)

The ROR Letter reserved Meridian's rights under the contractual-liability exclusion set forth at Exclusion (b) of the CGL Policy form, which generally excludes coverage for liability arising out of an insured's assumption of liability in a contract or agreement. WAL's position is that Exclusion (b) does not bar coverage for the HDDS claim for several reasons.

Most fundamentally, the HDDS claim is not solely or exclusively a contractual-indemnity obligation. The claim arises out of, and is inextricably intertwined with, an underlying determination by DCMA that costs incurred by WAL under WP-4 were unallowable, unreasonable, or subject to disallowance under the Federal Acquisition Regulation and applicable cost accounting standards. The COPD issued by ACO Lt. Col. Vickers constitutes a government regulatory determination concerning WAL's operational conduct in performing defense contract work — specifically, the manner in which WAL managed fabrication processes, controlled costs, and complied with contract specifications. This is not a claim that implicates only WAL's contractual promises to HDDS; rather, it implicates WAL's underlying acts and omissions in the performance of work, which give rise to potential liability independent of any contractual indemnification clause.

Moreover, WAL's substantive defenses to HDDS's claim underscore that the cost overruns are attributable to third-party and external causation rather than to any voluntary assumption of liability by WAL under the Teaming Agreement. Specifically:

(a) Titanium Raw-Material Cost Escalation (approximately $4.2 million). WAL contends that a substantial portion of the WP-4 cost overruns — approximately $4.2 million — is directly attributable to force-majeure events, specifically the unprecedented escalation in the cost of aerospace-grade titanium raw materials during the relevant performance period, driven by global supply-chain disruptions. These cost increases were wholly beyond WAL's control and were not foreseeable at the time the Teaming Agreement or the prime contract was executed.

(b) HDDS-Supplied Engineering Specifications (approximately $5.1 million in rework costs). WAL further contends that approximately $5.1 million of the WP-4 cost overruns resulted from non-conforming machining tolerances caused by defective or ambiguous engineering specifications supplied by HDDS as the prime contractor and engineering authority under the ATAP program. WAL was required to undertake extensive rework of titanium structural assemblies to bring components into conformance with corrected specifications subsequently issued by HDDS, and the resulting costs were a direct consequence of HDDS's own errors, not WAL's performance.

(c) Late Delivery of Government-Furnished Equipment (approximately $2.3 million in idle-labor charges). Finally, WAL contends that approximately $2.3 million in idle-labor charges included in the WP-4 overruns were caused by HDDS's late delivery of government-furnished equipment ("GFE") that WAL required to perform fabrication and assembly operations. The late delivery of GFE resulted in extended periods of production downtime, during which WAL's skilled workforce incurred labor costs that were unproductive through no fault of WAL's own.

These factual predicates demonstrate that the HDDS claim does not arise solely from WAL's contractual assumption of liability. Rather, the claim involves WAL's operational conduct and the conduct of third parties, including HDDS itself and the U.S. Government, that proximately caused or contributed to the cost overruns at issue. Exclusion (b) is therefore inapplicable or, at minimum, does not provide a basis for a blanket denial of coverage.

B. The Government-Contract Exclusion (Endorsement GC-04, CGL Policy)

The ROR Letter also reserved Meridian's rights under Endorsement GC-04 to the CGL Policy, which excludes coverage for claims relating to cost disallowances under a U.S. Government contract. WAL's position is that Endorsement GC-04 is inapplicable to the HDDS claim because the claim at issue is an inter-party indemnification demand between two private commercial entities — HDDS and WAL — arising under a private commercial teaming agreement, and not a direct government claim against WAL.

The DCMA COPD is directed to HDDS in its capacity as the prime contractor under Prime Contract No. FA8620-19-C-0337. WAL is not a party to the prime contract, is not in privity with the U.S. Government, and has not received any direct claim, demand, or determination from the Government. HDDS's Demand against WAL is a derivative, private-party claim that seeks to shift to WAL liability that HDDS may ultimately face vis-à-vis the Government. The fact that the underlying cost disallowance originated in a government contract does not transform an inter-party indemnification claim between private commercial entities into a "government contract claim" within the meaning of Endorsement GC-04.

