1025-00005 · Quorum Insurance Holdings · Case Assessment

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

March 14, 2026

MEMORANDUM

FROM: Douglas Carmichael, Responsible Partner, and Jeffrey Park, Lead Associate Calderwood & Harkness LLP One Liberty Plaza, 55th Floor New York, NY 10006

TO: Rachel Sondergaard, General Counsel Quorum Insurance Holdings Corp. 200 Constitution Plaza, Suite 3400 Hartford, CT 06103

RE: Initial Case Assessment — Pinnacle Atlantic Reinsurance Ltd. Pre-Suit Demand — Treaty No. PA-QCS-2019-EXL-0044

MATTER NO.: 1025-00005

CONFIDENTIALITY NOTICE: This memorandum is prepared in connection with anticipated litigation and/or arbitration and is protected by the attorney-client privilege and the work product doctrine. The analyses, opinions, conclusions, and strategic recommendations contained herein reflect the mental impressions, conclusions, and legal theories of counsel. This memorandum is intended solely for the use of the addressee and authorized recipients identified in the distribution list appended hereto. Do not forward, copy, distribute, or disclose the contents of this memorandum to any person or entity without the prior written authorization of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.

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I. Executive Summary

Calderwood & Harkness LLP was retained on March 2, 2026, by Quorum Insurance Holdings Corp. ("QIH") and its principal insurance subsidiary, Quorum Casualty & Surety Company ("QC&S"), to assess and defend against the pre-suit demand of Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"). This memorandum provides our initial case assessment, including a detailed analysis of the four grounds asserted by Pinnacle Atlantic, an aggregate exposure analysis, forum and dispute resolution considerations, recommended defenses and potential counterclaims, identification of key witnesses and documents, and strategic recommendations for both the immediate and medium-term horizons.

Pinnacle Atlantic's demand, dated February 14, 2026, was transmitted by its outside counsel, Hargrove, Fitch & Calloway LLP ("HFC"), through its partner Nathaniel R. Calloway III. The demand seeks the return of $78,400,000 in reinsurance recoverables previously paid under Treaty No. PA-QCS-2019-EXL-0044 (the "2019 Treaty" or "Treaty"), plus $12,600,000 in accrued interest calculated at a rate of eight percent (8%) per annum over an approximate twenty-four (24) month average period, for a total demand of $91,000,000.

The dispute centers on cessions made for two treaty years:

• Treaty Year 2022 (July 1, 2022 – June 30, 2023): $69,700,000 ceded against an aggregate net incurred loss of $189,700,000, after the $120,000,000 per-treaty-year retention.

• Treaty Year 2023 (July 1, 2023 – June 30, 2024): $8,700,000 ceded against an aggregate net incurred loss of $128,700,000, after the same retention.

These amounts were paid by Pinnacle Atlantic in full across seven billing installments from October 15, 2022 through March 29, 2024, without contemporaneous objection.

Pinnacle Atlantic's demand asserts four grounds for disgorgement of the paid recoverables:

1. Late Notice (Ground 1): Alleged untimely notice of the Meridian Docks mass tort claims under Treaty Article 7.

2. IBNR Misallocation (Ground 2): Alleged improper allocation of $22,300,000 in IBNR reserve development to Treaty Year 2022 under Treaty Article 5.

3. Follow-the-Fortunes Challenge (Ground 3): Alleged bad-faith settlement of the Veridian Financial Services E&O cluster, purportedly in violation of Treaty Article 11.

4. Premium Underreporting (Ground 4): Alleged underreporting of $6,800,000 in ceded earned premium under Treaty Article 3.

Overall Assessment. Based on our preliminary review of the demand letter, the Treaty, and information provided by QC&S to date, it is our assessment that QC&S has strong defenses on Grounds 1, 3, and 4, and a moderate risk on Ground 2 (IBNR allocation). The exposure range spans from $0 (best case, full defense on all grounds) to $91,000,000 (worst case, full adverse outcome with interest). In our judgment, the most likely outcome falls in the range of a partial concession or adverse finding on the IBNR allocation issue, resulting in a reduction of approximately $22,300,000 in ceded losses, with QC&S retaining the balance of the $78,400,000 recoverable. Even this likely-case scenario should be vigorously defended, as the actuarial judgment underlying the allocation is entitled to deference under both the Treaty and applicable law.

Strategic Recommendation. We recommend that QC&S pursue a multi-track strategy:

(a) Invoke Treaty Article 22 and demand arbitration under ARIAS-U.S. Rules, as the Treaty mandates and as the most favorable forum for QC&S;

(b) Simultaneously propose voluntary mediation as a preliminary step, without prejudice to the demand to arbitrate, to explore resolution before incurring full arbitration costs;

(c) Prepare pre-litigation defensive pleadings — including a verified answer, affirmative defenses, counterclaims, and a motion to compel arbitration — in the event Pinnacle Atlantic files suit in New York Supreme Court, Commercial Division, as HFC's demand letter suggests it may; and

(d) Commence comprehensive document collection, claims file review, and expert retention to develop the factual record on each ground, particularly the IBNR allocation at issue in Ground 2.

The QIH Board Audit Committee authorized the retention of litigation counsel on February 24, 2026. We note that the matter carries significant financial implications for QC&S and QIH, including potential impacts on QC&S's statutory surplus (currently $1.42 billion as of December 31, 2025), QIH's GAAP financial statements, compliance with the minimum statutory surplus covenant ($1.1 billion) under the Cartwright National Bank revolving credit facility, and SEC and NYDFS disclosure obligations. We address each of these considerations in the sections that follow.

II. Background

A. The Parties

Quorum Insurance Holdings Corp. ("QIH"). QIH is a Delaware corporation, publicly traded on the Nasdaq Global Select Market under the ticker symbol QIHC, and headquartered at 200 Constitution Plaza, Suite 3400, Hartford, Connecticut 06103. QIH operates as a multi-line insurance holding company with a technology-enabled distribution platform marketed under the brand name "QuorumEdge." For the fiscal year ended December 31, 2025, QIH reported gross written premium of approximately $4.18 billion and net earned premium of approximately $2.93 billion. As of February 28, 2026, QIH's market capitalization stood at approximately $6.7 billion. QIH's Chief Executive Officer is Martin Galbraith. Rachel Sondergaard serves as General Counsel, and Tobias Engstrom serves as Senior Vice President, Reinsurance & Capital Markets. QIH's financial statements for FY 2025 were audited by Meridian Whitcomb & Co. LLP, which issued an unqualified opinion that includes the $78.4 million reinsurance recoverable at issue in this dispute.

Quorum Casualty & Surety Company ("QC&S"). QC&S is QIH's principal insurance subsidiary and the cedent under the 2019 Treaty. QC&S is a New York-domiciled stock property & casualty insurer, assigned NAIC Company Code No. 24891, with its principal office at 200 Constitution Plaza, Suite 3200, Hartford, Connecticut 06103. QC&S maintains an A.M. Ridgeway financial strength rating of A (Excellent) with a Stable outlook, last affirmed in the 2025 rating cycle. As of December 31, 2025, QC&S reported statutory surplus of $1.42 billion. QC&S underwrites commercial general liability, excess and umbrella liability, professional liability, and related casualty lines. Diana Kessler-Hoff serves as Vice President, Claims & Reinsurance Recoveries, and is the principal internal stakeholder responsible for the cessions at issue.

Pinnacle Atlantic Reinsurance Ltd. ("PARL" or "Pinnacle Atlantic"). Pinnacle Atlantic is a Bermuda Class 4 insurer regulated by the Bermuda Monetary Authority, holding BMA Registration No. BMA-4R-2008-0331. Its registered office is located at Clarendon House, 14 Church Street, Hamilton HM 11, Bermuda. Pinnacle Atlantic maintains a U.S. office at 1285 Avenue of the Americas, 28th Floor, New York, New York 10019. It is a wholly owned subsidiary of Pinnacle Atlantic Group Holdings Ltd., a Bermuda exempted company. Pinnacle Atlantic is a global reinsurer specializing in casualty treaty and facultative reinsurance, reporting gross reinsurance assumed of approximately $9.6 billion for the fiscal year ended December 31, 2025. Sir Edmund Haverford serves as Chief Executive Officer, Lorraine Metcalf serves as Chief Claims Officer, and Conrad Hesse serves as Senior Vice President, Treaty Disputes & Recoveries. The HFC pre-suit demand letter identifies Mr. Hesse as the principal Pinnacle Atlantic contact for purposes of this dispute.

Broadreach Intermediaries Inc. ("Broadreach"). Broadreach is a New York corporation and licensed reinsurance intermediary, with offices at 100 Wall Street, 18th Floor, New York, New York 10005. Broadreach's Account Executive, James "Jamie" Castellano, placed the 2019 Treaty on behalf of QC&S and has handled all premium and claims-settlement transmittals between QC&S and Pinnacle Atlantic for the duration of the Treaty. Broadreach is designated as the intermediary under Treaty Article 9, which governs the flow of premium payments, claims notifications, and loss information between the parties. Broadreach's role is significant to this dispute, as the timing and content of transmittals through Broadreach bear directly on the notice and premium reporting issues raised in Pinnacle Atlantic's demand.

B. The 2019 Treaty

The Treaty at the center of this dispute is designated Treaty No. PA-QCS-2019-EXL-0044. The following summarizes the key structural and substantive provisions of the Treaty based on our preliminary review of the executed agreement and its endorsements.

Type. The Treaty is an aggregate excess-of-loss reinsurance treaty covering specified casualty lines. Unlike a per-occurrence excess-of-loss treaty, the Treaty responds when QC&S's aggregate net incurred losses across all covered claims in a given treaty year exceed a specified retention. This structural feature is directly relevant to several aspects of the dispute, as Pinnacle Atlantic's obligations under the Treaty are triggered by aggregate loss totals rather than individual claim outcomes.

Effective Date and Term. The Treaty became effective on July 1, 2019, with an original term of five years through June 30, 2024. The Treaty provides for automatic annual extensions unless either party provides ninety (90) days' written notice of non-renewal. The Treaty was extended through June 30, 2026 via two successive automatic one-year extensions. On October 1, 2025, Pinnacle Atlantic provided notice of non-renewal. Accordingly, the Treaty will lapse upon the expiration of the current extension period on June 30, 2026. The Treaty's run-off provisions (Article 18) will govern the handling of any outstanding claims or cessions following expiration.

Covered Lines. The Treaty covers losses arising under commercial general liability, excess and umbrella liability, and professional liability policies issued by QC&S during the treaty year. The covered lines definition is set forth in Article 2 and the attached Schedule of Business.

Retention. QC&S's retention under the Treaty is $120,000,000 in aggregate net incurred losses per treaty year. This means that Pinnacle Atlantic's obligation to pay ceded losses does not attach until QC&S's total aggregate net incurred losses in the covered lines, for a given treaty year, exceed $120 million.

Cession Limit. The Treaty's cession limit is $200,000,000 per treaty year in excess of the retention. Accordingly, the Treaty covers losses falling within the layer from $120,000,000 to $320,000,000 in aggregate net incurred losses per treaty year.

Treaty Premium. The Treaty provides for a provisional premium rate of forty-two percent (42%) of ceded earned premium, subject to a slide-scale adjustment based on loss experience. The slide-scale provides for a minimum premium rate of thirty-five percent (35%) and a maximum premium rate of fifty-two percent (52%). The slide-scale adjustment is calculated and settled on an annual basis following the close of each treaty year, with a final adjustment upon completion of the run-off period.

Governing Law. Article 16 of the Treaty provides that the Treaty shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict-of-laws provisions.

Arbitration. Article 22 of the Treaty provides for the resolution of disputes through binding arbitration before a three-member arbitration panel sitting in New York, New York, under the rules and procedures of ARIAS-U.S. (the AIDA Reinsurance and Insurance Arbitration Society – U.S.). The arbitration clause is broadly worded and applies to disputes "arising under or in connection with" the Treaty. We address the forum implications of this clause in detail in Section V below.

Intermediary. Article 9 designates Broadreach Intermediaries Inc. as the intermediary for all communications, premium transmittals, and claims-settlement transmittals under the Treaty.

C. Disputed Cessions

The disputed cessions span two treaty years:

Treaty Year 2022 (July 1, 2022 – June 30, 2023). QC&S reported aggregate net incurred losses of $189,700,000 across all covered casualty lines for this treaty year. After application of the $120,000,000 retention, the ceded loss was $69,700,000. This figure reflects incurred losses from a number of underlying claims and claim clusters, including the Meridian Docks mass tort claims and the IBNR reserve development at issue in Pinnacle Atlantic's demand.

Treaty Year 2023 (July 1, 2023 – June 30, 2024). QC&S reported aggregate net incurred losses of $128,700,000 for this treaty year. After application of the $120,000,000 retention, the ceded loss was $8,700,000. The Veridian Financial Services E&O cluster settlement is the principal driver of the aggregate losses exceeding the retention in this treaty year.

