1022-00001 · Northgate Networks America Inc · Insurance Coverage

reservation-of-rights-analysis-memo.docx DOCUMENT Antitrust

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

TO: Catherine Ng, U.S. Deputy General Counsel, Northgate Networks America Inc. James Whitford, Group General Counsel, Northgate Telecommunications PLC

FROM: Elaine Forsythe, Responsible Partner, Calderwood & Harkness LLP Howard Bellamy, Billing Partner, Calderwood & Harkness LLP

CC: Aaron Liu, Lead Associate, Calderwood & Harkness LLP Monica Reyes, Working Associate, Calderwood & Harkness LLP

DATE: November 18, 2022

RE: Analysis of Clarendon Mutual Insurance Ltd. Reservation of Rights Letter Dated November 3, 2022 — Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW (E.D. Va.)

ENGAGEMENT REF. NO.: C&H-2022-ATR-00419

I. Executive Summary

The purpose of this memorandum is to analyze the reservation of rights ("ROR") letter issued by Clarendon Mutual Insurance Ltd. ("Clarendon" or the "Insurer") dated November 3, 2022, in response to the tender by Northgate Networks America Inc. ("Northgate America") and Northgate Telecommunications PLC ("Northgate PLC," and together with Northgate America, "Northgate") of the litigation captioned Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW (E.D. Va.) (the "Ridgepoint Litigation" or the "Underlying Action") under the Directors & Officers / Entity Liability Policy, Policy No. CLM-DO-2022-007841 (the "Policy" or the "D&O Policy").

The tender letter was sent by Calderwood & Harkness LLP ("C&H") on October 12, 2022, in coordination with Northgate's insurance coverage counsel, Whitmore & Crane LLP, 380 Madison Avenue, 22nd Floor, New York, NY 10017 ("Whitmore & Crane" or "Coverage Counsel"). The tender requested defense and indemnity coverage under the Policy for the Ridgepoint Litigation, which arises out of a single-count complaint alleging monopolization in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.

Clarendon acknowledged receipt of the claim and agreed to participate in the defense, subject to a reservation of rights. The principal reservation concerns the potential applicability of Exclusion 4(j) of the Policy — the antitrust exclusion — which purports to exclude from coverage any "Loss arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, including but not limited to the Sherman Act, the Clayton Act, or any analogous state or foreign statute."

Our overall assessment is as follows: Northgate has strong arguments that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation, particularly if the exclusion contains a "final adjudication" or "in fact" qualifier — a feature common in modern D&O policies — that would preclude invocation of the exclusion absent a judicial determination that the insured actually violated the referenced antitrust statutes. However, the reservation creates meaningful uncertainty that must be managed proactively, and there is a non-trivial risk that Clarendon may later deny indemnity on this basis, particularly if the underlying antitrust claim survives dispositive motions.

We recommend that Northgate coordinate closely with Whitmore & Crane LLP on a formal response to the reservation of rights letter and on the development of a potential coverage dispute strategy. In addition, Northgate should consider early engagement with the excess carriers in the D&O tower — Avalon Specialty Underwriters Inc. ("Avalon") and Pinnacle Re Ltd. ("Pinnacle Re") — to ensure that their respective notice obligations are satisfied and that those carriers' coverage positions are obtained as promptly as practicable.

The balance of this memorandum provides a detailed analysis of Clarendon's reservation, the relevant policy language, the applicable legal standards, and our specific recommendations.

II. Background

A. The Underlying Litigation

On September 19, 2022, Ridgepoint Communications Inc. ("Ridgepoint") filed a civil complaint in the United States District Court for the Eastern District of Virginia, Alexandria Division, initiating the action captioned Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW. The case has been assigned to the Honorable Claudia M. Wentworth, United States District Judge.

The complaint asserts a single cause of action under Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2, alleging monopolization. Specifically, Ridgepoint alleges that Northgate's refusal to provide interconnection and physical colocation access at fourteen (14) specific central-office and meet-me-room facilities located in the Philadelphia–Baltimore–Washington, D.C. corridor constitutes unlawful monopolization of what Ridgepoint defines as the "last-mile enterprise fiber-optic transport services market." Ridgepoint contends that Northgate possesses monopoly power in this purported relevant market and that its refusal to deal with Ridgepoint on reasonable commercial terms constitutes exclusionary conduct in violation of Section 2.

Ridgepoint seeks substantial monetary and equitable relief. On the damages side, Ridgepoint claims $127 million in lost profits over a five-year projected period (2022–2027), trebled to $381 million pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, which provides for the recovery of treble damages by any person injured in his business or property by reason of an antitrust violation. Ridgepoint also seeks permanent injunctive relief compelling Northgate to provide interconnection and physical colocation access at all fourteen identified facilities on terms that Ridgepoint characterizes as "commercially reasonable and non-discriminatory."

Calderwood & Harkness LLP entered its appearance on October 3, 2022, on behalf of both Northgate Telecommunications PLC and Northgate Networks America Inc. as defendants in the Underlying Action. On November 14, 2022, C&H filed a Motion to Dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing, among other things, that Ridgepoint has failed to plausibly allege a relevant antitrust market, that Northgate's refusal to deal does not constitute actionable exclusionary conduct under the framework established by Harborview Holdings Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), and that Ridgepoint's damages theory is speculative and insufficiently pled. As of the date of this memorandum, the Motion to Dismiss remains pending before Judge Wentworth and has not yet been fully briefed.

B. The Insurance Program

Northgate maintains a Directors & Officers / Entity Liability insurance program (the "D&O Program") structured as a multi-layered tower with a combined limit of $150 million. The primary layer is underwritten by Clarendon Mutual Insurance Ltd., a Bermuda exempted company, under Policy No. CLM-DO-2022-007841. The D&O Program is structured as follows:

The primary layer, underwritten by Clarendon Mutual, provides a $50 million per-occurrence limit of liability. Coverage under the primary layer is subject to Northgate's satisfaction of a $10 million self-insured retention ("SIR"). The Clarendon Policy is a claims-made and reported policy with a policy period of January 1, 2022, through December 31, 2022. The excess D&O tower provides an additional $100 million in aggregate excess coverage across two layers, bringing the total D&O tower to $150 million in combined limits (inclusive of the $50 million primary layer). The $10 million SIR must be fully exhausted before Clarendon's indemnity obligation attaches.

It is important to note that the total available coverage under the D&O tower — $150 million, inclusive of the SIR — is less than the $381 million in trebled damages that Ridgepoint seeks. This coverage gap has significant implications for Northgate's exposure, which are addressed in greater detail in Sections V and VII below.

C. The Tender and Clarendon's Response

On October 12, 2022, Calderwood & Harkness LLP, in coordination with Whitmore & Crane LLP (Northgate's dedicated insurance coverage counsel), sent a formal insurance tender letter to Clarendon Mutual Insurance Ltd. requesting defense and indemnity coverage under the D&O / Entity Liability Policy for the Ridgepoint Litigation. The tender letter identified the Underlying Action, enclosed copies of the filed complaint and summons, and requested that Clarendon acknowledge coverage, agree to fund Northgate's defense (subject to the SIR), and confirm its obligation to indemnify Northgate against any covered loss arising out of the Ridgepoint Litigation.

Clarendon responded by issuing its reservation of rights letter on November 3, 2022, approximately three weeks after receipt of the tender. In that letter, Clarendon acknowledged receipt of the claim and agreed to participate in the defense of the Ridgepoint Litigation, subject to the terms and conditions of the Policy and a reservation of rights. The substance of Clarendon's reservation concerns the potential applicability of Exclusion 4(j) — the antitrust exclusion — to the claims asserted by Ridgepoint. Clarendon's letter is analyzed in detail in Section III below.

III. Analysis of the Reservation of Rights Letter

A. Summary of Clarendon's Position

Clarendon's November 3, 2022 reservation of rights letter addresses several key aspects of the coverage analysis:

First, Clarendon acknowledges that the Ridgepoint Litigation falls within the general scope of the D&O / Entity Liability Policy's insuring agreement. Specifically, Clarendon does not dispute that the Underlying Action constitutes a "Claim" as defined by the Policy, that the Claim was first made against an "Insured Entity" during the Policy period, and that the Claim was timely reported to Clarendon. Clarendon further acknowledges that both Northgate Networks America Inc. and Northgate Telecommunications PLC are named insureds under the Policy.

Second, Clarendon does not dispute that the Underlying Action constitutes a covered "Securities and Entity Claim" within the meaning of the Policy's entity liability coverage section. This is a significant concession, as it confirms that the general insuring agreement is triggered and that any denial of coverage must rest on the application of a specific exclusion rather than on a failure to satisfy the basic coverage grant.

Third, and most critically, Clarendon expressly reserves its right to invoke Exclusion 4(j) of the Policy to deny or limit coverage. Exclusion 4(j) — the antitrust exclusion — excludes coverage for:

"Loss arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, including but not limited to the Sherman Act, the Clayton Act, or any analogous state or foreign statute."

Clarendon's letter specifically notes that the Ridgepoint complaint alleges a violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, and seeks treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15 — both statutes expressly and specifically referenced in the text of Exclusion 4(j). Clarendon observes that the complaint on its face appears to fall squarely within the scope of the exclusion.

Fourth, Clarendon states that it will "continue to monitor the proceedings" and that it "reserves the right to withdraw from defense participation or deny indemnity at a later date if it determines that Exclusion 4(j) applies to bar coverage for the Ridgepoint Litigation." This language is typical of reservation of rights letters but creates an ongoing uncertainty about the stability of Clarendon's defense commitment.

The balance of this section analyzes the strength and weakness of Clarendon's reservation with respect to Exclusion 4(j).

B. Analysis of Exclusion 4(j) — The Antitrust Exclusion

1. Text and Scope of the Exclusion. Exclusion 4(j) of the Policy provides, in relevant part:

"The Insurer shall not be liable to make any payment for Loss under this Policy arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, whether federal, state, local, or foreign, including but not limited to the Sherman Antitrust Act (15 U.S.C. §§ 1–7), the Clayton Act (15 U.S.C. §§ 12–27), the Federal Trade Commission Act (15 U.S.C. §§ 41–58), the Robinson-Patman Act (15 U.S.C. § 13), or any analogous state or foreign statute, regulation, or common-law principle."

Several features of this exclusion merit close attention:

The causal nexus language — "arising out of, based upon, or attributable to" — is the broadest formulation typically encountered in insurance policies. Courts consistently construe the phrase "arising out of" as requiring only that there be some causal connection, however remote, between the excluded conduct and the loss for which coverage is sought. It does not require that the excluded conduct be the sole, proximate, or direct cause of the loss. See, e.g., Markel Int'l Ins. Co. v. Westchester Fire Ins. Co., 246 F.3d 46, 51 (2d Cir. 2001) (noting that "arising out of" is "ordinarily understood to mean originating from, incident to, or having connection with"); Mt. Hawley Ins. Co. v. AMCI, Inc., 2013 WL 5946714, at *4 (W.D. Pa. Nov. 6, 2013) (similar). The addition of "based upon" and "attributable to" further broadens the scope of the exclusion beyond what "arising out of" alone would accomplish.

The enumeration of specific statutes — including the Sherman Act and the Clayton Act by name and citation — is also significant. This enumeration eliminates any argument that the exclusion is ambiguous as to which laws are covered. The Ridgepoint complaint invokes precisely the statutes named in Exclusion 4(j): the claim is brought under Section 2 of the Sherman Act, and the damages are sought under Section 4 of the Clayton Act. On its face, therefore, the exclusion appears to encompass the claims asserted in the Ridgepoint Litigation.