WAL's reading of Endorsement GC-04 is consistent with the reasonable expectations of a sophisticated commercial policyholder. WAL purchased the CGL Policy to protect against third-party claims, including claims by commercial partners and counterparties arising out of WAL's business operations. An interpretation of Endorsement GC-04 that would exclude coverage for any claim that has any connection, however attenuated, to a government contract would effectively render the CGL Policy illusory for a defense contractor like WAL, whose business operations are substantially oriented toward government contract work. Such an interpretation is contrary to well-established principles of insurance policy construction, which require that exclusions be narrowly construed and that ambiguities be resolved in favor of the insured.

C. Reservation of Rights

WAL expressly reserves all rights under both policies and under applicable law, including without limitation any rights to assert claims for breach of the duty to defend, breach of the duty to indemnify, bad faith, and estoppel. WAL notes that an insurer's unreasonable delay in issuing a coverage determination may, under applicable law, give rise to liability for bad faith and may result in the insurer being estopped from asserting coverage defenses that it failed to timely invoke. WAL does not waive any such rights by the making of this request.

VI. Request for Definitive Coverage Determination

In light of the foregoing, WAL respectfully but firmly requests that Meridian issue a definitive coverage position — either granting or denying coverage — under both of the following policies:

(a) The D&O Policy, Policy No. MSI-DO-2022-07814, with an aggregate limit of $10,000,000 and a retention of $250,000; and

(b) The CGL Policy, Policy No. MSI-CGL-2021-33291, with an aggregate limit of $25,000,000 and a self-insured retention of $500,000.

If Meridian determines that coverage applies under either or both policies, WAL requests that Meridian:

(a) Acknowledge its duty to defend WAL against the HDDS claim, including the counterclaim asserted in the DJ Action;

(b) Begin reimbursing WAL's defense costs incurred to date and commit to funding WAL's defense costs on a going-forward basis; and

(c) Confirm the scope of indemnity coverage available to WAL for any ultimate liability arising from the HDDS claim under the applicable policy or policies.

WAL requests that Meridian provide its definitive response within thirty (30) days of the date of this letter, i.e., no later than April 10, 2023. WAL believes this timeframe is more than reasonable in light of the fact that Meridian has had the tender materials in its possession since September 22, 2022 — a period now approaching six months — and has had ample opportunity to complete its investigation.

We emphasize that although the DJ Action is currently stayed, the case remains active on the Court's docket, HDDS's counterclaim for $14,726,583 plus attorneys' fees is pending, and the DCMA administrative review could conclude at any time with the issuance of a COFD. Upon issuance of a COFD, it is likely that the stay will be lifted and the litigation will resume on an accelerated schedule. WAL must be in a position to respond to these developments with full knowledge of its insurer's coverage position, and further delay by Meridian in providing a definitive determination is prejudicial to WAL's interests and inconsistent with Meridian's obligations under the policies and applicable law.

VII. Reservation of Rights

WAL expressly reserves all rights, remedies, and defenses available to it under the D&O Policy, the CGL Policy, at law, and in equity, including but not limited to claims for breach of the duty to defend, breach of the duty to indemnify, breach of the implied covenant of good faith and fair dealing, bad faith, estoppel, and any other claim or remedy that may be available under applicable state or federal law. Nothing in this letter, in our prior correspondence, or in any communications between WAL and Meridian shall be construed as a waiver, relinquishment, or limitation of any of WAL's rights under the policies or applicable law. WAL's decision to request a definitive coverage determination rather than to pursue litigation against Meridian at this time is made without prejudice to WAL's right to pursue all available remedies in the event that Meridian fails to timely and adequately respond to this request.