Total Ceded. The total ceded loss across both treaty years is $78,400,000 ($69,700,000 for TY 2022 plus $8,700,000 for TY 2023).

Payment History. Pinnacle Atlantic paid the total ceded amount of $78,400,000 in full across seven billing installments, beginning with the first installment of $15,000,000 on October 15, 2022, and concluding with the final installment of $3,200,000 on March 29, 2024. Each installment was transmitted through Broadreach Intermediaries in accordance with Treaty Article 9. At no point during this payment sequence did Pinnacle Atlantic raise any objection to the cessions, the underlying claims, the loss reports, or the premium calculations. This payment history is material to the waiver and estoppel defenses discussed in Section VI.

D. Pre-Suit Demand and Procedural History

The procedural history leading to the present engagement is as follows:

December 12, 2025. Pinnacle Atlantic transmitted a "reservation of rights" letter to QC&S regarding the TY 2022 and TY 2023 cessions. The letter, sent directly from Conrad Hesse (SVP, Treaty Disputes & Recoveries) to Diana Kessler-Hoff (VP, Claims & Reinsurance Recoveries), stated that Pinnacle Atlantic was conducting an internal review of the cessions and reserved all rights "with respect to the amounts paid and the underlying claims and reserve information supporting the cessions." The letter did not identify specific grounds for dispute or demand any specific relief. It came approximately twenty months and seventeen days after the final billing installment was paid on March 29, 2024 — a significant delay that we believe strengthens QC&S's waiver and estoppel arguments.

February 14, 2026. HFC, through Nathaniel R. Calloway III, transmitted a formal pre-suit demand letter to QC&S on behalf of Pinnacle Atlantic. The letter demands the return of $78,400,000 in paid recoverables plus $12,600,000 in accrued interest at eight percent (8%) per annum, for a total demand of $91,000,000. The letter sets forth the four grounds discussed in detail in Section III below. Notably, the demand letter asserts that Treaty Article 22's arbitration clause is "inapplicable to the specific claims raised," although the basis for this assertion is not elaborated. The letter states that if QC&S does not "remit full payment within thirty (30) days," Pinnacle Atlantic will "pursue all available remedies, including but not limited to commencing an action in the Supreme Court of the State of New York, New York County, Commercial Division."

February 24, 2026. The QIH Board Audit Committee was briefed on the Pinnacle Atlantic demand. Following presentation by Rachel Sondergaard and Tobias Engstrom, the Audit Committee authorized the retention of outside litigation counsel and directed General Counsel to engage Calderwood & Harkness LLP.

March 2, 2026. Calderwood & Harkness LLP formally opened the engagement. On March 4, 2026, at our direction, QIH issued a company-wide litigation hold notice to all relevant custodians, including Diana Kessler-Hoff, Tobias Engstrom, and members of the QC&S claims department and actuarial teams. We are in the process of collecting custodian acknowledgments.

III. Analysis of Pinnacle Atlantic's Four Grounds

This section provides a detailed analysis of each of the four grounds asserted in Pinnacle Atlantic's pre-suit demand. For each ground, we set forth the factual background, Pinnacle Atlantic's position as articulated in the HFC demand letter, QC&S's available defenses, and our preliminary merits assessment. We note at the outset that our analysis is based on information available as of the date of this memorandum and is subject to refinement as we complete our review of the underlying claims files, actuarial workpapers, and other key documents identified in Section VIII.

A. Ground 1: Late Notice Under Article 7 — Meridian Docks Mass Tort Cluster

1. Factual Background

The Meridian Docks claims comprise thirty-one (31) related commercial general liability bodily injury claims arising from alleged toxic contamination at the Meridian Docks industrial waterfront redevelopment project in Newark, New Jersey. The claims allege that construction workers, site visitors, and neighboring residents were exposed to hazardous substances — including volatile organic compounds, heavy metals, and residual industrial contaminants — released during demolition and excavation activities at the Meridian Docks site between 2019 and 2021.

The policyholder is Meridian Docks Development LLC, a New Jersey limited liability company engaged in the redevelopment of the former Meridian industrial port facility. Meridian Docks Development LLC is insured under QC&S Commercial General Liability Policy No. CGL-2020-09844, which was issued effective January 1, 2020, with a per-occurrence limit of $5,000,000 and a general aggregate limit of $25,000,000. The thirty-one claims were filed across multiple jurisdictions, primarily in New Jersey Superior Court (Essex County) and the United States District Court for the District of New Jersey, between March 2021 and August 2022.

QC&S first reserved the Meridian Docks claims on March 15, 2021, when the initial claims were reported and opened in the QC&S claims system. At that time, each of the individual claims was reserved at modest amounts reflecting early-stage bodily injury exposure assessments. The aggregate initial reserves across all thirty-one claims did not individually exceed the Treaty's Article 7 individual claim reporting threshold of $1,000,000 per claim.

Notice of the Meridian Docks claims was given to Pinnacle Atlantic via Broadreach Intermediaries on May 22, 2022. The delay between initial reservation and formal notice — a period of approximately fourteen months and seven days — is the basis for Pinnacle Atlantic's late notice argument.

QC&S's current net incurred loss across all thirty-one Meridian Docks claims stands at $41,200,000. These claims are a significant driver of the TY 2022 aggregate losses exceeding the $120,000,000 retention and contributing to the $69,700,000 cession for that treaty year.

2. Pinnacle Atlantic's Position

Pinnacle Atlantic contends that Article 7 of the Treaty requires "prompt notice" of claims that "may materially impact the cession" and that a delay of fourteen months and seven days from initial reservation to formal notice is per se unreasonable and constitutes a material breach of the Treaty. Pinnacle Atlantic's demand letter characterizes this delay as "fundamentally inconsistent with the reporting obligations that form the bedrock of the cedent-reinsurer relationship."

In support of its position, Pinnacle Atlantic asserts that it was prejudiced by the delayed notice because it was unable to monitor, participate in, or influence the claims handling and reserving process during the critical initial period when the Meridian Docks claims were being evaluated, reserved, and in certain cases settled. The demand letter further contends that had Pinnacle Atlantic received timely notice, it would have deployed its own environmental claims specialists and would have sought to participate in the defense and settlement strategy under the Treaty's consultation provisions.

Pinnacle Atlantic asserts that the late notice vitiates the Treaty cession as to all thirty-one Meridian Docks claims, thereby reducing the TY 2022 aggregate net incurred loss by $41,200,000 — which would reduce the ceded loss from $69,700,000 to $28,500,000, a reduction of $41,200,000.

3. QC&S's Defense

We believe QC&S has strong defenses against the late notice ground, on multiple independent bases:

Treaty Threshold. Article 7 of the Treaty contains an individual claim reporting threshold of $1,000,000 per claim. The thirty-one Meridian Docks claims were initially reserved individually at amounts well below this threshold. It was not until the first quarter of 2022, as the claims matured and additional information regarding the extent of contamination and the severity of alleged injuries became available, that reserve increases on certain individual claims crossed the $1,000,000 threshold. QC&S provided notice to Pinnacle Atlantic via Broadreach promptly upon the threshold being triggered — on May 22, 2022, within approximately two months of the Q1 2022 reserve increases. The Treaty does not require notice of claims below the individual reporting threshold, and QC&S's reading of its notice obligation is faithful to the text of Article 7. The fourteen-month gap cited by Pinnacle Atlantic measures from initial reservation — not from the date on which the Treaty's notice obligation was triggered.

New York Prejudice Requirement. Under New York law, which governs the Treaty, late notice in the reinsurance context does not automatically vitiate coverage. Unlike direct insurance, where notice provisions may be treated as conditions precedent under certain circumstances, New York courts have consistently held that a reinsurer seeking to avoid payment based on late notice must demonstrate actual prejudice resulting from the delay. This principle is well-established in case law including Unigard Security Insurance Co. v. North River Insurance Co., 79 N.Y.2d 576 (1992), and its progeny. The burden of demonstrating actual prejudice falls squarely on Pinnacle Atlantic as the party asserting the defense.

Absence of Prejudice. We believe that Pinnacle Atlantic will have significant difficulty establishing actual prejudice in this case. The Treaty is an aggregate excess-of-loss treaty, not a per-occurrence treaty. Pinnacle Atlantic's obligation is triggered by the total aggregate losses in a treaty year, not by the handling or outcome of individual claims. Pinnacle Atlantic does not have individual claim adjustment rights or the contractual right to direct the defense of underlying claims. The cessions are driven by aggregate loss totals, and individual claim outcomes are relevant only insofar as they contribute to those totals. It is difficult to articulate a cognizable theory of prejudice in this context — Pinnacle Atlantic's exposure is the same regardless of whether it received notice of the Meridian Docks claims in March 2021 or May 2022, because the aggregate loss total that triggers the cession is determined by the totality of all claims in the treaty year.

Moreover, Broadreach transmitted periodic bordereau and aggregate loss reports to Pinnacle Atlantic throughout the treaty period, keeping Pinnacle Atlantic informed of the developing aggregate loss picture. While these reports may not have specifically itemized the Meridian Docks claims prior to the formal notice in May 2022, they provided Pinnacle Atlantic with visibility into the trajectory of QC&S's aggregate loss development.

Waiver and Estoppel. Pinnacle Atlantic paid all seven billing installments — totaling $78,400,000 — between October 15, 2022 and March 29, 2024 without raising any late notice objection. The first billing installment was paid approximately five months after the notice was given, and subsequent installments were paid over the following eighteen months. At no point during this payment sequence did Pinnacle Atlantic object to the Meridian Docks claims on notice grounds. Pinnacle Atlantic's reservation-of-rights letter was not sent until December 12, 2025 — nearly twenty-one months after the final payment. This course of conduct supports strong arguments for waiver of the late notice defense and estoppel based on Pinnacle Atlantic's conduct in making payments with full knowledge of the relevant facts.

Course of Dealing. The parties' course of dealing throughout the Treaty period should also be considered. If, as we expect, the document review reveals that Pinnacle Atlantic routinely accepted claims notices that were transmitted on a similar timeline or that reflected similar threshold-based notice practices, this will further undermine its position on this ground.

4. Merits Assessment

This is a strong defense for QC&S. The threshold-based notice argument is well-supported by the plain text of Article 7. New York's prejudice requirement for reinsurance late notice creates a significant additional layer of protection, and the aggregate excess-of-loss structure of the Treaty makes it particularly difficult for Pinnacle Atlantic to demonstrate actual prejudice from delayed individual claim notice. Pinnacle Atlantic's payment of all installments without contemporaneous objection supports robust waiver and estoppel arguments.

Risk on this ground: LOW.

We note, however, that the strength of this defense depends in part on the content of the claims files and the Treaty's notice provisions, both of which we have not yet had the opportunity to review in full detail. We will confirm this assessment upon completion of the document review.

B. Ground 2: Misallocation of IBNR Reserve Development Under Article 5

1. Factual Background

Pinnacle Atlantic's second ground concerns the allocation of $22,300,000 in IBNR (incurred but not reported) reserve strengthening to Treaty Year 2022. Pinnacle Atlantic contends that this amount should properly have been attributed to Treaty Year 2021.

The significance of this alleged misallocation is driven by the differing aggregate loss positions in TY 2021 and TY 2022:

• TY 2021. QC&S's aggregate net incurred loss for TY 2021 was $104,600,000 — below the $120,000,000 retention. No cession attached to TY 2021, and this figure is undisputed by Pinnacle Atlantic.

• TY 2022. QC&S's reported aggregate net incurred loss for TY 2022 was $189,700,000. After the $120,000,000 retention, the ceded loss was $69,700,000.

If the $22,300,000 IBNR development were reallocated from TY 2022 to TY 2021, the impact would be as follows:

• TY 2021 revised aggregate: $104,600,000 + $22,300,000 = $126,900,000. This would exceed the $120,000,000 retention by $6,900,000, but Pinnacle Atlantic does not dispute TY 2021 and does not seek to create a TY 2021 cession. The relevant point, from Pinnacle Atlantic's perspective, is the removal of the amount from TY 2022.

• TY 2022 revised aggregate: $189,700,000 - $22,300,000 = $167,400,000. After the $120,000,000 retention, the revised ceded loss would be $47,400,000 — a reduction of $22,300,000 from the reported $69,700,000.

• Total revised cessions: $47,400,000 (TY 2022) + $8,700,000 (TY 2023) = $56,100,000, compared to the reported $78,400,000.

QC&S's IBNR allocation was prepared by its consulting actuaries, Velthorn Actuarial Advisors LLC, under the direction of Dr. Stephen Tanaka, FCAS, MAAA, Velthorn's Principal Actuary. Dr. Tanaka certified the loss development analysis and IBNR allocation methodology underlying the TY 2022 and TY 2023 cessions. The Velthorn certification and supporting workpapers are among the most critical documents to be obtained and reviewed in this matter.