Additionally, the exclusion covers both "actual" and "alleged" violations, which on a plain reading would mean that the exclusion could apply not only where the insured has been adjudged to have committed an antitrust violation, but also where the insured is merely accused of such a violation. This language, if enforced as written and without qualification, would be highly favorable to Clarendon's position, as it would allow the exclusion to be triggered by the mere allegation of an antitrust violation in a complaint, regardless of whether the allegation is ultimately sustained. However, whether this language is modified by other provisions of the Policy — including any "final adjudication" or "in fact" qualifier — is a critical question that we address below.

2. Arguments That Exclusion 4(j) Applies (Clarendon's Likely Position). Based on Clarendon's reservation of rights letter and the text of the Policy, we anticipate that Clarendon will advance the following arguments in support of the applicability of Exclusion 4(j):

The sole cause of action is a Sherman Act claim. Unlike cases involving mixed claims — where a complaint alleges both covered and excluded claims, and the insurer may owe a duty to defend with respect to the covered claims even if certain claims are excluded — the Ridgepoint complaint asserts a single cause of action under Section 2 of the Sherman Act. There is no tort, breach of contract, securities fraud, or other non-antitrust claim in the complaint. Clarendon will argue that this is not a case where the exclusion applies to only some of the claims and the insurer must still defend the balance; rather, the entire action falls within the scope of the exclusion.

The damages arise directly under the Clayton Act's treble-damage provision. The $381 million damages figure is derived entirely from the Clayton Act's provision for treble damages, 15 U.S.C. § 15, which is expressly referenced in Exclusion 4(j). Clarendon will argue that this further confirms that the loss sought by Ridgepoint is of precisely the type that the exclusion was designed to exclude.

The exclusion references both "actual" and "alleged" violations. As noted above, Exclusion 4(j) covers loss arising out of "any actual or alleged violation" of the enumerated statutes. Clarendon will contend that this language means the exclusion applies based on the nature of the allegations in the complaint, without regard to whether the insured is ultimately found to have committed a violation. Under this reading, the mere filing of a complaint alleging a Sherman Act violation triggers the exclusion, and no adjudication is required.

Policy exclusions for specifically enumerated statutory violations are generally enforced as written. Courts are generally reluctant to read ambiguity into exclusions that specifically identify the statutes at issue, particularly where the underlying complaint plainly invokes those statutes. See, e.g., National Union Fire Ins. Co. v. Continental Illinois Corp., 666 F. Supp. 1180, 1195 (N.D. Ill. 1987) (enforcing antitrust exclusion where the underlying claims sounded exclusively in antitrust); Sphinx Int'l, Inc. v. National Union Fire Ins. Co., 226 F. Supp. 2d 1326, 1341 (M.D. Fla. 2002), aff'd, 412 F.3d 1224 (11th Cir. 2005) (similar).

Clarendon's position, while not without weaknesses, is grounded in a straightforward textual reading of the exclusion and the complaint. We take this position seriously and believe it presents a meaningful risk to coverage.

3. Arguments That Exclusion 4(j) Should Not Bar Coverage (Northgate's Position). Notwithstanding the apparent breadth of Exclusion 4(j), Northgate has several strong arguments that the exclusion should not bar coverage for the Ridgepoint Litigation. We address each in turn.

Entity Liability Coverage Carve-Back. Many modern D&O policies, particularly those underwritten by sophisticated Bermuda and London-market carriers, contain entity liability extensions that are specifically intended to cover regulatory and competition-related exposures at the entity level. These extensions often include carve-backs or exceptions to general exclusions — including antitrust exclusions — that restore coverage for entity-level claims that would otherwise be excluded. It is critical that Whitmore & Crane conduct a thorough review of the Policy to determine whether any such carve-back applies to Exclusion 4(j). If the entity liability coverage section of the Policy contains a provision that overrides or narrows the antitrust exclusion for claims brought against the insured entity (as opposed to individual directors and officers), this could substantially undermine Clarendon's reservation. We note that the Clarendon ROR letter does not address this issue, which may indicate that Clarendon has not fully analyzed whether any such carve-back applies.

"Final Adjudication" or "In Fact" Qualifier. A central question in the coverage analysis is whether Exclusion 4(j) contains a "final adjudication" or "in fact" qualifier — that is, a provision that limits the applicability of the exclusion to situations in which the insured has been finally adjudged by a court of competent jurisdiction, or has been determined in fact, to have violated the referenced antitrust statutes. Such qualifiers are common in D&O policies and serve the important function of preventing insurers from invoking exclusions based on mere allegations that have not been substantiated through litigation or other proceedings.

If Exclusion 4(j) contains such a qualifier, the exclusion cannot be invoked at this stage of the proceedings. The Ridgepoint complaint has not survived a motion to dismiss — indeed, Northgate's Motion to Dismiss is currently pending — and there has been no adjudication of any kind regarding whether Northgate actually violated Section 2 of the Sherman Act. Under a "final adjudication" or "in fact" reading, the exclusion would only become operative if and when a court or other competent tribunal actually determines that Northgate engaged in the alleged monopolization. Until that time, the exclusion would be held in abeyance, and Clarendon's coverage obligations would remain in full force.

We note that, even if the Policy contains such a qualifier, it may not definitively resolve the coverage question in Northgate's favor. For example, if the Ridgepoint Litigation were to proceed to trial and result in a verdict finding that Northgate violated Section 2, the qualifier would be satisfied and the exclusion would likely apply retroactively to bar both defense and indemnity coverage. Nonetheless, the presence of a "final adjudication" qualifier would significantly strengthen Northgate's position at this stage and would support the argument that Clarendon's reservation of rights is premature.

Whitmore & Crane should review the full Policy, including all endorsements, to determine whether such a qualifier exists and, if so, its precise scope and operation.

Refusal-to-Deal Defense Posture. Northgate's defense in the Underlying Action is that its refusal to provide interconnection and colocation access to Ridgepoint does not constitute a violation of Section 2 of the Sherman Act. This defense is grounded in the well-established framework set forth in Harborview Holdings Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). Under Trinko, a firm's unilateral refusal to deal with a competitor is generally not actionable under Section 2 absent extraordinary circumstances, and the Supreme Court has expressed a strong reluctance to impose antitrust liability based on a refusal to assist a rival, particularly in regulated industries. Northgate's position is that the Trinko framework forecloses Ridgepoint's claim as a matter of law.

If Northgate prevails on this defense — whether on the pending Motion to Dismiss, at summary judgment, or at trial — there will be no "violation" of the Sherman Act to trigger the exclusion, regardless of whether the exclusion contains a "final adjudication" qualifier. A judicial determination that Northgate's conduct does not constitute monopolization would effectively moot the coverage question, because there would be no antitrust violation (actual or, in substance, proven) upon which the exclusion could operate. The strongest path to preserving coverage is therefore to defeat the underlying antitrust claim on the merits.

Duty to Defend vs. Duty to Indemnify. Under applicable insurance law principles, the duty to defend is broader than the duty to indemnify. An insurer that owes a duty to defend must continue to fund the insured's defense so long as there is any reasonable potential that the underlying claims could result in a covered loss. The insurer may not withdraw from the defense merely because it believes an exclusion may ultimately apply; rather, the insurer must fund the defense while reserving its right to contest coverage at a later date.

The specific contours of the duty-to-defend analysis depend on the applicable law governing the Policy. If the Policy is governed by New York law, for example, the insurer's duty to defend is triggered whenever the allegations in the underlying complaint suggest a reasonable possibility of coverage, and the insurer must defend the entire action even if some claims are potentially excluded. See Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137 (2006). If the Policy is governed by Bermuda law or English law, the duty-to-defend framework may differ, as discussed in Section III.B.4 below. Regardless of the applicable law, however, the reservation of rights does not relieve Clarendon of its obligation to participate in the defense while the claim is pending and the coverage question remains unresolved.

Public Policy Considerations. In certain jurisdictions, courts have expressed reluctance to enforce antitrust exclusions broadly where the insured has not been adjudged to have committed a willful or intentional antitrust violation. The rationale underlying this reluctance is that antitrust exclusions are sometimes treated as a species of intentional-act or illegal-act exclusion, and public policy disfavors allowing insurers to deny coverage based on allegations of conduct that the insured denies and that has not been proven. Some courts have distinguished between "statutory-reference" exclusions (which exclude coverage based on the type of statute at issue, regardless of culpability) and "intentional-act" exclusions (which exclude coverage only for conduct that the insured intentionally or willfully undertook). Where the distinction applies, courts may require a higher showing before enforcing an antitrust exclusion, particularly where the insured's defense is that no violation occurred.

We acknowledge that this public-policy argument is jurisdiction-specific and may not be available under all applicable laws. Nevertheless, it provides an additional ground for resisting the application of Exclusion 4(j), particularly if the Policy is governed by a jurisdiction that takes a restrictive approach to the enforcement of antitrust exclusions.

Allocation. Even if Exclusion 4(j) ultimately bars coverage for the treble-damages component of Ridgepoint's claim — on the theory that treble damages are punitive in nature and that the antitrust exclusion applies to the punitive multiplier — Northgate may argue that the single-damages component (i.e., the $127 million in underlying compensatory damages) remains covered. Under this theory, the antitrust exclusion would bar coverage only for the punitive enhancement (the additional $254 million attributable to trebling), while the underlying compensatory damages, which could arguably be characterized as commercial or economic loss rather than as "antitrust loss" per se, would remain within the scope of coverage. This argument would require an allocation between covered and excluded components of the loss, and its viability depends on the specific language of the Policy and applicable law regarding the insurability of treble damages.

We note that many jurisdictions hold treble damages under the Clayton Act to be uninsurable as a matter of public policy, at least insofar as the treble multiplier is concerned. See, e.g., Hartford Accident & Indem. Co. v. Village of Hempstead, 48 N.Y.2d 218, 226 (1979) (holding that punitive damages are uninsurable under New York law); but cf. the more nuanced treatment in some jurisdictions that permit insurance for the compensatory component while excluding the punitive multiplier. If applicable law distinguishes between the compensatory and punitive components of a treble-damages award, Northgate may have a basis for preserving partial coverage even if the antitrust exclusion is held to apply generally.

4. Jurisdictional and Choice-of-Law Considerations. The resolution of the coverage dispute may turn in significant part on the applicable law governing the construction of the Policy and, specifically, the interpretation of Exclusion 4(j). Several jurisdictions are potentially relevant:

Policy Governing-Law Clause. Clarendon Mutual is a Bermuda exempted company, and the Policy may contain a governing-law clause specifying the law that governs the interpretation of the Policy's terms and conditions. Common choices in policies issued by Bermuda-domiciled carriers include English law, Bermuda law, and New York law. Whitmore & Crane should confirm the governing-law provision in the Policy, as this will determine the interpretive framework applicable to the antitrust exclusion.

If New York law applies: New York courts generally enforce policy exclusions as written, provided that the exclusionary language is clear and unambiguous. See Pioneer Tower Owners Ass'n v. State Farm Fire & Cas. Co., 12 N.Y.3d 302, 307 (2009) ("Where the provisions of a policy are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement."). Under New York law, the insurer bears the burden of proving that an exclusion applies, and ambiguities in exclusionary clauses are construed against the insurer and in favor of the insured. See Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 218 (2002). If the antitrust exclusion is clear on its face, a New York court will likely enforce it. However, if the exclusion contains a "final adjudication" qualifier or other limiting language, New York courts will give full effect to that limitation.

If Bermuda or English law applies: The duty-to-defend framework under Bermuda and English law differs from the American framework in important respects. English and Bermuda law do not recognize a free-standing "duty to defend" in the same manner as American insurance law. Instead, coverage is typically analyzed under an indemnity-based model, in which the insurer's obligation is to hold the insured harmless for covered losses. The implications of this distinction for Clarendon's defense participation — and for Northgate's ability to compel continued participation — should be analyzed by Whitmore & Crane in light of the specific Policy terms and the applicable regulatory framework.