VIII. Enclosures

Enclosed herewith for Meridian's reference are the following documents:

1. Copy of Verified Complaint for Declaratory Judgment filed November 28, 2022 (Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB, U.S. District Court for the Southern District of New York);

2. Copy of HDDS Answer and Counterclaim filed January 13, 2023; and

3. Copy of Court Order Granting Stay dated March 7, 2023.

We look forward to receiving Meridian's definitive coverage position at the earliest opportunity and in no event later than April 10, 2023. Should you require any additional information or documentation to complete your coverage analysis, please do not hesitate to contact the undersigned directly at (212) 403-7246 or by electronic mail at panand@calderwoodharkness.com. We are prepared to make ourselves and our client available for a conference call at Meridian's convenience to discuss the foregoing matters.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand Partner

600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 403-7246 Facsimile: (212) 403-7001

Email: panand@calderwoodharkness.com

cc: (via electronic mail)

Marcus J. Whitmore, Chief Executive Officer, Whitmore Aerospace LLC Gregory Poole, General Counsel, Whitmore Aerospace LLC Douglas Carmichael, Partner, Calderwood & Harkness LLP

Enclosures (3)

CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 403-7000 Facsimile: (212) 403-7001 www.calderwoodharkness.com
March 10, 2023
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND ELECTRONIC MAIL (rachel.underwood@meridiansurety.com)
Rachel Underwood, Esq. Senior Claims Counsel Meridian Surety & Insurance Group 500 Plaza Drive Secaucus, New Jersey 07094
Re: Whitmore Aerospace LLC — Request for Definitive Coverage Determination Claim Tender dated September 22, 2022 D&O Policy No. MSI-DO-2022-07814 (Aggregate Limit: $10,000,000; Retention: $250,000) CGL Policy No. MSI-CGL-2021-33291 (Aggregate Limit: $25,000,000; SIR: $500,000) Indemnification Demand by Hargrove-Dalton Defense Systems, Inc. — $14,726,583
Dear Ms. Underwood:
I. Introduction and Purpose
This firm represents Whitmore Aerospace LLC ("WAL"), a Virginia limited liability company headquartered at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151, in connection with an indemnification dispute with Hargrove-Dalton Defense Systems, Inc. ("HDDS"). We write as a follow-up to our initial tender letter dated September 22, 2022 and to Meridian Surety & Insurance Group's ("Meridian") reservation-of-rights letter dated November 1, 2022 (the "ROR Letter"), and to request that Meridian provide a definitive coverage determination under both the Directors & Officers Liability Policy, Policy No. MSI-DO-2022-07814 (the "D&O Policy"), and the Commercial General Liability Policy, Policy No. MSI-CGL-2021-33291 (the "CGL Policy").
As set forth in greater detail below, more than four months have elapsed since Meridian issued the ROR Letter, during which time WAL has received no further substantive communication from Meridian regarding its coverage position under either policy. In the intervening period, significant developments have occurred in the underlying dispute, including the filing of a federal declaratory judgment action and a counterclaim against WAL by HDDS seeking the full indemnification amount of $14,726,583, plus attorneys' fees. WAL continues to incur substantial defense costs in connection with both the federal litigation and the ongoing administrative review by the Defense Contract Management Agency ("DCMA"), with no contribution from Meridian toward those expenses. WAL requires certainty regarding Meridian's obligations under the policies at this juncture, and the continued absence of a definitive coverage position is causing WAL significant and compounding prejudice.
II. Summary of the Underlying Claim and Tender
We briefly restate the factual background underlying WAL's claim tender, which was set forth in detail in our September 22, 2022 correspondence and the accompanying enclosures.
On September 9, 2022, HDDS transmitted to WAL a formal indemnification demand in the amount of $14,726,583 (the "Demand"). The Demand arises from cost overruns identified by the United States Department of Defense, Defense Contract Management Agency ("DCMA"), under Prime Contract No. FA8620-19-C-0337, relating to the Advanced Tactical Airframe Program ("ATAP"). The cost overruns were the subject of a Contracting Officer's Preliminary Determination ("COPD") issued on August 1, 2022, by Administrative Contracting Officer Lt. Col. Sandra M. Vickers, United States Air Force. The COPD identified total cost overruns of $14,726,583 across multiple work packages under the ATAP prime contract and directed HDDS, as the prime contractor, to provide a written response and corrective action plan.