2. Pinnacle Atlantic's Position

Pinnacle Atlantic's demand letter contends that the $22,300,000 in IBNR development relates to underlying accident-year 2021 exposures — that is, to claims arising from insured events occurring during the period that falls within TY 2021 — and should therefore be attributed to TY 2021 for purposes of the Treaty cession calculation. The demand letter asserts that QC&S's allocation of this development to TY 2022 had the effect of inflating the TY 2022 aggregate loss above the level that would otherwise have attached, resulting in an overstated cession.

Pinnacle Atlantic's letter does not identify the specific claims or lines of business to which the $22,300,000 in IBNR relates, nor does it attach or cite any actuarial analysis supporting its position. It states that Pinnacle Atlantic's "independent actuarial review" has concluded that the allocation is "inconsistent with standard actuarial practice and the Treaty's loss allocation provisions." We have not been provided with Pinnacle Atlantic's actuarial analysis and do not know its scope, methodology, or author.

3. QC&S's Defense

We believe QC&S has a defensible position on this ground, but it is the area of greatest factual and technical uncertainty, and the most likely ground on which Pinnacle Atlantic may achieve some degree of success.

Treaty Language. Article 5.2 of the Treaty defines "losses incurred" and prescribes the methodology for allocating losses, including IBNR, to treaty years. The precise text of Article 5.2 will be critical to this analysis, and we have not yet obtained the executed Treaty. Based on our preliminary understanding from QC&S's description, the Treaty allocates losses based on the treaty year in which they are "incurred" — a term that may encompass both the timing of the underlying events and the timing of the loss development, depending on the specific drafting.

Velthorn Methodology. Velthorn's methodology, as described to us by Tobias Engstrom, allocated the IBNR development to TY 2022 based on the principle that the development factors crystallized during the TY 2022 reporting period. Under this approach, IBNR development is allocated to the treaty year in which the cedent recognizes the development in its reserves, rather than the treaty year in which the underlying insured events occurred. Velthorn determined that the claims whose development gave rise to the $22,300,000 reserve increase exhibited characteristics and development patterns that aligned with accident-year 2022 experience. Dr. Tanaka's certification of this allocation was prepared in accordance with applicable Actuarial Standards of Practice ("ASOPs") promulgated by the Actuarial Standards Board.

Deference to Cedent's Actuarial Judgment. As a general matter, reinsurance arbitrators and courts afford significant deference to the cedent's reasonable actuarial judgment in allocating losses to treaty years, particularly where the allocation is supported by an actuarial certification. Pinnacle Atlantic bears the burden of demonstrating that QC&S's allocation was arbitrary, capricious, or made in bad faith. A mere difference of professional actuarial opinion, standing alone, is typically insufficient to overturn a cedent's allocation.

Areas of Vulnerability. Notwithstanding these defenses, we note several areas of vulnerability:

• The distinction between "when the underlying events occurred" and "when the development was recognized" is a question on which reasonable actuaries may disagree. If the IBNR relates to claims arising from insured events clearly occurring during TY 2021, Pinnacle Atlantic's argument has facial plausibility.

• The magnitude of the development ($22,300,000) is substantial and, if allocated to TY 2021, would have caused TY 2021 to breach the retention. This raises an inference — however unfounded — that the allocation was influenced by the desire to maximize the cession in a treaty year where the retention was already breached rather than in a year where it was not.

• We have not yet had the opportunity to review Velthorn's detailed workpapers, development triangles, or underlying claim data. The strength of our defense on this ground depends critically on the quality and documentation of Velthorn's work.

4. Merits Assessment

This ground presents MODERATE risk and is the most technically complex issue in the dispute. The outcome will depend heavily on the actuarial evidence — specifically, whether the IBNR development factors are more properly attributed to accident-year 2021 or accident-year 2022 under the Treaty's definition of "losses incurred" as set forth in Article 5.2, and whether Velthorn's methodology is consistent with accepted actuarial standards and practices.

Pinnacle Atlantic's argument has facial plausibility, particularly if the underlying claims relate to accident-year 2021 events. However, actuarial allocation of IBNR development is inherently a matter of professional judgment, and Velthorn's certification carries significant weight. The cedent's actuarial judgment is entitled to deference absent a showing that it was arbitrary, capricious, or in bad faith.

We strongly recommend that an independent actuarial expert be retained immediately to review Velthorn's workpapers and allocation methodology, assess the vulnerability of QC&S's position, and, if necessary, prepare a rebuttal analysis and expert testimony. If the allocation is partially or fully reallocated by an arbitration panel, the financial impact would be a reduction of up to $22,300,000 in ceded losses, representing the principal area of exposure in this dispute.

C. Ground 3: Follow-the-Fortunes / Settlements Under Article 11 — Veridian E&O Cluster

1. Factual Background

Pinnacle Atlantic's third ground challenges the settlement of three related errors & omissions / professional liability claims brought by investors against Veridian Financial Services Inc., a QC&S policyholder. The claims alleged that Veridian made material misrepresentations in the sale of structured financial products, including collateralized loan obligations and structured notes, resulting in substantial investor losses during a period of market volatility in 2022–2023.

Veridian Financial Services Inc. was insured under QC&S Professional Liability Policy No. PL-2021-15327, which provided coverage for claims arising from wrongful acts in the rendering of professional financial services. The policy was issued effective July 1, 2021, with a per-claim limit of $15,000,000 and an aggregate limit of $40,000,000.

The three claims (designated Claim A, Claim B, and Claim C) were filed in the United States District Court for the Southern District of New York by separate groups of institutional and high-net-worth investors. The claims alleged violations of federal and state securities laws, common law fraud, and negligent misrepresentation, and sought compensatory and, in certain cases, punitive damages.

QC&S settled all three claims on September 8, 2023, for a combined total of $34,500,000, allocated as follows:

• Claim A: $14,200,000

• Claim B: $12,800,000

• Claim C: $7,500,000

After application of other reinsurance, QC&S's net retained loss on the Veridian cluster was $26,100,000. The amount ceded to the Treaty within the TY 2023 aggregate was $8,700,000, which constitutes the entirety of the TY 2023 cession. The Veridian settlement is the event that pushed TY 2023 aggregate losses from below the $120,000,000 retention to above it, thereby creating the TY 2023 cession.

2. Pinnacle Atlantic's Position

Pinnacle Atlantic's demand letter alleges that QC&S settled the Veridian claims "without meaningful litigation exposure analysis, at inflated amounts, in order to artificially push aggregate losses above the $120,000,000 retention in Treaty Year 2023." The letter characterizes the settlement as lacking "good faith and businesslike conduct" and asserts that the settlement "vitiates Pinnacle Atlantic's obligation to follow QC&S's fortunes" under Article 11 of the Treaty.

In essence, Pinnacle Atlantic's argument is that QC&S engaged in loss manipulation or treaty abuse — deliberately overpaying the Veridian settlement to create a cession that would not otherwise have existed. This is a serious allegation that, if substantiated, could undermine the cession. However, as discussed below, it faces formidable legal and evidentiary obstacles.

3. QC&S's Defense

We believe QC&S has strong defenses on this ground, grounded in both the settled law of reinsurance and the specific facts of the Veridian settlement.

Follow-the-Fortunes Doctrine. Under New York law, the follow-the-fortunes doctrine is a foundational principle of reinsurance. It requires the reinsurer to follow the cedent's good-faith claims decisions — including settlement decisions — unless the cedent acted in bad faith, or the claim is clearly outside the terms of the underlying policy. This principle has been affirmed repeatedly by New York courts, including in British International Insurance Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2d Cir. 2003), and North River Insurance Co. v. ACE American Reinsurance Co., 361 F.3d 134 (2d Cir. 2004). The doctrine reflects the reality that the cedent, not the reinsurer, is in the best position to evaluate claims and make settlement decisions, and that reinsurers accept the cedent's business judgment as part of the bargain of the reinsurance contract.

Treaty Article 11. Article 11 of the Treaty codifies the follow-the-fortunes standard, providing that Pinnacle Atlantic shall follow QC&S's fortunes with respect to claims handling, settlements, and payments made by QC&S in the ordinary course of business, provided such decisions are made in good faith and in a businesslike manner. This is a standard provision in reinsurance treaties and reflects the parties' agreed allocation of claims-handling authority and risk.

Burden of Proof. The burden of overcoming the follow-the-fortunes obligation falls on the reinsurer. To avoid following the cedent's settlement, Pinnacle Atlantic must demonstrate that the settlement was made in bad faith, through fraud, or with gross negligence. This is an extraordinarily high standard, and reinsurers rarely succeed in overcoming it.

QC&S's Settlement Process. Based on our preliminary understanding from Diana Kessler-Hoff, the Veridian claims were evaluated through QC&S's standard claims committee process. Internal claims professionals reviewed the claims, defense counsel retained by QC&S assessed the litigation exposure, and the settlement amounts were approved through the multi-level claims committee review and approval process. The settlement amounts were within the reasonable range of litigation exposure given the nature of the underlying E&O allegations, the strength of the plaintiffs' evidence regarding structured-product misrepresentations, the potential for adverse jury verdicts in the Southern District of New York (a jurisdiction known for plaintiff-friendly outcomes in securities-related litigation), and the aggregate exposure across three related claims.

QC&S's Retained Exposure. A critical fact undermining Pinnacle Atlantic's allegation is that QC&S retained $26,100,000 net of other reinsurance on the Veridian settlement. This represents a substantial economic stake — approximately seventy-six percent (76%) of the total settlement amount. A cedent that retains $26.1 million on a settlement has a powerful economic incentive to settle at the lowest reasonable amount, not to inflate the settlement. The retained exposure directly rebuts any suggestion that QC&S lacked "skin in the game" or that it used the settlement to manipulate its aggregate loss position for Treaty purposes.

Aggregate Treaty Structure. The fact that the Veridian settlement caused TY 2023 aggregate losses to cross the $120,000,000 retention threshold is not, in itself, evidence of bad faith. Aggregate excess-of-loss treaties inherently involve cessions that attach when aggregate losses cross a threshold. Individual claim settlements that contribute to the aggregate total are a routine and expected feature of such treaties. If the mere creation of a cession through a legitimate settlement were sufficient to void the cedent's follow-the-fortunes protection, the aggregate excess-of-loss structure would be unworkable.

Pinnacle Atlantic's Payment Without Objection. As with Ground 1, Pinnacle Atlantic paid the TY 2023 billing installments without raising any contemporaneous objection to the Veridian settlement or the resulting cession. The installments were transmitted through Broadreach, which provided supporting loss information. Pinnacle Atlantic's failure to object at the time of payment is relevant to waiver and estoppel.

4. Merits Assessment

This is a strong defense for QC&S. The follow-the-fortunes doctrine is well-established under New York law and strongly favors cedents. Pinnacle Atlantic's allegation of settlement inflation is speculative and would require affirmative evidence of bad faith — a very difficult standard to meet, particularly where the cedent retained a substantial economic interest in the outcome. QC&S's significant retained exposure of $26,100,000 further undermines any allegation that the settlement was inflated for the purpose of creating a reinsurance cession.

Risk on this ground: LOW to MODERATE.

We note that the claims file documentation of the settlement evaluation will be critical to confirming this assessment. If the claims files reflect a thorough, documented evaluation of litigation exposure, defense counsel input, and claims committee approval, the defense will be very strong. Conversely, if the documentation is thin or if the settlement approval process was irregular, Pinnacle Atlantic may be able to create questions of fact regarding good faith. We strongly recommend a thorough, privilege-aware review of the Veridian claims files as an immediate priority.

D. Ground 4: Ceded Earned Premium Underreporting Under Article 3

1. Factual Background

Pinnacle Atlantic's fourth and final ground involves a dispute over the calculation of ceded earned premium for TY 2022. QC&S reported ceded earned premium of $38,400,000 for TY 2022. Pinnacle Atlantic calculates ceded earned premium at $45,200,000, a difference of $6,800,000.

At the provisional treaty premium rate of forty-two percent (42%), the alleged shortfall results in a treaty premium underpayment of $2,856,000 ($6,800,000 x 42%). This is the amount that Pinnacle Atlantic contends QC&S owes in additional treaty premium.

2. Pinnacle Atlantic's Position

Pinnacle Atlantic's demand letter asserts that QC&S "materially underreported ceded earned premium by $6,800,000," and characterizes this underreporting as part of a broader "pattern of treaty non-compliance" that, in combination with the other three grounds, entitles Pinnacle Atlantic to a treaty termination right or, at minimum, an offset against the ceded losses. The demand letter aggregates this ground with the other three as evidence that QC&S has not complied with its obligations under the Treaty.

3. QC&S's Defense

We believe QC&S has a strong defense on this ground, as the premium discrepancy appears to be entirely attributable to a difference in treaty interpretation regarding the inclusion of certain premium categories.