Under English law, exclusion clauses are interpreted strictly but in accordance with their plain meaning. See Impact Funding Solutions Ltd v. Barrington Support Services Ltd, [2016] UKSC 57 (applying ordinary principles of contractual construction to exclusion clauses in insurance policies). Ambiguity is resolved against the insurer under the contra proferentem rule, but this rule is applied only as a last resort where the language is genuinely ambiguous after applying ordinary interpretive principles. English courts will not strain to find ambiguity where the language is clear.

Virginia law. The Underlying Action is pending in the Eastern District of Virginia, and Virginia insurance law may also be relevant depending on the location of the insured, the situs of the loss, or other connecting factors. Virginia courts apply the "eight corners" rule in duty-to-defend disputes, comparing the four corners of the underlying complaint with the four corners of the insurance policy to determine whether the allegations potentially fall within the scope of coverage. See CUNA Mut. Ins. Soc'y v. Norwegian Tp., 376 S.E.2d 310, 314 (Va. 1989).

The choice-of-law analysis is a matter that Whitmore & Crane should address in its detailed policy review. We flag these considerations here so that the Northgate legal team is aware of the potential variability in outcomes depending on the applicable jurisdiction.

C. Clarendon's Continued Defense Participation

Despite the reservation of rights, Clarendon has agreed to participate in the defense of the Ridgepoint Litigation at this stage. This participation is significant, as it means that Clarendon will, subject to the terms of the Policy and the SIR, fund or reimburse defense costs incurred by Northgate in defending against the Ridgepoint claims.

However, several important caveats apply:

First, Clarendon's participation is expressly conditioned on its ongoing reservation of rights. This means that Clarendon's willingness to participate in the defense today does not constitute a waiver of its right to invoke Exclusion 4(j) at a later date. Clarendon may seek to withdraw from defense participation at a future stage — for example, after the Motion to Dismiss is decided — if it concludes that the exclusion definitively applies. The reservation of rights letter specifically preserves this option.

Second, Clarendon's defense participation may be limited to the payment or reimbursement of defense costs (including attorney fees, expert fees, and related expenses), subject to the exhaustion of the SIR. Whether Clarendon's participation extends to the payment of indemnity for any judgment or settlement is a separate question that remains open under the reservation. Clarendon may take the position that it will fund the defense but will not indemnify Northgate against any ultimate liability, particularly if the liability arises directly from an adjudicated antitrust violation.

Third, Northgate should not rely on Clarendon's continued defense participation as a guarantee of coverage or as an indication that Clarendon will ultimately agree that coverage exists. Reservation of rights letters are designed precisely to preserve the insurer's options, and Clarendon's agreement to participate in the defense at this early stage should not be taken as an acknowledgment that the antitrust exclusion is inapplicable.

Fourth, Northgate should be aware that Clarendon's defense participation under a reservation of rights may create a potential conflict of interest. In some jurisdictions, an insured that is defended under a reservation of rights has the right to select independent defense counsel at the insurer's expense, on the theory that the insurer's reservation creates a conflict between the insurer's interest in establishing the applicability of the exclusion and the insured's interest in defeating the underlying claim. Whether this right applies here depends on the applicable law and the specific nature of the reservation. Whitmore & Crane should advise on this issue.

IV. Self-Insured Retention Analysis

The $10 million self-insured retention under the Clarendon primary policy is a critical threshold in the coverage analysis. Clarendon's indemnity and defense-cost reimbursement obligations do not attach until the SIR has been fully exhausted. The terms of the SIR — and, specifically, whether it is eroded by defense costs (including attorney fees, expert fees, and e-discovery costs) or only by indemnity payments (i.e., judgments and settlements) — must be confirmed by reference to the Policy language. In many D&O policies, the SIR is eroded by both defense costs and indemnity payments, meaning that the insured's expenditures on defense reduce the SIR dollar-for-dollar alongside any amounts paid in settlement or satisfaction of a judgment. Whitmore & Crane should confirm the specific terms of the SIR provision.

As of the date of this memorandum, Northgate has incurred the following defense costs in connection with the Ridgepoint Litigation:

The foregoing amounts reflect billings through early November 2022 and represent the total fees and costs incurred across all work streams in the Ridgepoint Litigation to date. While the precise allocation of these costs to the SIR depends on the Policy's terms, it is clear that defense spending is substantial and is likely to increase significantly if the case survives the Motion to Dismiss and proceeds into discovery. Major cost drivers going forward would include extensive document discovery (Northgate's files relating to interconnection and colocation decisions at the fourteen identified facilities), depositions of Northgate executives and technical personnel, expert discovery relating to market definition, monopoly power, and damages, and trial preparation and trial itself.

If defense costs erode the SIR — which is the more common formulation in D&O policies of this type — the $10 million threshold could be reached relatively early in the litigation, potentially within the first twelve to eighteen months, given the scope and complexity of the matter. Once the SIR is exhausted, Clarendon's payment obligations attach, and the coverage dispute becomes directly and immediately financial rather than prospective.

Tracking SIR erosion is critical for both Northgate's financial planning and Clarendon's obligations. We recommend establishing a dedicated tracking mechanism, coordinated between Howard Bellamy (C&H billing partner), Catherine Ng (Northgate U.S. Deputy General Counsel), and Whitmore & Crane, to monitor cumulative defense expenditures and project when the SIR is likely to be exhausted. This tracking will also be relevant to the timing of any formal coverage demand or declaratory judgment action, as Clarendon's obligations become most consequential when the SIR is near exhaustion and the insurer's actual payment obligations are imminent.

V. Excess Tower Considerations

A. Avalon Specialty Underwriters Inc. — First Excess Layer ($30 Million)

Avalon Specialty Underwriters Inc. ("Avalon"), a New York corporation, provides $30 million in excess coverage under the first excess layer of the D&O tower, sitting above Clarendon's $50 million primary layer. Avalon's coverage attaches at $60 million (the sum of the $10 million SIR and the $50 million Clarendon primary limit).

As is typical for excess D&O policies, Avalon's policy is expected to follow the terms and conditions of the Clarendon primary policy on a "follow-form" basis. This means that the definitions, insuring agreements, exclusions, and conditions of the Clarendon primary policy are generally incorporated by reference into the Avalon excess policy, unless the Avalon policy contains specific provisions that modify or override the underlying terms. Critically, if the Avalon policy follows form to the Clarendon primary, Exclusion 4(j) — the antitrust exclusion — applies with equal force at the excess level as at the primary level.

The practical implication is that if Clarendon ultimately denies coverage under Exclusion 4(j), Avalon will very likely take the same position and deny coverage under its follow-form policy. Conversely, if Northgate successfully defeats Clarendon's exclusion argument, that outcome should flow through to the excess level and establish coverage under the Avalon layer as well.

We recommend that Northgate, through Whitmore & Crane, promptly provide formal notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights to Avalon. This notice is important for several reasons: (a) the Avalon excess policy likely contains its own notice provisions, which must be complied with to preserve coverage; (b) early notice allows Avalon to evaluate its own coverage position and potentially engage with Clarendon on the exclusion question; and (c) Northgate should obtain Avalon's written acknowledgment of the claim and its coverage position, which will be relevant in the event of a subsequent coverage dispute.

B. Pinnacle Re Ltd. — Second Excess Layer ($20 Million)

Pinnacle Re Ltd. ("Pinnacle Re"), a Bermuda exempted company, provides $20 million in excess coverage under the second excess layer of the D&O tower. Pinnacle Re's coverage attaches at $90 million (the sum of the $10 million SIR, the $50 million Clarendon primary limit, and the $30 million Avalon first excess limit).

The same follow-form analysis that applies to Avalon applies to Pinnacle Re. If Pinnacle Re's policy follows form to the Clarendon primary policy, the antitrust exclusion (Exclusion 4(j)) will apply at the second excess level as well. Accordingly, Pinnacle Re's coverage position on the antitrust exclusion will likely track Clarendon's position.

We similarly recommend that formal notice of the claim and of Clarendon's reservation of rights be provided to Pinnacle Re promptly, through Whitmore & Crane, in order to preserve Northgate's rights under the second excess layer.

C. Practical Implications

The total D&O tower provides $150 million in combined limits ($10 million SIR + $50 million Clarendon primary + $30 million Avalon first excess + $20 million Pinnacle Re second excess, with the SIR borne by Northgate, yielding $100 million in insurer-funded limits). It is important to note that this total tower — even if fully available — is insufficient to cover Ridgepoint's full trebled damages claim of $381 million. There is an exposure gap of approximately $231 million ($381 million in trebled damages minus $150 million in total tower limits), plus uncovered defense costs in excess of those funded by the tower. This gap represents the portion of any adverse judgment that Northgate would be required to fund from its own resources, even in a scenario where full coverage is available.

However, Northgate's damages rebuttal substantially reduces the expected exposure. Dr. Priya Narasimhan of Ellsworth Economic Consulting, Northgate's retained damages expert, has conducted a preliminary assessment of Ridgepoint's damages claims and estimates that Ridgepoint's actual provable lost profits, under proper economic methodology, are in the range of $18 million to $24 million before trebling. If this estimate is credited, the trebled damages would range from $54 million to $72 million, which is well within the capacity of the D&O tower (even under the primary layer alone, before the excess layers are implicated).

The coverage gap underscores the importance of the damages defense in the Underlying Action. If Northgate's damages rebuttal is successful in reducing Ridgepoint's claimed damages to a level within the D&O tower, the practical significance of the antitrust exclusion question diminishes, particularly if Northgate prevails on liability altogether (which would moot the coverage question entirely). Conversely, if the case proceeds to a large adverse judgment at or near Ridgepoint's claimed amount of $381 million, the interplay between the coverage gap and the antitrust exclusion creates a scenario in which Northgate could face both a denial of coverage and an uninsured exposure in excess of $200 million — a result that underscores the critical importance of the defense strategy.

VI. Coordination with Whitmore & Crane LLP (Coverage Counsel)

Whitmore & Crane LLP, located at 380 Madison Avenue, 22nd Floor, New York, NY 10017, serves as Northgate's insurance coverage counsel and has been engaged in the coverage analysis since the initial stages of the Ridgepoint Litigation. Calderwood & Harkness coordinated closely with Whitmore & Crane in preparing and transmitting the October 12, 2022 tender letter to Clarendon Mutual, and the two firms have maintained regular communication regarding coverage developments.

Going forward, we recommend the following division of responsibilities between Calderwood & Harkness (defense counsel) and Whitmore & Crane (coverage counsel):

Whitmore & Crane should take the lead on the following coverage-specific matters:

(a) Detailed policy analysis. Whitmore & Crane should conduct a comprehensive, provision-by-provision review of the Clarendon primary policy, including all endorsements, riders, and amendments, to identify: (i) any carve-backs, exceptions, or qualifications to Exclusion 4(j) that may limit or override the antitrust exclusion; (ii) the presence or absence of a "final adjudication" or "in fact" qualifier in the exclusion; (iii) any entity liability coverage extensions that may restore coverage for claims that would otherwise be excluded; and (iv) the governing-law clause and its implications for the interpretive framework.

(b) Formal response to Clarendon's reservation of rights letter. Whitmore & Crane should prepare and transmit a formal written response to Clarendon's November 3, 2022 reservation of rights letter, asserting Northgate's position that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation and demanding that Clarendon continue full defense participation without reservation, or, in the alternative, that Clarendon identify with specificity the factual and legal bases for its reservation.

(c) Notice to excess carriers. Whitmore & Crane should ensure that formal notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights is provided to Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd. in compliance with the notice provisions of the respective excess policies.

(d) Monitoring of compliance with policy conditions. Whitmore & Crane should monitor Northgate's ongoing compliance with all Policy conditions, including cooperation obligations, consent-to-settle provisions, and any periodic reporting requirements.

