letter-meridian-tender-indemnity-claim.docx

1019-00005 · Whitmore Aerospace LLC · Insurance Coverage

letter-meridian-tender-indemnity-claim.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) 554-7000 Facsimile: (212) 554-7001 www.calderwoodharkness.com

September 22, 2022

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND VIA EMAIL

This letter constitutes formal notice of claim and tender of defense and indemnity under the policies identified herein.

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

Re: Tender of Claim — Whitmore Aerospace LLC Policy Nos.: MSI-DO-2022-07814 (Directors' & Officers' Liability) and MSI-CGL-2021-33291 (Commercial General Liability) Indemnification Demand by Hargrove-Dalton Defense Systems, Inc. — $14,726,583

Dear Ms. Underwood:

I. Introduction and Purpose of This Letter

This firm represents Whitmore Aerospace LLC ("WAL"), a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. WAL is a named insured under two policies of insurance issued by Meridian Surety & Insurance Group ("Meridian"), specifically: (1) Directors' and Officers' Liability Policy No. MSI-DO-2022-07814 (the "D&O Policy"), and (2) Commercial General Liability Policy No. MSI-CGL-2021-33291 (the "CGL Policy," and together with the D&O Policy, the "Policies").

The purpose of this letter is to provide Meridian with formal notice of a claim against WAL and to tender to Meridian a demand for defense and indemnity in connection with that claim. On September 9, 2022, Hargrove-Dalton Defense Systems, Inc. ("HDDS") served upon WAL a formal indemnification demand letter (the "HDDS Demand"), asserting that WAL is contractually obligated to indemnify HDDS in the amount of Fourteen Million Seven Hundred Twenty-Six Thousand Five Hundred Eighty-Three Dollars ($14,726,583). The HDDS Demand arises from a Contracting Officer's Preliminary Determination issued by the Defense Contract Management Agency ("DCMA") identifying cost overruns on a U.S. Air Force defense contract for which HDDS serves as prime contractor and WAL serves as a team member. A copy of the HDDS Demand is enclosed herewith as Enclosure 1.

By this letter, WAL hereby formally tenders the HDDS Demand to Meridian under both the D&O Policy and the CGL Policy. WAL requests that Meridian promptly acknowledge coverage, assume WAL's defense, and indemnify WAL against all liability arising from the HDDS Demand, to the full extent of the applicable policy limits. The factual and contractual bases for WAL's tender are set forth in detail below.

II. The Insured — Whitmore Aerospace LLC

WAL is a Virginia limited liability company organized and existing under the laws of the Commonwealth of Virginia. Its Employer Identification Number is 54-2198437. WAL was founded in 2006 by Marcus J. Whitmore and Elaine Whitmore, and has grown into a significant participant in the aerospace and defense manufacturing industry. WAL specializes in the design, engineering, and production of precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts for both military and commercial aerospace platforms. WAL's products are incorporated into critical defense systems and commercial aircraft operated worldwide.

For fiscal year 2022, WAL reported annual revenue of approximately $287 million and employs approximately 1,400 individuals across its manufacturing facilities and corporate offices. WAL holds an active facility security clearance at the SECRET level, issued by the Defense Counterintelligence and Security Agency, which is required for its performance of classified government contracts.

WAL's key personnel relevant to this matter include the following:

• Marcus J. Whitmore — Founder, Chief Executive Officer, and Managing Member

• Elaine Whitmore — Co-Founder and Chief Financial Officer

• Gregory Poole — General Counsel and Vice President of Legal Affairs

• Catherine Soo-Hyun Park — Vice President, Government Contracts & Compliance

Each of these individuals has been directly involved in WAL's performance under the contract at issue and may be exposed to personal liability in connection with the HDDS Demand, as discussed further in Section V below.

III. Applicable Insurance Policies

WAL maintains two insurance policies with Meridian that are potentially implicated by the HDDS Demand. The material terms of each policy are summarized below.

A. Directors' and Officers' Liability Policy

The D&O Policy provides coverage for claims made against WAL's directors, officers, managing members, and other insured persons for wrongful acts committed in their capacity as such, including coverage for defense costs and indemnity obligations. The HDDS Demand was first made on September 9, 2022, well within the current policy period. WAL is not aware of any prior notice of this claim having been given under any predecessor policy.

B. Commercial General Liability Policy

The CGL Policy provides general coverage for claims arising from WAL's business operations, including its aerospace manufacturing activities. The CGL Policy covers, among other things, claims for property damage, bodily injury, personal injury, and advertising injury arising from the insured's operations, products, and completed operations. The cost overruns identified in the HDDS Demand are directly attributable to WAL's core manufacturing operations performed under its teaming agreement with HDDS and thus fall squarely within the operational scope covered by the CGL Policy.

IV. Background Facts

A. The Prime Contract and the Teaming Agreement

HDDS is a Delaware corporation headquartered at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is a major prime defense contractor with approximately $3.4 billion in annual revenue. HDDS is the prime contractor under U.S. Air Force Prime Contract No. FA8620-19-C-0337 for the Advanced Tactical Airframe Program ("ATAP"), which is administered by the Air Force Life Cycle Management Center (AFLCMC) at Wright-Patterson Air Force Base, Ohio.