Article 3.4 Exclusion. Based on our preliminary discussions with Tobias Engstrom, the $6,800,000 difference arises from Pinnacle Atlantic's improper inclusion of run-off portfolio transfer premiums that are expressly excluded from the definition of "ceded earned premium" under Article 3.4 of the Treaty. Run-off portfolio transfer premiums relate to blocks of business that QC&S acquired through assumption reinsurance transactions and that are written on a run-off basis. Article 3.4 — a provision that was negotiated during the original placement of the Treaty — expressly excludes these premiums from the ceded earned premium base used to calculate treaty premium. QC&S's reported figure of $38,400,000 correctly reflects this exclusion, and Pinnacle Atlantic's figure of $45,200,000 improperly includes them.

Remedy Limited to Premium True-Up. Even assuming, arguendo, that some premium adjustment were warranted, the appropriate remedy would be a premium true-up — that is, payment by QC&S of additional treaty premium in the amount of the shortfall multiplied by the applicable premium rate. The remedy would not be a treaty termination right, an offset against ceded losses, or disgorgement of paid recoverables. The Treaty's slide-scale adjustment mechanism (minimum 35%, maximum 52%) is specifically designed to address premium variations through the annual premium adjustment process, not through cession avoidance or treaty termination.

De Minimis Amount. The amount at issue — $2,856,000 in alleged underpayment of treaty premium — is de minimis relative to the $78,400,000 in disputed cessions. Pinnacle Atlantic's attempt to bootstrap a modest premium calculation dispute into a ground for disgorgement of the entire recoverable is overreaching and unsupported by the Treaty's remedial provisions.

Document Support. We recommend that Tobias Engstrom prepare detailed workpapers supporting QC&S's premium calculations and the Article 3.4 exclusion, including the identification of the specific portfolio transfer premiums excluded and the treaty provision supporting their exclusion. These workpapers will be essential to resolving this ground.

4. Merits Assessment

This is a strong defense for QC&S. The Article 3.4 exclusion appears to directly address the premium discrepancy, and Pinnacle Atlantic's own calculation appears to include premium categories that the Treaty expressly excludes. Even if QC&S were incorrect on the premium calculation — a possibility we consider unlikely — the remedy would be limited to a premium true-up of approximately $2,856,000, not disgorgement of $78,400,000 in cessions. Pinnacle Atlantic's attempt to aggregate this modest premium issue with its other three grounds as evidence of a "pattern of non-compliance" is a litigation tactic designed to add bulk to an otherwise weak claim.

Risk on this ground: LOW.

IV. Aggregate Exposure Analysis

A. Exposure Range

Based on our analysis of the four grounds set forth in Section III, we present the following exposure range:

We assess the likelihood distribution as follows: the best case is achievable but depends on the strength of the actuarial evidence on Ground 2; the likely case reflects what we believe is the most probable range of outcomes in arbitration, acknowledging the factual uncertainty surrounding the IBNR allocation; and the worst case is unlikely given the strength of QC&S's defenses on three of the four grounds, but cannot be excluded entirely.

We emphasize that these assessments are preliminary and subject to revision as we complete our document review, retain and consult with actuarial experts, and develop the factual record on each ground.

B. Financial Impact Modeling

Statutory Surplus Impact (QC&S):

• If $78.4M write-off (likely case, full Ground 2 concession plus return of principal only): Surplus falls to approximately $1,341,600,000. Headroom narrows to approximately $241,600,000.

• If $91.0M adverse outcome (worst case, full disgorgement plus interest): Surplus falls to approximately $1,329,000,000. Headroom narrows to approximately $229,000,000.

In all scenarios analyzed, QC&S's statutory surplus remains above the $1,100,000,000 minimum covenant under the Cartwright National Bank revolving credit facility. No covenant breach is anticipated. However, the reduced headroom — particularly under the worst-case scenario — warrants careful monitoring, and we recommend assessing whether the credit agreement contains any notification or reporting requirements that may be triggered by the pending dispute or by any adverse outcome.

GAAP Impact (QIH):

A full write-off of the $78,400,000 reinsurance recoverable would result in a pre-tax charge to QIH's consolidated financial statements of $78,400,000. At the federal corporate income tax rate of 21%, the after-tax net income impact would be approximately $61,936,000 ($78,400,000 x (1 - 0.21)). This impact would be reflected in QIH's consolidated income statement for the quarter in which the charge is taken.

Reinsurance Recoverable on QC&S Statutory Balance Sheet:

The $78,400,000 in disputed recoverables is reflected on QC&S's Schedule F, Part 3 (Ceded Reinsurance) as of December 31, 2025. Any reduction in the recoverable, whether through settlement, adverse arbitration award, or voluntary concession, would require adjustment to QC&S's statutory balance sheet, with corresponding impacts on surplus and Schedule F disclosures.

Credit Facility:

QIH maintains a $750,000,000 senior secured revolving credit facility with Cartwright National Bank, N.A., maturing June 2028. The administrative agent relationship manager is Andrew Bao. The credit agreement contains a minimum statutory surplus covenant of $1,100,000,000 applicable to QC&S. As noted above, no covenant breach is anticipated under any scenario. However, the credit agreement should be reviewed for (i) material litigation notification requirements, (ii) material adverse change reporting provisions, and (iii) any requirement to provide notice of changes in the QC&S reinsurance recoverable position. We recommend that Tobias Engstrom coordinate with internal treasury to review the credit agreement provisions and assess any applicable notification obligations.

V. Forum and Dispute Resolution Analysis

A. Arbitration Under Treaty Article 22

Treaty Article 22 provides for the resolution of disputes through binding arbitration before a three-member arbitration panel sitting in New York, New York, under ARIAS-U.S. Rules. Based on our preliminary review, the scope of the arbitration clause appears to be broad, covering disputes "arising under or in connection with" the Treaty. This language is standard in reinsurance treaties and is routinely interpreted to encompass virtually all disputes between the parties relating to the Treaty, including disputes concerning the interpretation of Treaty provisions, the calculation and allocation of losses, the validity of cessions, and claims-handling and notice obligations.

HFC's pre-suit demand letter asserts that the Article 22 arbitration clause is "inapplicable to the specific claims raised" by Pinnacle Atlantic. The demand letter does not elaborate on the basis for this assertion, and we believe it is likely meritless. All four grounds asserted by Pinnacle Atlantic relate directly to the interpretation and performance of the Treaty: Article 7 (notice), Article 5 (IBNR allocation and loss incurred definition), Article 11 (follow-the-fortunes), and Article 3 (premium reporting). These are quintessential Treaty disputes that fall squarely within the scope of a broadly worded arbitration clause.

Under both New York CPLR Article 75 (governing arbitration agreements under New York state law) and the Federal Arbitration Act, 9 U.S.C. sections 1 through 16 (applicable if the Treaty involves interstate or international commerce, as it plainly does given Pinnacle Atlantic's Bermuda domicile), there is a strong presumption in favor of arbitrability, particularly in commercial contracts. This presumption is reinforced in the reinsurance context, where ARIAS-U.S. arbitration is the established and preferred dispute resolution mechanism. Courts routinely compel arbitration of reinsurance disputes where a valid arbitration clause exists, and doubts regarding the scope of the clause are resolved in favor of arbitration.

If Pinnacle Atlantic files suit in New York Supreme Court, Commercial Division, as the HFC demand letter threatens, QC&S should promptly move to compel arbitration and stay the litigation pursuant to CPLR Section 7503(a) and/or Section 3 of the Federal Arbitration Act. We believe such a motion would have a high likelihood of success given the broad scope of the arbitration clause and the nature of the disputes at issue.

B. Strategic Considerations

In evaluating the optimal forum strategy, we have considered the following factors:

Advantages of Arbitration:

• Industry Expertise. An ARIAS-U.S. arbitration panel will typically consist of current or former reinsurance executives and attorneys with deep expertise in treaty interpretation, follow-the-fortunes doctrine, actuarial concepts, and the customs and practices of the reinsurance industry. This expertise is particularly valuable in this dispute, which involves technical actuarial issues (IBNR allocation), industry-specific doctrines (follow-the-fortunes), and Treaty interpretation.

• Confidentiality. Arbitration proceedings are private and confidential. Given QIH's status as a publicly traded company, avoiding a public litigation record that could attract investor, analyst, or media scrutiny is an important consideration. Public filings and courtroom proceedings could create adverse publicity and potentially impact QIH's stock price, even if QC&S ultimately prevails on the merits.

• Speed. Arbitration proceedings typically proceed on a faster timetable than litigation in the Commercial Division, which, notwithstanding its efficiency relative to other courts, is subject to calendar congestion and procedural delays. A faster resolution reduces uncertainty for QIH's financial reporting and investor relations.

• Limited Appellate Review. While this is also a disadvantage (see below), limited appellate review means that a favorable outcome is more likely to be final, reducing the risk of prolonged uncertainty.

Disadvantages of Arbitration:

• Limited discovery. ARIAS-U.S. proceedings provide for more limited discovery than is available in litigation. However, given that the key documents are largely within QC&S's own files and records, and that QC&S is the defending party, this limitation may not be significant.

• Limited Appellate Rights. If the arbitration outcome is adverse, the grounds for vacating an arbitration award under both CPLR Article 75 and the FAA are extremely narrow, essentially limited to fraud, corruption, partiality, or manifest disregard of the law. This means that an adverse outcome in arbitration is effectively final.

• "Split the Baby" Risk. Arbitration panels in the reinsurance industry have a reputation — whether deserved or not — for reaching compromise outcomes that do not fully vindicate either party's position. This risk is mitigated here by the strength of QC&S's defenses on three of the four grounds, but it should be acknowledged.

Litigation Risks:

• Public Proceedings. Litigation in New York Supreme Court, Commercial Division, would be a matter of public record. Complaint, answer, motion papers, and any trial proceedings would be accessible to investors, analysts, rating agencies, regulators, and the press.

• Judicial Expertise. While Commercial Division justices are highly knowledgeable generalists, they typically have less expertise in reinsurance-specific doctrines and actuarial issues than ARIAS-U.S. arbitrators. This could be a disadvantage on the more technical aspects of the dispute.

• Appellate Exposure. Litigation outcomes are subject to full appellate review, which could prolong the dispute and increase costs. However, appellate review also provides a mechanism to correct errors, which could be beneficial if the initial outcome is adverse.

Recommendation. We recommend that QC&S pursue arbitration as the primary forum. This recommendation is consistent with the Treaty terms, which mandate arbitration. It is also strategically advantageous for QC&S because the industry expertise of ARIAS-U.S. arbitrators, the confidentiality of the proceedings, and the potential for faster resolution all favor QC&S's interests. The strength of QC&S's position — strong defenses on three of four grounds — weighs in favor of arbitration, as the risk of a "split the baby" outcome is mitigated by the relative clarity of the merits on most issues.

We further recommend that QC&S simultaneously propose voluntary mediation as a preliminary step before formal arbitration proceedings. A mediation with a neutral mediator experienced in reinsurance disputes — conducted on a without-prejudice basis — could provide an opportunity to resolve the dispute efficiently and potentially on terms favorable to QC&S (e.g., a modest concession on the IBNR issue in exchange for Pinnacle Atlantic's withdrawal of the remaining grounds and confirmation of the balance of the recoverable). Mediation does not waive or prejudice QC&S's demand to arbitrate.

VI. Defenses and Affirmative Claims

A. Affirmative Defenses

Based on our analysis, QC&S should assert the following affirmative defenses in response to Pinnacle Atlantic's demand, whether in the context of arbitration proceedings or, if necessary, in responsive pleadings in litigation:

1. Full Compliance with Treaty Terms. QC&S has at all times complied with the terms and conditions of the Treaty, including Articles 3, 5, 7, and 11, and is entitled to retain the full $78,400,000 in reinsurance recoverables.

2. Timely Notice Under Article 7. QC&S provided timely notice of the Meridian Docks claims in accordance with Article 7's individual claim reporting threshold of $1,000,000 per claim. The claims were individually reserved below the threshold until Q1 2022, at which time reserve increases triggered the notice obligation. Notice was provided promptly on May 22, 2022.

3. Proper IBNR Allocation Under Article 5.2. QC&S's allocation of IBNR reserve development to Treaty Year 2022 was proper under Article 5.2, consistent with actuarial standards of practice, and certified by Velthorn Actuarial Advisors LLC through Dr. Stephen Tanaka, FCAS, MAAA. The allocation is entitled to deference as an exercise of reasonable actuarial judgment.

4. Follow-the-Fortunes Doctrine. QC&S's settlement of the Veridian Financial Services E&O claims was made in good faith, in the ordinary course of business, and within the reasonable range of litigation exposure. Pinnacle Atlantic is obligated to follow QC&S's fortunes under Article 11 and New York reinsurance law. Pinnacle Atlantic cannot demonstrate bad faith, fraud, or gross negligence in QC&S's claims handling or settlement decisions.

5. Proper Premium Reporting Under Article 3. QC&S properly reported ceded earned premium of $38,400,000 for TY 2022, correctly excluding run-off portfolio transfer premiums pursuant to Article 3.4 of the Treaty. Pinnacle Atlantic's calculation of $45,200,000 improperly includes excluded premium categories.