(e) Preparation for a potential declaratory judgment action. If Clarendon's position hardens and coverage is formally denied, Whitmore & Crane should be prepared to advise on the filing of a declaratory judgment action to establish Northgate's right to coverage. This would include analysis of the appropriate forum, timing, and strategy for such an action.

Calderwood & Harkness will continue to lead the defense of the Underlying Action and will coordinate with Whitmore & Crane as follows:

(a) Substantive defense strategy. C&H will develop and execute the defense strategy in the Ridgepoint Litigation in accordance with Northgate's best interests and in the exercise of independent professional judgment. Defense strategy will be developed without regard to coverage considerations — that is, C&H will not tailor defense positions to maximize or protect insurance coverage at the expense of the defense of the underlying claims.

(b) Coverage-sensitive coordination. Notwithstanding the foregoing, C&H will be mindful of the potential implications of defense positions and concessions for the coverage analysis. In particular, C&H will avoid making admissions or concessions in the Underlying Action that could be characterized as acknowledging an antitrust violation or as supporting Clarendon's argument that Exclusion 4(j) applies. This is a matter of prudent coordination, not of coverage-driven advocacy, and C&H will consult with Whitmore & Crane as appropriate to ensure that the defense is conducted in a manner that does not inadvertently prejudice Northgate's coverage position.

(c) Information sharing. C&H will provide Whitmore & Crane with copies of all material filings, orders, and developments in the Underlying Action, to the extent necessary for Whitmore & Crane to fulfill its coverage advisory role. This information sharing will be conducted under the common-interest privilege, and appropriate privilege protections will be maintained at all times.

It is important that the defense and coverage functions remain closely coordinated but distinct. Defense counsel must exercise independent professional judgment in the Underlying Action, and coverage considerations should not drive defense strategy. At the same time, the defense team should be aware of the coverage landscape so that inadvertent harm to the coverage position is avoided.

VII. Risk Assessment and Recommendations

A. Overall Coverage Assessment

On balance, Northgate has reasonable arguments against the application of Exclusion 4(j) to bar coverage for the Ridgepoint Litigation. The strength of Northgate's position depends significantly on several factors that require further investigation by Whitmore & Crane, including:

• Whether the Policy contains a "final adjudication" or "in fact" qualifier in Exclusion 4(j), which would prevent the exclusion from being invoked absent a judicial determination that Northgate actually violated the antitrust laws;

• Whether the entity liability coverage section of the Policy contains a carve-back or exception to the antitrust exclusion for claims brought against the insured entity;

• The applicable governing law and its treatment of antitrust exclusions in D&O policies; and

• The ultimate outcome of the Underlying Action on the merits.

If the exclusion contains a "final adjudication" or "in fact" qualifier, Northgate's coverage position is strong at this stage, because no adjudication has occurred and the complaint has not even survived a motion to dismiss. In that scenario, Clarendon's reservation is premature, and coverage should remain intact pending the resolution of the Underlying Action on the merits.

However, if the exclusion is absolute — that is, if it applies based on the nature of the allegations in the complaint, without regard to whether the insured is ultimately found to have committed a violation — coverage is at meaningful risk. In that scenario, the fact that the Ridgepoint complaint asserts solely antitrust claims under the Sherman Act and Clayton Act, with no non-antitrust claims in the complaint, makes it difficult to argue that the exclusion does not facially apply.

The strongest path to preserving coverage is to defeat the underlying antitrust claim on the merits. If Northgate prevails on its Motion to Dismiss, or at summary judgment, or at trial, the antitrust exclusion question becomes moot, because there will be no antitrust violation — actual or adjudicated — to trigger the exclusion. This alignment between the defense strategy and the coverage strategy underscores the importance of a vigorous and well-resourced defense of the Underlying Action.

B. Specific Recommendations

Based on the foregoing analysis, we recommend that Northgate take the following steps:

1. Whitmore & Crane to respond formally to Clarendon's reservation of rights letter. Whitmore & Crane should prepare and transmit a detailed written response to Clarendon's November 3, 2022 reservation of rights letter, asserting Northgate's position that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation and demanding continued full defense participation by Clarendon. The response should address each of the arguments identified in Section III.B.3 above and should request that Clarendon identify with specificity the factual and legal bases for its reservation. The response should be sent at the earliest practicable date, and in any event no later than thirty (30) days from the date of this memorandum (i.e., by December 18, 2022).

2. Provide notice to excess carriers. Whitmore & Crane should promptly send formal written notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights to Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd. in compliance with the notice provisions of the respective excess policies. The notice should request that each excess carrier acknowledge receipt of the notice, confirm its coverage position, and identify any additional information or documentation it requires. This notice should be transmitted as soon as possible, ideally within two weeks of the date of this memorandum, to avoid any risk that late notice could be asserted as a defense to coverage.

3. Track SIR erosion. Northgate should establish a dedicated tracking mechanism to monitor the cumulative defense costs incurred in the Ridgepoint Litigation against the $10 million SIR. This tracking should be coordinated between Howard Bellamy (C&H billing partner), Catherine Ng (Northgate U.S. Deputy General Counsel), and Whitmore & Crane. The tracker should be updated monthly and should include all categories of defense expenditure, including attorney fees, expert fees, e-discovery costs, and any other amounts that erode the SIR under the terms of the Policy. Timely and accurate SIR tracking will enable Northgate to project when the SIR will be exhausted and Clarendon's payment obligations will attach, and will facilitate financial planning for the litigation.

4. Preserve coverage positions. In all filings, briefs, discovery responses, and other submissions in the Underlying Action, defense counsel should avoid admissions or concessions that could be characterized as acknowledging an antitrust violation by Northgate. Any such acknowledgment — whether express or implied — could strengthen Clarendon's argument that Exclusion 4(j) applies, and could potentially satisfy a "final adjudication" or "in fact" qualifier by establishing that Northgate has conceded liability. This does not mean that defense counsel should tailor its strategy to coverage considerations; rather, it means that defense counsel should be aware of the potential coverage implications of defense positions and should consult with Whitmore & Crane where appropriate.

5. Evaluate declaratory judgment action. If Clarendon's position hardens — for example, if Clarendon declines to continue defense participation, formally denies coverage, or refuses to reimburse defense costs after the SIR is exhausted — Northgate should consider filing a declaratory judgment action to establish its right to coverage under the Policy. The timing, forum, and strategy for such an action should be discussed with Whitmore & Crane. Potential forums include the United States District Court for the Southern District of New York (given the New York nexus of several of the parties and the policy), the Supreme Court of Bermuda (if Bermuda law governs the Policy), or the courts of the jurisdiction specified in the Policy's dispute-resolution clause. Whitmore & Crane should advise on the most favorable forum and the optimal timing for initiating such an action, taking into account the procedural posture of the Underlying Action and the state of the coverage dispute.

6. Monitor parallel FCC proceeding. Northgate is a party to a parallel proceeding before the Federal Communications Commission, Docket WC-23-0042, before Administrative Law Judge Robert Fenwick. This FCC proceeding involves issues related to Northgate's interconnection and colocation practices that overlap substantively with the allegations in the Ridgepoint Litigation. An FCC determination that Northgate's interconnection practices were commercially reasonable and consistent with applicable regulatory requirements would provide strong support for the argument that Northgate did not violate Section 2 of the Sherman Act — and, by extension, that the antitrust exclusion should not apply. Conversely, an adverse FCC determination could undermine Northgate's defense posture and strengthen the case for the exclusion. C&H and Northgate's regulatory counsel should monitor this proceeding closely and coordinate with Whitmore & Crane to ensure that any FCC findings are appropriately communicated to Clarendon and the excess carriers.

7. Budget for uncovered exposure. Given the uncertainty surrounding the coverage analysis and the fact that the total D&O tower ($150 million) does not fully cover Ridgepoint's trebled damages claim of $381 million, Northgate should budget for the possibility of bearing defense costs and indemnity exposure outside the insurance program. This budgeting should account for several scenarios: (a) full coverage available, with damages limited to the range estimated by Dr. Narasimhan ($54–$72 million trebled), in which case the tower is sufficient; (b) full coverage available, but damages exceed the tower, creating an uninsured gap; (c) coverage denied under Exclusion 4(j), requiring Northgate to fund the entire defense and any indemnity from its own resources; and (d) partial coverage available (e.g., coverage for defense costs but not indemnity, or coverage for single damages but not the treble multiplier). Financial planning for these scenarios should be undertaken in coordination with Northgate's finance and treasury functions.

VIII. Conclusion

Clarendon Mutual's reservation of rights is a significant but not unexpected development in light of the antitrust nature of the claims asserted in the Ridgepoint Litigation. The antitrust exclusion in Exclusion 4(j) of the D&O Policy is broad and specifically references the Sherman Act and the Clayton Act — the very statutes under which Ridgepoint's sole cause of action is brought. Clarendon's decision to reserve its rights with respect to this exclusion is a standard insurer response to a claim of this nature and reflects a legitimate, if contestable, coverage concern.

Northgate has colorable and, in our assessment, reasonable arguments to resist the application of Exclusion 4(j). The strength of those arguments depends on several critical factors that require further investigation, most notably the presence or absence of a "final adjudication" or "in fact" qualifier in the exclusion, the existence of entity liability carve-backs, and the applicable governing law. If the exclusion is qualified, Northgate's position is strong at this stage. If the exclusion is absolute, the coverage risk is meaningful, though not insurmountable, particularly if Northgate prevails on the merits of the underlying antitrust claim.

The immediate next steps are as follows:

(a) Coordinate with Whitmore & Crane LLP on a formal written response to Clarendon's November 3, 2022 reservation of rights letter;

(b) Provide formal notice of the claim and the reservation to the excess carriers (Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd.);

(d) Continue to develop and execute the defense of the Underlying Action in a manner that is both vigorous and consistent with the preservation of Northgate's coverage rights.

Calderwood & Harkness will continue to keep Catherine Ng and James Whitford apprised of all developments in the Ridgepoint Litigation that bear on coverage, and will coordinate closely with Whitmore & Crane on all coverage-related matters. We are available to discuss this memorandum and its recommendations at your earliest convenience.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Elaine Forsythe Responsible Partner, Antitrust & Competition Calderwood & Harkness LLP 1200 K Street NW, Suite 900 Washington, D.C. 20005

By: ________

Howard Bellamy Billing Partner, Antitrust & Competition Calderwood & Harkness LLP 450 Lexington Avenue, 35th Floor New York, NY 10017

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION Calderwood & Harkness LLP	Engagement Ref. No. C&H-2022-ATR-00419
Layer	Carrier	Domicile	Limit	Attachment Point
Self-Insured Retention	Northgate	N/A	$10,000,000	$0
Layer 1 (Primary)	Clarendon Mutual Insurance Ltd.	Bermuda (exempted company)	$50,000,000	$10,000,000 (above SIR)
Layer 2 (First Excess)	Avalon Specialty Underwriters Inc.	New York	$30,000,000	$60,000,000 ($10M SIR + $50M primary)
Layer 3 (Second Excess)	Pinnacle Re Ltd.	Bermuda (exempted company)	$20,000,000	$90,000,000 ($10M SIR + $50M primary + $30M first excess)
Vendor / Firm	Description	Amount Billed Through Early November 2022
Calderwood & Harkness LLP	Legal fees (defense counsel)	Portion of $1,247,600 total pre-stay billings
Ellsworth Economic Consulting	Damages expert (Dr. Priya Narasimhan)	Portion of $412,000 to date
Torrence Policy Group	Regulatory and public policy consulting	Portion of $187,500 to date
Candela discovery Solutions	E-discovery and document review	Portion of $294,000 to date