The ATAP prime contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following key financial terms:

• Target Cost: $412,000,000

• Target Fee: 8% of target cost ($32,960,000)

• Ceiling Price: $470,000,000

• Share Ratio: 70/30 (government/contractor) for cost overruns; 60/40 (government/contractor) for cost underruns

• Period of Performance: September 1, 2019 through August 31, 2024 (five base years), with two one-year option periods

On June 12, 2019, prior to the commencement of performance under the ATAP prime contract, WAL and HDDS entered into a Teaming Agreement (the "Teaming Agreement") pursuant to which WAL agreed to serve as a team member and to perform Work Package 4 ("WP-4"). WP-4 encompasses the fabrication and delivery of titanium structural assemblies, including wing-box substructure, center fuselage longerons, and bulkhead fittings — critical structural components of the ATAP airframe. WAL's allocated share of the prime contract's target cost is approximately 18%, or $74,160,000. Relevant excerpts of the Teaming Agreement are enclosed herewith as Enclosure 3.

The Teaming Agreement contains several provisions that are directly relevant to the HDDS Demand, including the indemnification provisions discussed in Section IV.C below, as well as a governing-law clause (Section 18.1) designating New York law and a forum-selection clause (Section 18.2) designating the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County, as the exclusive forum for any disputes arising under the Agreement.

B. The DCMA Cost-Overrun Determination

On August 1, 2022, the Defense Contract Management Agency ("DCMA"), acting through Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, of DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination (the "COPD") identifying aggregate cost overruns on the ATAP program in the amount of $14,726,583. A copy of the COPD is enclosed herewith as Enclosure 2.

The COPD attributes the identified cost overruns as follows:

• $12,817,441 (87.03%) is attributed to WP-4 (titanium structural assemblies), the work package performed by WAL.

• $1,909,142 (12.97%) is attributed to other work packages performed by HDDS or other team members.

With respect to the WP-4 overruns specifically, the COPD identifies the following root causes:

1. Titanium raw-material cost escalation — approximately $4,200,000, resulting from global supply-chain disruptions and commodity-price volatility affecting the cost of aerospace-grade titanium alloy;

2. Rework due to non-conforming machining tolerances — approximately $5,100,000, attributed to alleged deviations from engineering specifications in the machining of certain structural components, requiring rework and re-inspection;

3. Schedule delays causing idle-labor charges — approximately $2,300,000, resulting from production schedule disruptions that caused labor resources to remain idle during periods of delayed work; and

4. Engineering change proposal implementation costs — approximately $1,200,000, arising from the implementation of government-directed engineering changes during the performance period.

It is critically important to note that the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer or the Defense Contract Audit Agency ("DCAA"). The COPD expressly states that it is subject to further review, audit, and potential revision. No final determination of cost allowability, allocability, or reasonableness has been issued, and no formal demand for repayment has been made by the U.S. Government against HDDS or any other party.

C. The HDDS Indemnification Demand

Notwithstanding the preliminary nature of the COPD, HDDS transmitted to WAL, on September 9, 2022, a formal indemnification demand letter — the HDDS Demand — asserting that WAL is obligated under the Teaming Agreement to indemnify HDDS for the entire $14,726,583 identified in the COPD. The HDDS Demand is premised on Section 11.4 of the Teaming Agreement, which provides, in relevant part:

"Team Member shall defend, indemnify, and hold harmless Team Lead from and against any and all losses, liabilities, claims, damages, costs, and expenses (including reasonable attorneys' fees) arising out of or relating to: . . . (b) any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance, to the extent such claim is caused by Team Member's acts or omissions."

Section 11.5 of the Teaming Agreement provides a cap on the team member's aggregate liability:

"Notwithstanding anything to the contrary in this Agreement, Team Member's aggregate liability under this Article 11 shall not exceed one hundred twenty percent (120%) of the value of Team Member's Work Package."

Applying the 120% cap to WAL's allocated share of the target cost ($74,160,000), WAL's maximum aggregate liability under Section 11.5 is $88,992,000.

Additionally, Section 11.6 of the Teaming Agreement provides that, in any action to enforce the indemnification obligations of Article 11, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs of litigation.

D. WAL's Position on the HDDS Demand

WAL vigorously disputes the HDDS Demand on multiple independent grounds:

First, Section 11.4(b) of the Teaming Agreement expressly limits the indemnification obligation to costs that are "caused by Team Member's acts or omissions." WAL contends that the cost overruns identified in the COPD were not caused by WAL's acts or omissions, but rather were caused by circumstances beyond WAL's control and, in significant part, by HDDS's own conduct. Specifically:

(a) The titanium raw-material cost escalation of approximately $4,200,000 was the result of unprecedented global supply-chain disruptions and commodity-price volatility, constituting a force-majeure event that was neither foreseeable nor within WAL's control. WAL timely notified HDDS of the cost impacts in accordance with the notice provisions of the Teaming Agreement.

(b) The rework costs of approximately $5,100,000 were caused primarily by deficient engineering specifications furnished by HDDS to WAL. WAL performed its machining operations in conformity with the specifications as provided. When non-conformances were identified, investigation revealed that the root cause was dimensional and tolerance errors in the HDDS-furnished engineering data package, not errors in WAL's manufacturing processes.

(c) The idle-labor charges of approximately $2,300,000 were caused by HDDS's late delivery of government-furnished equipment ("GFE") that WAL required to perform certain manufacturing operations. WAL repeatedly notified HDDS of the GFE delivery delays and the resulting schedule impacts, but HDDS failed to take corrective action in a timely manner.

(d) The engineering change proposal implementation costs of approximately $1,200,000 arose from government-directed changes that were flowed down to WAL by HDDS without adequate equitable adjustment to WAL's work package value.

Second, the HDDS Demand improperly includes $1,909,142 in cost overruns attributed to work packages other than WP-4 — work packages for which WAL has no performance responsibility and no conceivable liability under any provision of the Teaming Agreement. HDDS's attempt to shift these non-WP-4 costs to WAL is unsupported by the plain language of the Teaming Agreement and is wholly without merit.