6. Waiver and/or Estoppel. Pinnacle Atlantic paid all seven billing installments totaling $78,400,000 between

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
March 14, 2026
MEMORANDUM
FROM: Douglas Carmichael, Responsible Partner, and Jeffrey Park, Lead Associate Calderwood & Harkness LLP One Liberty Plaza, 55th Floor New York, NY 10006
TO: Rachel Sondergaard, General Counsel Quorum Insurance Holdings Corp. 200 Constitution Plaza, Suite 3400 Hartford, CT 06103
RE: Initial Case Assessment — Pinnacle Atlantic Reinsurance Ltd. Pre-Suit Demand — Treaty No. PA-QCS-2019-EXL-0044
MATTER NO.: 1025-00005
CONFIDENTIALITY NOTICE: This memorandum is prepared in connection with anticipated litigation and/or arbitration and is protected by the attorney-client privilege and the work product doctrine. The analyses, opinions, conclusions, and strategic recommendations contained herein reflect the mental impressions, conclusions, and legal theories of counsel. This memorandum is intended solely for the use of the addressee and authorized recipients identified in the distribution list appended hereto. Do not forward, copy, distribute, or disclose the contents of this memorandum to any person or entity without the prior written authorization of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
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I. Executive Summary
Calderwood & Harkness LLP was retained on March 2, 2026, by Quorum Insurance Holdings Corp. ("QIH") and its principal insurance subsidiary, Quorum Casualty & Surety Company ("QC&S"), to assess and defend against the pre-suit demand of Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"). This memorandum provides our initial case assessment, including a detailed analysis of the four grounds asserted by Pinnacle Atlantic, an aggregate exposure analysis, forum and dispute resolution considerations, recommended defenses and potential counterclaims, identification of key witnesses and documents, and strategic recommendations for both the immediate and medium-term horizons.
Pinnacle Atlantic's demand, dated February 14, 2026, was transmitted by its outside counsel, Hargrove, Fitch & Calloway LLP ("HFC"), through its partner Nathaniel R. Calloway III. The demand seeks the return of $78,400,000 in reinsurance recoverables previously paid under Treaty No. PA-QCS-2019-EXL-0044 (the "2019 Treaty" or "Treaty"), plus $12,600,000 in accrued interest calculated at a rate of eight percent (8%) per annum over an approximate twenty-four (24) month average period, for a total demand of $91,000,000.
The dispute centers on cessions made for two treaty years:
• Treaty Year 2022 (July 1, 2022 – June 30, 2023): $69,700,000 ceded against an aggregate net incurred loss of $189,700,000, after the $120,000,000 per-treaty-year retention.
• Treaty Year 2023 (July 1, 2023 – June 30, 2024): $8,700,000 ceded against an aggregate net incurred loss of $128,700,000, after the same retention.
These amounts were paid by Pinnacle Atlantic in full across seven billing installments from October 15, 2022 through March 29, 2024, without contemporaneous objection.
Pinnacle Atlantic's demand asserts four grounds for disgorgement of the paid recoverables:
1. Late Notice (Ground 1): Alleged untimely notice of the Meridian Docks mass tort claims under Treaty Article 7.
2. IBNR Misallocation (Ground 2): Alleged improper allocation of $22,300,000 in IBNR reserve development to Treaty Year 2022 under Treaty Article 5.
3. Follow-the-Fortunes Challenge (Ground 3): Alleged bad-faith settlement of the Veridian Financial Services E&O cluster, purportedly in violation of Treaty Article 11.
4. Premium Underreporting (Ground 4): Alleged underreporting of $6,800,000 in ceded earned premium under Treaty Article 3.
Overall Assessment. Based on our preliminary review of the demand letter, the Treaty, and information provided by QC&S to date, it is our assessment that QC&S has strong defenses on Grounds 1, 3, and 4, and a moderate risk on Ground 2 (IBNR allocation). The exposure range spans from $0 (best case, full defense on all grounds) to $91,000,000 (worst case, full adverse outcome with interest). In our judgment, the most likely outcome falls in the range of a partial concession or adverse finding on the IBNR allocation issue, resulting in a reduction of approximately $22,300,000 in ceded losses, with QC&S retaining the balance of the $78,400,000 recoverable. Even this likely-case scenario should be vigorously defended, as the actuarial judgment underlying the allocation is entitled to deference under both the Treaty and applicable law.
Strategic Recommendation. We recommend that QC&S pursue a multi-track strategy:
(a) Invoke Treaty Article 22 and demand arbitration under ARIAS-U.S. Rules, as the Treaty mandates and as the most favorable forum for QC&S;
(b) Simultaneously propose voluntary mediation as a preliminary step, without prejudice to the demand to arbitrate, to explore resolution before incurring full arbitration costs;
(c) Prepare pre-litigation defensive pleadings — including a verified answer, affirmative defenses, counterclaims, and a motion to compel arbitration — in the event Pinnacle Atlantic files suit in New York Supreme Court, Commercial Division, as HFC's demand letter suggests it may; and
(d) Commence comprehensive document collection, claims file review, and expert retention to develop the factual record on each ground, particularly the IBNR allocation at issue in Ground 2.
The QIH Board Audit Committee authorized the retention of litigation counsel on February 24, 2026. We note that the matter carries significant financial implications for QC&S and QIH, including potential impacts on QC&S's statutory surplus (currently $1.42 billion as of December 31, 2025), QIH's GAAP financial statements, compliance with the minimum statutory surplus covenant ($1.1 billion) under the Cartwright National Bank revolving credit facility, and SEC and NYDFS disclosure obligations. We address each of these considerations in the sections that follow.
II. Background
A. The Parties
Quorum Insurance Holdings Corp. ("QIH"). QIH is a Delaware corporation, publicly traded on the Nasdaq Global Select Market under the ticker symbol QIHC, and headquartered at 200 Constitution Plaza, Suite 3400, Hartford, Connecticut 06103. QIH operates as a multi-line insurance holding company with a technology-enabled distribution platform marketed under the brand name "QuorumEdge." For the fiscal year ended December 31, 2025, QIH reported gross written premium of approximately $4.18 billion and net earned premium of approximately $2.93 billion. As of February 28, 2026, QIH's market capitalization stood at approximately $6.7 billion. QIH's Chief Executive Officer is Martin Galbraith. Rachel Sondergaard serves as General Counsel, and Tobias Engstrom serves as Senior Vice President, Reinsurance & Capital Markets. QIH's financial statements for FY 2025 were audited by Meridian Whitcomb & Co. LLP, which issued an unqualified opinion that includes the $78.4 million reinsurance recoverable at issue in this dispute.
Quorum Casualty & Surety Company ("QC&S"). QC&S is QIH's principal insurance subsidiary and the cedent under the 2019 Treaty. QC&S is a New York-domiciled stock property & casualty insurer, assigned NAIC Company Code No. 24891, with its principal office at 200 Constitution Plaza, Suite 3200, Hartford, Connecticut 06103. QC&S maintains an A.M. Ridgeway financial strength rating of A (Excellent) with a Stable outlook, last affirmed in the 2025 rating cycle. As of December 31, 2025, QC&S reported statutory surplus of $1.42 billion. QC&S underwrites commercial general liability, excess and umbrella liability, professional liability, and related casualty lines. Diana Kessler-Hoff serves as Vice President, Claims & Reinsurance Recoveries, and is the principal internal stakeholder responsible for the cessions at issue.
Pinnacle Atlantic Reinsurance Ltd. ("PARL" or "Pinnacle Atlantic"). Pinnacle Atlantic is a Bermuda Class 4 insurer regulated by the Bermuda Monetary Authority, holding BMA Registration No. BMA-4R-2008-0331. Its registered office is located at Clarendon House, 14 Church Street, Hamilton HM 11, Bermuda. Pinnacle Atlantic maintains a U.S. office at 1285 Avenue of the Americas, 28th Floor, New York, New York 10019. It is a wholly owned subsidiary of Pinnacle Atlantic Group Holdings Ltd., a Bermuda exempted company. Pinnacle Atlantic is a global reinsurer specializing in casualty treaty and facultative reinsurance, reporting gross reinsurance assumed of approximately $9.6 billion for the fiscal year ended December 31, 2025. Sir Edmund Haverford serves as Chief Executive Officer, Lorraine Metcalf serves as Chief Claims Officer, and Conrad Hesse serves as Senior Vice President, Treaty Disputes & Recoveries. The HFC pre-suit demand letter identifies Mr. Hesse as the principal Pinnacle Atlantic contact for purposes of this dispute.
Broadreach Intermediaries Inc. ("Broadreach"). Broadreach is a New York corporation and licensed reinsurance intermediary, with offices at 100 Wall Street, 18th Floor, New York, New York 10005. Broadreach's Account Executive, James "Jamie" Castellano, placed the 2019 Treaty on behalf of QC&S and has handled all premium and claims-settlement transmittals between QC&S and Pinnacle Atlantic for the duration of the Treaty. Broadreach is designated as the intermediary under Treaty Article 9, which governs the flow of premium payments, claims notifications, and loss information between the parties. Broadreach's role is significant to this dispute, as the timing and content of transmittals through Broadreach bear directly on the notice and premium reporting issues raised in Pinnacle Atlantic's demand.
B. The 2019 Treaty
The Treaty at the center of this dispute is designated Treaty No. PA-QCS-2019-EXL-0044. The following summarizes the key structural and substantive provisions of the Treaty based on our preliminary review of the executed agreement and its endorsements.
Type. The Treaty is an aggregate excess-of-loss reinsurance treaty covering specified casualty lines. Unlike a per-occurrence excess-of-loss treaty, the Treaty responds when QC&S's aggregate net incurred losses across all covered claims in a given treaty year exceed a specified retention. This structural feature is directly relevant to several aspects of the dispute, as Pinnacle Atlantic's obligations under the Treaty are triggered by aggregate loss totals rather than individual claim outcomes.
Effective Date and Term. The Treaty became effective on July 1, 2019, with an original term of five years through June 30, 2024. The Treaty provides for automatic annual extensions unless either party provides ninety (90) days' written notice of non-renewal. The Treaty was extended through June 30, 2026 via two successive automatic one-year extensions. On October 1, 2025, Pinnacle Atlantic provided notice of non-renewal. Accordingly, the Treaty will lapse upon the expiration of the current extension period on June 30, 2026. The Treaty's run-off provisions (Article 18) will govern the handling of any outstanding claims or cessions following expiration.
Covered Lines. The Treaty covers losses arising under commercial general liability, excess and umbrella liability, and professional liability policies issued by QC&S during the treaty year. The covered lines definition is set forth in Article 2 and the attached Schedule of Business.
Retention. QC&S's retention under the Treaty is $120,000,000 in aggregate net incurred losses per treaty year. This means that Pinnacle Atlantic's obligation to pay ceded losses does not attach until QC&S's total aggregate net incurred losses in the covered lines, for a given treaty year, exceed $120 million.
Cession Limit. The Treaty's cession limit is $200,000,000 per treaty year in excess of the retention. Accordingly, the Treaty covers losses falling within the layer from $120,000,000 to $320,000,000 in aggregate net incurred losses per treaty year.
Treaty Premium. The Treaty provides for a provisional premium rate of forty-two percent (42%) of ceded earned premium, subject to a slide-scale adjustment based on loss experience. The slide-scale provides for a minimum premium rate of thirty-five percent (35%) and a maximum premium rate of fifty-two percent (52%). The slide-scale adjustment is calculated and settled on an annual basis following the close of each treaty year, with a final adjustment upon completion of the run-off period.
Governing Law. Article 16 of the Treaty provides that the Treaty shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict-of-laws provisions.
Arbitration. Article 22 of the Treaty provides for the resolution of disputes through binding arbitration before a three-member arbitration panel sitting in New York, New York, under the rules and procedures of ARIAS-U.S. (the AIDA Reinsurance and Insurance Arbitration Society – U.S.). The arbitration clause is broadly worded and applies to disputes "arising under or in connection with" the Treaty. We address the forum implications of this clause in detail in Section V below.
Intermediary. Article 9 designates Broadreach Intermediaries Inc. as the intermediary for all communications, premium transmittals, and claims-settlement transmittals under the Treaty.
C. Disputed Cessions
The disputed cessions span two treaty years:
Treaty Year 2022 (July 1, 2022 – June 30, 2023). QC&S reported aggregate net incurred losses of $189,700,000 across all covered casualty lines for this treaty year. After application of the $120,000,000 retention, the ceded loss was $69,700,000. This figure reflects incurred losses from a number of underlying claims and claim clusters, including the Meridian Docks mass tort claims and the IBNR reserve development at issue in Pinnacle Atlantic's demand.
Treaty Year 2023 (July 1, 2023 – June 30, 2024). QC&S reported aggregate net incurred losses of $128,700,000 for this treaty year. After application of the $120,000,000 retention, the ceded loss was $8,700,000. The Veridian Financial Services E&O cluster settlement is the principal driver of the aggregate losses exceeding the retention in this treaty year.
Total Ceded. The total ceded loss across both treaty years is $78,400,000 ($69,700,000 for TY 2022 plus $8,700,000 for TY 2023).
Payment History. Pinnacle Atlantic paid the total ceded amount of $78,400,000 in full across seven billing installments, beginning with the first installment of $15,000,000 on October 15, 2022, and concluding with the final installment of $3,200,000 on March 29, 2024. Each installment was transmitted through Broadreach Intermediaries in accordance with Treaty Article 9. At no point during this payment sequence did Pinnacle Atlantic raise any objection to the cessions, the underlying claims, the loss reports, or the premium calculations. This payment history is material to the waiver and estoppel defenses discussed in Section VI.