HDDS asserts that WAL is obligated to indemnify HDDS for the entirety of the cost overruns pursuant to Section 11.4 of the Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), entered into between HDDS, in its capacity as Team Lead and prime contractor, and WAL, in its capacity as Team Member and subcontractor. Under the Teaming Agreement, WAL's scope of work consisted of the fabrication of titanium structural assemblies designated as Work Package 4 ("WP-4"). WP-4 represented approximately eighteen percent (18%) of the prime contract's total target cost of $412,000,000, or approximately $74,160,000.
Critically, however, the COPD issued by ACO Lt. Col. Vickers attributes only $12,817,441 — or 87.03% — of the total $14,726,583 in identified overruns to WP-4. The remaining $1,909,142, representing 12.97% of the total, is attributed to other work packages entirely unrelated to WAL's scope of performance under the Teaming Agreement. Despite this clear delineation in the COPD, HDDS's Demand seeks indemnification from WAL for the full $14,726,583, including the $1,909,142 in non-WP-4 overruns for which WAL bears no responsibility.
On September 22, 2022, this firm tendered the HDDS Demand to Meridian under both the D&O Policy and the CGL Policy on WAL's behalf, requesting that Meridian acknowledge its duty to defend WAL against the indemnification claim and confirm indemnity coverage for any ultimate liability. Our tender letter enclosed copies of the HDDS Demand letter, the DCMA COPD, the Teaming Agreement, and the relevant provisions of the prime contract, and provided a detailed summary of the factual and legal basis for WAL's coverage request.
III. Meridian's Reservation-of-Rights Letter
On November 1, 2022, Meridian issued the ROR Letter, which acknowledged receipt of WAL's claim tender and stated that Meridian was continuing to investigate the claim. The ROR Letter reserved Meridian's rights on two principal grounds, both directed to the CGL Policy:
First, the ROR Letter cited the contractual-liability exclusion set forth at Exclusion (b) of the CGL Policy form (Policy No. MSI-CGL-2021-33291) as a potential basis for denying coverage. Meridian's stated rationale was that WAL's indemnity obligation, if any, arises from WAL's contractual undertaking under Section 11.4 of the Teaming Agreement rather than from any tort liability, and that Exclusion (b) may therefore bar coverage for the claim.
Second, the ROR Letter cited the government-contract exclusion set forth in Endorsement GC-04 to the CGL Policy as an additional potential basis for denying coverage. Meridian's stated rationale was that the underlying claim relates to cost disallowances under a United States Government contract and therefore falls within the scope of Endorsement GC-04.
The ROR Letter did not provide a definitive coverage determination under either the CGL Policy or the D&O Policy. The ROR Letter stated that Meridian would "continue to investigate the claim and the applicability of the foregoing exclusions" and that Meridian "reserve[d] all of its rights and defenses under the policies." Since the date of the ROR Letter, Meridian has not provided a defense to WAL, has not funded or reimbursed any portion of WAL's defense costs, and has not issued any further substantive correspondence to this firm or to WAL regarding its coverage position. Informal inquiries placed by the undersigned to Meridian's claims department on December 14, 2022 and January 24, 2023 were acknowledged but yielded no substantive update.
IV. Developments Since the Reservation-of-Rights Letter
Significant developments have occurred in the underlying dispute since November 1, 2022. We summarize these developments below to ensure that Meridian's coverage analysis reflects the current posture of the matter.
A. Filing of the Declaratory Judgment Action
On November 28, 2022, WAL filed a Verified Complaint for Declaratory Judgment against HDDS in the United States District Court for the Southern District of New York, Case No. 1:22-cv-10147-RMB (the "DJ Action"). The action was assigned to the Honorable Richard M. Brannigan, United States District Judge. WAL's complaint seeks a judicial declaration that: (1) Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD; (2) to the extent any indemnification obligation exists, WAL's liability is limited to overruns proximately caused by WAL's acts or omissions in the performance of WP-4; and (3) HDDS's Demand is overbroad and legally unsupported to the extent it seeks to impose on WAL liability for $1,909,142 in non-WP-4 overruns that are wholly unrelated to WAL's scope of work under the Teaming Agreement. A copy of the Verified Complaint is enclosed as Enclosure 1 to this letter.
HDDS is represented in the DJ Action by Leonard Trager, Esq. and Megan Forsythe, Esq. of Voss, Trager & Kendall LLP, 900 17th Street NW, Suite 800, Washington, D.C. 20006.
B. HDDS's Answer and Counterclaim