Third, the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer or DCAA. The indemnification trigger under Section 11.4(b) — "any claim by the U.S. Government that costs . . . are unallowable, unreasonable, or otherwise subject to disallowance" — has not been satisfied, because the COPD is not a final claim of disallowance but rather an interim identification of potential cost overruns subject to further review and potential revision. HDDS's demand is therefore premature.

WAL has initiated the dispute-resolution process set forth in the Teaming Agreement. On September 30, 2022, a senior executive negotiation session was conducted between Marcus J. Whitmore, CEO of WAL, and William Fong, Senior Vice President of Contracts & Procurement of HDDS. That session did not result in a resolution of the dispute. A second senior executive negotiation session has been scheduled for October 14, 2022. WAL is participating in these negotiations in good faith, but has determined that it is necessary and prudent to tender the HDDS Demand to Meridian at this time to preserve its rights under the Policies.

E. Potential Litigation

WAL anticipates that, if the dispute with HDDS is not resolved through the contractual dispute-resolution mechanisms prescribed by the Teaming Agreement, litigation is likely to ensue. In such event, WAL may seek declaratory relief in the appropriate forum to establish that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the amounts demanded. HDDS may be expected to assert counterclaims against WAL for the full $14,726,583, together with a claim for attorneys' fees under Section 11.6 of the Teaming Agreement.

Pursuant to the forum-selection clause in Section 18.2 of the Teaming Agreement, any such litigation would be venued in the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County. WAL's exposure in such litigation, inclusive of attorneys' fees and costs, could significantly exceed the amount of the HDDS Demand itself.

V. Basis for Coverage Under the D&O Policy

The HDDS Demand directly implicates potential liability of WAL's officers and managing members for decisions made in their capacities as directors and officers of WAL in connection with the performance of WP-4. The decisions at issue include, but are not limited to, the procurement strategy for titanium raw materials, the selection and oversight of manufacturing processes and quality-control protocols, the allocation of labor resources, and compliance with HDDS-furnished engineering specifications. Each of these decisions was made by, or under the direction of, WAL's officers and managing members, including Marcus J. Whitmore (CEO and Managing Member), Elaine Whitmore (CFO), and Gregory Poole (General Counsel and VP Legal Affairs).

The HDDS Demand constitutes a "Claim" as that term is defined under the D&O Policy. The Demand is a written demand for monetary relief directed against WAL, and its resolution will necessarily involve an evaluation of the conduct and decision-making of WAL's insured persons. To the extent HDDS pursues litigation, WAL's officers and managers may face personal exposure for their roles in directing WAL's performance of WP-4, particularly in light of the allegation that WAL's "acts or omissions" caused the identified cost overruns.

The D&O Policy provides coverage for defense costs and indemnity arising from claims made against insured persons for wrongful acts committed in their capacity as directors, officers, or managers of the insured entity. The aggregate limit of the D&O Policy is $10,000,000, subject to a per-claim retention of $250,000. WAL hereby tenders the HDDS Demand under the D&O Policy and requests that Meridian acknowledge coverage, assume the defense, and indemnify WAL and its insured persons to the full extent of the D&O Policy limits.

VI. Basis for Coverage Under the CGL Policy

The HDDS Demand arises directly from WAL's performance of aerospace manufacturing operations — the core business operations for which WAL obtained and maintains the CGL Policy. The cost overruns identified in the COPD relate to WAL's fabrication and delivery of titanium structural assemblies under WP-4, and include claims of alleged defective machining and manufacturing processes that necessitated rework (approximately $5,100,000 in rework costs), operational delays attributable to WAL's manufacturing schedule (approximately $2,300,000 in idle-labor charges), and other costs arising from WAL's manufacturing operations.

The HDDS Demand constitutes a claim for damages arising from WAL's operations that falls within the coverage afforded by the CGL Policy. The alleged non-conforming machining work, and the resulting rework and associated costs, may constitute "property damage" within the meaning of the CGL Policy — specifically, physical injury to or loss of use of tangible property caused by WAL's manufacturing operations. Additionally, to the extent the claim encompasses damages beyond traditional property damage, WAL requests that Meridian evaluate coverage under all potentially applicable insuring agreements within the CGL Policy, including but not limited to coverage for "personal injury," "advertising injury," and the policy's broader provisions for damages arising from the insured's operations, products, and completed operations.

The CGL Policy provides an aggregate limit of $25,000,000, subject to a self-insured retention of $500,000 per occurrence. WAL hereby tenders the HDDS Demand under the CGL Policy and requests that Meridian acknowledge coverage, assume the defense, and indemnify WAL to the full extent of the CGL Policy limits.

VII. Formal Tender and Request for Defense and Indemnity

By this letter, Whitmore Aerospace LLC hereby formally tenders the HDDS indemnification demand of Fourteen Million Seven Hundred Twenty-Six Thousand Five Hundred Eighty-Three Dollars ($14,726,583) to Meridian Surety & Insurance Group for defense and indemnification under both:

• Directors' and Officers' Liability Policy No. MSI-DO-2022-07814; and

• Commercial General Liability Policy No. MSI-CGL-2021-33291.