D. Pre-Suit Demand and Procedural History
The procedural history leading to the present engagement is as follows:
December 12, 2025. Pinnacle Atlantic transmitted a "reservation of rights" letter to QC&S regarding the TY 2022 and TY 2023 cessions. The letter, sent directly from Conrad Hesse (SVP, Treaty Disputes & Recoveries) to Diana Kessler-Hoff (VP, Claims & Reinsurance Recoveries), stated that Pinnacle Atlantic was conducting an internal review of the cessions and reserved all rights "with respect to the amounts paid and the underlying claims and reserve information supporting the cessions." The letter did not identify specific grounds for dispute or demand any specific relief. It came approximately twenty months and seventeen days after the final billing installment was paid on March 29, 2024 — a significant delay that we believe strengthens QC&S's waiver and estoppel arguments.
February 14, 2026. HFC, through Nathaniel R. Calloway III, transmitted a formal pre-suit demand letter to QC&S on behalf of Pinnacle Atlantic. The letter demands the return of $78,400,000 in paid recoverables plus $12,600,000 in accrued interest at eight percent (8%) per annum, for a total demand of $91,000,000. The letter sets forth the four grounds discussed in detail in Section III below. Notably, the demand letter asserts that Treaty Article 22's arbitration clause is "inapplicable to the specific claims raised," although the basis for this assertion is not elaborated. The letter states that if QC&S does not "remit full payment within thirty (30) days," Pinnacle Atlantic will "pursue all available remedies, including but not limited to commencing an action in the Supreme Court of the State of New York, New York County, Commercial Division."
February 24, 2026. The QIH Board Audit Committee was briefed on the Pinnacle Atlantic demand. Following presentation by Rachel Sondergaard and Tobias Engstrom, the Audit Committee authorized the retention of outside litigation counsel and directed General Counsel to engage Calderwood & Harkness LLP.
March 2, 2026. Calderwood & Harkness LLP formally opened the engagement. On March 4, 2026, at our direction, QIH issued a company-wide litigation hold notice to all relevant custodians, including Diana Kessler-Hoff, Tobias Engstrom, and members of the QC&S claims department and actuarial teams. We are in the process of collecting custodian acknowledgments.
III. Analysis of Pinnacle Atlantic's Four Grounds
This section provides a detailed analysis of each of the four grounds asserted in Pinnacle Atlantic's pre-suit demand. For each ground, we set forth the factual background, Pinnacle Atlantic's position as articulated in the HFC demand letter, QC&S's available defenses, and our preliminary merits assessment. We note at the outset that our analysis is based on information available as of the date of this memorandum and is subject to refinement as we complete our review of the underlying claims files, actuarial workpapers, and other key documents identified in Section VIII.
A. Ground 1: Late Notice Under Article 7 — Meridian Docks Mass Tort Cluster
1. Factual Background
The Meridian Docks claims comprise thirty-one (31) related commercial general liability bodily injury claims arising from alleged toxic contamination at the Meridian Docks industrial waterfront redevelopment project in Newark, New Jersey. The claims allege that construction workers, site visitors, and neighboring residents were exposed to hazardous substances — including volatile organic compounds, heavy metals, and residual industrial contaminants — released during demolition and excavation activities at the Meridian Docks site between 2019 and 2021.
The policyholder is Meridian Docks Development LLC, a New Jersey limited liability company engaged in the redevelopment of the former Meridian industrial port facility. Meridian Docks Development LLC is insured under QC&S Commercial General Liability Policy No. CGL-2020-09844, which was issued effective January 1, 2020, with a per-occurrence limit of $5,000,000 and a general aggregate limit of $25,000,000. The thirty-one claims were filed across multiple jurisdictions, primarily in New Jersey Superior Court (Essex County) and the United States District Court for the District of New Jersey, between March 2021 and August 2022.
QC&S first reserved the Meridian Docks claims on March 15, 2021, when the initial claims were reported and opened in the QC&S claims system. At that time, each of the individual claims was reserved at modest amounts reflecting early-stage bodily injury exposure assessments. The aggregate initial reserves across all thirty-one claims did not individually exceed the Treaty's Article 7 individual claim reporting threshold of $1,000,000 per claim.
Notice of the Meridian Docks claims was given to Pinnacle Atlantic via Broadreach Intermediaries on May 22, 2022. The delay between initial reservation and formal notice — a period of approximately fourteen months and seven days — is the basis for Pinnacle Atlantic's late notice argument.
QC&S's current net incurred loss across all thirty-one Meridian Docks claims stands at $41,200,000. These claims are a significant driver of the TY 2022 aggregate losses exceeding the $120,000,000 retention and contributing to the $69,700,000 cession for that treaty year.
2. Pinnacle Atlantic's Position
Pinnacle Atlantic contends that Article 7 of the Treaty requires "prompt notice" of claims that "may materially impact the cession" and that a delay of fourteen months and seven days from initial reservation to formal notice is per se unreasonable and constitutes a material breach of the Treaty. Pinnacle Atlantic's demand letter characterizes this delay as "fundamentally inconsistent with the reporting obligations that form the bedrock of the cedent-reinsurer relationship."
In support of its position, Pinnacle Atlantic asserts that it was prejudiced by the delayed notice because it was unable to monitor, participate in, or influence the claims handling and reserving process during the critical initial period when the Meridian Docks claims were being evaluated, reserved, and in certain cases settled. The demand letter further contends that had Pinnacle Atlantic received timely notice, it would have deployed its own environmental claims specialists and would have sought to participate in the defense and settlement strategy under the Treaty's consultation provisions.
Pinnacle Atlantic asserts that the late notice vitiates the Treaty cession as to all thirty-one Meridian Docks claims, thereby reducing the TY 2022 aggregate net incurred loss by $41,200,000 — which would reduce the ceded loss from $69,700,000 to $28,500,000, a reduction of $41,200,000.
3. QC&S's Defense
We believe QC&S has strong defenses against the late notice ground, on multiple independent bases:
Treaty Threshold. Article 7 of the Treaty contains an individual claim reporting threshold of $1,000,000 per claim. The thirty-one Meridian Docks claims were initially reserved individually at amounts well below this threshold. It was not until the first quarter of 2022, as the claims matured and additional information regarding the extent of contamination and the severity of alleged injuries became available, that reserve increases on certain individual claims crossed the $1,000,000 threshold. QC&S provided notice to Pinnacle Atlantic via Broadreach promptly upon the threshold being triggered — on May 22, 2022, within approximately two months of the Q1 2022 reserve increases. The Treaty does not require notice of claims below the individual reporting threshold, and QC&S's reading of its notice obligation is faithful to the text of Article 7. The fourteen-month gap cited by Pinnacle Atlantic measures from initial reservation — not from the date on which the Treaty's notice obligation was triggered.
New York Prejudice Requirement. Under New York law, which governs the Treaty, late notice in the reinsurance context does not automatically vitiate coverage. Unlike direct insurance, where notice provisions may be treated as conditions precedent under certain circumstances, New York courts have consistently held that a reinsurer seeking to avoid payment based on late notice must demonstrate actual prejudice resulting from the delay. This principle is well-established in case law including Unigard Security Insurance Co. v. North River Insurance Co., 79 N.Y.2d 576 (1992), and its progeny. The burden of demonstrating actual prejudice falls squarely on Pinnacle Atlantic as the party asserting the defense.
Absence of Prejudice. We believe that Pinnacle Atlantic will have significant difficulty establishing actual prejudice in this case. The Treaty is an aggregate excess-of-loss treaty, not a per-occurrence treaty. Pinnacle Atlantic's obligation is triggered by the total aggregate losses in a treaty year, not by the handling or outcome of individual claims. Pinnacle Atlantic does not have individual claim adjustment rights or the contractual right to direct the defense of underlying claims. The cessions are driven by aggregate loss totals, and individual claim outcomes are relevant only insofar as they contribute to those totals. It is difficult to articulate a cognizable theory of prejudice in this context — Pinnacle Atlantic's exposure is the same regardless of whether it received notice of the Meridian Docks claims in March 2021 or May 2022, because the aggregate loss total that triggers the cession is determined by the totality of all claims in the treaty year.
Moreover, Broadreach transmitted periodic bordereau and aggregate loss reports to Pinnacle Atlantic throughout the treaty period, keeping Pinnacle Atlantic informed of the developing aggregate loss picture. While these reports may not have specifically itemized the Meridian Docks claims prior to the formal notice in May 2022, they provided Pinnacle Atlantic with visibility into the trajectory of QC&S's aggregate loss development.
Waiver and Estoppel. Pinnacle Atlantic paid all seven billing installments — totaling $78,400,000 — between October 15, 2022 and March 29, 2024 without raising any late notice objection. The first billing installment was paid approximately five months after the notice was given, and subsequent installments were paid over the following eighteen months. At no point during this payment sequence did Pinnacle Atlantic object to the Meridian Docks claims on notice grounds. Pinnacle Atlantic's reservation-of-rights letter was not sent until December 12, 2025 — nearly twenty-one months after the final payment. This course of conduct supports strong arguments for waiver of the late notice defense and estoppel based on Pinnacle Atlantic's conduct in making payments with full knowledge of the relevant facts.
Course of Dealing. The parties' course of dealing throughout the Treaty period should also be considered. If, as we expect, the document review reveals that Pinnacle Atlantic routinely accepted claims notices that were transmitted on a similar timeline or that reflected similar threshold-based notice practices, this will further undermine its position on this ground.
4. Merits Assessment
This is a strong defense for QC&S. The threshold-based notice argument is well-supported by the plain text of Article 7. New York's prejudice requirement for reinsurance late notice creates a significant additional layer of protection, and the aggregate excess-of-loss structure of the Treaty makes it particularly difficult for Pinnacle Atlantic to demonstrate actual prejudice from delayed individual claim notice. Pinnacle Atlantic's payment of all installments without contemporaneous objection supports robust waiver and estoppel arguments.
Risk on this ground: LOW.
We note, however, that the strength of this defense depends in part on the content of the claims files and the Treaty's notice provisions, both of which we have not yet had the opportunity to review in full detail. We will confirm this assessment upon completion of the document review.
B. Ground 2: Misallocation of IBNR Reserve Development Under Article 5
1. Factual Background
Pinnacle Atlantic's second ground concerns the allocation of $22,300,000 in IBNR (incurred but not reported) reserve strengthening to Treaty Year 2022. Pinnacle Atlantic contends that this amount should properly have been attributed to Treaty Year 2021.
The significance of this alleged misallocation is driven by the differing aggregate loss positions in TY 2021 and TY 2022:
• TY 2021. QC&S's aggregate net incurred loss for TY 2021 was $104,600,000 — below the $120,000,000 retention. No cession attached to TY 2021, and this figure is undisputed by Pinnacle Atlantic.
• TY 2022. QC&S's reported aggregate net incurred loss for TY 2022 was $189,700,000. After the $120,000,000 retention, the ceded loss was $69,700,000.
If the $22,300,000 IBNR development were reallocated from TY 2022 to TY 2021, the impact would be as follows:
• TY 2021 revised aggregate: $104,600,000 + $22,300,000 = $126,900,000. This would exceed the $120,000,000 retention by $6,900,000, but Pinnacle Atlantic does not dispute TY 2021 and does not seek to create a TY 2021 cession. The relevant point, from Pinnacle Atlantic's perspective, is the removal of the amount from TY 2022.
• TY 2022 revised aggregate: $189,700,000 - $22,300,000 = $167,400,000. After the $120,000,000 retention, the revised ceded loss would be $47,400,000 — a reduction of $22,300,000 from the reported $69,700,000.
• Total revised cessions: $47,400,000 (TY 2022) + $8,700,000 (TY 2023) = $56,100,000, compared to the reported $78,400,000.
QC&S's IBNR allocation was prepared by its consulting actuaries, Velthorn Actuarial Advisors LLC, under the direction of Dr. Stephen Tanaka, FCAS, MAAA, Velthorn's Principal Actuary. Dr. Tanaka certified the loss development analysis and IBNR allocation methodology underlying the TY 2022 and TY 2023 cessions. The Velthorn certification and supporting workpapers are among the most critical documents to be obtained and reviewed in this matter.
2. Pinnacle Atlantic's Position
Pinnacle Atlantic's demand letter contends that the $22,300,000 in IBNR development relates to underlying accident-year 2021 exposures — that is, to claims arising from insured events occurring during the period that falls within TY 2021 — and should therefore be attributed to TY 2021 for purposes of the Treaty cession calculation. The demand letter asserts that QC&S's allocation of this development to TY 2022 had the effect of inflating the TY 2022 aggregate loss above the level that would otherwise have attached, resulting in an overstated cession.
Pinnacle Atlantic's letter does not identify the specific claims or lines of business to which the $22,300,000 in IBNR relates, nor does it attach or cite any actuarial analysis supporting its position. It states that Pinnacle Atlantic's "independent actuarial review" has concluded that the allocation is "inconsistent with standard actuarial practice and the Treaty's loss allocation provisions." We have not been provided with Pinnacle Atlantic's actuarial analysis and do not know its scope, methodology, or author.