On January 13, 2023, HDDS filed an Answer and Counterclaim in the DJ Action. HDDS's counterclaim seeks contractual indemnification from WAL in the full amount of $14,726,583, plus attorneys' fees incurred by HDDS in prosecuting its indemnification claim, which HDDS asserts are recoverable under Section 11.6 of the Teaming Agreement. HDDS's counterclaim thus asserts an affirmative monetary claim against WAL that, with the addition of attorneys' fees, will substantially exceed the original Demand amount. A copy of the HDDS Answer and Counterclaim is enclosed as Enclosure 2 to this letter.
On February 3, 2023, WAL filed its Reply to the Counterclaim, denying the material allegations set forth therein and asserting affirmative defenses including, among others, failure to state a claim, comparative fault, failure to mitigate, and the inapplicability of the Teaming Agreement's indemnification provision to the cost categories at issue.
C. Stay of Proceedings
On February 10, 2023, WAL moved to stay the DJ Action pending the completion of the DCMA administrative review of the cost overruns under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109. WAL's motion argued that the DCMA's forthcoming Contracting Officer's Final Decision ("COFD") would likely resolve or substantially narrow the factual predicate underlying HDDS's indemnification claim, including the allocation of cost overruns between WP-4 and other work packages, the allowability and reasonableness of challenged costs, and the extent to which any overruns were attributable to government-caused delays or defective specifications.
On February 24, 2023, WAL and HDDS filed a joint stipulation to stay, reflecting HDDS's consent to the requested relief. On March 7, 2023, Judge Brannigan issued an order granting the stay. In his order, Judge Brannigan found that "the DCMA administrative proceeding will likely resolve or narrow the factual predicate for the indemnity dispute, and the efficient administration of justice counsels in favor of awaiting the Contracting Officer's Final Decision before proceeding to discovery or dispositive motions in this action." The court ordered the parties to file joint status reports every 120 days, with the first report due on or before July 5, 2023. A copy of the Court's Order Granting Stay dated March 7, 2023 is enclosed as Enclosure 3 to this letter.
The DJ Action is currently dormant pending the issuance of a COFD by ACO Lt. Col. Vickers. HDDS filed a formal response and COFD request with DCMA on October 15, 2022, and the DCMA review remains pending as of the date of this letter. We note, however, that DCMA contracting officers are generally expected to issue a COFD within sixty (60) days of a contractor's request, and the review has now been pending for nearly five months. WAL anticipates that the COFD could issue at any time, which would likely result in prompt reactivation of the DJ Action on an accelerated timetable.
D. WAL's Ongoing Defense Costs
WAL continues to incur substantial legal fees and expenses in connection with both the DJ Action and the monitoring of the DCMA administrative proceeding. This firm's engagement is on an hourly-rate basis, and WAL has borne the entirety of these costs without any contribution from Meridian. As of the date of this letter, WAL's aggregate defense costs in connection with this matter are significant and continuing to accrue.
We further note that the indemnity demand amount of $14,726,583 substantially exceeds the D&O Policy retention of $250,000 and the CGL Policy self-insured retention of $500,000. WAL's defense costs to date, standing alone, also approach or exceed the applicable retention thresholds. Accordingly, Meridian's coverage obligations, including any duty to reimburse defense costs and to provide indemnity coverage, have been triggered or will imminently be triggered under one or both policies.
V. WAL's Position on Coverage
WAL respectfully disagrees with the reservations identified in the ROR Letter and maintains that coverage exists under one or both of the D&O Policy and the CGL Policy. WAL's position with respect to each of the reservations set forth in the ROR Letter is as follows.
A. The Contractual-Liability Exclusion (Exclusion (b), CGL Policy)
The ROR Letter reserved Meridian's rights under the contractual-liability exclusion set forth at Exclusion (b) of the CGL Policy form, which generally excludes coverage for liability arising out of an insured's assumption of liability in a contract or agreement. WAL's position is that Exclusion (b) does not bar coverage for the HDDS claim for several reasons.
Most fundamentally, the HDDS claim is not solely or exclusively a contractual-indemnity obligation. The claim arises out of, and is inextricably intertwined with, an underlying determination by DCMA that costs incurred by WAL under WP-4 were unallowable, unreasonable, or subject to disallowance under the Federal Acquisition Regulation and applicable cost accounting standards. The COPD issued by ACO Lt. Col. Vickers constitutes a government regulatory determination concerning WAL's operational conduct in performing defense contract work — specifically, the manner in which WAL managed fabrication processes, controlled costs, and complied with contract specifications. This is not a claim that implicates only WAL's contractual promises to HDDS; rather, it implicates WAL's underlying acts and omissions in the performance of work, which give rise to potential liability independent of any contractual indemnification clause.