WAL respectfully requests that Meridian take the following actions promptly:

(a) Acknowledge receipt of this tender and confirm that this letter has been received and logged as a formal claim submission under both Policies;

(b) Promptly investigate the claim and the underlying facts and circumstances described herein, and issue a formal coverage determination with respect to each Policy within a reasonable time;

(c) Provide WAL with a complete defense, including payment of all defense costs, attorneys' fees, expert witness fees, and litigation expenses, in any litigation or arbitration arising from or related to the HDDS Demand;

(d) Indemnify WAL against any and all liability, up to the applicable policy limits, arising from or related to the HDDS Demand, including any judgment, settlement, award, or other resolution of the underlying claim; and

(e) Designate a claims handler and provide WAL and its counsel with contact information for the individual responsible for managing this claim on Meridian's behalf.

WAL reserves all rights under the Policies, including but not limited to the right to select counsel of its choosing, to the extent permitted by applicable law and the terms of the Policies. WAL further reserves the right to seek reimbursement from Meridian for all defense costs and expenses incurred by WAL in the event that Meridian fails to timely assume WAL's defense or otherwise fails to meet its obligations under the Policies.

VIII. Preservation of Rights

This letter is not intended to, and shall not be construed to, waive, limit, or modify any of WAL's rights or remedies under the Policies, at law, or in equity. WAL expressly reserves all such rights and remedies, including, without limitation:

(a) The right to challenge any denial, reservation, or limitation of coverage asserted by Meridian;

(b) The right to seek a judicial determination of coverage in any appropriate forum;

(c) The right to recover consequential and extra-contractual damages in the event of Meridian's bad-faith denial of coverage or unreasonable delay in claims handling;

(d) The right to assert any claim or defense that may become available to WAL as additional facts are developed; and

(e) The right to amend or supplement this tender as additional information becomes available.

WAL requests that Meridian promptly notify WAL and its counsel of any coverage defenses, reservations of rights, or limitations that Meridian intends to assert with respect to either Policy. In the event Meridian determines that any portion of the HDDS Demand is not covered, WAL requests a detailed written explanation of the specific policy provisions upon which Meridian relies, together with the factual and legal basis for any such determination.

WAL expects Meridian to comply fully with its obligations under applicable law — including, without limitation, the laws of the State of New Jersey (as applicable to Meridian's domicile and regulatory obligations as an insurer) and the laws of the State of New York (as applicable to the underlying dispute and the Teaming Agreement) — regarding timely claims handling, good-faith investigation, and fair dealing with its insureds. WAL further expects that Meridian will not engage in any conduct that would constitute an unfair claims settlement practice under N.J. Stat. Ann. § 17:29B-4 or N.Y. Ins. Law § 2601, or that would otherwise violate Meridian's duties of good faith and fair dealing.

IX. Enclosed Documents

The following documents are enclosed with this letter for Meridian's review in connection with its coverage investigation:

Enclosure 1: Copy of the HDDS Indemnification Demand Letter dated September 9, 2022.

Enclosure 2: Copy of the DCMA Contracting Officer's Preliminary Determination (COPD) dated August 1, 2022.

Enclosure 3: Copy of the Teaming Agreement between WAL and HDDS dated June 12, 2019 (relevant excerpts, including Sections 11.4, 11.5, 11.6, 18.1, 18.2, and 18.3).

WAL will promptly provide Meridian with any additional documents, information, or materials that Meridian may reasonably request in connection with its investigation and evaluation of coverage under the Policies. WAL requests that any such requests for additional information be directed to the undersigned counsel.

X. Contact Information and Response Requested

All correspondence, notices, and communications regarding this claim should be directed to:

Priya Anand, Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 554-7218

Email: panand@calderwoodharkness.com

with a copy to:

Gregory Poole, General Counsel Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151 Telephone: (703) 448-3600

Email: gpoole@whitmoreaero.com

WAL requests that Meridian acknowledge receipt of this letter and the enclosed documents within five (5) business days of the date hereof. WAL further requests that Meridian provide a substantive written coverage response — including either an acceptance of coverage, a reservation of rights, or a denial of coverage, with a detailed explanation of the basis for any such determination — within thirty (30) calendar days of the date of this letter, i.e., no later than October 22, 2022.

Given the significance of the claim — $14,726,583 — and the distinct possibility that HDDS will initiate litigation against WAL in the near term if the contractual dispute-resolution process does not yield a resolution, WAL urges Meridian to treat this matter with the highest priority and to expedite its review accordingly. Any delay in Meridian's response or assumption of WAL's defense could result in material prejudice to WAL's interests and to Meridian's own obligations under the Policies.

Thank you for your prompt attention to this matter. We look forward to receiving Meridian's acknowledgment and substantive response within the time frames set forth above. Should you have any questions or require any additional information, please do not hesitate to contact me directly.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand Partner

Telephone: (212) 554-7218

Email: panand@calderwoodharkness.com

Enclosures (3):

1. HDDS Indemnification Demand Letter dated September 9, 2022

2. DCMA Contracting Officer's Preliminary Determination (COPD) dated August 1, 2022

3. Teaming Agreement dated June 12, 2019 (relevant excerpts: Sections 11.4, 11.5, 11.6, 18.1, 18.2, and 18.3)

cc: Gregory Poole, General Counsel, Whitmore Aerospace LLC cc: Douglas Carmichael, Partner, Calderwood & Harkness LLP

Term	Detail
Carrier	Meridian Surety & Insurance Group
Policy Number	MSI-DO-2022-07814
Aggregate Limit of Liability	$10,000,000
Retention (per Claim)	$250,000
Policy Period	July 1, 2022 – July 1, 2023
Term	Detail
Carrier	Meridian Surety & Insurance Group
Policy Number	MSI-CGL-2021-33291
Aggregate Limit of Liability	$25,000,000
Self-Insured Retention (per Occurrence)	$500,000
Policy Period	Current; continuous coverage

CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 554-7000 Facsimile: (212) 554-7001 www.calderwoodharkness.com
September 22, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND VIA EMAIL
This letter constitutes formal notice of claim and tender of defense and indemnity under the policies identified herein.
Rachel Underwood, Esq. Senior Claims Counsel Meridian Surety & Insurance Group 500 Plaza Drive Secaucus, New Jersey 07094
Re: Tender of Claim — Whitmore Aerospace LLC Policy Nos.: MSI-DO-2022-07814 (Directors' & Officers' Liability) and MSI-CGL-2021-33291 (Commercial General Liability) Indemnification Demand by Hargrove-Dalton Defense Systems, Inc. — $14,726,583
Dear Ms. Underwood:
I. Introduction and Purpose of This Letter
This firm represents Whitmore Aerospace LLC ("WAL"), a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. WAL is a named insured under two policies of insurance issued by Meridian Surety & Insurance Group ("Meridian"), specifically: (1) Directors' and Officers' Liability Policy No. MSI-DO-2022-07814 (the "D&O Policy"), and (2) Commercial General Liability Policy No. MSI-CGL-2021-33291 (the "CGL Policy," and together with the D&O Policy, the "Policies").
The purpose of this letter is to provide Meridian with formal notice of a claim against WAL and to tender to Meridian a demand for defense and indemnity in connection with that claim. On September 9, 2022, Hargrove-Dalton Defense Systems, Inc. ("HDDS") served upon WAL a formal indemnification demand letter (the "HDDS Demand"), asserting that WAL is contractually obligated to indemnify HDDS in the amount of Fourteen Million Seven Hundred Twenty-Six Thousand Five Hundred Eighty-Three Dollars ($14,726,583). The HDDS Demand arises from a Contracting Officer's Preliminary Determination issued by the Defense Contract Management Agency ("DCMA") identifying cost overruns on a U.S. Air Force defense contract for which HDDS serves as prime contractor and WAL serves as a team member. A copy of the HDDS Demand is enclosed herewith as Enclosure 1.
By this letter, WAL hereby formally tenders the HDDS Demand to Meridian under both the D&O Policy and the CGL Policy. WAL requests that Meridian promptly acknowledge coverage, assume WAL's defense, and indemnify WAL against all liability arising from the HDDS Demand, to the full extent of the applicable policy limits. The factual and contractual bases for WAL's tender are set forth in detail below.
II. The Insured — Whitmore Aerospace LLC
WAL is a Virginia limited liability company organized and existing under the laws of the Commonwealth of Virginia. Its Employer Identification Number is 54-2198437. WAL was founded in 2006 by Marcus J. Whitmore and Elaine Whitmore, and has grown into a significant participant in the aerospace and defense manufacturing industry. WAL specializes in the design, engineering, and production of precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts for both military and commercial aerospace platforms. WAL's products are incorporated into critical defense systems and commercial aircraft operated worldwide.
For fiscal year 2022, WAL reported annual revenue of approximately $287 million and employs approximately 1,400 individuals across its manufacturing facilities and corporate offices. WAL holds an active facility security clearance at the SECRET level, issued by the Defense Counterintelligence and Security Agency, which is required for its performance of classified government contracts.
WAL's key personnel relevant to this matter include the following:
• Marcus J. Whitmore — Founder, Chief Executive Officer, and Managing Member
• Elaine Whitmore — Co-Founder and Chief Financial Officer
• Gregory Poole — General Counsel and Vice President of Legal Affairs
• Catherine Soo-Hyun Park — Vice President, Government Contracts & Compliance
Each of these individuals has been directly involved in WAL's performance under the contract at issue and may be exposed to personal liability in connection with the HDDS Demand, as discussed further in Section V below.
III. Applicable Insurance Policies
WAL maintains two insurance policies with Meridian that are potentially implicated by the HDDS Demand. The material terms of each policy are summarized below.
A. Directors' and Officers' Liability Policy
The D&O Policy provides coverage for claims made against WAL's directors, officers, managing members, and other insured persons for wrongful acts committed in their capacity as such, including coverage for defense costs and indemnity obligations. The HDDS Demand was first made on September 9, 2022, well within the current policy period. WAL is not aware of any prior notice of this claim having been given under any predecessor policy.
B. Commercial General Liability Policy
The CGL Policy provides general coverage for claims arising from WAL's business operations, including its aerospace manufacturing activities. The CGL Policy covers, among other things, claims for property damage, bodily injury, personal injury, and advertising injury arising from the insured's operations, products, and completed operations. The cost overruns identified in the HDDS Demand are directly attributable to WAL's core manufacturing operations performed under its teaming agreement with HDDS and thus fall squarely within the operational scope covered by the CGL Policy.
IV. Background Facts
A. The Prime Contract and the Teaming Agreement
HDDS is a Delaware corporation headquartered at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is a major prime defense contractor with approximately $3.4 billion in annual revenue. HDDS is the prime contractor under U.S. Air Force Prime Contract No. FA8620-19-C-0337 for the Advanced Tactical Airframe Program ("ATAP"), which is administered by the Air Force Life Cycle Management Center (AFLCMC) at Wright-Patterson Air Force Base, Ohio.
The ATAP prime contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following key financial terms:
• Target Cost: $412,000,000
• Target Fee: 8% of target cost ($32,960,000)
• Ceiling Price: $470,000,000
• Share Ratio: 70/30 (government/contractor) for cost overruns; 60/40 (government/contractor) for cost underruns
• Period of Performance: September 1, 2019 through August 31, 2024 (five base years), with two one-year option periods