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
TO: Catherine Ng, U.S. Deputy General Counsel, Northgate Networks America Inc. James Whitford, Group General Counsel, Northgate Telecommunications PLC
FROM: Elaine Forsythe, Responsible Partner, Calderwood & Harkness LLP Howard Bellamy, Billing Partner, Calderwood & Harkness LLP
CC: Aaron Liu, Lead Associate, Calderwood & Harkness LLP Monica Reyes, Working Associate, Calderwood & Harkness LLP
DATE: November 18, 2022
RE: Analysis of Clarendon Mutual Insurance Ltd. Reservation of Rights Letter Dated November 3, 2022 — Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW (E.D. Va.)
ENGAGEMENT REF. NO.: C&H-2022-ATR-00419
I. Executive Summary
The purpose of this memorandum is to analyze the reservation of rights ("ROR") letter issued by Clarendon Mutual Insurance Ltd. ("Clarendon" or the "Insurer") dated November 3, 2022, in response to the tender by Northgate Networks America Inc. ("Northgate America") and Northgate Telecommunications PLC ("Northgate PLC," and together with Northgate America, "Northgate") of the litigation captioned Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW (E.D. Va.) (the "Ridgepoint Litigation" or the "Underlying Action") under the Directors & Officers / Entity Liability Policy, Policy No. CLM-DO-2022-007841 (the "Policy" or the "D&O Policy").
The tender letter was sent by Calderwood & Harkness LLP ("C&H") on October 12, 2022, in coordination with Northgate's insurance coverage counsel, Whitmore & Crane LLP, 380 Madison Avenue, 22nd Floor, New York, NY 10017 ("Whitmore & Crane" or "Coverage Counsel"). The tender requested defense and indemnity coverage under the Policy for the Ridgepoint Litigation, which arises out of a single-count complaint alleging monopolization in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.
Clarendon acknowledged receipt of the claim and agreed to participate in the defense, subject to a reservation of rights. The principal reservation concerns the potential applicability of Exclusion 4(j) of the Policy — the antitrust exclusion — which purports to exclude from coverage any "Loss arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, including but not limited to the Sherman Act, the Clayton Act, or any analogous state or foreign statute."
Our overall assessment is as follows: Northgate has strong arguments that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation, particularly if the exclusion contains a "final adjudication" or "in fact" qualifier — a feature common in modern D&O policies — that would preclude invocation of the exclusion absent a judicial determination that the insured actually violated the referenced antitrust statutes. However, the reservation creates meaningful uncertainty that must be managed proactively, and there is a non-trivial risk that Clarendon may later deny indemnity on this basis, particularly if the underlying antitrust claim survives dispositive motions.
We recommend that Northgate coordinate closely with Whitmore & Crane LLP on a formal response to the reservation of rights letter and on the development of a potential coverage dispute strategy. In addition, Northgate should consider early engagement with the excess carriers in the D&O tower — Avalon Specialty Underwriters Inc. ("Avalon") and Pinnacle Re Ltd. ("Pinnacle Re") — to ensure that their respective notice obligations are satisfied and that those carriers' coverage positions are obtained as promptly as practicable.
The balance of this memorandum provides a detailed analysis of Clarendon's reservation, the relevant policy language, the applicable legal standards, and our specific recommendations.
II. Background
A. The Underlying Litigation
On September 19, 2022, Ridgepoint Communications Inc. ("Ridgepoint") filed a civil complaint in the United States District Court for the Eastern District of Virginia, Alexandria Division, initiating the action captioned Ridgepoint Communications Inc. v. Northgate Networks America Inc. et al., Case No. 1:22-cv-01487-CMW. The case has been assigned to the Honorable Claudia M. Wentworth, United States District Judge.
The complaint asserts a single cause of action under Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2, alleging monopolization. Specifically, Ridgepoint alleges that Northgate's refusal to provide interconnection and physical colocation access at fourteen (14) specific central-office and meet-me-room facilities located in the Philadelphia–Baltimore–Washington, D.C. corridor constitutes unlawful monopolization of what Ridgepoint defines as the "last-mile enterprise fiber-optic transport services market." Ridgepoint contends that Northgate possesses monopoly power in this purported relevant market and that its refusal to deal with Ridgepoint on reasonable commercial terms constitutes exclusionary conduct in violation of Section 2.
Ridgepoint seeks substantial monetary and equitable relief. On the damages side, Ridgepoint claims $127 million in lost profits over a five-year projected period (2022–2027), trebled to $381 million pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, which provides for the recovery of treble damages by any person injured in his business or property by reason of an antitrust violation. Ridgepoint also seeks permanent injunctive relief compelling Northgate to provide interconnection and physical colocation access at all fourteen identified facilities on terms that Ridgepoint characterizes as "commercially reasonable and non-discriminatory."
Calderwood & Harkness LLP entered its appearance on October 3, 2022, on behalf of both Northgate Telecommunications PLC and Northgate Networks America Inc. as defendants in the Underlying Action. On November 14, 2022, C&H filed a Motion to Dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing, among other things, that Ridgepoint has failed to plausibly allege a relevant antitrust market, that Northgate's refusal to deal does not constitute actionable exclusionary conduct under the framework established by Harborview Holdings Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), and that Ridgepoint's damages theory is speculative and insufficiently pled. As of the date of this memorandum, the Motion to Dismiss remains pending before Judge Wentworth and has not yet been fully briefed.
B. The Insurance Program
Northgate maintains a Directors & Officers / Entity Liability insurance program (the "D&O Program") structured as a multi-layered tower with a combined limit of $150 million. The primary layer is underwritten by Clarendon Mutual Insurance Ltd., a Bermuda exempted company, under Policy No. CLM-DO-2022-007841. The D&O Program is structured as follows:
The primary layer, underwritten by Clarendon Mutual, provides a $50 million per-occurrence limit of liability. Coverage under the primary layer is subject to Northgate's satisfaction of a $10 million self-insured retention ("SIR"). The Clarendon Policy is a claims-made and reported policy with a policy period of January 1, 2022, through December 31, 2022. The excess D&O tower provides an additional $100 million in aggregate excess coverage across two layers, bringing the total D&O tower to $150 million in combined limits (inclusive of the $50 million primary layer). The $10 million SIR must be fully exhausted before Clarendon's indemnity obligation attaches.
It is important to note that the total available coverage under the D&O tower — $150 million, inclusive of the SIR — is less than the $381 million in trebled damages that Ridgepoint seeks. This coverage gap has significant implications for Northgate's exposure, which are addressed in greater detail in Sections V and VII below.
C. The Tender and Clarendon's Response
On October 12, 2022, Calderwood & Harkness LLP, in coordination with Whitmore & Crane LLP (Northgate's dedicated insurance coverage counsel), sent a formal insurance tender letter to Clarendon Mutual Insurance Ltd. requesting defense and indemnity coverage under the D&O / Entity Liability Policy for the Ridgepoint Litigation. The tender letter identified the Underlying Action, enclosed copies of the filed complaint and summons, and requested that Clarendon acknowledge coverage, agree to fund Northgate's defense (subject to the SIR), and confirm its obligation to indemnify Northgate against any covered loss arising out of the Ridgepoint Litigation.
Clarendon responded by issuing its reservation of rights letter on November 3, 2022, approximately three weeks after receipt of the tender. In that letter, Clarendon acknowledged receipt of the claim and agreed to participate in the defense of the Ridgepoint Litigation, subject to the terms and conditions of the Policy and a reservation of rights. The substance of Clarendon's reservation concerns the potential applicability of Exclusion 4(j) — the antitrust exclusion — to the claims asserted by Ridgepoint. Clarendon's letter is analyzed in detail in Section III below.
III. Analysis of the Reservation of Rights Letter
A. Summary of Clarendon's Position
Clarendon's November 3, 2022 reservation of rights letter addresses several key aspects of the coverage analysis:
First, Clarendon acknowledges that the Ridgepoint Litigation falls within the general scope of the D&O / Entity Liability Policy's insuring agreement. Specifically, Clarendon does not dispute that the Underlying Action constitutes a "Claim" as defined by the Policy, that the Claim was first made against an "Insured Entity" during the Policy period, and that the Claim was timely reported to Clarendon. Clarendon further acknowledges that both Northgate Networks America Inc. and Northgate Telecommunications PLC are named insureds under the Policy.
Second, Clarendon does not dispute that the Underlying Action constitutes a covered "Securities and Entity Claim" within the meaning of the Policy's entity liability coverage section. This is a significant concession, as it confirms that the general insuring agreement is triggered and that any denial of coverage must rest on the application of a specific exclusion rather than on a failure to satisfy the basic coverage grant.
Third, and most critically, Clarendon expressly reserves its right to invoke Exclusion 4(j) of the Policy to deny or limit coverage. Exclusion 4(j) — the antitrust exclusion — excludes coverage for:
"Loss arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, including but not limited to the Sherman Act, the Clayton Act, or any analogous state or foreign statute."
Clarendon's letter specifically notes that the Ridgepoint complaint alleges a violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, and seeks treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15 — both statutes expressly and specifically referenced in the text of Exclusion 4(j). Clarendon observes that the complaint on its face appears to fall squarely within the scope of the exclusion.
Fourth, Clarendon states that it will "continue to monitor the proceedings" and that it "reserves the right to withdraw from defense participation or deny indemnity at a later date if it determines that Exclusion 4(j) applies to bar coverage for the Ridgepoint Litigation." This language is typical of reservation of rights letters but creates an ongoing uncertainty about the stability of Clarendon's defense commitment.
The balance of this section analyzes the strength and weakness of Clarendon's reservation with respect to Exclusion 4(j).
B. Analysis of Exclusion 4(j) — The Antitrust Exclusion
1. Text and Scope of the Exclusion. Exclusion 4(j) of the Policy provides, in relevant part:
"The Insurer shall not be liable to make any payment for Loss under this Policy arising out of, based upon, or attributable to any actual or alleged violation of any antitrust, competition, restraint of trade, or unfair trade practices law or regulation, whether federal, state, local, or foreign, including but not limited to the Sherman Antitrust Act (15 U.S.C. §§ 1–7), the Clayton Act (15 U.S.C. §§ 12–27), the Federal Trade Commission Act (15 U.S.C. §§ 41–58), the Robinson-Patman Act (15 U.S.C. § 13), or any analogous state or foreign statute, regulation, or common-law principle."
Several features of this exclusion merit close attention:
The causal nexus language — "arising out of, based upon, or attributable to" — is the broadest formulation typically encountered in insurance policies. Courts consistently construe the phrase "arising out of" as requiring only that there be some causal connection, however remote, between the excluded conduct and the loss for which coverage is sought. It does not require that the excluded conduct be the sole, proximate, or direct cause of the loss. See, e.g., Markel Int'l Ins. Co. v. Westchester Fire Ins. Co., 246 F.3d 46, 51 (2d Cir. 2001) (noting that "arising out of" is "ordinarily understood to mean originating from, incident to, or having connection with"); Mt. Hawley Ins. Co. v. AMCI, Inc., 2013 WL 5946714, at *4 (W.D. Pa. Nov. 6, 2013) (similar). The addition of "based upon" and "attributable to" further broadens the scope of the exclusion beyond what "arising out of" alone would accomplish.
The enumeration of specific statutes — including the Sherman Act and the Clayton Act by name and citation — is also significant. This enumeration eliminates any argument that the exclusion is ambiguous as to which laws are covered. The Ridgepoint complaint invokes precisely the statutes named in Exclusion 4(j): the claim is brought under Section 2 of the Sherman Act, and the damages are sought under Section 4 of the Clayton Act. On its face, therefore, the exclusion appears to encompass the claims asserted in the Ridgepoint Litigation.
Additionally, the exclusion covers both "actual" and "alleged" violations, which on a plain reading would mean that the exclusion could apply not only where the insured has been adjudged to have committed an antitrust violation, but also where the insured is merely accused of such a violation. This language, if enforced as written and without qualification, would be highly favorable to Clarendon's position, as it would allow the exclusion to be triggered by the mere allegation of an antitrust violation in a complaint, regardless of whether the allegation is ultimately sustained. However, whether this language is modified by other provisions of the Policy — including any "final adjudication" or "in fact" qualifier — is a critical question that we address below.