3. QC&S's Defense
We believe QC&S has a defensible position on this ground, but it is the area of greatest factual and technical uncertainty, and the most likely ground on which Pinnacle Atlantic may achieve some degree of success.
Treaty Language. Article 5.2 of the Treaty defines "losses incurred" and prescribes the methodology for allocating losses, including IBNR, to treaty years. The precise text of Article 5.2 will be critical to this analysis, and we have not yet obtained the executed Treaty. Based on our preliminary understanding from QC&S's description, the Treaty allocates losses based on the treaty year in which they are "incurred" — a term that may encompass both the timing of the underlying events and the timing of the loss development, depending on the specific drafting.
Velthorn Methodology. Velthorn's methodology, as described to us by Tobias Engstrom, allocated the IBNR development to TY 2022 based on the principle that the development factors crystallized during the TY 2022 reporting period. Under this approach, IBNR development is allocated to the treaty year in which the cedent recognizes the development in its reserves, rather than the treaty year in which the underlying insured events occurred. Velthorn determined that the claims whose development gave rise to the $22,300,000 reserve increase exhibited characteristics and development patterns that aligned with accident-year 2022 experience. Dr. Tanaka's certification of this allocation was prepared in accordance with applicable Actuarial Standards of Practice ("ASOPs") promulgated by the Actuarial Standards Board.
Deference to Cedent's Actuarial Judgment. As a general matter, reinsurance arbitrators and courts afford significant deference to the cedent's reasonable actuarial judgment in allocating losses to treaty years, particularly where the allocation is supported by an actuarial certification. Pinnacle Atlantic bears the burden of demonstrating that QC&S's allocation was arbitrary, capricious, or made in bad faith. A mere difference of professional actuarial opinion, standing alone, is typically insufficient to overturn a cedent's allocation.
Areas of Vulnerability. Notwithstanding these defenses, we note several areas of vulnerability:
• The distinction between "when the underlying events occurred" and "when the development was recognized" is a question on which reasonable actuaries may disagree. If the IBNR relates to claims arising from insured events clearly occurring during TY 2021, Pinnacle Atlantic's argument has facial plausibility.
• The magnitude of the development ($22,300,000) is substantial and, if allocated to TY 2021, would have caused TY 2021 to breach the retention. This raises an inference — however unfounded — that the allocation was influenced by the desire to maximize the cession in a treaty year where the retention was already breached rather than in a year where it was not.
• We have not yet had the opportunity to review Velthorn's detailed workpapers, development triangles, or underlying claim data. The strength of our defense on this ground depends critically on the quality and documentation of Velthorn's work.
4. Merits Assessment
This ground presents MODERATE risk and is the most technically complex issue in the dispute. The outcome will depend heavily on the actuarial evidence — specifically, whether the IBNR development factors are more properly attributed to accident-year 2021 or accident-year 2022 under the Treaty's definition of "losses incurred" as set forth in Article 5.2, and whether Velthorn's methodology is consistent with accepted actuarial standards and practices.
Pinnacle Atlantic's argument has facial plausibility, particularly if the underlying claims relate to accident-year 2021 events. However, actuarial allocation of IBNR development is inherently a matter of professional judgment, and Velthorn's certification carries significant weight. The cedent's actuarial judgment is entitled to deference absent a showing that it was arbitrary, capricious, or in bad faith.
We strongly recommend that an independent actuarial expert be retained immediately to review Velthorn's workpapers and allocation methodology, assess the vulnerability of QC&S's position, and, if necessary, prepare a rebuttal analysis and expert testimony. If the allocation is partially or fully reallocated by an arbitration panel, the financial impact would be a reduction of up to $22,300,000 in ceded losses, representing the principal area of exposure in this dispute.
C. Ground 3: Follow-the-Fortunes / Settlements Under Article 11 — Veridian E&O Cluster
1. Factual Background
Pinnacle Atlantic's third ground challenges the settlement of three related errors & omissions / professional liability claims brought by investors against Veridian Financial Services Inc., a QC&S policyholder. The claims alleged that Veridian made material misrepresentations in the sale of structured financial products, including collateralized loan obligations and structured notes, resulting in substantial investor losses during a period of market volatility in 2022–2023.
Veridian Financial Services Inc. was insured under QC&S Professional Liability Policy No. PL-2021-15327, which provided coverage for claims arising from wrongful acts in the rendering of professional financial services. The policy was issued effective July 1, 2021, with a per-claim limit of $15,000,000 and an aggregate limit of $40,000,000.
The three claims (designated Claim A, Claim B, and Claim C) were filed in the United States District Court for the Southern District of New York by separate groups of institutional and high-net-worth investors. The claims alleged violations of federal and state securities laws, common law fraud, and negligent misrepresentation, and sought compensatory and, in certain cases, punitive damages.
QC&S settled all three claims on September 8, 2023, for a combined total of $34,500,000, allocated as follows:
• Claim A: $14,200,000
• Claim B: $12,800,000
• Claim C: $7,500,000
After application of other reinsurance, QC&S's net retained loss on the Veridian cluster was $26,100,000. The amount ceded to the Treaty within the TY 2023 aggregate was $8,700,000, which constitutes the entirety of the TY 2023 cession. The Veridian settlement is the event that pushed TY 2023 aggregate losses from below the $120,000,000 retention to above it, thereby creating the TY 2023 cession.
2. Pinnacle Atlantic's Position
Pinnacle Atlantic's demand letter alleges that QC&S settled the Veridian claims "without meaningful litigation exposure analysis, at inflated amounts, in order to artificially push aggregate losses above the $120,000,000 retention in Treaty Year 2023." The letter characterizes the settlement as lacking "good faith and businesslike conduct" and asserts that the settlement "vitiates Pinnacle Atlantic's obligation to follow QC&S's fortunes" under Article 11 of the Treaty.
In essence, Pinnacle Atlantic's argument is that QC&S engaged in loss manipulation or treaty abuse — deliberately overpaying the Veridian settlement to create a cession that would not otherwise have existed. This is a serious allegation that, if substantiated, could undermine the cession. However, as discussed below, it faces formidable legal and evidentiary obstacles.
3. QC&S's Defense
We believe QC&S has strong defenses on this ground, grounded in both the settled law of reinsurance and the specific facts of the Veridian settlement.
Follow-the-Fortunes Doctrine. Under New York law, the follow-the-fortunes doctrine is a foundational principle of reinsurance. It requires the reinsurer to follow the cedent's good-faith claims decisions — including settlement decisions — unless the cedent acted in bad faith, or the claim is clearly outside the terms of the underlying policy. This principle has been affirmed repeatedly by New York courts, including in British International Insurance Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2d Cir. 2003), and North River Insurance Co. v. ACE American Reinsurance Co., 361 F.3d 134 (2d Cir. 2004). The doctrine reflects the reality that the cedent, not the reinsurer, is in the best position to evaluate claims and make settlement decisions, and that reinsurers accept the cedent's business judgment as part of the bargain of the reinsurance contract.
Treaty Article 11. Article 11 of the Treaty codifies the follow-the-fortunes standard, providing that Pinnacle Atlantic shall follow QC&S's fortunes with respect to claims handling, settlements, and payments made by QC&S in the ordinary course of business, provided such decisions are made in good faith and in a businesslike manner. This is a standard provision in reinsurance treaties and reflects the parties' agreed allocation of claims-handling authority and risk.
Burden of Proof. The burden of overcoming the follow-the-fortunes obligation falls on the reinsurer. To avoid following the cedent's settlement, Pinnacle Atlantic must demonstrate that the settlement was made in bad faith, through fraud, or with gross negligence. This is an extraordinarily high standard, and reinsurers rarely succeed in overcoming it.
QC&S's Settlement Process. Based on our preliminary understanding from Diana Kessler-Hoff, the Veridian claims were evaluated through QC&S's standard claims committee process. Internal claims professionals reviewed the claims, defense counsel retained by QC&S assessed the litigation exposure, and the settlement amounts were approved through the multi-level claims committee review and approval process. The settlement amounts were within the reasonable range of litigation exposure given the nature of the underlying E&O allegations, the strength of the plaintiffs' evidence regarding structured-product misrepresentations, the potential for adverse jury verdicts in the Southern District of New York (a jurisdiction known for plaintiff-friendly outcomes in securities-related litigation), and the aggregate exposure across three related claims.
QC&S's Retained Exposure. A critical fact undermining Pinnacle Atlantic's allegation is that QC&S retained $26,100,000 net of other reinsurance on the Veridian settlement. This represents a substantial economic stake — approximately seventy-six percent (76%) of the total settlement amount. A cedent that retains $26.1 million on a settlement has a powerful economic incentive to settle at the lowest reasonable amount, not to inflate the settlement. The retained exposure directly rebuts any suggestion that QC&S lacked "skin in the game" or that it used the settlement to manipulate its aggregate loss position for Treaty purposes.
Aggregate Treaty Structure. The fact that the Veridian settlement caused TY 2023 aggregate losses to cross the $120,000,000 retention threshold is not, in itself, evidence of bad faith. Aggregate excess-of-loss treaties inherently involve cessions that attach when aggregate losses cross a threshold. Individual claim settlements that contribute to the aggregate total are a routine and expected feature of such treaties. If the mere creation of a cession through a legitimate settlement were sufficient to void the cedent's follow-the-fortunes protection, the aggregate excess-of-loss structure would be unworkable.
Pinnacle Atlantic's Payment Without Objection. As with Ground 1, Pinnacle Atlantic paid the TY 2023 billing installments without raising any contemporaneous objection to the Veridian settlement or the resulting cession. The installments were transmitted through Broadreach, which provided supporting loss information. Pinnacle Atlantic's failure to object at the time of payment is relevant to waiver and estoppel.
4. Merits Assessment
This is a strong defense for QC&S. The follow-the-fortunes doctrine is well-established under New York law and strongly favors cedents. Pinnacle Atlantic's allegation of settlement inflation is speculative and would require affirmative evidence of bad faith — a very difficult standard to meet, particularly where the cedent retained a substantial economic interest in the outcome. QC&S's significant retained exposure of $26,100,000 further undermines any allegation that the settlement was inflated for the purpose of creating a reinsurance cession.
Risk on this ground: LOW to MODERATE.
We note that the claims file documentation of the settlement evaluation will be critical to confirming this assessment. If the claims files reflect a thorough, documented evaluation of litigation exposure, defense counsel input, and claims committee approval, the defense will be very strong. Conversely, if the documentation is thin or if the settlement approval process was irregular, Pinnacle Atlantic may be able to create questions of fact regarding good faith. We strongly recommend a thorough, privilege-aware review of the Veridian claims files as an immediate priority.
D. Ground 4: Ceded Earned Premium Underreporting Under Article 3
1. Factual Background
Pinnacle Atlantic's fourth and final ground involves a dispute over the calculation of ceded earned premium for TY 2022. QC&S reported ceded earned premium of $38,400,000 for TY 2022. Pinnacle Atlantic calculates ceded earned premium at $45,200,000, a difference of $6,800,000.
At the provisional treaty premium rate of forty-two percent (42%), the alleged shortfall results in a treaty premium underpayment of $2,856,000 ($6,800,000 x 42%). This is the amount that Pinnacle Atlantic contends QC&S owes in additional treaty premium.
2. Pinnacle Atlantic's Position
Pinnacle Atlantic's demand letter asserts that QC&S "materially underreported ceded earned premium by $6,800,000," and characterizes this underreporting as part of a broader "pattern of treaty non-compliance" that, in combination with the other three grounds, entitles Pinnacle Atlantic to a treaty termination right or, at minimum, an offset against the ceded losses. The demand letter aggregates this ground with the other three as evidence that QC&S has not complied with its obligations under the Treaty.
3. QC&S's Defense
We believe QC&S has a strong defense on this ground, as the premium discrepancy appears to be entirely attributable to a difference in treaty interpretation regarding the inclusion of certain premium categories.
Article 3.4 Exclusion. Based on our preliminary discussions with Tobias Engstrom, the $6,800,000 difference arises from Pinnacle Atlantic's improper inclusion of run-off portfolio transfer premiums that are expressly excluded from the definition of "ceded earned premium" under Article 3.4 of the Treaty. Run-off portfolio transfer premiums relate to blocks of business that QC&S acquired through assumption reinsurance transactions and that are written on a run-off basis. Article 3.4 — a provision that was negotiated during the original placement of the Treaty — expressly excludes these premiums from the ceded earned premium base used to calculate treaty premium. QC&S's reported figure of $38,400,000 correctly reflects this exclusion, and Pinnacle Atlantic's figure of $45,200,000 improperly includes them.
Remedy Limited to Premium True-Up. Even assuming, arguendo, that some premium adjustment were warranted, the appropriate remedy would be a premium true-up — that is, payment by QC&S of additional treaty premium in the amount of the shortfall multiplied by the applicable premium rate. The remedy would not be a treaty termination right, an offset against ceded losses, or disgorgement of paid recoverables. The Treaty's slide-scale adjustment mechanism (minimum 35%, maximum 52%) is specifically designed to address premium variations through the annual premium adjustment process, not through cession avoidance or treaty termination.
De Minimis Amount. The amount at issue — $2,856,000 in alleged underpayment of treaty premium — is de minimis relative to the $78,400,000 in disputed cessions. Pinnacle Atlantic's attempt to bootstrap a modest premium calculation dispute into a ground for disgorgement of the entire recoverable is overreaching and unsupported by the Treaty's remedial provisions.
Document Support. We recommend that Tobias Engstrom prepare detailed workpapers supporting QC&S's premium calculations and the Article 3.4 exclusion, including the identification of the specific portfolio transfer premiums excluded and the treaty provision supporting their exclusion. These workpapers will be essential to resolving this ground.
4. Merits Assessment
This is a strong defense for QC&S. The Article 3.4 exclusion appears to directly address the premium discrepancy, and Pinnacle Atlantic's own calculation appears to include premium categories that the Treaty expressly excludes. Even if QC&S were incorrect on the premium calculation — a possibility we consider unlikely — the remedy would be limited to a premium true-up of approximately $2,856,000, not disgorgement of $78,400,000 in cessions. Pinnacle Atlantic's attempt to aggregate this modest premium issue with its other three grounds as evidence of a "pattern of non-compliance" is a litigation tactic designed to add bulk to an otherwise weak claim.
Risk on this ground: LOW.
IV. Aggregate Exposure Analysis
A. Exposure Range
Based on our analysis of the four grounds set forth in Section III, we present the following exposure range:
We assess the likelihood distribution as follows: the best case is achievable but depends on the strength of the actuarial evidence on Ground 2; the likely case reflects what we believe is the most probable range of outcomes in arbitration, acknowledging the factual uncertainty surrounding the IBNR allocation; and the worst case is unlikely given the strength of QC&S's defenses on three of the four grounds, but cannot be excluded entirely.
We emphasize that these assessments are preliminary and subject to revision as we complete our document review, retain and consult with actuarial experts, and develop the factual record on each ground.
B. Financial Impact Modeling
Statutory Surplus Impact (QC&S):
• If $78.4M write-off (likely case, full Ground 2 concession plus return of principal only): Surplus falls to approximately $1,341,600,000. Headroom narrows to approximately $241,600,000.
• If $91.0M adverse outcome (worst case, full disgorgement plus interest): Surplus falls to approximately $1,329,000,000. Headroom narrows to approximately $229,000,000.
In all scenarios analyzed, QC&S's statutory surplus remains above the $1,100,000,000 minimum covenant under the Cartwright National Bank revolving credit facility. No covenant breach is anticipated. However, the reduced headroom — particularly under the worst-case scenario — warrants careful monitoring, and we recommend assessing whether the credit agreement contains any notification or reporting requirements that may be triggered by the pending dispute or by any adverse outcome.
GAAP Impact (QIH):
A full write-off of the $78,400,000 reinsurance recoverable would result in a pre-tax charge to QIH's consolidated financial statements of $78,400,000. At the federal corporate income tax rate of 21%, the after-tax net income impact would be approximately $61,936,000 ($78,400,000 x (1 - 0.21)). This impact would be reflected in QIH's consolidated income statement for the quarter in which the charge is taken.
Reinsurance Recoverable on QC&S Statutory Balance Sheet:
The $78,400,000 in disputed recoverables is reflected on QC&S's Schedule F, Part 3 (Ceded Reinsurance) as of December 31, 2025. Any reduction in the recoverable, whether through settlement, adverse arbitration award, or voluntary concession, would require adjustment to QC&S's statutory balance sheet, with corresponding impacts on surplus and Schedule F disclosures.
Credit Facility:
QIH maintains a $750,000,000 senior secured revolving credit facility with Cartwright National Bank, N.A., maturing June 2028. The administrative agent relationship manager is Andrew Bao. The credit agreement contains a minimum statutory surplus covenant of $1,100,000,000 applicable to QC&S. As noted above, no covenant breach is anticipated under any scenario. However, the credit agreement should be reviewed for (i) material litigation notification requirements, (ii) material adverse change reporting provisions, and (iii) any requirement to provide notice of changes in the QC&S reinsurance recoverable position. We recommend that Tobias Engstrom coordinate with internal treasury to review the credit agreement provisions and assess any applicable notification obligations.
V. Forum and Dispute Resolution Analysis
A. Arbitration Under Treaty Article 22
Treaty Article 22 provides for the resolution of disputes through binding arbitration before a three-member arbitration panel sitting in New York, New York, under ARIAS-U.S. Rules. Based on our preliminary review, the scope of the arbitration clause appears to be broad, covering disputes "arising under or in connection with" the Treaty. This language is standard in reinsurance treaties and is routinely interpreted to encompass virtually all disputes between the parties relating to the Treaty, including disputes concerning the interpretation of Treaty provisions, the calculation and allocation of losses, the validity of cessions, and claims-handling and notice obligations.
HFC's pre-suit demand letter asserts that the Article 22 arbitration clause is "inapplicable to the specific claims raised" by Pinnacle Atlantic. The demand letter does not elaborate on the basis for this assertion, and we believe it is likely meritless. All four grounds asserted by Pinnacle Atlantic relate directly to the interpretation and performance of the Treaty: Article 7 (notice), Article 5 (IBNR allocation and loss incurred definition), Article 11 (follow-the-fortunes), and Article 3 (premium reporting). These are quintessential Treaty disputes that fall squarely within the scope of a broadly worded arbitration clause.
Under both New York CPLR Article 75 (governing arbitration agreements under New York state law) and the Federal Arbitration Act, 9 U.S.C. sections 1 through 16 (applicable if the Treaty involves interstate or international commerce, as it plainly does given Pinnacle Atlantic's Bermuda domicile), there is a strong presumption in favor of arbitrability, particularly in commercial contracts. This presumption is reinforced in the reinsurance context, where ARIAS-U.S. arbitration is the established and preferred dispute resolution mechanism. Courts routinely compel arbitration of reinsurance disputes where a valid arbitration clause exists, and doubts regarding the scope of the clause are resolved in favor of arbitration.
If Pinnacle Atlantic files suit in New York Supreme Court, Commercial Division, as the HFC demand letter threatens, QC&S should promptly move to compel arbitration and stay the litigation pursuant to CPLR Section 7503(a) and/or Section 3 of the Federal Arbitration Act. We believe such a motion would have a high likelihood of success given the broad scope of the arbitration clause and the nature of the disputes at issue.
B. Strategic Considerations
In evaluating the optimal forum strategy, we have considered the following factors:
Advantages of Arbitration:
• Industry Expertise. An ARIAS-U.S. arbitration panel will typically consist of current or former reinsurance executives and attorneys with deep expertise in treaty interpretation, follow-the-fortunes doctrine, actuarial concepts, and the customs and practices of the reinsurance industry. This expertise is particularly valuable in this dispute, which involves technical actuarial issues (IBNR allocation), industry-specific doctrines (follow-the-fortunes), and Treaty interpretation.
• Confidentiality. Arbitration proceedings are private and confidential. Given QIH's status as a publicly traded company, avoiding a public litigation record that could attract investor, analyst, or media scrutiny is an important consideration. Public filings and courtroom proceedings could create adverse publicity and potentially impact QIH's stock price, even if QC&S ultimately prevails on the merits.
• Speed. Arbitration proceedings typically proceed on a faster timetable than litigation in the Commercial Division, which, notwithstanding its efficiency relative to other courts, is subject to calendar congestion and procedural delays. A faster resolution reduces uncertainty for QIH's financial reporting and investor relations.
• Limited Appellate Review. While this is also a disadvantage (see below), limited appellate review means that a favorable outcome is more likely to be final, reducing the risk of prolonged uncertainty.
Disadvantages of Arbitration:
• Limited discovery. ARIAS-U.S. proceedings provide for more limited discovery than is available in litigation. However, given that the key documents are largely within QC&S's own files and records, and that QC&S is the defending party, this limitation may not be significant.
• Limited Appellate Rights. If the arbitration outcome is adverse, the grounds for vacating an arbitration award under both CPLR Article 75 and the FAA are extremely narrow, essentially limited to fraud, corruption, partiality, or manifest disregard of the law. This means that an adverse outcome in arbitration is effectively final.
• "Split the Baby" Risk. Arbitration panels in the reinsurance industry have a reputation — whether deserved or not — for reaching compromise outcomes that do not fully vindicate either party's position. This risk is mitigated here by the strength of QC&S's defenses on three of the four grounds, but it should be acknowledged.
Litigation Risks:
• Public Proceedings. Litigation in New York Supreme Court, Commercial Division, would be a matter of public record. Complaint, answer, motion papers, and any trial proceedings would be accessible to investors, analysts, rating agencies, regulators, and the press.
• Judicial Expertise. While Commercial Division justices are highly knowledgeable generalists, they typically have less expertise in reinsurance-specific doctrines and actuarial issues than ARIAS-U.S. arbitrators. This could be a disadvantage on the more technical aspects of the dispute.
• Appellate Exposure. Litigation outcomes are subject to full appellate review, which could prolong the dispute and increase costs. However, appellate review also provides a mechanism to correct errors, which could be beneficial if the initial outcome is adverse.
Recommendation. We recommend that QC&S pursue arbitration as the primary forum. This recommendation is consistent with the Treaty terms, which mandate arbitration. It is also strategically advantageous for QC&S because the industry expertise of ARIAS-U.S. arbitrators, the confidentiality of the proceedings, and the potential for faster resolution all favor QC&S's interests. The strength of QC&S's position — strong defenses on three of four grounds — weighs in favor of arbitration, as the risk of a "split the baby" outcome is mitigated by the relative clarity of the merits on most issues.
We further recommend that QC&S simultaneously propose voluntary mediation as a preliminary step before formal arbitration proceedings. A mediation with a neutral mediator experienced in reinsurance disputes — conducted on a without-prejudice basis — could provide an opportunity to resolve the dispute efficiently and potentially on terms favorable to QC&S (e.g., a modest concession on the IBNR issue in exchange for Pinnacle Atlantic's withdrawal of the remaining grounds and confirmation of the balance of the recoverable). Mediation does not waive or prejudice QC&S's demand to arbitrate.
VI. Defenses and Affirmative Claims
A. Affirmative Defenses
Based on our analysis, QC&S should assert the following affirmative defenses in response to Pinnacle Atlantic's demand, whether in the context of arbitration proceedings or, if necessary, in responsive pleadings in litigation:
1. Full Compliance with Treaty Terms. QC&S has at all times complied with the terms and conditions of the Treaty, including Articles 3, 5, 7, and 11, and is entitled to retain the full $78,400,000 in reinsurance recoverables.
2. Timely Notice Under Article 7. QC&S provided timely notice of the Meridian Docks claims in accordance with Article 7's individual claim reporting threshold of $1,000,000 per claim. The claims were individually reserved below the threshold until Q1 2022, at which time reserve increases triggered the notice obligation. Notice was provided promptly on May 22, 2022.
3. Proper IBNR Allocation Under Article 5.2. QC&S's allocation of IBNR reserve development to Treaty Year 2022 was proper under Article 5.2, consistent with actuarial standards of practice, and certified by Velthorn Actuarial Advisors LLC through Dr. Stephen Tanaka, FCAS, MAAA. The allocation is entitled to deference as an exercise of reasonable actuarial judgment.
4. Follow-the-Fortunes Doctrine. QC&S's settlement of the Veridian Financial Services E&O claims was made in good faith, in the ordinary course of business, and within the reasonable range of litigation exposure. Pinnacle Atlantic is obligated to follow QC&S's fortunes under Article 11 and New York reinsurance law. Pinnacle Atlantic cannot demonstrate bad faith, fraud, or gross negligence in QC&S's claims handling or settlement decisions.
5. Proper Premium Reporting Under Article 3. QC&S properly reported ceded earned premium of $38,400,000 for TY 2022, correctly excluding run-off portfolio transfer premiums pursuant to Article 3.4 of the Treaty. Pinnacle Atlantic's calculation of $45,200,000 improperly includes excluded premium categories.
6. Waiver and/or Estoppel. Pinnacle Atlantic paid all seven billing installments totaling $78,400,000 between

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