On June 12, 2019, prior to the commencement of performance under the ATAP prime contract, WAL and HDDS entered into a Teaming Agreement (the "Teaming Agreement") pursuant to which WAL agreed to serve as a team member and to perform Work Package 4 ("WP-4"). WP-4 encompasses the fabrication and delivery of titanium structural assemblies, including wing-box substructure, center fuselage longerons, and bulkhead fittings — critical structural components of the ATAP airframe. WAL's allocated share of the prime contract's target cost is approximately 18%, or $74,160,000. Relevant excerpts of the Teaming Agreement are enclosed herewith as Enclosure 3.
The Teaming Agreement contains several provisions that are directly relevant to the HDDS Demand, including the indemnification provisions discussed in Section IV.C below, as well as a governing-law clause (Section 18.1) designating New York law and a forum-selection clause (Section 18.2) designating the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County, as the exclusive forum for any disputes arising under the Agreement.
B. The DCMA Cost-Overrun Determination
On August 1, 2022, the Defense Contract Management Agency ("DCMA"), acting through Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, of DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination (the "COPD") identifying aggregate cost overruns on the ATAP program in the amount of $14,726,583. A copy of the COPD is enclosed herewith as Enclosure 2.
The COPD attributes the identified cost overruns as follows:
• $12,817,441 (87.03%) is attributed to WP-4 (titanium structural assemblies), the work package performed by WAL.
• $1,909,142 (12.97%) is attributed to other work packages performed by HDDS or other team members.
With respect to the WP-4 overruns specifically, the COPD identifies the following root causes:
1. Titanium raw-material cost escalation — approximately $4,200,000, resulting from global supply-chain disruptions and commodity-price volatility affecting the cost of aerospace-grade titanium alloy;
2. Rework due to non-conforming machining tolerances — approximately $5,100,000, attributed to alleged deviations from engineering specifications in the machining of certain structural components, requiring rework and re-inspection;
3. Schedule delays causing idle-labor charges — approximately $2,300,000, resulting from production schedule disruptions that caused labor resources to remain idle during periods of delayed work; and
4. Engineering change proposal implementation costs — approximately $1,200,000, arising from the implementation of government-directed engineering changes during the performance period.
It is critically important to note that the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer or the Defense Contract Audit Agency ("DCAA"). The COPD expressly states that it is subject to further review, audit, and potential revision. No final determination of cost allowability, allocability, or reasonableness has been issued, and no formal demand for repayment has been made by the U.S. Government against HDDS or any other party.
C. The HDDS Indemnification Demand
Notwithstanding the preliminary nature of the COPD, HDDS transmitted to WAL, on September 9, 2022, a formal indemnification demand letter — the HDDS Demand — asserting that WAL is obligated under the Teaming Agreement to indemnify HDDS for the entire $14,726,583 identified in the COPD. The HDDS Demand is premised on Section 11.4 of the Teaming Agreement, which provides, in relevant part:
"Team Member shall defend, indemnify, and hold harmless Team Lead from and against any and all losses, liabilities, claims, damages, costs, and expenses (including reasonable attorneys' fees) arising out of or relating to: . . . (b) any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance, to the extent such claim is caused by Team Member's acts or omissions."
Section 11.5 of the Teaming Agreement provides a cap on the team member's aggregate liability:
"Notwithstanding anything to the contrary in this Agreement, Team Member's aggregate liability under this Article 11 shall not exceed one hundred twenty percent (120%) of the value of Team Member's Work Package."
Applying the 120% cap to WAL's allocated share of the target cost ($74,160,000), WAL's maximum aggregate liability under Section 11.5 is $88,992,000.
Additionally, Section 11.6 of the Teaming Agreement provides that, in any action to enforce the indemnification obligations of Article 11, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs of litigation.
D. WAL's Position on the HDDS Demand
WAL vigorously disputes the HDDS Demand on multiple independent grounds:
First, Section 11.4(b) of the Teaming Agreement expressly limits the indemnification obligation to costs that are "caused by Team Member's acts or omissions." WAL contends that the cost overruns identified in the COPD were not caused by WAL's acts or omissions, but rather were caused by circumstances beyond WAL's control and, in significant part, by HDDS's own conduct. Specifically:
(a) The titanium raw-material cost escalation of approximately $4,200,000 was the result of unprecedented global supply-chain disruptions and commodity-price volatility, constituting a force-majeure event that was neither foreseeable nor within WAL's control. WAL timely notified HDDS of the cost impacts in accordance with the notice provisions of the Teaming Agreement.
(b) The rework costs of approximately $5,100,000 were caused primarily by deficient engineering specifications furnished by HDDS to WAL. WAL performed its machining operations in conformity with the specifications as provided. When non-conformances were identified, investigation revealed that the root cause was dimensional and tolerance errors in the HDDS-furnished engineering data package, not errors in WAL's manufacturing processes.
(c) The idle-labor charges of approximately $2,300,000 were caused by HDDS's late delivery of government-furnished equipment ("GFE") that WAL required to perform certain manufacturing operations. WAL repeatedly notified HDDS of the GFE delivery delays and the resulting schedule impacts, but HDDS failed to take corrective action in a timely manner.
(d) The engineering change proposal implementation costs of approximately $1,200,000 arose from government-directed changes that were flowed down to WAL by HDDS without adequate equitable adjustment to WAL's work package value.
Second, the HDDS Demand improperly includes $1,909,142 in cost overruns attributed to work packages other than WP-4 — work packages for which WAL has no performance responsibility and no conceivable liability under any provision of the Teaming Agreement. HDDS's attempt to shift these non-WP-4 costs to WAL is unsupported by the plain language of the Teaming Agreement and is wholly without merit.