2. Arguments That Exclusion 4(j) Applies (Clarendon's Likely Position). Based on Clarendon's reservation of rights letter and the text of the Policy, we anticipate that Clarendon will advance the following arguments in support of the applicability of Exclusion 4(j):
The sole cause of action is a Sherman Act claim. Unlike cases involving mixed claims — where a complaint alleges both covered and excluded claims, and the insurer may owe a duty to defend with respect to the covered claims even if certain claims are excluded — the Ridgepoint complaint asserts a single cause of action under Section 2 of the Sherman Act. There is no tort, breach of contract, securities fraud, or other non-antitrust claim in the complaint. Clarendon will argue that this is not a case where the exclusion applies to only some of the claims and the insurer must still defend the balance; rather, the entire action falls within the scope of the exclusion.
The damages arise directly under the Clayton Act's treble-damage provision. The $381 million damages figure is derived entirely from the Clayton Act's provision for treble damages, 15 U.S.C. § 15, which is expressly referenced in Exclusion 4(j). Clarendon will argue that this further confirms that the loss sought by Ridgepoint is of precisely the type that the exclusion was designed to exclude.
The exclusion references both "actual" and "alleged" violations. As noted above, Exclusion 4(j) covers loss arising out of "any actual or alleged violation" of the enumerated statutes. Clarendon will contend that this language means the exclusion applies based on the nature of the allegations in the complaint, without regard to whether the insured is ultimately found to have committed a violation. Under this reading, the mere filing of a complaint alleging a Sherman Act violation triggers the exclusion, and no adjudication is required.
Policy exclusions for specifically enumerated statutory violations are generally enforced as written. Courts are generally reluctant to read ambiguity into exclusions that specifically identify the statutes at issue, particularly where the underlying complaint plainly invokes those statutes. See, e.g., National Union Fire Ins. Co. v. Continental Illinois Corp., 666 F. Supp. 1180, 1195 (N.D. Ill. 1987) (enforcing antitrust exclusion where the underlying claims sounded exclusively in antitrust); Sphinx Int'l, Inc. v. National Union Fire Ins. Co., 226 F. Supp. 2d 1326, 1341 (M.D. Fla. 2002), aff'd, 412 F.3d 1224 (11th Cir. 2005) (similar).
Clarendon's position, while not without weaknesses, is grounded in a straightforward textual reading of the exclusion and the complaint. We take this position seriously and believe it presents a meaningful risk to coverage.
3. Arguments That Exclusion 4(j) Should Not Bar Coverage (Northgate's Position). Notwithstanding the apparent breadth of Exclusion 4(j), Northgate has several strong arguments that the exclusion should not bar coverage for the Ridgepoint Litigation. We address each in turn.
Entity Liability Coverage Carve-Back. Many modern D&O policies, particularly those underwritten by sophisticated Bermuda and London-market carriers, contain entity liability extensions that are specifically intended to cover regulatory and competition-related exposures at the entity level. These extensions often include carve-backs or exceptions to general exclusions — including antitrust exclusions — that restore coverage for entity-level claims that would otherwise be excluded. It is critical that Whitmore & Crane conduct a thorough review of the Policy to determine whether any such carve-back applies to Exclusion 4(j). If the entity liability coverage section of the Policy contains a provision that overrides or narrows the antitrust exclusion for claims brought against the insured entity (as opposed to individual directors and officers), this could substantially undermine Clarendon's reservation. We note that the Clarendon ROR letter does not address this issue, which may indicate that Clarendon has not fully analyzed whether any such carve-back applies.
"Final Adjudication" or "In Fact" Qualifier. A central question in the coverage analysis is whether Exclusion 4(j) contains a "final adjudication" or "in fact" qualifier — that is, a provision that limits the applicability of the exclusion to situations in which the insured has been finally adjudged by a court of competent jurisdiction, or has been determined in fact, to have violated the referenced antitrust statutes. Such qualifiers are common in D&O policies and serve the important function of preventing insurers from invoking exclusions based on mere allegations that have not been substantiated through litigation or other proceedings.
If Exclusion 4(j) contains such a qualifier, the exclusion cannot be invoked at this stage of the proceedings. The Ridgepoint complaint has not survived a motion to dismiss — indeed, Northgate's Motion to Dismiss is currently pending — and there has been no adjudication of any kind regarding whether Northgate actually violated Section 2 of the Sherman Act. Under a "final adjudication" or "in fact" reading, the exclusion would only become operative if and when a court or other competent tribunal actually determines that Northgate engaged in the alleged monopolization. Until that time, the exclusion would be held in abeyance, and Clarendon's coverage obligations would remain in full force.
We note that, even if the Policy contains such a qualifier, it may not definitively resolve the coverage question in Northgate's favor. For example, if the Ridgepoint Litigation were to proceed to trial and result in a verdict finding that Northgate violated Section 2, the qualifier would be satisfied and the exclusion would likely apply retroactively to bar both defense and indemnity coverage. Nonetheless, the presence of a "final adjudication" qualifier would significantly strengthen Northgate's position at this stage and would support the argument that Clarendon's reservation of rights is premature.
Whitmore & Crane should review the full Policy, including all endorsements, to determine whether such a qualifier exists and, if so, its precise scope and operation.
Refusal-to-Deal Defense Posture. Northgate's defense in the Underlying Action is that its refusal to provide interconnection and colocation access to Ridgepoint does not constitute a violation of Section 2 of the Sherman Act. This defense is grounded in the well-established framework set forth in Harborview Holdings Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). Under Trinko, a firm's unilateral refusal to deal with a competitor is generally not actionable under Section 2 absent extraordinary circumstances, and the Supreme Court has expressed a strong reluctance to impose antitrust liability based on a refusal to assist a rival, particularly in regulated industries. Northgate's position is that the Trinko framework forecloses Ridgepoint's claim as a matter of law.
If Northgate prevails on this defense — whether on the pending Motion to Dismiss, at summary judgment, or at trial — there will be no "violation" of the Sherman Act to trigger the exclusion, regardless of whether the exclusion contains a "final adjudication" qualifier. A judicial determination that Northgate's conduct does not constitute monopolization would effectively moot the coverage question, because there would be no antitrust violation (actual or, in substance, proven) upon which the exclusion could operate. The strongest path to preserving coverage is therefore to defeat the underlying antitrust claim on the merits.
Duty to Defend vs. Duty to Indemnify. Under applicable insurance law principles, the duty to defend is broader than the duty to indemnify. An insurer that owes a duty to defend must continue to fund the insured's defense so long as there is any reasonable potential that the underlying claims could result in a covered loss. The insurer may not withdraw from the defense merely because it believes an exclusion may ultimately apply; rather, the insurer must fund the defense while reserving its right to contest coverage at a later date.
The specific contours of the duty-to-defend analysis depend on the applicable law governing the Policy. If the Policy is governed by New York law, for example, the insurer's duty to defend is triggered whenever the allegations in the underlying complaint suggest a reasonable possibility of coverage, and the insurer must defend the entire action even if some claims are potentially excluded. See Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137 (2006). If the Policy is governed by Bermuda law or English law, the duty-to-defend framework may differ, as discussed in Section III.B.4 below. Regardless of the applicable law, however, the reservation of rights does not relieve Clarendon of its obligation to participate in the defense while the claim is pending and the coverage question remains unresolved.
Public Policy Considerations. In certain jurisdictions, courts have expressed reluctance to enforce antitrust exclusions broadly where the insured has not been adjudged to have committed a willful or intentional antitrust violation. The rationale underlying this reluctance is that antitrust exclusions are sometimes treated as a species of intentional-act or illegal-act exclusion, and public policy disfavors allowing insurers to deny coverage based on allegations of conduct that the insured denies and that has not been proven. Some courts have distinguished between "statutory-reference" exclusions (which exclude coverage based on the type of statute at issue, regardless of culpability) and "intentional-act" exclusions (which exclude coverage only for conduct that the insured intentionally or willfully undertook). Where the distinction applies, courts may require a higher showing before enforcing an antitrust exclusion, particularly where the insured's defense is that no violation occurred.
We acknowledge that this public-policy argument is jurisdiction-specific and may not be available under all applicable laws. Nevertheless, it provides an additional ground for resisting the application of Exclusion 4(j), particularly if the Policy is governed by a jurisdiction that takes a restrictive approach to the enforcement of antitrust exclusions.
Allocation. Even if Exclusion 4(j) ultimately bars coverage for the treble-damages component of Ridgepoint's claim — on the theory that treble damages are punitive in nature and that the antitrust exclusion applies to the punitive multiplier — Northgate may argue that the single-damages component (i.e., the $127 million in underlying compensatory damages) remains covered. Under this theory, the antitrust exclusion would bar coverage only for the punitive enhancement (the additional $254 million attributable to trebling), while the underlying compensatory damages, which could arguably be characterized as commercial or economic loss rather than as "antitrust loss" per se, would remain within the scope of coverage. This argument would require an allocation between covered and excluded components of the loss, and its viability depends on the specific language of the Policy and applicable law regarding the insurability of treble damages.
We note that many jurisdictions hold treble damages under the Clayton Act to be uninsurable as a matter of public policy, at least insofar as the treble multiplier is concerned. See, e.g., Hartford Accident & Indem. Co. v. Village of Hempstead, 48 N.Y.2d 218, 226 (1979) (holding that punitive damages are uninsurable under New York law); but cf. the more nuanced treatment in some jurisdictions that permit insurance for the compensatory component while excluding the punitive multiplier. If applicable law distinguishes between the compensatory and punitive components of a treble-damages award, Northgate may have a basis for preserving partial coverage even if the antitrust exclusion is held to apply generally.
4. Jurisdictional and Choice-of-Law Considerations. The resolution of the coverage dispute may turn in significant part on the applicable law governing the construction of the Policy and, specifically, the interpretation of Exclusion 4(j). Several jurisdictions are potentially relevant:
Policy Governing-Law Clause. Clarendon Mutual is a Bermuda exempted company, and the Policy may contain a governing-law clause specifying the law that governs the interpretation of the Policy's terms and conditions. Common choices in policies issued by Bermuda-domiciled carriers include English law, Bermuda law, and New York law. Whitmore & Crane should confirm the governing-law provision in the Policy, as this will determine the interpretive framework applicable to the antitrust exclusion.
If New York law applies: New York courts generally enforce policy exclusions as written, provided that the exclusionary language is clear and unambiguous. See Pioneer Tower Owners Ass'n v. State Farm Fire & Cas. Co., 12 N.Y.3d 302, 307 (2009) ("Where the provisions of a policy are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement."). Under New York law, the insurer bears the burden of proving that an exclusion applies, and ambiguities in exclusionary clauses are construed against the insurer and in favor of the insured. See Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 218 (2002). If the antitrust exclusion is clear on its face, a New York court will likely enforce it. However, if the exclusion contains a "final adjudication" qualifier or other limiting language, New York courts will give full effect to that limitation.
If Bermuda or English law applies: The duty-to-defend framework under Bermuda and English law differs from the American framework in important respects. English and Bermuda law do not recognize a free-standing "duty to defend" in the same manner as American insurance law. Instead, coverage is typically analyzed under an indemnity-based model, in which the insurer's obligation is to hold the insured harmless for covered losses. The implications of this distinction for Clarendon's defense participation — and for Northgate's ability to compel continued participation — should be analyzed by Whitmore & Crane in light of the specific Policy terms and the applicable regulatory framework.