Moreover, WAL's substantive defenses to HDDS's claim underscore that the cost overruns are attributable to third-party and external causation rather than to any voluntary assumption of liability by WAL under the Teaming Agreement. Specifically:
(a) Titanium Raw-Material Cost Escalation (approximately $4.2 million). WAL contends that a substantial portion of the WP-4 cost overruns — approximately $4.2 million — is directly attributable to force-majeure events, specifically the unprecedented escalation in the cost of aerospace-grade titanium raw materials during the relevant performance period, driven by global supply-chain disruptions. These cost increases were wholly beyond WAL's control and were not foreseeable at the time the Teaming Agreement or the prime contract was executed.
(b) HDDS-Supplied Engineering Specifications (approximately $5.1 million in rework costs). WAL further contends that approximately $5.1 million of the WP-4 cost overruns resulted from non-conforming machining tolerances caused by defective or ambiguous engineering specifications supplied by HDDS as the prime contractor and engineering authority under the ATAP program. WAL was required to undertake extensive rework of titanium structural assemblies to bring components into conformance with corrected specifications subsequently issued by HDDS, and the resulting costs were a direct consequence of HDDS's own errors, not WAL's performance.
(c) Late Delivery of Government-Furnished Equipment (approximately $2.3 million in idle-labor charges). Finally, WAL contends that approximately $2.3 million in idle-labor charges included in the WP-4 overruns were caused by HDDS's late delivery of government-furnished equipment ("GFE") that WAL required to perform fabrication and assembly operations. The late delivery of GFE resulted in extended periods of production downtime, during which WAL's skilled workforce incurred labor costs that were unproductive through no fault of WAL's own.
These factual predicates demonstrate that the HDDS claim does not arise solely from WAL's contractual assumption of liability. Rather, the claim involves WAL's operational conduct and the conduct of third parties, including HDDS itself and the U.S. Government, that proximately caused or contributed to the cost overruns at issue. Exclusion (b) is therefore inapplicable or, at minimum, does not provide a basis for a blanket denial of coverage.
B. The Government-Contract Exclusion (Endorsement GC-04, CGL Policy)
The ROR Letter also reserved Meridian's rights under Endorsement GC-04 to the CGL Policy, which excludes coverage for claims relating to cost disallowances under a U.S. Government contract. WAL's position is that Endorsement GC-04 is inapplicable to the HDDS claim because the claim at issue is an inter-party indemnification demand between two private commercial entities — HDDS and WAL — arising under a private commercial teaming agreement, and not a direct government claim against WAL.
The DCMA COPD is directed to HDDS in its capacity as the prime contractor under Prime Contract No. FA8620-19-C-0337. WAL is not a party to the prime contract, is not in privity with the U.S. Government, and has not received any direct claim, demand, or determination from the Government. HDDS's Demand against WAL is a derivative, private-party claim that seeks to shift to WAL liability that HDDS may ultimately face vis-à-vis the Government. The fact that the underlying cost disallowance originated in a government contract does not transform an inter-party indemnification claim between private commercial entities into a "government contract claim" within the meaning of Endorsement GC-04.
WAL's reading of Endorsement GC-04 is consistent with the reasonable expectations of a sophisticated commercial policyholder. WAL purchased the CGL Policy to protect against third-party claims, including claims by commercial partners and counterparties arising out of WAL's business operations. An interpretation of Endorsement GC-04 that would exclude coverage for any claim that has any connection, however attenuated, to a government contract would effectively render the CGL Policy illusory for a defense contractor like WAL, whose business operations are substantially oriented toward government contract work. Such an interpretation is contrary to well-established principles of insurance policy construction, which require that exclusions be narrowly construed and that ambiguities be resolved in favor of the insured.
C. Reservation of Rights