Third, the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer or DCAA. The indemnification trigger under Section 11.4(b) — "any claim by the U.S. Government that costs . . . are unallowable, unreasonable, or otherwise subject to disallowance" — has not been satisfied, because the COPD is not a final claim of disallowance but rather an interim identification of potential cost overruns subject to further review and potential revision. HDDS's demand is therefore premature.
WAL has initiated the dispute-resolution process set forth in the Teaming Agreement. On September 30, 2022, a senior executive negotiation session was conducted between Marcus J. Whitmore, CEO of WAL, and William Fong, Senior Vice President of Contracts & Procurement of HDDS. That session did not result in a resolution of the dispute. A second senior executive negotiation session has been scheduled for October 14, 2022. WAL is participating in these negotiations in good faith, but has determined that it is necessary and prudent to tender the HDDS Demand to Meridian at this time to preserve its rights under the Policies.
E. Potential Litigation
WAL anticipates that, if the dispute with HDDS is not resolved through the contractual dispute-resolution mechanisms prescribed by the Teaming Agreement, litigation is likely to ensue. In such event, WAL may seek declaratory relief in the appropriate forum to establish that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the amounts demanded. HDDS may be expected to assert counterclaims against WAL for the full $14,726,583, together with a claim for attorneys' fees under Section 11.6 of the Teaming Agreement.
Pursuant to the forum-selection clause in Section 18.2 of the Teaming Agreement, any such litigation would be venued in the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County. WAL's exposure in such litigation, inclusive of attorneys' fees and costs, could significantly exceed the amount of the HDDS Demand itself.
V. Basis for Coverage Under the D&O Policy
The HDDS Demand directly implicates potential liability of WAL's officers and managing members for decisions made in their capacities as directors and officers of WAL in connection with the performance of WP-4. The decisions at issue include, but are not limited to, the procurement strategy for titanium raw materials, the selection and oversight of manufacturing processes and quality-control protocols, the allocation of labor resources, and compliance with HDDS-furnished engineering specifications. Each of these decisions was made by, or under the direction of, WAL's officers and managing members, including Marcus J. Whitmore (CEO and Managing Member), Elaine Whitmore (CFO), and Gregory Poole (General Counsel and VP Legal Affairs).
The HDDS Demand constitutes a "Claim" as that term is defined under the D&O Policy. The Demand is a written demand for monetary relief directed against WAL, and its resolution will necessarily involve an evaluation of the conduct and decision-making of WAL's insured persons. To the extent HDDS pursues litigation, WAL's officers and managers may face personal exposure for their roles in directing WAL's performance of WP-4, particularly in light of the allegation that WAL's "acts or omissions" caused the identified cost overruns.
The D&O Policy provides coverage for defense costs and indemnity arising from claims made against insured persons for wrongful acts committed in their capacity as directors, officers, or managers of the insured entity. The aggregate limit of the D&O Policy is $10,000,000, subject to a per-claim retention of $250,000. WAL hereby tenders the HDDS Demand under the D&O Policy and requests that Meridian acknowledge coverage, assume the defense, and indemnify WAL and its insured persons to the full extent of the D&O Policy limits.
VI. Basis for Coverage Under the CGL Policy
The HDDS Demand arises directly from WAL's performance of aerospace manufacturing operations — the core business operations for which WAL obtained and maintains the CGL Policy. The cost overruns identified in the COPD relate to WAL's fabrication and delivery of titanium structural assemblies under WP-4, and include claims of alleged defective machining and manufacturing processes that necessitated rework (approximately $5,100,000 in rework costs), operational delays attributable to WAL's manufacturing schedule (approximately $2,300,000 in idle-labor charges), and other costs arising from WAL's manufacturing operations.
The HDDS Demand constitutes a claim for damages arising from WAL's operations that falls within the coverage afforded by the CGL Policy. The alleged non-conforming machining work, and the resulting rework and associated costs, may constitute "property damage" within the meaning of the CGL Policy — specifically, physical injury to or loss of use of tangible property caused by WAL's manufacturing operations. Additionally, to the extent the claim encompasses damages beyond traditional property damage, WAL requests that Meridian evaluate coverage under all potentially applicable insuring agreements within the CGL Policy, including but not limited to coverage for "personal injury," "advertising injury," and the policy's broader provisions for damages arising from the insured's operations, products, and completed operations.
The CGL Policy provides an aggregate limit of $25,000,000, subject to a self-insured retention of $500,000 per occurrence. WAL hereby tenders the HDDS Demand under the CGL Policy and requests that Meridian acknowledge coverage, assume the defense, and indemnify WAL to the full extent of the CGL Policy limits.
VII. Formal Tender and Request for Defense and Indemnity
By this letter, Whitmore Aerospace LLC hereby formally tenders the HDDS indemnification demand of Fourteen Million Seven Hundred Twenty-Six Thousand Five Hundred Eighty-Three Dollars ($14,726,583) to Meridian Surety & Insurance Group for defense and indemnification under both:
• Directors' and Officers' Liability Policy No. MSI-DO-2022-07814; and
• Commercial General Liability Policy No. MSI-CGL-2021-33291.
WAL respectfully requests that Meridian take the following actions promptly:
(a) Acknowledge receipt of this tender and confirm that this letter has been received and logged as a formal claim submission under both Policies;
(b) Promptly investigate the claim and the underlying facts and circumstances described herein, and issue a formal coverage determination with respect to each Policy within a reasonable time;