Under English law, exclusion clauses are interpreted strictly but in accordance with their plain meaning. See Impact Funding Solutions Ltd v. Barrington Support Services Ltd, [2016] UKSC 57 (applying ordinary principles of contractual construction to exclusion clauses in insurance policies). Ambiguity is resolved against the insurer under the contra proferentem rule, but this rule is applied only as a last resort where the language is genuinely ambiguous after applying ordinary interpretive principles. English courts will not strain to find ambiguity where the language is clear.
Virginia law. The Underlying Action is pending in the Eastern District of Virginia, and Virginia insurance law may also be relevant depending on the location of the insured, the situs of the loss, or other connecting factors. Virginia courts apply the "eight corners" rule in duty-to-defend disputes, comparing the four corners of the underlying complaint with the four corners of the insurance policy to determine whether the allegations potentially fall within the scope of coverage. See CUNA Mut. Ins. Soc'y v. Norwegian Tp., 376 S.E.2d 310, 314 (Va. 1989).
The choice-of-law analysis is a matter that Whitmore & Crane should address in its detailed policy review. We flag these considerations here so that the Northgate legal team is aware of the potential variability in outcomes depending on the applicable jurisdiction.
C. Clarendon's Continued Defense Participation
Despite the reservation of rights, Clarendon has agreed to participate in the defense of the Ridgepoint Litigation at this stage. This participation is significant, as it means that Clarendon will, subject to the terms of the Policy and the SIR, fund or reimburse defense costs incurred by Northgate in defending against the Ridgepoint claims.
However, several important caveats apply:
First, Clarendon's participation is expressly conditioned on its ongoing reservation of rights. This means that Clarendon's willingness to participate in the defense today does not constitute a waiver of its right to invoke Exclusion 4(j) at a later date. Clarendon may seek to withdraw from defense participation at a future stage — for example, after the Motion to Dismiss is decided — if it concludes that the exclusion definitively applies. The reservation of rights letter specifically preserves this option.
Second, Clarendon's defense participation may be limited to the payment or reimbursement of defense costs (including attorney fees, expert fees, and related expenses), subject to the exhaustion of the SIR. Whether Clarendon's participation extends to the payment of indemnity for any judgment or settlement is a separate question that remains open under the reservation. Clarendon may take the position that it will fund the defense but will not indemnify Northgate against any ultimate liability, particularly if the liability arises directly from an adjudicated antitrust violation.
Third, Northgate should not rely on Clarendon's continued defense participation as a guarantee of coverage or as an indication that Clarendon will ultimately agree that coverage exists. Reservation of rights letters are designed precisely to preserve the insurer's options, and Clarendon's agreement to participate in the defense at this early stage should not be taken as an acknowledgment that the antitrust exclusion is inapplicable.
Fourth, Northgate should be aware that Clarendon's defense participation under a reservation of rights may create a potential conflict of interest. In some jurisdictions, an insured that is defended under a reservation of rights has the right to select independent defense counsel at the insurer's expense, on the theory that the insurer's reservation creates a conflict between the insurer's interest in establishing the applicability of the exclusion and the insured's interest in defeating the underlying claim. Whether this right applies here depends on the applicable law and the specific nature of the reservation. Whitmore & Crane should advise on this issue.
IV. Self-Insured Retention Analysis
The $10 million self-insured retention under the Clarendon primary policy is a critical threshold in the coverage analysis. Clarendon's indemnity and defense-cost reimbursement obligations do not attach until the SIR has been fully exhausted. The terms of the SIR — and, specifically, whether it is eroded by defense costs (including attorney fees, expert fees, and e-discovery costs) or only by indemnity payments (i.e., judgments and settlements) — must be confirmed by reference to the Policy language. In many D&O policies, the SIR is eroded by both defense costs and indemnity payments, meaning that the insured's expenditures on defense reduce the SIR dollar-for-dollar alongside any amounts paid in settlement or satisfaction of a judgment. Whitmore & Crane should confirm the specific terms of the SIR provision.
As of the date of this memorandum, Northgate has incurred the following defense costs in connection with the Ridgepoint Litigation:
The foregoing amounts reflect billings through early November 2022 and represent the total fees and costs incurred across all work streams in the Ridgepoint Litigation to date. While the precise allocation of these costs to the SIR depends on the Policy's terms, it is clear that defense spending is substantial and is likely to increase significantly if the case survives the Motion to Dismiss and proceeds into discovery. Major cost drivers going forward would include extensive document discovery (Northgate's files relating to interconnection and colocation decisions at the fourteen identified facilities), depositions of Northgate executives and technical personnel, expert discovery relating to market definition, monopoly power, and damages, and trial preparation and trial itself.
If defense costs erode the SIR — which is the more common formulation in D&O policies of this type — the $10 million threshold could be reached relatively early in the litigation, potentially within the first twelve to eighteen months, given the scope and complexity of the matter. Once the SIR is exhausted, Clarendon's payment obligations attach, and the coverage dispute becomes directly and immediately financial rather than prospective.
Tracking SIR erosion is critical for both Northgate's financial planning and Clarendon's obligations. We recommend establishing a dedicated tracking mechanism, coordinated between Howard Bellamy (C&H billing partner), Catherine Ng (Northgate U.S. Deputy General Counsel), and Whitmore & Crane, to monitor cumulative defense expenditures and project when the SIR is likely to be exhausted. This tracking will also be relevant to the timing of any formal coverage demand or declaratory judgment action, as Clarendon's obligations become most consequential when the SIR is near exhaustion and the insurer's actual payment obligations are imminent.
V. Excess Tower Considerations
A. Avalon Specialty Underwriters Inc. — First Excess Layer ($30 Million)
Avalon Specialty Underwriters Inc. ("Avalon"), a New York corporation, provides $30 million in excess coverage under the first excess layer of the D&O tower, sitting above Clarendon's $50 million primary layer. Avalon's coverage attaches at $60 million (the sum of the $10 million SIR and the $50 million Clarendon primary limit).
As is typical for excess D&O policies, Avalon's policy is expected to follow the terms and conditions of the Clarendon primary policy on a "follow-form" basis. This means that the definitions, insuring agreements, exclusions, and conditions of the Clarendon primary policy are generally incorporated by reference into the Avalon excess policy, unless the Avalon policy contains specific provisions that modify or override the underlying terms. Critically, if the Avalon policy follows form to the Clarendon primary, Exclusion 4(j) — the antitrust exclusion — applies with equal force at the excess level as at the primary level.
The practical implication is that if Clarendon ultimately denies coverage under Exclusion 4(j), Avalon will very likely take the same position and deny coverage under its follow-form policy. Conversely, if Northgate successfully defeats Clarendon's exclusion argument, that outcome should flow through to the excess level and establish coverage under the Avalon layer as well.
We recommend that Northgate, through Whitmore & Crane, promptly provide formal notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights to Avalon. This notice is important for several reasons: (a) the Avalon excess policy likely contains its own notice provisions, which must be complied with to preserve coverage; (b) early notice allows Avalon to evaluate its own coverage position and potentially engage with Clarendon on the exclusion question; and (c) Northgate should obtain Avalon's written acknowledgment of the claim and its coverage position, which will be relevant in the event of a subsequent coverage dispute.
B. Pinnacle Re Ltd. — Second Excess Layer ($20 Million)
Pinnacle Re Ltd. ("Pinnacle Re"), a Bermuda exempted company, provides $20 million in excess coverage under the second excess layer of the D&O tower. Pinnacle Re's coverage attaches at $90 million (the sum of the $10 million SIR, the $50 million Clarendon primary limit, and the $30 million Avalon first excess limit).
The same follow-form analysis that applies to Avalon applies to Pinnacle Re. If Pinnacle Re's policy follows form to the Clarendon primary policy, the antitrust exclusion (Exclusion 4(j)) will apply at the second excess level as well. Accordingly, Pinnacle Re's coverage position on the antitrust exclusion will likely track Clarendon's position.
We similarly recommend that formal notice of the claim and of Clarendon's reservation of rights be provided to Pinnacle Re promptly, through Whitmore & Crane, in order to preserve Northgate's rights under the second excess layer.
C. Practical Implications
The total D&O tower provides $150 million in combined limits ($10 million SIR + $50 million Clarendon primary + $30 million Avalon first excess + $20 million Pinnacle Re second excess, with the SIR borne by Northgate, yielding $100 million in insurer-funded limits). It is important to note that this total tower — even if fully available — is insufficient to cover Ridgepoint's full trebled damages claim of $381 million. There is an exposure gap of approximately $231 million ($381 million in trebled damages minus $150 million in total tower limits), plus uncovered defense costs in excess of those funded by the tower. This gap represents the portion of any adverse judgment that Northgate would be required to fund from its own resources, even in a scenario where full coverage is available.
However, Northgate's damages rebuttal substantially reduces the expected exposure. Dr. Priya Narasimhan of Ellsworth Economic Consulting, Northgate's retained damages expert, has conducted a preliminary assessment of Ridgepoint's damages claims and estimates that Ridgepoint's actual provable lost profits, under proper economic methodology, are in the range of $18 million to $24 million before trebling. If this estimate is credited, the trebled damages would range from $54 million to $72 million, which is well within the capacity of the D&O tower (even under the primary layer alone, before the excess layers are implicated).
The coverage gap underscores the importance of the damages defense in the Underlying Action. If Northgate's damages rebuttal is successful in reducing Ridgepoint's claimed damages to a level within the D&O tower, the practical significance of the antitrust exclusion question diminishes, particularly if Northgate prevails on liability altogether (which would moot the coverage question entirely). Conversely, if the case proceeds to a large adverse judgment at or near Ridgepoint's claimed amount of $381 million, the interplay between the coverage gap and the antitrust exclusion creates a scenario in which Northgate could face both a denial of coverage and an uninsured exposure in excess of $200 million — a result that underscores the critical importance of the defense strategy.
VI. Coordination with Whitmore & Crane LLP (Coverage Counsel)
Whitmore & Crane LLP, located at 380 Madison Avenue, 22nd Floor, New York, NY 10017, serves as Northgate's insurance coverage counsel and has been engaged in the coverage analysis since the initial stages of the Ridgepoint Litigation. Calderwood & Harkness coordinated closely with Whitmore & Crane in preparing and transmitting the October 12, 2022 tender letter to Clarendon Mutual, and the two firms have maintained regular communication regarding coverage developments.
Going forward, we recommend the following division of responsibilities between Calderwood & Harkness (defense counsel) and Whitmore & Crane (coverage counsel):
Whitmore & Crane should take the lead on the following coverage-specific matters:
(a) Detailed policy analysis. Whitmore & Crane should conduct a comprehensive, provision-by-provision review of the Clarendon primary policy, including all endorsements, riders, and amendments, to identify: (i) any carve-backs, exceptions, or qualifications to Exclusion 4(j) that may limit or override the antitrust exclusion; (ii) the presence or absence of a "final adjudication" or "in fact" qualifier in the exclusion; (iii) any entity liability coverage extensions that may restore coverage for claims that would otherwise be excluded; and (iv) the governing-law clause and its implications for the interpretive framework.
(b) Formal response to Clarendon's reservation of rights letter. Whitmore & Crane should prepare and transmit a formal written response to Clarendon's November 3, 2022 reservation of rights letter, asserting Northgate's position that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation and demanding that Clarendon continue full defense participation without reservation, or, in the alternative, that Clarendon identify with specificity the factual and legal bases for its reservation.
(c) Notice to excess carriers. Whitmore & Crane should ensure that formal notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights is provided to Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd. in compliance with the notice provisions of the respective excess policies.
(d) Monitoring of compliance with policy conditions. Whitmore & Crane should monitor Northgate's ongoing compliance with all Policy conditions, including cooperation obligations, consent-to-settle provisions, and any periodic reporting requirements.