WAL expressly reserves all rights under both policies and under applicable law, including without limitation any rights to assert claims for breach of the duty to defend, breach of the duty to indemnify, bad faith, and estoppel. WAL notes that an insurer's unreasonable delay in issuing a coverage determination may, under applicable law, give rise to liability for bad faith and may result in the insurer being estopped from asserting coverage defenses that it failed to timely invoke. WAL does not waive any such rights by the making of this request.
VI. Request for Definitive Coverage Determination
In light of the foregoing, WAL respectfully but firmly requests that Meridian issue a definitive coverage position — either granting or denying coverage — under both of the following policies:
(a) The D&O Policy, Policy No. MSI-DO-2022-07814, with an aggregate limit of $10,000,000 and a retention of $250,000; and
(b) The CGL Policy, Policy No. MSI-CGL-2021-33291, with an aggregate limit of $25,000,000 and a self-insured retention of $500,000.
If Meridian determines that coverage applies under either or both policies, WAL requests that Meridian:
(a) Acknowledge its duty to defend WAL against the HDDS claim, including the counterclaim asserted in the DJ Action;
(b) Begin reimbursing WAL's defense costs incurred to date and commit to funding WAL's defense costs on a going-forward basis; and
(c) Confirm the scope of indemnity coverage available to WAL for any ultimate liability arising from the HDDS claim under the applicable policy or policies.
WAL requests that Meridian provide its definitive response within thirty (30) days of the date of this letter, i.e., no later than April 10, 2023. WAL believes this timeframe is more than reasonable in light of the fact that Meridian has had the tender materials in its possession since September 22, 2022 — a period now approaching six months — and has had ample opportunity to complete its investigation.
We emphasize that although the DJ Action is currently stayed, the case remains active on the Court's docket, HDDS's counterclaim for $14,726,583 plus attorneys' fees is pending, and the DCMA administrative review could conclude at any time with the issuance of a COFD. Upon issuance of a COFD, it is likely that the stay will be lifted and the litigation will resume on an accelerated schedule. WAL must be in a position to respond to these developments with full knowledge of its insurer's coverage position, and further delay by Meridian in providing a definitive determination is prejudicial to WAL's interests and inconsistent with Meridian's obligations under the policies and applicable law.
VII. Reservation of Rights
WAL expressly reserves all rights, remedies, and defenses available to it under the D&O Policy, the CGL Policy, at law, and in equity, including but not limited to claims for breach of the duty to defend, breach of the duty to indemnify, breach of the implied covenant of good faith and fair dealing, bad faith, estoppel, and any other claim or remedy that may be available under applicable state or federal law. Nothing in this letter, in our prior correspondence, or in any communications between WAL and Meridian shall be construed as a waiver, relinquishment, or limitation of any of WAL's rights under the policies or applicable law. WAL's decision to request a definitive coverage determination rather than to pursue litigation against Meridian at this time is made without prejudice to WAL's right to pursue all available remedies in the event that Meridian fails to timely and adequately respond to this request.
VIII. Enclosures
Enclosed herewith for Meridian's reference are the following documents:
1. Copy of Verified Complaint for Declaratory Judgment filed November 28, 2022 (Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB, U.S. District Court for the Southern District of New York);
2. Copy of HDDS Answer and Counterclaim filed January 13, 2023; and
3. Copy of Court Order Granting Stay dated March 7, 2023.
We look forward to receiving Meridian's definitive coverage position at the earliest opportunity and in no event later than April 10, 2023. Should you require any additional information or documentation to complete your coverage analysis, please do not hesitate to contact the undersigned directly at (212) 403-7246 or by electronic mail at panand@calderwoodharkness.com. We are prepared to make ourselves and our client available for a conference call at Meridian's convenience to discuss the foregoing matters.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand Partner
600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 403-7246 Facsimile: (212) 403-7001
Email: panand@calderwoodharkness.com
cc: (via electronic mail)
Marcus J. Whitmore, Chief Executive Officer, Whitmore Aerospace LLC Gregory Poole, General Counsel, Whitmore Aerospace LLC Douglas Carmichael, Partner, Calderwood & Harkness LLP
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