(c) Provide WAL with a complete defense, including payment of all defense costs, attorneys' fees, expert witness fees, and litigation expenses, in any litigation or arbitration arising from or related to the HDDS Demand;
(d) Indemnify WAL against any and all liability, up to the applicable policy limits, arising from or related to the HDDS Demand, including any judgment, settlement, award, or other resolution of the underlying claim; and
(e) Designate a claims handler and provide WAL and its counsel with contact information for the individual responsible for managing this claim on Meridian's behalf.
WAL reserves all rights under the Policies, including but not limited to the right to select counsel of its choosing, to the extent permitted by applicable law and the terms of the Policies. WAL further reserves the right to seek reimbursement from Meridian for all defense costs and expenses incurred by WAL in the event that Meridian fails to timely assume WAL's defense or otherwise fails to meet its obligations under the Policies.
VIII. Preservation of Rights
This letter is not intended to, and shall not be construed to, waive, limit, or modify any of WAL's rights or remedies under the Policies, at law, or in equity. WAL expressly reserves all such rights and remedies, including, without limitation:
(a) The right to challenge any denial, reservation, or limitation of coverage asserted by Meridian;
(b) The right to seek a judicial determination of coverage in any appropriate forum;
(c) The right to recover consequential and extra-contractual damages in the event of Meridian's bad-faith denial of coverage or unreasonable delay in claims handling;
(d) The right to assert any claim or defense that may become available to WAL as additional facts are developed; and
(e) The right to amend or supplement this tender as additional information becomes available.
WAL requests that Meridian promptly notify WAL and its counsel of any coverage defenses, reservations of rights, or limitations that Meridian intends to assert with respect to either Policy. In the event Meridian determines that any portion of the HDDS Demand is not covered, WAL requests a detailed written explanation of the specific policy provisions upon which Meridian relies, together with the factual and legal basis for any such determination.
WAL expects Meridian to comply fully with its obligations under applicable law — including, without limitation, the laws of the State of New Jersey (as applicable to Meridian's domicile and regulatory obligations as an insurer) and the laws of the State of New York (as applicable to the underlying dispute and the Teaming Agreement) — regarding timely claims handling, good-faith investigation, and fair dealing with its insureds. WAL further expects that Meridian will not engage in any conduct that would constitute an unfair claims settlement practice under N.J. Stat. Ann. § 17:29B-4 or N.Y. Ins. Law § 2601, or that would otherwise violate Meridian's duties of good faith and fair dealing.
IX. Enclosed Documents
The following documents are enclosed with this letter for Meridian's review in connection with its coverage investigation:
Enclosure 1: Copy of the HDDS Indemnification Demand Letter dated September 9, 2022.
Enclosure 2: Copy of the DCMA Contracting Officer's Preliminary Determination (COPD) dated August 1, 2022.
Enclosure 3: Copy of the Teaming Agreement between WAL and HDDS dated June 12, 2019 (relevant excerpts, including Sections 11.4, 11.5, 11.6, 18.1, 18.2, and 18.3).
WAL will promptly provide Meridian with any additional documents, information, or materials that Meridian may reasonably request in connection with its investigation and evaluation of coverage under the Policies. WAL requests that any such requests for additional information be directed to the undersigned counsel.
X. Contact Information and Response Requested
All correspondence, notices, and communications regarding this claim should be directed to:
Priya Anand, Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 554-7218
Email: panand@calderwoodharkness.com
with a copy to:
Gregory Poole, General Counsel Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151 Telephone: (703) 448-3600
Email: gpoole@whitmoreaero.com
WAL requests that Meridian acknowledge receipt of this letter and the enclosed documents within five (5) business days of the date hereof. WAL further requests that Meridian provide a substantive written coverage response — including either an acceptance of coverage, a reservation of rights, or a denial of coverage, with a detailed explanation of the basis for any such determination — within thirty (30) calendar days of the date of this letter, i.e., no later than October 22, 2022.
Given the significance of the claim — $14,726,583 — and the distinct possibility that HDDS will initiate litigation against WAL in the near term if the contractual dispute-resolution process does not yield a resolution, WAL urges Meridian to treat this matter with the highest priority and to expedite its review accordingly. Any delay in Meridian's response or assumption of WAL's defense could result in material prejudice to WAL's interests and to Meridian's own obligations under the Policies.
Thank you for your prompt attention to this matter. We look forward to receiving Meridian's acknowledgment and substantive response within the time frames set forth above. Should you have any questions or require any additional information, please do not hesitate to contact me directly.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand Partner
Telephone: (212) 554-7218
Email: panand@calderwoodharkness.com
Enclosures (3):
1. HDDS Indemnification Demand Letter dated September 9, 2022
2. DCMA Contracting Officer's Preliminary Determination (COPD) dated August 1, 2022
3. Teaming Agreement dated June 12, 2019 (relevant excerpts: Sections 11.4, 11.5, 11.6, 18.1, 18.2, and 18.3)
cc: Gregory Poole, General Counsel, Whitmore Aerospace LLC cc: Douglas Carmichael, Partner, Calderwood & Harkness LLP
Term | Detail
Carrier | Meridian Surety & Insurance Group
Policy Number | MSI-DO-2022-07814
Aggregate Limit of Liability | $10,000,000
Retention (per Claim) | $250,000
Policy Period | July 1, 2022 – July 1, 2023
Term | Detail
Carrier | Meridian Surety & Insurance Group
Policy Number | MSI-CGL-2021-33291
Aggregate Limit of Liability | $25,000,000
Self-Insured Retention (per Occurrence) | $500,000
Policy Period | Current; continuous coverage

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