(e) Preparation for a potential declaratory judgment action. If Clarendon's position hardens and coverage is formally denied, Whitmore & Crane should be prepared to advise on the filing of a declaratory judgment action to establish Northgate's right to coverage. This would include analysis of the appropriate forum, timing, and strategy for such an action.
Calderwood & Harkness will continue to lead the defense of the Underlying Action and will coordinate with Whitmore & Crane as follows:
(a) Substantive defense strategy. C&H will develop and execute the defense strategy in the Ridgepoint Litigation in accordance with Northgate's best interests and in the exercise of independent professional judgment. Defense strategy will be developed without regard to coverage considerations — that is, C&H will not tailor defense positions to maximize or protect insurance coverage at the expense of the defense of the underlying claims.
(b) Coverage-sensitive coordination. Notwithstanding the foregoing, C&H will be mindful of the potential implications of defense positions and concessions for the coverage analysis. In particular, C&H will avoid making admissions or concessions in the Underlying Action that could be characterized as acknowledging an antitrust violation or as supporting Clarendon's argument that Exclusion 4(j) applies. This is a matter of prudent coordination, not of coverage-driven advocacy, and C&H will consult with Whitmore & Crane as appropriate to ensure that the defense is conducted in a manner that does not inadvertently prejudice Northgate's coverage position.
(c) Information sharing. C&H will provide Whitmore & Crane with copies of all material filings, orders, and developments in the Underlying Action, to the extent necessary for Whitmore & Crane to fulfill its coverage advisory role. This information sharing will be conducted under the common-interest privilege, and appropriate privilege protections will be maintained at all times.
It is important that the defense and coverage functions remain closely coordinated but distinct. Defense counsel must exercise independent professional judgment in the Underlying Action, and coverage considerations should not drive defense strategy. At the same time, the defense team should be aware of the coverage landscape so that inadvertent harm to the coverage position is avoided.
VII. Risk Assessment and Recommendations
A. Overall Coverage Assessment
On balance, Northgate has reasonable arguments against the application of Exclusion 4(j) to bar coverage for the Ridgepoint Litigation. The strength of Northgate's position depends significantly on several factors that require further investigation by Whitmore & Crane, including:
• Whether the Policy contains a "final adjudication" or "in fact" qualifier in Exclusion 4(j), which would prevent the exclusion from being invoked absent a judicial determination that Northgate actually violated the antitrust laws;
• Whether the entity liability coverage section of the Policy contains a carve-back or exception to the antitrust exclusion for claims brought against the insured entity;
• The applicable governing law and its treatment of antitrust exclusions in D&O policies; and
• The ultimate outcome of the Underlying Action on the merits.
If the exclusion contains a "final adjudication" or "in fact" qualifier, Northgate's coverage position is strong at this stage, because no adjudication has occurred and the complaint has not even survived a motion to dismiss. In that scenario, Clarendon's reservation is premature, and coverage should remain intact pending the resolution of the Underlying Action on the merits.
However, if the exclusion is absolute — that is, if it applies based on the nature of the allegations in the complaint, without regard to whether the insured is ultimately found to have committed a violation — coverage is at meaningful risk. In that scenario, the fact that the Ridgepoint complaint asserts solely antitrust claims under the Sherman Act and Clayton Act, with no non-antitrust claims in the complaint, makes it difficult to argue that the exclusion does not facially apply.
The strongest path to preserving coverage is to defeat the underlying antitrust claim on the merits. If Northgate prevails on its Motion to Dismiss, or at summary judgment, or at trial, the antitrust exclusion question becomes moot, because there will be no antitrust violation — actual or adjudicated — to trigger the exclusion. This alignment between the defense strategy and the coverage strategy underscores the importance of a vigorous and well-resourced defense of the Underlying Action.
B. Specific Recommendations
Based on the foregoing analysis, we recommend that Northgate take the following steps:
1. Whitmore & Crane to respond formally to Clarendon's reservation of rights letter. Whitmore & Crane should prepare and transmit a detailed written response to Clarendon's November 3, 2022 reservation of rights letter, asserting Northgate's position that Exclusion 4(j) does not apply to bar coverage for the Ridgepoint Litigation and demanding continued full defense participation by Clarendon. The response should address each of the arguments identified in Section III.B.3 above and should request that Clarendon identify with specificity the factual and legal bases for its reservation. The response should be sent at the earliest practicable date, and in any event no later than thirty (30) days from the date of this memorandum (i.e., by December 18, 2022).
2. Provide notice to excess carriers. Whitmore & Crane should promptly send formal written notice of the Ridgepoint Litigation claim and of Clarendon's reservation of rights to Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd. in compliance with the notice provisions of the respective excess policies. The notice should request that each excess carrier acknowledge receipt of the notice, confirm its coverage position, and identify any additional information or documentation it requires. This notice should be transmitted as soon as possible, ideally within two weeks of the date of this memorandum, to avoid any risk that late notice could be asserted as a defense to coverage.
3. Track SIR erosion. Northgate should establish a dedicated tracking mechanism to monitor the cumulative defense costs incurred in the Ridgepoint Litigation against the $10 million SIR. This tracking should be coordinated between Howard Bellamy (C&H billing partner), Catherine Ng (Northgate U.S. Deputy General Counsel), and Whitmore & Crane. The tracker should be updated monthly and should include all categories of defense expenditure, including attorney fees, expert fees, e-discovery costs, and any other amounts that erode the SIR under the terms of the Policy. Timely and accurate SIR tracking will enable Northgate to project when the SIR will be exhausted and Clarendon's payment obligations will attach, and will facilitate financial planning for the litigation.
4. Preserve coverage positions. In all filings, briefs, discovery responses, and other submissions in the Underlying Action, defense counsel should avoid admissions or concessions that could be characterized as acknowledging an antitrust violation by Northgate. Any such acknowledgment — whether express or implied — could strengthen Clarendon's argument that Exclusion 4(j) applies, and could potentially satisfy a "final adjudication" or "in fact" qualifier by establishing that Northgate has conceded liability. This does not mean that defense counsel should tailor its strategy to coverage considerations; rather, it means that defense counsel should be aware of the potential coverage implications of defense positions and should consult with Whitmore & Crane where appropriate.
5. Evaluate declaratory judgment action. If Clarendon's position hardens — for example, if Clarendon declines to continue defense participation, formally denies coverage, or refuses to reimburse defense costs after the SIR is exhausted — Northgate should consider filing a declaratory judgment action to establish its right to coverage under the Policy. The timing, forum, and strategy for such an action should be discussed with Whitmore & Crane. Potential forums include the United States District Court for the Southern District of New York (given the New York nexus of several of the parties and the policy), the Supreme Court of Bermuda (if Bermuda law governs the Policy), or the courts of the jurisdiction specified in the Policy's dispute-resolution clause. Whitmore & Crane should advise on the most favorable forum and the optimal timing for initiating such an action, taking into account the procedural posture of the Underlying Action and the state of the coverage dispute.
6. Monitor parallel FCC proceeding. Northgate is a party to a parallel proceeding before the Federal Communications Commission, Docket WC-23-0042, before Administrative Law Judge Robert Fenwick. This FCC proceeding involves issues related to Northgate's interconnection and colocation practices that overlap substantively with the allegations in the Ridgepoint Litigation. An FCC determination that Northgate's interconnection practices were commercially reasonable and consistent with applicable regulatory requirements would provide strong support for the argument that Northgate did not violate Section 2 of the Sherman Act — and, by extension, that the antitrust exclusion should not apply. Conversely, an adverse FCC determination could undermine Northgate's defense posture and strengthen the case for the exclusion. C&H and Northgate's regulatory counsel should monitor this proceeding closely and coordinate with Whitmore & Crane to ensure that any FCC findings are appropriately communicated to Clarendon and the excess carriers.
7. Budget for uncovered exposure. Given the uncertainty surrounding the coverage analysis and the fact that the total D&O tower ($150 million) does not fully cover Ridgepoint's trebled damages claim of $381 million, Northgate should budget for the possibility of bearing defense costs and indemnity exposure outside the insurance program. This budgeting should account for several scenarios: (a) full coverage available, with damages limited to the range estimated by Dr. Narasimhan ($54–$72 million trebled), in which case the tower is sufficient; (b) full coverage available, but damages exceed the tower, creating an uninsured gap; (c) coverage denied under Exclusion 4(j), requiring Northgate to fund the entire defense and any indemnity from its own resources; and (d) partial coverage available (e.g., coverage for defense costs but not indemnity, or coverage for single damages but not the treble multiplier). Financial planning for these scenarios should be undertaken in coordination with Northgate's finance and treasury functions.
VIII. Conclusion
Clarendon Mutual's reservation of rights is a significant but not unexpected development in light of the antitrust nature of the claims asserted in the Ridgepoint Litigation. The antitrust exclusion in Exclusion 4(j) of the D&O Policy is broad and specifically references the Sherman Act and the Clayton Act — the very statutes under which Ridgepoint's sole cause of action is brought. Clarendon's decision to reserve its rights with respect to this exclusion is a standard insurer response to a claim of this nature and reflects a legitimate, if contestable, coverage concern.
Northgate has colorable and, in our assessment, reasonable arguments to resist the application of Exclusion 4(j). The strength of those arguments depends on several critical factors that require further investigation, most notably the presence or absence of a "final adjudication" or "in fact" qualifier in the exclusion, the existence of entity liability carve-backs, and the applicable governing law. If the exclusion is qualified, Northgate's position is strong at this stage. If the exclusion is absolute, the coverage risk is meaningful, though not insurmountable, particularly if Northgate prevails on the merits of the underlying antitrust claim.
The immediate next steps are as follows:
(a) Coordinate with Whitmore & Crane LLP on a formal written response to Clarendon's November 3, 2022 reservation of rights letter;
(b) Provide formal notice of the claim and the reservation to the excess carriers (Avalon Specialty Underwriters Inc. and Pinnacle Re Ltd.);
(c) Establish and maintain a tracking mechanism for SIR erosion; and
(d) Continue to develop and execute the defense of the Underlying Action in a manner that is both vigorous and consistent with the preservation of Northgate's coverage rights.
Calderwood & Harkness will continue to keep Catherine Ng and James Whitford apprised of all developments in the Ridgepoint Litigation that bear on coverage, and will coordinate closely with Whitmore & Crane on all coverage-related matters. We are available to discuss this memorandum and its recommendations at your earliest convenience.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Elaine Forsythe Responsible Partner, Antitrust & Competition Calderwood & Harkness LLP 1200 K Street NW, Suite 900 Washington, D.C. 20005
By: ________
Howard Bellamy Billing Partner, Antitrust & Competition Calderwood & Harkness LLP 450 Lexington Avenue, 35th Floor New York, NY 10017
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION Calderwood & Harkness LLP | Engagement Ref. No. C&H-2022-ATR-00419
Layer | Carrier | Domicile | Limit | Attachment Point
Self-Insured Retention | Northgate | N/A | $10,000,000 | $0
Layer 1 (Primary) | Clarendon Mutual Insurance Ltd. | Bermuda (exempted company) | $50,000,000 | $10,000,000 (above SIR)
Layer 2 (First Excess) | Avalon Specialty Underwriters Inc. | New York | $30,000,000 | $60,000,000 ($10M SIR + $50M primary)
Layer 3 (Second Excess) | Pinnacle Re Ltd. | Bermuda (exempted company) | $20,000,000 | $90,000,000 ($10M SIR + $50M primary + $30M first excess)
Vendor / Firm | Description | Amount Billed Through Early November 2022
Calderwood & Harkness LLP | Legal fees (defense counsel) | Portion of $1,247,600 total pre-stay billings
Ellsworth Economic Consulting | Damages expert (Dr. Priya Narasimhan) | Portion of $412,000 to date
Torrence Policy Group | Regulatory and public policy consulting | Portion of $187,500 to date
Candela discovery Solutions | E-discovery and document review | Portion of $294,000 to date

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

ENGAGEMENT REF. NO.: C&H-2022-ATR-00419

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts