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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Rachel Sondergaard, General Counsel, Quorum Insurance Holdings Corp.

FROM: Jeffrey Park, Lead Associate, and Yuki Nakamura, Associate, Calderwood & Harkness LLP

DATE: March 12, 2026

RE: Treaty Interpretation Memorandum — Key Provisions of Aggregate Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 Between Quorum Casualty & Surety Company (Cedent) and Pinnacle Atlantic Reinsurance Ltd. (Reinsurer)

MATTER NO.: 1025-00005

REVIEWED BY: Douglas Carmichael, Responsible Partner

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I. Purpose and Scope of Memorandum

This memorandum provides a provision-by-provision analysis of six key articles of that certain Aggregate Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty") between Quorum Casualty & Surety Company ("QC&S"), a New York-domiciled stock property and casualty insurer (NAIC No. 24891), as cedent, and Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"), a Bermuda Class 4 insurer (BMA Registration No. BMA-4R-2008-0331), as reinsurer. This memorandum is prepared at the request of Quorum Insurance Holdings Corp. ("QIH"), the parent company of QC&S, and is directed to Rachel Sondergaard, General Counsel of QIH, in connection with the pre-suit dispute initiated by Pinnacle Atlantic through its counsel, Hargrove, Fitch & Calloway LLP ("HFC").

The Treaty articles analyzed herein are as follows:

• Article 3 — Premium Reporting

• Article 5 — Losses Incurred Definition / IBNR Allocation

• Article 7 — Notice Requirements

• Article 9 — Intermediary Clause

• Article 11 — Follow-the-Fortunes / Settlements

• Article 22 — Arbitration

Each article is interpreted under New York law, which is the governing law of the Treaty as designated by Article 16 thereof. The Treaty's choice-of-law provision is unambiguous and has not been challenged by Pinnacle Atlantic or HFC.

For each article, this memorandum identifies textual ambiguities, relevant New York precedent, and the interaction between the provision and one or more of the four grounds asserted in Pinnacle Atlantic's pre-suit demand letter dated February 14, 2026 (the "Demand Letter"), sent by HFC on behalf of Pinnacle Atlantic. The four grounds asserted in the Demand Letter are:

1. Ground No. 1: Late notice of the Meridian Docks mass tort claims in violation of Article 7;

2. Ground No. 2: Misallocation of $22,300,000 in IBNR reserve development to Treaty Year 2022 in violation of Article 5;

3. Ground No. 3: Failure of QC&S to exercise good-faith, businesslike claims-handling judgment in settling the Veridian Financial Services E&O cluster claims, in violation of the follow-the-fortunes obligation under Article 11; and

4. Ground No. 4: Inaccurate premium reporting and underreporting of ceded earned premium for Treaty Year 2022 in violation of Article 3.

This memorandum is intended to serve as the central interpretive framework for the dispute. Cross-references to companion memoranda are noted where appropriate, including the following related work product prepared or under preparation by this firm:

• Late Notice Defense Analysis Memorandum (Matter No. 1025-00005-A);

• IBNR Allocation Analysis Memorandum (Matter No. 1025-00005-B);

• Follow-the-Fortunes / Settlements Analysis Memorandum (Matter No. 1025-00005-C);

• Premium Reporting & Termination Rights Analysis Memorandum (Matter No. 1025-00005-D);

• Arbitration vs. Litigation Forum Analysis Memorandum (Matter No. 1025-00005-E);

• Draft Motion to Compel Arbitration (Matter No. 1025-00005-F); and

• Draft Third-Party Subpoena to Broadreach Intermediaries Inc. (Matter No. 1025-00005-G).

II. Overview of the Treaty

A. Treaty Structure and Parties

Treaty No. PA-QCS-2019-EXL-0044 is an aggregate excess-of-loss reinsurance treaty covering casualty lines of business. The Treaty was placed by Broadreach Intermediaries Inc. and became effective on July 1, 2019. The parties to the Treaty are:

Cedent: Quorum Casualty & Surety Company ("QC&S"), a stock property and casualty insurer domiciled in the State of New York, with its principal office located at 200 Constitution Plaza, Suite 3200, Hartford, Connecticut 06103. QC&S is licensed to write property and casualty insurance in all fifty states, the District of Columbia, and the U.S. Virgin Islands. QC&S holds NAIC Company Code No. 24891 and is a wholly owned subsidiary of Quorum Insurance Holdings Corp., a Delaware holding company.

Reinsurer: Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"), a Class 4 insurer domiciled in Bermuda, with its registered office at Pinnacle Atlantic House, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda. Pinnacle Atlantic is registered with the Bermuda Monetary Authority under Registration No. BMA-4R-2008-0331 and is an indirect wholly owned subsidiary of Pinnacle Atlantic Group Holdings Ltd., a Bermuda exempted company.

The original term of the Treaty was five years, running from July 1, 2019 through June 30, 2024. The Treaty contains an automatic annual extension provision, pursuant to which the Treaty automatically extends for successive one-year periods unless either party provides 90 days' written non-renewal notice prior to the expiration of the then-current term. The Treaty has been extended twice under this provision: the first extension covered the period from July 1, 2024 through June 30, 2025, and the second extension covers the period from July 1, 2025 through June 30, 2026. On October 1, 2025, Pinnacle Atlantic provided written non-renewal notice in accordance with the Treaty's automatic extension provision. Accordingly, the Treaty will expire by its terms on June 30, 2026 and will not extend further.

B. Covered Lines

The Treaty covers three casualty lines of business written by QC&S:

1. Commercial general liability policies issued by QC&S on occurrence and claims-made forms;

2. Excess and umbrella liability policies issued by QC&S; and

3. Professional liability (errors and omissions) policies issued by QC&S.

The Treaty does not cover directors' and officers' liability, employment practices liability, or any property lines written by QC&S. The scope of covered lines is defined in Article 2 of the Treaty (Business Covered) and is not at issue in the present dispute.

C. Retention and Cession Limits

The Treaty is structured as an aggregate excess-of-loss contract. Under Article 6 of the Treaty, QC&S retains the first $120,000,000 in aggregate net incurred losses per treaty year (the "Retention"). Losses incurred in excess of the Retention, up to a maximum of $200,000,000 per treaty year, are ceded to Pinnacle Atlantic. Thus, the Treaty responds to aggregate net incurred losses within the range of $120,000,000 to $320,000,000 per treaty year. The $200,000,000 cession limit represents the maximum amount recoverable from Pinnacle Atlantic in any single treaty year.

It is important to note that the aggregate structure means that individual claims are not directly ceded to Pinnacle Atlantic; rather, Pinnacle Atlantic's obligation is triggered when the aggregate of all net incurred losses across all covered lines exceeds the Retention in a given treaty year. This aggregate structure is central to several of the interpretive disputes discussed below, particularly as to the allocation of IBNR reserves under Article 5.

D. Premium Structure

The Treaty provides for a sliding-scale premium structure. Under Article 3.3, the provisional reinsurance premium rate is set at 42% of ceded earned premium for the applicable treaty year. This provisional rate is subject to retroactive adjustment based on loss ratio experience, with a minimum rate of 35% and a maximum rate of 52%. The sliding-scale adjustment mechanism is designed to align the reinsurance premium with actual loss experience over the life of the Treaty, such that favorable loss experience results in a lower ultimate premium rate (subject to the 35% floor) and adverse loss experience results in a higher rate (subject to the 52% cap).

The provisional rate of 42% is applied to ceded earned premium as initially reported and is subject to later adjustment as loss experience develops. The sliding-scale adjustment is calculated annually, typically in connection with the treaty year's final premium report following the close of all claims.

E. Reinsurance Intermediary

The Treaty was placed by Broadreach Intermediaries Inc. ("Broadreach"), a New York-licensed reinsurance intermediary with offices at 100 Wall Street, 18th Floor, New York, New York 10005. The account executive for the Treaty at Broadreach is James "Jamie" Castellano. Broadreach is designated as the authorized intermediary under Article 9 of the Treaty. Broadreach's role includes the receipt and transmission of all notices, premium payments, loss billings, claims-settlement transmittals, and other communications between QC&S and Pinnacle Atlantic. As discussed in greater detail in Section VI below, the intermediary clause in Article 9 has significant implications for the notice dispute.

F. Treaty Years at Issue

The current dispute principally concerns two treaty years:

Treaty Year 2022 (July 1, 2022 — June 30, 2023): QC&S reported aggregate net incurred losses of $189,700,000 for TY 2022. Because this amount exceeds the $120,000,000 Retention by $69,700,000, QC&S ceded $69,700,000 to Pinnacle Atlantic under the Treaty. The TY 2022 cession is the larger of the two disputed amounts and is the subject of Pinnacle Atlantic's challenges based on IBNR misallocation (Ground No. 2), late notice (Ground No. 1), and premium underreporting (Ground No. 4).

Treaty Year 2023 (July 1, 2023 — June 30, 2024): QC&S reported aggregate net incurred losses of $128,700,000 for TY 2023. This amount exceeds the Retention by $8,700,000, which was ceded to Pinnacle Atlantic. The TY 2023 cession is the subject of Pinnacle Atlantic's challenge based on the follow-the-fortunes / settlements dispute (Ground No. 3), as the Veridian Financial Services E&O cluster settlement contributed to the aggregate exceeding the Retention in TY 2023.

The total reinsurance recoverable at issue across both treaty years is $78,400,000 ($69,700,000 for TY 2022 plus $8,700,000 for TY 2023). Pinnacle Atlantic paid this amount across seven billing installments between October 15, 2022 and March 29, 2024. In the Demand Letter, Pinnacle Atlantic demands the return of the full $78,400,000 plus interest of $12,600,000, for a total demand of $91,000,000.

III. Article 3 — Premium Reporting

A. Text and Structure of Article 3

Article 3 of the Treaty governs QC&S's obligation to report ceded earned premium to Pinnacle Atlantic and sets forth the methodology for calculating the reinsurance premium owed under the Treaty. Article 3 consists of five subsections, each of which is discussed below.

Article 3.1 — Definition of Ceded Earned Premium. Article 3.1 defines "Ceded Earned Premium" as the premium earned on policies that are subject to the Treaty during the applicable treaty year. This includes all premiums earned on commercial general liability, excess/umbrella liability, and professional liability policies written by QC&S that fall within the scope of Article 2 (Business Covered). The definition encompasses both direct written premiums and assumed premiums, net of ceded premiums to other reinsurers, to the extent such premiums relate to covered lines during the applicable treaty year. The term is further subject to the exclusions set forth in Article 3.4, discussed below.

Article 3.2 — Quarterly Reporting Deadlines and Format. Article 3.2 requires QC&S to report ceded earned premium to Pinnacle Atlantic (through the intermediary, Broadreach) on a quarterly basis. The reporting deadline is 45 days after the end of each calendar quarter. Thus, for TY 2022, the reporting deadlines were November 14, 2022 (for Q1, ending September 30, 2022), February 14, 2023 (for Q2, ending December 31, 2022), May 15, 2023 (for Q3, ending March 31, 2023), and August 14, 2023 (for Q4, ending June 30, 2023). Article 3.2 also specifies the format for premium bordereaux, requiring a line-by-line listing of premiums by policy number, coverage type, and earned premium allocation.

Article 3.3 — Calculation of Treaty Premium. Article 3.3 provides for the calculation of reinsurance premium at the provisional rate of 42% of ceded earned premium, subject to retroactive sliding-scale adjustment based on loss ratio experience. The minimum rate is 35% and the maximum rate is 52%. The sliding-scale formula adjusts the ultimate premium rate based on the ratio of ceded losses to ceded earned premium. The provisional premium payments made during the treaty year are trued up following the close of the treaty year and the compilation of final loss and premium data.

Article 3.4 — Exclusion Provision. Article 3.4 excludes certain categories of premium from the definition of "Ceded Earned Premium." Specifically, Article 3.4 provides that the ceded earned premium base shall not include premiums "attributable to the assumption or cession of liabilities under any portfolio transfer, loss portfolio transfer, or run-off transaction." This exclusion is designed to ensure that one-time, block-transfer transactions — which may distort the underlying premium base and loss experience — are not included in the ceded earned premium calculation. The scope and application of this exclusion is a central issue in the premium reporting dispute, as discussed below.

Article 3.5 — Cure Provision (if any). Our review of the Treaty has not identified a specific cure provision within Article 3 that affords either party a right to terminate the Treaty based on premium reporting errors. Article 14 (Termination) contains general termination provisions, but does not specifically reference premium reporting as a termination trigger. This is a favorable point for QC&S, as discussed below.

B. Key Interpretive Questions

The central interpretive dispute under Article 3 concerns the scope of the Article 3.4 exclusion for "run-off portfolio transfer premiums." The facts underlying this dispute are as follows:

For TY 2022, QC&S reported total ceded earned premium of $38,400,000. Pinnacle Atlantic, through HFC, contends that the correct figure is $45,200,000, a difference of $6,800,000. QC&S's position is that the $6,800,000 discrepancy is attributable to premiums that QC&S properly excluded from the ceded earned premium base under Article 3.4, on the basis that those premiums relate to liabilities assumed by QC&S in connection with a run-off portfolio transfer. Pinnacle Atlantic contends that the transaction in question does not qualify as a "run-off portfolio transfer" or "run-off transaction" within the meaning of Article 3.4 and that the premiums should have been included in the ceded earned premium base.

The critical ambiguity lies in the fact that Article 3.4 does not define the terms "portfolio transfer," "loss portfolio transfer," or "run-off transaction" with specificity. The Treaty does not reference any regulatory or industry definition, nor does it provide examples or criteria for distinguishing a qualifying run-off transaction from an ordinary assumption of liabilities. This lack of definitional precision creates a genuine interpretive question: Does the transaction at issue — which involved QC&S's assumption of a book of commercial general liability reserves from an affiliated entity — fall within the exclusion?

The financial impact of this dispute is relatively contained. Even if Pinnacle Atlantic's calculation were adopted, the premium underpayment at the provisional rate would be $2,856,000 ($6,800,000 × 42%). This amount, while not immaterial, is substantially less than the total disputed recoverable of $78,400,000. As discussed below, the appropriate remedy under both the Treaty and New York law would be a retroactive premium adjustment, not rescission or avoidance of the Treaty's cessions.

C. New York Law on Premium Reporting in Reinsurance Treaties

Under New York law, premium reporting obligations in reinsurance treaties are generally treated as conditions precedent that must be materially complied with. However, New York courts have consistently drawn a distinction between deliberate misrepresentation of premium and a good-faith difference of interpretation regarding calculation methodology. Immaterial errors, inadvertent discrepancies, and good-faith disputes over the application of treaty definitions do not typically vitiate a reinsurance treaty or provide the reinsurer with grounds for rescission or avoidance. See Unigard Sec. Ins. Co. v. Greaves Specialty Insurance, 79 N.Y.2d 576 (1992) (emphasizing the importance of good faith in the reinsurance relationship).

New York courts have also recognized that late or inaccurate premium reporting may give rise to an offset or credit in favor of the reinsurer but does not ordinarily provide grounds for treaty rescission or avoidance unless the treaty specifically so provides. Where the treaty does not contain a specific termination trigger tied to premium reporting errors, the reinsurer's remedy is limited to adjustment of the premium and, potentially, interest on any underpaid amounts. The general principle is that reinsurance treaties are to be enforced according to their terms, and that immaterial reporting discrepancies do not excuse the reinsurer's obligations under the treaty.

Moreover, New York courts have applied the doctrine of substantial compliance in the context of reinsurance premium reporting obligations. Where the cedent has timely submitted premium bordereaux, has cooperated with the reinsurer's auditors, and has disclosed the basis for its calculations, the cedent has substantially complied with its reporting obligations even if there is a dispute over a particular line item or exclusion.

D. Interaction with Pinnacle Atlantic's Ground No. 4 (Inaccurate Premium Reporting)

Pinnacle Atlantic's Ground No. 4, as articulated in the Demand Letter, asserts that QC&S's underreporting of $6,800,000 in ceded earned premium for TY 2022 constitutes a material breach of the Treaty that entitles Pinnacle Atlantic to either (a) terminate the Treaty, or (b) offset the underpaid premium against ceded losses. The analysis of this claim proceeds in several steps.

First, as to the termination argument, our review of the Treaty indicates that Article 3 does not contain a specific termination trigger for premium underreporting. Article 14 (Termination) sets forth the general conditions under which the Treaty may be terminated, including material breach, insolvency, and certain regulatory events. However, Article 14 does not specifically identify premium reporting errors as grounds for termination. Absent a specific termination trigger, Pinnacle Atlantic would need to establish that the alleged underreporting constitutes a "material breach" under Article 14's general material breach provision. Given that the discrepancy amounts to $6,800,000 out of a total ceded earned premium base of $38,400,000 (approximately 17.7%), and that QC&S has a colorable basis for its calculation under Article 3.4, it is unlikely that a tribunal would characterize this as a material breach warranting termination — particularly where the underreporting is the subject of a good-faith interpretive disagreement.

Second, QC&S's defense is that the $6,800,000 difference arises from QC&S's proper application of the Article 3.4 exclusion. QC&S treated the premiums associated with a certain assumption transaction as "attributable to the assumption or cession of liabilities under a ... run-off transaction" within the meaning of Article 3.4. If QC&S's interpretation is sustained, there is no underreporting at all — the ceded earned premium was correctly reported at $38,400,000.

Third, even if the $6,800,000 were found to be improperly excluded, the appropriate remedy under New York law and the Treaty's own terms would likely be a retroactive premium adjustment. That adjustment would increase the ceded earned premium base to $45,200,000, resulting in an additional provisional premium obligation of $2,856,000 ($6,800,000 × 42%). This amount could be offset against ceded losses, but it does not provide a basis for rescission, avoidance, or voiding of the $78,400,000 in cessions already made. The remedy is financial, not structural.

Fourth, we note that the $2,856,000 premium adjustment, even if owed, pales in comparison to the $78,400,000 in recoverables that Pinnacle Atlantic seeks to recover. The disproportion between the alleged breach and the demanded remedy underscores the weakness of Ground No. 4 as a basis for the Demand Letter's aggregate claim.

A more detailed treatment of these issues, including analysis of Article 14's termination provisions and the sliding-scale adjustment implications of a revised ceded earned premium base, is set forth in the Premium Reporting & Termination Rights Analysis Memorandum (Matter No. 1025-00005-D).

IV. Article 5 — Losses Incurred Definition and IBNR Allocation

A. Text and Structure of Article 5

Article 5 of the Treaty defines "Losses Incurred" for purposes of calculating aggregate net incurred losses and, by extension, for determining whether and to what extent the Retention has been exceeded in any given treaty year. Article 5 is among the most technically complex provisions of the Treaty and is at the center of the IBNR allocation dispute (Ground No. 2). Article 5 consists of four subsections.

Article 5.1 — General Definition. Article 5.1 defines "Losses Incurred" to include, generally, three categories of losses attributable to covered lines during the applicable treaty year: (a) paid losses (i.e., loss payments actually disbursed by QC&S to or on behalf of claimants under covered policies); (b) case reserves (i.e., reserves established by QC&S on a claim-by-claim basis in respect of reported but unpaid losses); and (c) incurred but not reported ("IBNR") reserves attributable to covered lines during the applicable treaty year. The inclusion of IBNR reserves in the definition of Losses Incurred is standard in aggregate excess-of-loss reinsurance treaties, as it ensures that the aggregate net incurred loss calculation reflects not only known claims but also the estimated liability for claims that have occurred but have not yet been reported to QC&S.

Article 5.2 — Allocation Provision. Article 5.2 provides the rule for allocating losses to specific treaty years. It states that losses are to be allocated to the treaty year "in which such losses are incurred, as determined by the date of the occurrence or event giving rise to the claim." This provision is the focal point of the IBNR allocation dispute and is discussed in detail below.

Article 5.3 — Periodic Reporting and Adjustments. Article 5.3 provides for periodic reporting of incurred losses and permits retroactive adjustments for reserve development. Specifically, QC&S is required to report incurred losses to Pinnacle Atlantic on a quarterly basis, with adjustments to be made as reserves develop and as additional information becomes available regarding the ultimate cost of claims. This provision recognizes that aggregate excess-of-loss treaties necessarily involve ongoing reserve development, and that the aggregate net incurred loss figure for any given treaty year is subject to change over time as claims mature.

Article 5.4 — Actuarial Certification. Article 5.4 requires QC&S to provide actuarial certificates supporting its loss development estimates and IBNR reserves, prepared by a qualified actuary holding the designations of Fellow of the Casualty Actuarial Society (FCAS) and Member of the American Academy of Actuaries (MAAA). The actuarial certificates are to be provided in connection with the annual premium and loss reports and upon request by Pinnacle Atlantic. The purpose of this provision is to ensure that QC&S's IBNR estimates are grounded in recognized actuarial standards of practice and are subject to professional accountability.

QC&S has retained Velthorn Actuarial Advisors LLC ("Velthorn") to prepare the actuarial certificates required under Article 5.4. The principal actuary at Velthorn responsible for the Treaty's actuarial work is Dr. Stephen Tanaka, FCAS, MAAA. Dr. Tanaka has prepared actuarial certificates for each treaty year at issue, including TY 2022 and TY 2023.

B. Key Interpretive Questions

The central interpretive dispute under Article 5 concerns the allocation of $22,300,000 in IBNR reserve development between TY 2021 and TY 2022. The parties' positions are as follows:

QC&S's Position. QC&S, supported by the Velthorn actuarial certificates prepared by Dr. Stephen Tanaka, FCAS, MAAA, takes the position that the $22,300,000 in IBNR reserve development relates to accident-year 2022 claims whose development factors crystallized during the TY 2022 reporting period. Under QC&S's methodology, the IBNR development is properly allocated to TY 2022 because the underlying occurrences fall within accident year 2022 — that is, the loss-generating events occurred between July 1, 2022 and June 30, 2023. QC&S contends that its allocation methodology is consistent with recognized actuarial standards of practice (specifically, Actuarial Standard of Practice No. 43, as promulgated by the Actuarial Standards Board), that it has been applied consistently across all treaty years, and that it is supported by the actuarial certificates required under Article 5.4.

Pinnacle Atlantic's Position. Pinnacle Atlantic contends that the $22,300,000 in IBNR development relates to underlying accident-year 2021 exposures and should be allocated to TY 2021 (July 1, 2021 — June 30, 2022), not TY 2022. Pinnacle Atlantic's argument is that the occurrences giving rise to the developed IBNR took place during accident year 2021 and that, under Article 5.2's allocation rule, those losses should be allocated to TY 2021 based on the "date of the occurrence or event giving rise to the claim."

The financial consequences of this dispute are significant. If Pinnacle Atlantic's interpretation prevails:

• TY 2022: The aggregate net incurred loss would be reduced from $189,700,000 to $167,400,000 ($189,700,000 minus $22,300,000). The ceded loss would be reduced from $69,700,000 to $47,400,000 ($167,400,000 minus the $120,000,000 Retention), a reduction of $22,300,000.

• TY 2021: The aggregate net incurred loss would increase from $104,600,000 to $126,900,000 ($104,600,000 plus $22,300,000). This would breach the $120,000,000 Retention by $6,900,000, potentially creating a ceded loss of $6,900,000 for TY 2021.

• Net Impact: However, Pinnacle Atlantic has not asserted that it owes $6,900,000 for TY 2021 and is not arguing that TY 2021 should be reopened in its favor. The net effect of Pinnacle Atlantic's position is a one-sided reallocation that reduces total cessions from $78,400,000 to $56,100,000 ($47,400,000 for TY 2022 plus $8,700,000 for TY 2023), a reduction of $22,300,000, without any offsetting credit for the newly created TY 2021 cession. This asymmetric treatment is noteworthy and may be subject to challenge on equitable grounds.

C. Ambiguity in "Occurrence or Event Giving Rise to the Claim"

The interpretive difficulty arises from the language of Article 5.2 itself. The phrase "incurred, as determined by the date of the occurrence or event giving rise to the claim" presents a textual ambiguity that lies at the heart of the IBNR allocation dispute.

The Treaty does not define "occurrence or event" with reference to any specific actuarial standard of practice, regulatory framework, or industry convention. Nor does the Treaty provide guidance on how the phrase is to be applied in the context of IBNR reserves, which by definition relate to claims that have not yet been reported and for which the date of the underlying occurrence may not be precisely known at the time the reserve is established.

Under standard actuarial methodology, accident-year attribution depends on when the loss-generating event occurred. IBNR reserves are estimated based on historical development patterns and actuarial techniques (such as chain-ladder, Bornhuetter-Ferguson, or loss ratio methods) that project ultimate losses for each accident year. The resulting IBNR estimates are inherently subject to uncertainty and are typically revised as claims develop and as additional data becomes available. Importantly, IBNR reserve development may cross treaty-year boundaries — that is, a revision to the IBNR estimate for accident year 2021 may occur during the TY 2022 reporting period, creating a question as to which treaty year should bear the revised amount.

The key question, then, is whether Article 5.2 ties allocation to the accident year of the underlying occurrence (i.e., the year in which the loss-generating event took place) or to the treaty year in which the reserve development is recognized and reported. This distinction has enormous financial consequences in the present dispute.

If Article 5.2 is construed to require allocation based strictly on the accident year of the underlying occurrence, Pinnacle Atlantic may have an argument for reallocation of the $22,300,000 to TY 2021, provided it can demonstrate that the underlying claims are in fact attributable to accident-year 2021 occurrences. Under this reading, the fact that the IBNR development was recognized and reported during TY 2022 is irrelevant — what matters is when the losses were "incurred," and losses are incurred when the underlying occurrence or event takes place.

If, on the other hand, Article 5.2 is construed to allocate losses based on the treaty year in which the IBNR development is recognized and reported — effectively a "treaty-year-of-reporting" or "development-year" convention — then QC&S's allocation is proper, because the IBNR development crystallized and was reported during TY 2022.

The textual analysis does not clearly favor either interpretation. The phrase "incurred, as determined by the date of the occurrence or event giving rise to the claim" arguably points toward an accident-year allocation basis, because it links "incurred" to the "date of the occurrence." However, the practical implementation of IBNR allocation in aggregate excess-of-loss treaties often follows a reporting or development convention, because the cedent cannot allocate IBNR reserves by accident year until the reserves are actually established or revised. This practical reality suggests that Article 5.2 should be read in light of standard industry practice, which generally permits the cedent to allocate IBNR development to the treaty year in which it is reported, provided the allocation is reasonable and supported by qualified actuarial opinion.

Moreover, we note that Article 5.3 explicitly permits "retroactive adjustments for reserve development," which implies that loss allocations may shift over time as reserves develop. This provision is consistent with QC&S's approach of allocating IBNR development to TY 2022, the treaty year in which the development was recognized, rather than retroactively reallocating it to TY 2021.

D. New York Law on IBNR Allocation in Aggregate Excess-of-Loss Treaties

New York courts have addressed the issue of IBNR allocation in reinsurance disputes on several occasions, though the case law is not extensive. The general principles that emerge from the New York authorities are as follows:

First, New York courts have generally deferred to the cedent's reasonable actuarial methodology in allocating IBNR reserves, provided that the methodology is applied consistently across treaty years and is supported by a qualified actuarial opinion. See Employers' Fire Ins. Co. v. Glob. Reins. Corp. of Am., 287 A.D.2d 383 (1st Dep't 2001) (noting the importance of consistency in actuarial methodology). The rationale for this deference is that IBNR estimation involves inherent actuarial judgment, and courts are ill-equipped to second-guess the professional opinions of qualified actuaries who have applied recognized actuarial standards of practice.

Second, the standard of review for IBNR allocation disputes is whether the cedent's methodology was reasonable and in good faith, not whether the reinsurer would have used a different methodology or arrived at a different result. A reinsurer cannot defeat the cedent's allocation merely by presenting an alternative actuarial opinion that reaches a different conclusion; it must demonstrate that the cedent's methodology was unreasonable, inconsistent, or not in good faith.

Third, the actuarial certificates prepared under Article 5.4 carry significant evidentiary weight. If the certificates are properly prepared by a qualified actuary (FCAS, MAAA) applying recognized actuarial standards of practice — including, in particular, Actuarial Standard of Practice No. 43 (Property/Casualty Unpaid Claim Estimates) — they constitute strong evidence that the cedent's IBNR allocation is reasonable. A reinsurer seeking to challenge the certificates would need to present its own actuarial analysis demonstrating that the cedent's methodology is flawed or that the certificates do not comply with applicable standards.

Fourth, New York courts have recognized that IBNR allocation in aggregate excess-of-loss treaties involves inherent uncertainty and that the cedent is entitled to exercise professional judgment within the bounds of accepted actuarial practice. The courts have not imposed a single, mandatory allocation methodology; rather, they have recognized that multiple reasonable approaches may exist and that the cedent's choice among reasonable alternatives should be respected.

These principles strongly support QC&S's position. The Velthorn actuarial certificates, prepared by Dr. Tanaka, support the allocation of the $22,300,000 IBNR development to TY 2022. If those certificates are properly prepared and consistent with ASOP No. 43, they should carry significant weight in any adjudication of this issue.

E. Interaction with Pinnacle Atlantic's Ground No. 2 (Misallocation of IBNR)

Under the legal framework outlined above, Pinnacle Atlantic bears the burden of demonstrating that QC&S's IBNR allocation was unreasonable or inconsistent with the Treaty's terms. Specifically, Pinnacle Atlantic must show either (a) that Article 5.2 unambiguously requires accident-year allocation and that QC&S's development-year approach is inconsistent with the Treaty's text, or (b) that QC&S's actuarial methodology is unreasonable, inconsistent with prior treaty years, or not in good faith.

Neither showing will be straightforward for Pinnacle Atlantic. As to (a), the textual ambiguity discussed above means that Article 5.2 does not unambiguously require accident-year allocation. As to (b), the Velthorn actuarial certificates provide a strong evidentiary foundation for QC&S's methodology. QC&S should be prepared to defend the Velthorn methodology in detail, including the selection of development factors, the accident-year assignment conventions used in the IBNR estimation process, and the consistency of the methodology with prior treaty years. If QC&S can demonstrate that the same allocation methodology was used for TY 2020 and TY 2021 (treaty years in which the aggregate did not breach the Retention and no cessions were at issue), this consistency will significantly undermine Pinnacle Atlantic's claim of opportunistic allocation.

We also note the asymmetry of Pinnacle Atlantic's position: Pinnacle Atlantic argues for reallocation of $22,300,000 from TY 2022 to TY 2021 to reduce TY 2022 cessions, but does not argue that it owes the resulting $6,900,000 cession for TY 2021. This one-sided approach is inconsistent with the principles of good faith and fair dealing that govern the reinsurance relationship and may be persuasive to an arbitration panel.

A detailed actuarial and financial analysis of the IBNR allocation issue, including modeling of alternative allocation scenarios and assessment of the Velthorn methodology, is set forth in the IBNR Allocation Analysis Memorandum (Matter No. 1025-00005-B).

V. Article 7 — Notice Requirements

A. Text and Structure of Article 7

Article 7 of the Treaty establishes QC&S's obligation to notify Pinnacle Atlantic (through the intermediary, Broadreach) of claims and events that may give rise to cessions under the Treaty. Article 7 contains four subsections establishing distinct notice obligations.

Article 7.1 — Individual Claim Threshold. Article 7.1 requires QC&S to provide "prompt notice" to the Reinsurer of any individual claim that meets or exceeds the individual claim reporting threshold of $1,000,000 in reserves. This is a claim-specific threshold: when QC&S establishes case reserves of $1,000,000 or more on any individual claim under a covered policy, QC&S must promptly notify Pinnacle Atlantic (through Broadreach) of the existence of the claim, its nature, the reserves established, and such other information as may be reasonably necessary for the Reinsurer to evaluate the claim. The obligation is triggered by the establishment of reserves at or above the threshold, not by the occurrence of the underlying event.

Article 7.2 — Quarterly Aggregate Loss Reports. Article 7.2 requires QC&S to provide quarterly aggregate loss reports summarizing all incurred losses by treaty year. These reports are to be submitted on the same schedule as the premium bordereaux under Article 3.2 (i.e., within 45 days after the end of each calendar quarter). The quarterly aggregate loss reports provide Pinnacle Atlantic with ongoing visibility into the developing loss experience under each treaty year.

Article 7.3 — Aggregate Notification of Significant Events. Article 7.3 requires QC&S to provide prompt notice of any "occurrence, event, or series of related claims" that is reasonably likely to result in aggregate losses exceeding the Retention. This provision is broader than Article 7.1 in that it is not limited to individual claims that exceed the $1,000,000 reserve threshold; rather, it encompasses situations where the aggregate impact of a group of related claims (even if individually below the $1,000,000 threshold) is reasonably likely to push aggregate net incurred losses above the $120,000,000 Retention. The purpose of Article 7.3 is to provide early warning to the Reinsurer of events that may trigger its obligation under the Treaty, even before individual claims are large enough to trigger Article 7.1 reporting.

Article 7.4 — Notice Through Intermediary. Article 7.4 specifies that all notices under Article 7 are to be given through the intermediary (Broadreach Intermediaries Inc.) in accordance with Article 9. This provision links Article 7 to the intermediary clause and ensures that the communications channel is consistent with the Treaty's overall architecture.

B. Key Interpretive Questions

The critical interpretive issue under Article 7 is the interplay between Article 7.1 (individual claim threshold) and Article 7.3 (aggregate notification of significant events), particularly as applied to the Meridian Docks mass tort claims.

The underlying facts are as follows: In March 2021, QC&S received notification of 31 related toxic contamination claims arising from the Meridian Docks Development LLC industrial waterfront redevelopment project in Newark, New Jersey, covered under QC&S Policy No. CGL-2020-09844. QC&S first established reserves on the 31 Meridian Docks claims on March 15, 2021. At that time, each individual claim was reserved below $1,000,000. The claims were related in that they all arose from the same site and the same alleged contamination events, but they involved different claimants and different alleged injuries.

During Q1 2022, QC&S increased reserves on multiple Meridian Docks claims as additional information became available, including environmental testing results and the filing of amended complaints. Several individual claims crossed the $1,000,000 reserve threshold at that time. QC&S provided notice to Pinnacle Atlantic via Broadreach on May 22, 2022, approximately two months after the individual claim threshold was triggered.

The gap between QC&S's initial establishment of reserves (March 15, 2021) and its notice to Pinnacle Atlantic (May 22, 2022) is 14 months and 7 days. As of the date of this memorandum, the total Meridian Docks net incurred loss across all 31 claims is $41,200,000.

QC&S's Position. QC&S contends that its notice was timely because Article 7.1 was not triggered until Q1 2022, when individual claims first crossed the $1,000,000 reserve threshold. QC&S provided notice on May 22, 2022, within approximately 60 days of the threshold being reached. As to Article 7.3, QC&S contends that the aggregate notification obligation was not triggered in March 2021 because, at that time, with the Meridian Docks claims individually reserved at low amounts and total TY 2021 aggregate losses well below the $120,000,000 Retention, it was not yet "reasonably likely" that aggregate losses would exceed the Retention. The claims were in their early stages, the ultimate exposure was uncertain, and QC&S could not have reasonably anticipated at that time that the aggregate would breach the Retention.

Pinnacle Atlantic's Position. Pinnacle Atlantic contends that even if the individual claims were below the $1,000,000 threshold, the 31 related Meridian Docks claims constituted an "occurrence, event, or series of related claims" under Article 7.3 that should have been reported when first reserved in March 2021. Pinnacle Atlantic argues that it was reasonably foreseeable at that time that 31 related toxic contamination claims at a single industrial site would develop into a significant aggregate exposure and that QC&S should have provided notice under Article 7.3 at the outset. Under Pinnacle Atlantic's theory, the notice given on May 22, 2022 was 14 months and 7 days late.

Key Ambiguity. The Treaty does not define what constitutes "reasonably likely" to exceed the Retention under Article 7.3. Nor does it specify when a group of related claims becomes a "series" triggering the obligation, or how the cedent is to determine whether aggregate losses are "reasonably likely" to exceed the Retention when claims are in their early stages and reserves are developing. This ambiguity creates a question of interpretation that turns on both the Treaty's text and the surrounding circumstances, including the reasonableness of QC&S's assessment at the time the claims were first reserved.

We note that the phrase "reasonably likely" is a forward-looking standard that inherently involves judgment and estimation. It does not require certainty or even probability; rather, it requires a reasonable assessment at the time the relevant information is available. The question is whether, as of March 15, 2021, it was "reasonably likely" that the aggregate of all incurred losses under the Treaty (not just the Meridian Docks claims) would exceed $120,000,000. At that time, total TY 2021 aggregate losses were approximately $60,000,000, and the 31 Meridian Docks claims were collectively reserved at a fraction of the $120,000,000 Retention. QC&S's position that aggregate breach was not "reasonably likely" at that time is defensible on these facts.

C. New York Law on Late Notice in Reinsurance

New York reinsurance law applies a prejudice-based standard for late notice. Unlike the traditional "no-prejudice" rule that was historically applied to direct insurance policies in New York (under which late notice operated as an absolute defense regardless of whether the insurer was prejudiced), the standard applicable to reinsurance contracts requires the reinsurer to demonstrate that it suffered actual prejudice from the late notice. This distinction reflects the sophistication of the parties in the reinsurance market, the inherent delays in claims reporting that are common in the industry, and the different risk-allocation dynamics of reinsurance as compared to direct insurance.

Under the prejudice standard, Pinnacle Atlantic must show that the 14-month delay (assuming, arguendo, that notice was indeed late) materially impaired its ability to defend, investigate, monitor claims handling, or otherwise protect its interests. New York courts have identified several categories of prejudice that may be relevant in the reinsurance context, including:

• The loss of the opportunity to investigate or participate in the defense of the underlying claims;

• The loss of the ability to monitor the cedent's claims handling and settlement activity;

• The impairment of the reinsurer's ability to establish or maintain appropriate reserves;

• The loss of the opportunity to negotiate or provide input on settlement terms; and

• Demonstrable financial harm attributable to the delay in notice.

New York courts have held that in reinsurance disputes, the sophistication of the parties and the nature of the reinsurance relationship weigh against strict enforcement of notice conditions without a showing of prejudice. The notice condition in a reinsurance treaty is generally treated as a condition that must be substantially, not strictly, complied with. See Christiania Gen. Ins. Corp. v. Aldermere Assurance, 979 F.2d 268 (2d Cir. 1992) (applying New York law and holding that late notice in reinsurance context requires showing of prejudice); Unigard Sec. Ins. Co. v. Greaves Specialty Insurance, 79 N.Y.2d 576 (1992).

We also note the distinction between the notice obligations in Articles 7.1 and 7.3. Article 7.1 is a clear, objective trigger: the cedent must provide notice when individual claim reserves reach $1,000,000. Article 7.3, by contrast, involves a forward-looking assessment of whether the aggregate is "reasonably likely" to exceed the Retention. This forward-looking standard inherently involves judgment and is more difficult to enforce on a strict-compliance basis.

D. Interaction with Pinnacle Atlantic's Ground No. 1 (Late Notice)

To prevail on Ground No. 1, Pinnacle Atlantic must establish both (a) a treaty violation (i.e., that QC&S failed to provide timely notice under Article 7.1 or Article 7.3) and (b) actual prejudice resulting from the late notice. QC&S's defense strategy on this ground is multi-layered:

First, QC&S should argue that there was no violation of Article 7.1 because individual Meridian Docks claims were reserved below $1,000,000 until Q1 2022, when reserves were increased. QC&S provided notice on May 22, 2022, within approximately 60 days of the threshold being triggered. This notice was "prompt" under Article 7.1, particularly in the context of mass tort claims where reserve increases may affect multiple claims simultaneously and require internal review before notification.

Second, QC&S should argue that Article 7.3 was not triggered in March 2021 because aggregate losses exceeding the $120,000,000 Retention were not yet "reasonably likely" at that time. With total TY 2021 aggregate losses at approximately $60,000,000 and the Meridian Docks claims individually reserved at low amounts, a reasonable cedent in QC&S's position would not have concluded that the aggregate was "reasonably likely" to breach the Retention based on the information available as of March 15, 2021.

Third, even if notice was late, Pinnacle Atlantic has not and cannot establish actual prejudice. QC&S provided notice on May 22, 2022, well before any billing was submitted to Pinnacle Atlantic (the first billing installment was submitted on October 15, 2022). Pinnacle Atlantic had approximately five months between receiving notice and receiving the first bill, during which time it had the opportunity to investigate, monitor, and evaluate the Meridian Docks claims. Moreover, Pinnacle Atlantic's role under an aggregate excess-of-loss treaty is to respond to aggregate loss experience, not to participate in the defense or settlement of individual underlying claims. The nature of the reinsurance structure limits the categories of prejudice that Pinnacle Atlantic can plausibly assert.

A comprehensive analysis of the late notice defense, including case law on the prejudice standard, factual development recommendations, and argument templates, is set forth in the Late Notice Defense Analysis Memorandum (Matter No. 1025-00005-A).

VI. Article 9 — Intermediary Clause

A. Text and Structure of Article 9

Article 9 of the Treaty designates Broadreach Intermediaries Inc. ("Broadreach") as the authorized intermediary broker for all transactions under the Treaty. Article 9 consists of four subsections.

Article 9.1 — Broadreach as Authorized Intermediary. Article 9.1 provides that all notices, premium payments, loss billings, and claims-settlement transmittals under the Treaty are to be made through Broadreach. This provision establishes Broadreach as the sole authorized channel of communication between QC&S and Pinnacle Atlantic for all Treaty-related matters. Neither party is obligated to deal directly with the other; all dealings are to be conducted through Broadreach.

Article 9.2 — The Intermediary Clause. Article 9.2 contains the operative intermediary clause, which serves two critical functions. First, it provides that payment of reinsurance premium by QC&S to Broadreach constitutes payment to Pinnacle Atlantic for all purposes under the Treaty. Second, it provides that payment of reinsurance recoveries by Pinnacle Atlantic to Broadreach constitutes payment to QC&S for all purposes under the Treaty. This clause is a standard feature of brokered reinsurance transactions and allocates the credit risk of the intermediary between the parties.

Article 9.3 — Record-Keeping. Article 9.3 provides that Broadreach is responsible for maintaining accurate records of all transactions and transmittals made through it under the Treaty, including copies of all notices, premium bordereaux, loss reports, and billing statements.

Article 9.4 — Credit Risk Allocation. Article 9.4 addresses the allocation of credit risk in the event of Broadreach's insolvency or failure to remit payments. It provides that, to the extent Broadreach fails to remit payments to the party entitled to receive them, the paying party's obligation is deemed satisfied upon payment to Broadreach. In other words, the risk of Broadreach's insolvency falls on the party entitled to receive the payment, not the party that made the payment. This allocation is consistent with the standard intermediary clause construct, under which the broker is deemed the agent of the reinsurer for purposes of premium receipt and the agent of the cedent for purposes of loss recovery receipt.

B. Key Interpretive Questions

The intermediary clause has dual significance in the present dispute. First, it defines the mechanism through which notice obligations under Article 7 are satisfied. Second, it allocates the credit risk of the intermediary, though the credit risk issue is not presently in dispute.

As to the notice dispute, the relevant facts are as follows: QC&S's notice of the Meridian Docks claims was given "via Broadreach" on May 22, 2022. Article 7.4 confirms that notice under Article 7 is to be given through Broadreach in accordance with Article 9. The question arises: for purposes of determining whether QC&S's notice was timely under Article 7, does the date of QC&S's communication to Broadreach control, or does the date of Broadreach's onward communication to Pinnacle Atlantic control?

This question is significant because if there was any delay between QC&S's communication to Broadreach and Broadreach's forwarding of the notice to Pinnacle Atlantic, that delay should not be attributed to QC&S. Under the intermediary clause construct, QC&S satisfies its notice obligation when it provides notice to Broadreach; any subsequent delay in Broadreach's transmission is Broadreach's responsibility, not QC&S's.

Under standard reinsurance intermediary clause construction, notice to Broadreach should be deemed notice to Pinnacle Atlantic as of the date QC&S communicates to Broadreach. This is because Article 9.2 establishes Broadreach as the agent of Pinnacle Atlantic for purposes of receiving communications from QC&S, including notice under Article 7. Just as payment to Broadreach constitutes payment to Pinnacle Atlantic, notice to Broadreach should constitute notice to Pinnacle Atlantic.

C. New York Law on Intermediary Clauses

New York law recognizes and enforces the standard reinsurance intermediary clause. Under New York law, the intermediary is treated as the agent of the reinsurer for purposes of premium receipt and as the agent of the cedent for purposes of loss recovery receipt. See In re Ridgeline Assurance, 167 A.D.2d 75 (1st Dep't 1991) (discussing the intermediary clause and the allocation of credit risk in brokered reinsurance transactions). This agency relationship is contractual, arising from the terms of the intermediary clause itself, and governs the timing and effectiveness of communications made through the broker.

As to the timing of notice, New York courts have generally held that the timing of notice through an intermediary is measured from the date the cedent provides notice to the intermediary, not the date the intermediary forwards the notice to the reinsurer. This principle follows logically from the agency relationship established by the intermediary clause: if the intermediary is the reinsurer's agent for purposes of receiving communications, then receipt by the intermediary is receipt by the reinsurer. Any delay by the intermediary in forwarding the notice does not prejudice the cedent's compliance with its notice obligations.

This principle is particularly important in the present dispute, as the Demand Letter does not address the intermediary clause or the timing of Broadreach's onward communication. If Broadreach delayed in forwarding QC&S's May 22, 2022 notice to Pinnacle Atlantic, that delay is not attributable to QC&S and does not support a finding of late notice.

D. Interaction with the Dispute

The intermediary clause supports QC&S's position that notice was timely provided when given to Broadreach on May 22, 2022. For purposes of Article 7 compliance, QC&S's notice obligation was satisfied as of that date, regardless of when Broadreach forwarded the notice to Pinnacle Atlantic.

Broadreach's records will be critical evidence in establishing the precise timeline. Broadreach's placement records, treaty slips, correspondence files, and internal transaction logs should document when QC&S provided the Meridian Docks notice, when Broadreach received it, and when Broadreach transmitted it to Pinnacle Atlantic. We recommend that these records be obtained promptly, either through cooperative request to Broadreach or, if necessary, through third-party subpoena.

We have prepared a Draft Third-Party Subpoena to Broadreach Intermediaries Inc. (Matter No. 1025-00005-G) for use in the event that Broadreach does not voluntarily produce its records. Given QC&S's ongoing commercial relationship with Broadreach, we recommend first pursuing a cooperative request through the account executive, Jamie Castellano, before resorting to compulsory process.

VII. Article 11 — Follow-the-Fortunes / Settlements

A. Text and Structure of Article 11

Article 11 of the Treaty sets forth the "follow-the-fortunes" and "follow-the-settlements" obligations of Pinnacle Atlantic as reinsurer. These obligations are among the most fundamental principles of the reinsurance relationship and are broadly recognized in the reinsurance industry and in New York law. Article 11 consists of four subsections.

Article 11.1 — Follow-the-Fortunes. Article 11.1 provides that Pinnacle Atlantic agrees to "follow the fortunes" of QC&S with respect to all losses ceded under the Treaty, including the cedent's good-faith determination of liability and quantum. This provision is a general statement of the follow-the-fortunes doctrine, which requires the reinsurer to share the same fate as the cedent with respect to losses arising under the covered business. Under Article 11.1, Pinnacle Atlantic is bound by QC&S's good-faith determinations regarding the existence and amount of liability under the underlying policies, even if Pinnacle Atlantic would have reached a different conclusion.

Article 11.2 — Follow-the-Settlements. Article 11.2 provides that the Reinsurer shall follow the cedent's settlements, including settlements made in the ordinary course of business, provided that such settlements meet three conditions: (a) the settlement was made in good faith; (b) the settlement is not inconsistent with the terms of the underlying policies; and (c) the settlement reflects the exercise of "businesslike" claims-handling judgment. These three conditions define the standard of conduct that QC&S must meet in settling claims; as long as these conditions are satisfied, Pinnacle Atlantic is bound by the settlement and may not challenge its terms or amount.

Article 11.3 — Exceptions. Article 11.3 sets forth the exceptions to the follow-the-fortunes and follow-the-settlements obligations. It provides that the Reinsurer shall not be bound by any settlement that is the product of fraud, collusion, bad faith, or gross negligence on the part of the Cedent. This provision establishes an intentionally narrow set of exceptions — only the most egregious categories of misconduct (fraud, collusion, bad faith, or gross negligence) relieve the reinsurer of its obligation to follow the cedent's fortunes. Mere disagreement with the settlement amount, strategic second-guessing, or the availability of a less expensive resolution does not fall within the Article 11.3 exceptions.

Article 11.4 — Documentation. Article 11.4 provides that the Cedent shall provide the Reinsurer with reasonable documentation supporting any settlement that results in a cession under the Treaty, upon request. This documentation obligation permits the Reinsurer to review the basis for the cedent's settlement decisions but does not create a veto right or a right of prior approval.

B. Key Interpretive Questions

The focus of the follow-the-fortunes dispute is QC&S's settlement of the Veridian Financial Services E&O cluster claims. The relevant facts are as follows:

The policyholder is Veridian Financial Services Inc., insured under QC&S Policy No. PL-2021-15327 (professional liability / errors and omissions). The underlying claims involve allegations of misrepresentation in the sale of structured financial products to institutional investors. Three related claims were asserted against Veridian:

• Claim A: Settled for $14,200,000

• Claim B: Settled for $12,800,000

• Claim C: Settled for $7,500,000

• Total Settlement: $34,500,000

The settlements were executed on September 8, 2023. After accounting for recoveries under QC&S's other reinsurance arrangements, QC&S's net retained loss from the Veridian cluster was $26,100,000. The portion of the Veridian loss that is ceded to the Treaty (within the TY 2023 aggregate) is $8,700,000 — the entire TY 2023 cession.

Pinnacle Atlantic, through the Demand Letter, alleges that QC&S settled the Veridian claims "without meaningful litigation exposure analysis, at inflated amounts, to push aggregate losses above the retention in TY 2023." This allegation, at its core, accuses QC&S of bad faith — specifically, of intentionally inflating settlement amounts in order to manufacture a cession under the Treaty. If proven, such conduct would fall within the Article 11.3 exception. However, the allegation is a serious one that requires specific factual support, and Pinnacle Atlantic's burden of proof is demanding.

The key interpretive questions are as follows:

What is the standard of review for "good faith" and "businesslike" claims-handling judgment unde

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Rachel Sondergaard, General Counsel, Quorum Insurance Holdings Corp.
FROM: Jeffrey Park, Lead Associate, and Yuki Nakamura, Associate, Calderwood & Harkness LLP
DATE: March 12, 2026
RE: Treaty Interpretation Memorandum — Key Provisions of Aggregate Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 Between Quorum Casualty & Surety Company (Cedent) and Pinnacle Atlantic Reinsurance Ltd. (Reinsurer)
MATTER NO.: 1025-00005
REVIEWED BY: Douglas Carmichael, Responsible Partner
Right-click to update Table of Contents
I. Purpose and Scope of Memorandum
This memorandum provides a provision-by-provision analysis of six key articles of that certain Aggregate Excess-of-Loss Reinsurance Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty") between Quorum Casualty & Surety Company ("QC&S"), a New York-domiciled stock property and casualty insurer (NAIC No. 24891), as cedent, and Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"), a Bermuda Class 4 insurer (BMA Registration No. BMA-4R-2008-0331), as reinsurer. This memorandum is prepared at the request of Quorum Insurance Holdings Corp. ("QIH"), the parent company of QC&S, and is directed to Rachel Sondergaard, General Counsel of QIH, in connection with the pre-suit dispute initiated by Pinnacle Atlantic through its counsel, Hargrove, Fitch & Calloway LLP ("HFC").
The Treaty articles analyzed herein are as follows:
• Article 3 — Premium Reporting
• Article 5 — Losses Incurred Definition / IBNR Allocation
• Article 7 — Notice Requirements
• Article 9 — Intermediary Clause
• Article 11 — Follow-the-Fortunes / Settlements
• Article 22 — Arbitration
Each article is interpreted under New York law, which is the governing law of the Treaty as designated by Article 16 thereof. The Treaty's choice-of-law provision is unambiguous and has not been challenged by Pinnacle Atlantic or HFC.
For each article, this memorandum identifies textual ambiguities, relevant New York precedent, and the interaction between the provision and one or more of the four grounds asserted in Pinnacle Atlantic's pre-suit demand letter dated February 14, 2026 (the "Demand Letter"), sent by HFC on behalf of Pinnacle Atlantic. The four grounds asserted in the Demand Letter are:
1. Ground No. 1: Late notice of the Meridian Docks mass tort claims in violation of Article 7;
2. Ground No. 2: Misallocation of $22,300,000 in IBNR reserve development to Treaty Year 2022 in violation of Article 5;
3. Ground No. 3: Failure of QC&S to exercise good-faith, businesslike claims-handling judgment in settling the Veridian Financial Services E&O cluster claims, in violation of the follow-the-fortunes obligation under Article 11; and
4. Ground No. 4: Inaccurate premium reporting and underreporting of ceded earned premium for Treaty Year 2022 in violation of Article 3.
This memorandum is intended to serve as the central interpretive framework for the dispute. Cross-references to companion memoranda are noted where appropriate, including the following related work product prepared or under preparation by this firm:
• Late Notice Defense Analysis Memorandum (Matter No. 1025-00005-A);
• IBNR Allocation Analysis Memorandum (Matter No. 1025-00005-B);
• Follow-the-Fortunes / Settlements Analysis Memorandum (Matter No. 1025-00005-C);
• Premium Reporting & Termination Rights Analysis Memorandum (Matter No. 1025-00005-D);
• Arbitration vs. Litigation Forum Analysis Memorandum (Matter No. 1025-00005-E);
• Draft Motion to Compel Arbitration (Matter No. 1025-00005-F); and
• Draft Third-Party Subpoena to Broadreach Intermediaries Inc. (Matter No. 1025-00005-G).
II. Overview of the Treaty
A. Treaty Structure and Parties
Treaty No. PA-QCS-2019-EXL-0044 is an aggregate excess-of-loss reinsurance treaty covering casualty lines of business. The Treaty was placed by Broadreach Intermediaries Inc. and became effective on July 1, 2019. The parties to the Treaty are:
Cedent: Quorum Casualty & Surety Company ("QC&S"), a stock property and casualty insurer domiciled in the State of New York, with its principal office located at 200 Constitution Plaza, Suite 3200, Hartford, Connecticut 06103. QC&S is licensed to write property and casualty insurance in all fifty states, the District of Columbia, and the U.S. Virgin Islands. QC&S holds NAIC Company Code No. 24891 and is a wholly owned subsidiary of Quorum Insurance Holdings Corp., a Delaware holding company.
Reinsurer: Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL"), a Class 4 insurer domiciled in Bermuda, with its registered office at Pinnacle Atlantic House, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda. Pinnacle Atlantic is registered with the Bermuda Monetary Authority under Registration No. BMA-4R-2008-0331 and is an indirect wholly owned subsidiary of Pinnacle Atlantic Group Holdings Ltd., a Bermuda exempted company.
The original term of the Treaty was five years, running from July 1, 2019 through June 30, 2024. The Treaty contains an automatic annual extension provision, pursuant to which the Treaty automatically extends for successive one-year periods unless either party provides 90 days' written non-renewal notice prior to the expiration of the then-current term. The Treaty has been extended twice under this provision: the first extension covered the period from July 1, 2024 through June 30, 2025, and the second extension covers the period from July 1, 2025 through June 30, 2026. On October 1, 2025, Pinnacle Atlantic provided written non-renewal notice in accordance with the Treaty's automatic extension provision. Accordingly, the Treaty will expire by its terms on June 30, 2026 and will not extend further.
B. Covered Lines
The Treaty covers three casualty lines of business written by QC&S:
1. Commercial general liability policies issued by QC&S on occurrence and claims-made forms;
2. Excess and umbrella liability policies issued by QC&S; and
3. Professional liability (errors and omissions) policies issued by QC&S.
The Treaty does not cover directors' and officers' liability, employment practices liability, or any property lines written by QC&S. The scope of covered lines is defined in Article 2 of the Treaty (Business Covered) and is not at issue in the present dispute.
C. Retention and Cession Limits
The Treaty is structured as an aggregate excess-of-loss contract. Under Article 6 of the Treaty, QC&S retains the first $120,000,000 in aggregate net incurred losses per treaty year (the "Retention"). Losses incurred in excess of the Retention, up to a maximum of $200,000,000 per treaty year, are ceded to Pinnacle Atlantic. Thus, the Treaty responds to aggregate net incurred losses within the range of $120,000,000 to $320,000,000 per treaty year. The $200,000,000 cession limit represents the maximum amount recoverable from Pinnacle Atlantic in any single treaty year.
It is important to note that the aggregate structure means that individual claims are not directly ceded to Pinnacle Atlantic; rather, Pinnacle Atlantic's obligation is triggered when the aggregate of all net incurred losses across all covered lines exceeds the Retention in a given treaty year. This aggregate structure is central to several of the interpretive disputes discussed below, particularly as to the allocation of IBNR reserves under Article 5.
D. Premium Structure
The Treaty provides for a sliding-scale premium structure. Under Article 3.3, the provisional reinsurance premium rate is set at 42% of ceded earned premium for the applicable treaty year. This provisional rate is subject to retroactive adjustment based on loss ratio experience, with a minimum rate of 35% and a maximum rate of 52%. The sliding-scale adjustment mechanism is designed to align the reinsurance premium with actual loss experience over the life of the Treaty, such that favorable loss experience results in a lower ultimate premium rate (subject to the 35% floor) and adverse loss experience results in a higher rate (subject to the 52% cap).
The provisional rate of 42% is applied to ceded earned premium as initially reported and is subject to later adjustment as loss experience develops. The sliding-scale adjustment is calculated annually, typically in connection with the treaty year's final premium report following the close of all claims.
E. Reinsurance Intermediary
The Treaty was placed by Broadreach Intermediaries Inc. ("Broadreach"), a New York-licensed reinsurance intermediary with offices at 100 Wall Street, 18th Floor, New York, New York 10005. The account executive for the Treaty at Broadreach is James "Jamie" Castellano. Broadreach is designated as the authorized intermediary under Article 9 of the Treaty. Broadreach's role includes the receipt and transmission of all notices, premium payments, loss billings, claims-settlement transmittals, and other communications between QC&S and Pinnacle Atlantic. As discussed in greater detail in Section VI below, the intermediary clause in Article 9 has significant implications for the notice dispute.
F. Treaty Years at Issue
The current dispute principally concerns two treaty years:
Treaty Year 2022 (July 1, 2022 — June 30, 2023): QC&S reported aggregate net incurred losses of $189,700,000 for TY 2022. Because this amount exceeds the $120,000,000 Retention by $69,700,000, QC&S ceded $69,700,000 to Pinnacle Atlantic under the Treaty. The TY 2022 cession is the larger of the two disputed amounts and is the subject of Pinnacle Atlantic's challenges based on IBNR misallocation (Ground No. 2), late notice (Ground No. 1), and premium underreporting (Ground No. 4).
Treaty Year 2023 (July 1, 2023 — June 30, 2024): QC&S reported aggregate net incurred losses of $128,700,000 for TY 2023. This amount exceeds the Retention by $8,700,000, which was ceded to Pinnacle Atlantic. The TY 2023 cession is the subject of Pinnacle Atlantic's challenge based on the follow-the-fortunes / settlements dispute (Ground No. 3), as the Veridian Financial Services E&O cluster settlement contributed to the aggregate exceeding the Retention in TY 2023.
The total reinsurance recoverable at issue across both treaty years is $78,400,000 ($69,700,000 for TY 2022 plus $8,700,000 for TY 2023). Pinnacle Atlantic paid this amount across seven billing installments between October 15, 2022 and March 29, 2024. In the Demand Letter, Pinnacle Atlantic demands the return of the full $78,400,000 plus interest of $12,600,000, for a total demand of $91,000,000.
III. Article 3 — Premium Reporting
A. Text and Structure of Article 3
Article 3 of the Treaty governs QC&S's obligation to report ceded earned premium to Pinnacle Atlantic and sets forth the methodology for calculating the reinsurance premium owed under the Treaty. Article 3 consists of five subsections, each of which is discussed below.
Article 3.1 — Definition of Ceded Earned Premium. Article 3.1 defines "Ceded Earned Premium" as the premium earned on policies that are subject to the Treaty during the applicable treaty year. This includes all premiums earned on commercial general liability, excess/umbrella liability, and professional liability policies written by QC&S that fall within the scope of Article 2 (Business Covered). The definition encompasses both direct written premiums and assumed premiums, net of ceded premiums to other reinsurers, to the extent such premiums relate to covered lines during the applicable treaty year. The term is further subject to the exclusions set forth in Article 3.4, discussed below.
Article 3.2 — Quarterly Reporting Deadlines and Format. Article 3.2 requires QC&S to report ceded earned premium to Pinnacle Atlantic (through the intermediary, Broadreach) on a quarterly basis. The reporting deadline is 45 days after the end of each calendar quarter. Thus, for TY 2022, the reporting deadlines were November 14, 2022 (for Q1, ending September 30, 2022), February 14, 2023 (for Q2, ending December 31, 2022), May 15, 2023 (for Q3, ending March 31, 2023), and August 14, 2023 (for Q4, ending June 30, 2023). Article 3.2 also specifies the format for premium bordereaux, requiring a line-by-line listing of premiums by policy number, coverage type, and earned premium allocation.
Article 3.3 — Calculation of Treaty Premium. Article 3.3 provides for the calculation of reinsurance premium at the provisional rate of 42% of ceded earned premium, subject to retroactive sliding-scale adjustment based on loss ratio experience. The minimum rate is 35% and the maximum rate is 52%. The sliding-scale formula adjusts the ultimate premium rate based on the ratio of ceded losses to ceded earned premium. The provisional premium payments made during the treaty year are trued up following the close of the treaty year and the compilation of final loss and premium data.
Article 3.4 — Exclusion Provision. Article 3.4 excludes certain categories of premium from the definition of "Ceded Earned Premium." Specifically, Article 3.4 provides that the ceded earned premium base shall not include premiums "attributable to the assumption or cession of liabilities under any portfolio transfer, loss portfolio transfer, or run-off transaction." This exclusion is designed to ensure that one-time, block-transfer transactions — which may distort the underlying premium base and loss experience — are not included in the ceded earned premium calculation. The scope and application of this exclusion is a central issue in the premium reporting dispute, as discussed below.
Article 3.5 — Cure Provision (if any). Our review of the Treaty has not identified a specific cure provision within Article 3 that affords either party a right to terminate the Treaty based on premium reporting errors. Article 14 (Termination) contains general termination provisions, but does not specifically reference premium reporting as a termination trigger. This is a favorable point for QC&S, as discussed below.
B. Key Interpretive Questions
The central interpretive dispute under Article 3 concerns the scope of the Article 3.4 exclusion for "run-off portfolio transfer premiums." The facts underlying this dispute are as follows:
For TY 2022, QC&S reported total ceded earned premium of $38,400,000. Pinnacle Atlantic, through HFC, contends that the correct figure is $45,200,000, a difference of $6,800,000. QC&S's position is that the $6,800,000 discrepancy is attributable to premiums that QC&S properly excluded from the ceded earned premium base under Article 3.4, on the basis that those premiums relate to liabilities assumed by QC&S in connection with a run-off portfolio transfer. Pinnacle Atlantic contends that the transaction in question does not qualify as a "run-off portfolio transfer" or "run-off transaction" within the meaning of Article 3.4 and that the premiums should have been included in the ceded earned premium base.
The critical ambiguity lies in the fact that Article 3.4 does not define the terms "portfolio transfer," "loss portfolio transfer," or "run-off transaction" with specificity. The Treaty does not reference any regulatory or industry definition, nor does it provide examples or criteria for distinguishing a qualifying run-off transaction from an ordinary assumption of liabilities. This lack of definitional precision creates a genuine interpretive question: Does the transaction at issue — which involved QC&S's assumption of a book of commercial general liability reserves from an affiliated entity — fall within the exclusion?
The financial impact of this dispute is relatively contained. Even if Pinnacle Atlantic's calculation were adopted, the premium underpayment at the provisional rate would be $2,856,000 ($6,800,000 × 42%). This amount, while not immaterial, is substantially less than the total disputed recoverable of $78,400,000. As discussed below, the appropriate remedy under both the Treaty and New York law would be a retroactive premium adjustment, not rescission or avoidance of the Treaty's cessions.
C. New York Law on Premium Reporting in Reinsurance Treaties
Under New York law, premium reporting obligations in reinsurance treaties are generally treated as conditions precedent that must be materially complied with. However, New York courts have consistently drawn a distinction between deliberate misrepresentation of premium and a good-faith difference of interpretation regarding calculation methodology. Immaterial errors, inadvertent discrepancies, and good-faith disputes over the application of treaty definitions do not typically vitiate a reinsurance treaty or provide the reinsurer with grounds for rescission or avoidance. See Unigard Sec. Ins. Co. v. Greaves Specialty Insurance, 79 N.Y.2d 576 (1992) (emphasizing the importance of good faith in the reinsurance relationship).
New York courts have also recognized that late or inaccurate premium reporting may give rise to an offset or credit in favor of the reinsurer but does not ordinarily provide grounds for treaty rescission or avoidance unless the treaty specifically so provides. Where the treaty does not contain a specific termination trigger tied to premium reporting errors, the reinsurer's remedy is limited to adjustment of the premium and, potentially, interest on any underpaid amounts. The general principle is that reinsurance treaties are to be enforced according to their terms, and that immaterial reporting discrepancies do not excuse the reinsurer's obligations under the treaty.
Moreover, New York courts have applied the doctrine of substantial compliance in the context of reinsurance premium reporting obligations. Where the cedent has timely submitted premium bordereaux, has cooperated with the reinsurer's auditors, and has disclosed the basis for its calculations, the cedent has substantially complied with its reporting obligations even if there is a dispute over a particular line item or exclusion.
D. Interaction with Pinnacle Atlantic's Ground No. 4 (Inaccurate Premium Reporting)
Pinnacle Atlantic's Ground No. 4, as articulated in the Demand Letter, asserts that QC&S's underreporting of $6,800,000 in ceded earned premium for TY 2022 constitutes a material breach of the Treaty that entitles Pinnacle Atlantic to either (a) terminate the Treaty, or (b) offset the underpaid premium against ceded losses. The analysis of this claim proceeds in several steps.
First, as to the termination argument, our review of the Treaty indicates that Article 3 does not contain a specific termination trigger for premium underreporting. Article 14 (Termination) sets forth the general conditions under which the Treaty may be terminated, including material breach, insolvency, and certain regulatory events. However, Article 14 does not specifically identify premium reporting errors as grounds for termination. Absent a specific termination trigger, Pinnacle Atlantic would need to establish that the alleged underreporting constitutes a "material breach" under Article 14's general material breach provision. Given that the discrepancy amounts to $6,800,000 out of a total ceded earned premium base of $38,400,000 (approximately 17.7%), and that QC&S has a colorable basis for its calculation under Article 3.4, it is unlikely that a tribunal would characterize this as a material breach warranting termination — particularly where the underreporting is the subject of a good-faith interpretive disagreement.
Second, QC&S's defense is that the $6,800,000 difference arises from QC&S's proper application of the Article 3.4 exclusion. QC&S treated the premiums associated with a certain assumption transaction as "attributable to the assumption or cession of liabilities under a ... run-off transaction" within the meaning of Article 3.4. If QC&S's interpretation is sustained, there is no underreporting at all — the ceded earned premium was correctly reported at $38,400,000.
Third, even if the $6,800,000 were found to be improperly excluded, the appropriate remedy under New York law and the Treaty's own terms would likely be a retroactive premium adjustment. That adjustment would increase the ceded earned premium base to $45,200,000, resulting in an additional provisional premium obligation of $2,856,000 ($6,800,000 × 42%). This amount could be offset against ceded losses, but it does not provide a basis for rescission, avoidance, or voiding of the $78,400,000 in cessions already made. The remedy is financial, not structural.
Fourth, we note that the $2,856,000 premium adjustment, even if owed, pales in comparison to the $78,400,000 in recoverables that Pinnacle Atlantic seeks to recover. The disproportion between the alleged breach and the demanded remedy underscores the weakness of Ground No. 4 as a basis for the Demand Letter's aggregate claim.
A more detailed treatment of these issues, including analysis of Article 14's termination provisions and the sliding-scale adjustment implications of a revised ceded earned premium base, is set forth in the Premium Reporting & Termination Rights Analysis Memorandum (Matter No. 1025-00005-D).
IV. Article 5 — Losses Incurred Definition and IBNR Allocation
A. Text and Structure of Article 5
Article 5 of the Treaty defines "Losses Incurred" for purposes of calculating aggregate net incurred losses and, by extension, for determining whether and to what extent the Retention has been exceeded in any given treaty year. Article 5 is among the most technically complex provisions of the Treaty and is at the center of the IBNR allocation dispute (Ground No. 2). Article 5 consists of four subsections.
Article 5.1 — General Definition. Article 5.1 defines "Losses Incurred" to include, generally, three categories of losses attributable to covered lines during the applicable treaty year: (a) paid losses (i.e., loss payments actually disbursed by QC&S to or on behalf of claimants under covered policies); (b) case reserves (i.e., reserves established by QC&S on a claim-by-claim basis in respect of reported but unpaid losses); and (c) incurred but not reported ("IBNR") reserves attributable to covered lines during the applicable treaty year. The inclusion of IBNR reserves in the definition of Losses Incurred is standard in aggregate excess-of-loss reinsurance treaties, as it ensures that the aggregate net incurred loss calculation reflects not only known claims but also the estimated liability for claims that have occurred but have not yet been reported to QC&S.
Article 5.2 — Allocation Provision. Article 5.2 provides the rule for allocating losses to specific treaty years. It states that losses are to be allocated to the treaty year "in which such losses are incurred, as determined by the date of the occurrence or event giving rise to the claim." This provision is the focal point of the IBNR allocation dispute and is discussed in detail below.
Article 5.3 — Periodic Reporting and Adjustments. Article 5.3 provides for periodic reporting of incurred losses and permits retroactive adjustments for reserve development. Specifically, QC&S is required to report incurred losses to Pinnacle Atlantic on a quarterly basis, with adjustments to be made as reserves develop and as additional information becomes available regarding the ultimate cost of claims. This provision recognizes that aggregate excess-of-loss treaties necessarily involve ongoing reserve development, and that the aggregate net incurred loss figure for any given treaty year is subject to change over time as claims mature.
Article 5.4 — Actuarial Certification. Article 5.4 requires QC&S to provide actuarial certificates supporting its loss development estimates and IBNR reserves, prepared by a qualified actuary holding the designations of Fellow of the Casualty Actuarial Society (FCAS) and Member of the American Academy of Actuaries (MAAA). The actuarial certificates are to be provided in connection with the annual premium and loss reports and upon request by Pinnacle Atlantic. The purpose of this provision is to ensure that QC&S's IBNR estimates are grounded in recognized actuarial standards of practice and are subject to professional accountability.
QC&S has retained Velthorn Actuarial Advisors LLC ("Velthorn") to prepare the actuarial certificates required under Article 5.4. The principal actuary at Velthorn responsible for the Treaty's actuarial work is Dr. Stephen Tanaka, FCAS, MAAA. Dr. Tanaka has prepared actuarial certificates for each treaty year at issue, including TY 2022 and TY 2023.
B. Key Interpretive Questions
The central interpretive dispute under Article 5 concerns the allocation of $22,300,000 in IBNR reserve development between TY 2021 and TY 2022. The parties' positions are as follows:
QC&S's Position. QC&S, supported by the Velthorn actuarial certificates prepared by Dr. Stephen Tanaka, FCAS, MAAA, takes the position that the $22,300,000 in IBNR reserve development relates to accident-year 2022 claims whose development factors crystallized during the TY 2022 reporting period. Under QC&S's methodology, the IBNR development is properly allocated to TY 2022 because the underlying occurrences fall within accident year 2022 — that is, the loss-generating events occurred between July 1, 2022 and June 30, 2023. QC&S contends that its allocation methodology is consistent with recognized actuarial standards of practice (specifically, Actuarial Standard of Practice No. 43, as promulgated by the Actuarial Standards Board), that it has been applied consistently across all treaty years, and that it is supported by the actuarial certificates required under Article 5.4.
Pinnacle Atlantic's Position. Pinnacle Atlantic contends that the $22,300,000 in IBNR development relates to underlying accident-year 2021 exposures and should be allocated to TY 2021 (July 1, 2021 — June 30, 2022), not TY 2022. Pinnacle Atlantic's argument is that the occurrences giving rise to the developed IBNR took place during accident year 2021 and that, under Article 5.2's allocation rule, those losses should be allocated to TY 2021 based on the "date of the occurrence or event giving rise to the claim."
The financial consequences of this dispute are significant. If Pinnacle Atlantic's interpretation prevails:
• TY 2022: The aggregate net incurred loss would be reduced from $189,700,000 to $167,400,000 ($189,700,000 minus $22,300,000). The ceded loss would be reduced from $69,700,000 to $47,400,000 ($167,400,000 minus the $120,000,000 Retention), a reduction of $22,300,000.
• TY 2021: The aggregate net incurred loss would increase from $104,600,000 to $126,900,000 ($104,600,000 plus $22,300,000). This would breach the $120,000,000 Retention by $6,900,000, potentially creating a ceded loss of $6,900,000 for TY 2021.
• Net Impact: However, Pinnacle Atlantic has not asserted that it owes $6,900,000 for TY 2021 and is not arguing that TY 2021 should be reopened in its favor. The net effect of Pinnacle Atlantic's position is a one-sided reallocation that reduces total cessions from $78,400,000 to $56,100,000 ($47,400,000 for TY 2022 plus $8,700,000 for TY 2023), a reduction of $22,300,000, without any offsetting credit for the newly created TY 2021 cession. This asymmetric treatment is noteworthy and may be subject to challenge on equitable grounds.
C. Ambiguity in "Occurrence or Event Giving Rise to the Claim"
The interpretive difficulty arises from the language of Article 5.2 itself. The phrase "incurred, as determined by the date of the occurrence or event giving rise to the claim" presents a textual ambiguity that lies at the heart of the IBNR allocation dispute.
The Treaty does not define "occurrence or event" with reference to any specific actuarial standard of practice, regulatory framework, or industry convention. Nor does the Treaty provide guidance on how the phrase is to be applied in the context of IBNR reserves, which by definition relate to claims that have not yet been reported and for which the date of the underlying occurrence may not be precisely known at the time the reserve is established.
Under standard actuarial methodology, accident-year attribution depends on when the loss-generating event occurred. IBNR reserves are estimated based on historical development patterns and actuarial techniques (such as chain-ladder, Bornhuetter-Ferguson, or loss ratio methods) that project ultimate losses for each accident year. The resulting IBNR estimates are inherently subject to uncertainty and are typically revised as claims develop and as additional data becomes available. Importantly, IBNR reserve development may cross treaty-year boundaries — that is, a revision to the IBNR estimate for accident year 2021 may occur during the TY 2022 reporting period, creating a question as to which treaty year should bear the revised amount.
The key question, then, is whether Article 5.2 ties allocation to the accident year of the underlying occurrence (i.e., the year in which the loss-generating event took place) or to the treaty year in which the reserve development is recognized and reported. This distinction has enormous financial consequences in the present dispute.
If Article 5.2 is construed to require allocation based strictly on the accident year of the underlying occurrence, Pinnacle Atlantic may have an argument for reallocation of the $22,300,000 to TY 2021, provided it can demonstrate that the underlying claims are in fact attributable to accident-year 2021 occurrences. Under this reading, the fact that the IBNR development was recognized and reported during TY 2022 is irrelevant — what matters is when the losses were "incurred," and losses are incurred when the underlying occurrence or event takes place.
If, on the other hand, Article 5.2 is construed to allocate losses based on the treaty year in which the IBNR development is recognized and reported — effectively a "treaty-year-of-reporting" or "development-year" convention — then QC&S's allocation is proper, because the IBNR development crystallized and was reported during TY 2022.
The textual analysis does not clearly favor either interpretation. The phrase "incurred, as determined by the date of the occurrence or event giving rise to the claim" arguably points toward an accident-year allocation basis, because it links "incurred" to the "date of the occurrence." However, the practical implementation of IBNR allocation in aggregate excess-of-loss treaties often follows a reporting or development convention, because the cedent cannot allocate IBNR reserves by accident year until the reserves are actually established or revised. This practical reality suggests that Article 5.2 should be read in light of standard industry practice, which generally permits the cedent to allocate IBNR development to the treaty year in which it is reported, provided the allocation is reasonable and supported by qualified actuarial opinion.
Moreover, we note that Article 5.3 explicitly permits "retroactive adjustments for reserve development," which implies that loss allocations may shift over time as reserves develop. This provision is consistent with QC&S's approach of allocating IBNR development to TY 2022, the treaty year in which the development was recognized, rather than retroactively reallocating it to TY 2021.
D. New York Law on IBNR Allocation in Aggregate Excess-of-Loss Treaties
New York courts have addressed the issue of IBNR allocation in reinsurance disputes on several occasions, though the case law is not extensive. The general principles that emerge from the New York authorities are as follows:
First, New York courts have generally deferred to the cedent's reasonable actuarial methodology in allocating IBNR reserves, provided that the methodology is applied consistently across treaty years and is supported by a qualified actuarial opinion. See Employers' Fire Ins. Co. v. Glob. Reins. Corp. of Am., 287 A.D.2d 383 (1st Dep't 2001) (noting the importance of consistency in actuarial methodology). The rationale for this deference is that IBNR estimation involves inherent actuarial judgment, and courts are ill-equipped to second-guess the professional opinions of qualified actuaries who have applied recognized actuarial standards of practice.
Second, the standard of review for IBNR allocation disputes is whether the cedent's methodology was reasonable and in good faith, not whether the reinsurer would have used a different methodology or arrived at a different result. A reinsurer cannot defeat the cedent's allocation merely by presenting an alternative actuarial opinion that reaches a different conclusion; it must demonstrate that the cedent's methodology was unreasonable, inconsistent, or not in good faith.
Third, the actuarial certificates prepared under Article 5.4 carry significant evidentiary weight. If the certificates are properly prepared by a qualified actuary (FCAS, MAAA) applying recognized actuarial standards of practice — including, in particular, Actuarial Standard of Practice No. 43 (Property/Casualty Unpaid Claim Estimates) — they constitute strong evidence that the cedent's IBNR allocation is reasonable. A reinsurer seeking to challenge the certificates would need to present its own actuarial analysis demonstrating that the cedent's methodology is flawed or that the certificates do not comply with applicable standards.
Fourth, New York courts have recognized that IBNR allocation in aggregate excess-of-loss treaties involves inherent uncertainty and that the cedent is entitled to exercise professional judgment within the bounds of accepted actuarial practice. The courts have not imposed a single, mandatory allocation methodology; rather, they have recognized that multiple reasonable approaches may exist and that the cedent's choice among reasonable alternatives should be respected.
These principles strongly support QC&S's position. The Velthorn actuarial certificates, prepared by Dr. Tanaka, support the allocation of the $22,300,000 IBNR development to TY 2022. If those certificates are properly prepared and consistent with ASOP No. 43, they should carry significant weight in any adjudication of this issue.
E. Interaction with Pinnacle Atlantic's Ground No. 2 (Misallocation of IBNR)
Under the legal framework outlined above, Pinnacle Atlantic bears the burden of demonstrating that QC&S's IBNR allocation was unreasonable or inconsistent with the Treaty's terms. Specifically, Pinnacle Atlantic must show either (a) that Article 5.2 unambiguously requires accident-year allocation and that QC&S's development-year approach is inconsistent with the Treaty's text, or (b) that QC&S's actuarial methodology is unreasonable, inconsistent with prior treaty years, or not in good faith.
Neither showing will be straightforward for Pinnacle Atlantic. As to (a), the textual ambiguity discussed above means that Article 5.2 does not unambiguously require accident-year allocation. As to (b), the Velthorn actuarial certificates provide a strong evidentiary foundation for QC&S's methodology. QC&S should be prepared to defend the Velthorn methodology in detail, including the selection of development factors, the accident-year assignment conventions used in the IBNR estimation process, and the consistency of the methodology with prior treaty years. If QC&S can demonstrate that the same allocation methodology was used for TY 2020 and TY 2021 (treaty years in which the aggregate did not breach the Retention and no cessions were at issue), this consistency will significantly undermine Pinnacle Atlantic's claim of opportunistic allocation.
We also note the asymmetry of Pinnacle Atlantic's position: Pinnacle Atlantic argues for reallocation of $22,300,000 from TY 2022 to TY 2021 to reduce TY 2022 cessions, but does not argue that it owes the resulting $6,900,000 cession for TY 2021. This one-sided approach is inconsistent with the principles of good faith and fair dealing that govern the reinsurance relationship and may be persuasive to an arbitration panel.
A detailed actuarial and financial analysis of the IBNR allocation issue, including modeling of alternative allocation scenarios and assessment of the Velthorn methodology, is set forth in the IBNR Allocation Analysis Memorandum (Matter No. 1025-00005-B).
V. Article 7 — Notice Requirements
A. Text and Structure of Article 7
Article 7 of the Treaty establishes QC&S's obligation to notify Pinnacle Atlantic (through the intermediary, Broadreach) of claims and events that may give rise to cessions under the Treaty. Article 7 contains four subsections establishing distinct notice obligations.
Article 7.1 — Individual Claim Threshold. Article 7.1 requires QC&S to provide "prompt notice" to the Reinsurer of any individual claim that meets or exceeds the individual claim reporting threshold of $1,000,000 in reserves. This is a claim-specific threshold: when QC&S establishes case reserves of $1,000,000 or more on any individual claim under a covered policy, QC&S must promptly notify Pinnacle Atlantic (through Broadreach) of the existence of the claim, its nature, the reserves established, and such other information as may be reasonably necessary for the Reinsurer to evaluate the claim. The obligation is triggered by the establishment of reserves at or above the threshold, not by the occurrence of the underlying event.
Article 7.2 — Quarterly Aggregate Loss Reports. Article 7.2 requires QC&S to provide quarterly aggregate loss reports summarizing all incurred losses by treaty year. These reports are to be submitted on the same schedule as the premium bordereaux under Article 3.2 (i.e., within 45 days after the end of each calendar quarter). The quarterly aggregate loss reports provide Pinnacle Atlantic with ongoing visibility into the developing loss experience under each treaty year.
Article 7.3 — Aggregate Notification of Significant Events. Article 7.3 requires QC&S to provide prompt notice of any "occurrence, event, or series of related claims" that is reasonably likely to result in aggregate losses exceeding the Retention. This provision is broader than Article 7.1 in that it is not limited to individual claims that exceed the $1,000,000 reserve threshold; rather, it encompasses situations where the aggregate impact of a group of related claims (even if individually below the $1,000,000 threshold) is reasonably likely to push aggregate net incurred losses above the $120,000,000 Retention. The purpose of Article 7.3 is to provide early warning to the Reinsurer of events that may trigger its obligation under the Treaty, even before individual claims are large enough to trigger Article 7.1 reporting.
Article 7.4 — Notice Through Intermediary. Article 7.4 specifies that all notices under Article 7 are to be given through the intermediary (Broadreach Intermediaries Inc.) in accordance with Article 9. This provision links Article 7 to the intermediary clause and ensures that the communications channel is consistent with the Treaty's overall architecture.
B. Key Interpretive Questions
The critical interpretive issue under Article 7 is the interplay between Article 7.1 (individual claim threshold) and Article 7.3 (aggregate notification of significant events), particularly as applied to the Meridian Docks mass tort claims.
The underlying facts are as follows: In March 2021, QC&S received notification of 31 related toxic contamination claims arising from the Meridian Docks Development LLC industrial waterfront redevelopment project in Newark, New Jersey, covered under QC&S Policy No. CGL-2020-09844. QC&S first established reserves on the 31 Meridian Docks claims on March 15, 2021. At that time, each individual claim was reserved below $1,000,000. The claims were related in that they all arose from the same site and the same alleged contamination events, but they involved different claimants and different alleged injuries.
During Q1 2022, QC&S increased reserves on multiple Meridian Docks claims as additional information became available, including environmental testing results and the filing of amended complaints. Several individual claims crossed the $1,000,000 reserve threshold at that time. QC&S provided notice to Pinnacle Atlantic via Broadreach on May 22, 2022, approximately two months after the individual claim threshold was triggered.
The gap between QC&S's initial establishment of reserves (March 15, 2021) and its notice to Pinnacle Atlantic (May 22, 2022) is 14 months and 7 days. As of the date of this memorandum, the total Meridian Docks net incurred loss across all 31 claims is $41,200,000.
QC&S's Position. QC&S contends that its notice was timely because Article 7.1 was not triggered until Q1 2022, when individual claims first crossed the $1,000,000 reserve threshold. QC&S provided notice on May 22, 2022, within approximately 60 days of the threshold being reached. As to Article 7.3, QC&S contends that the aggregate notification obligation was not triggered in March 2021 because, at that time, with the Meridian Docks claims individually reserved at low amounts and total TY 2021 aggregate losses well below the $120,000,000 Retention, it was not yet "reasonably likely" that aggregate losses would exceed the Retention. The claims were in their early stages, the ultimate exposure was uncertain, and QC&S could not have reasonably anticipated at that time that the aggregate would breach the Retention.
Pinnacle Atlantic's Position. Pinnacle Atlantic contends that even if the individual claims were below the $1,000,000 threshold, the 31 related Meridian Docks claims constituted an "occurrence, event, or series of related claims" under Article 7.3 that should have been reported when first reserved in March 2021. Pinnacle Atlantic argues that it was reasonably foreseeable at that time that 31 related toxic contamination claims at a single industrial site would develop into a significant aggregate exposure and that QC&S should have provided notice under Article 7.3 at the outset. Under Pinnacle Atlantic's theory, the notice given on May 22, 2022 was 14 months and 7 days late.
Key Ambiguity. The Treaty does not define what constitutes "reasonably likely" to exceed the Retention under Article 7.3. Nor does it specify when a group of related claims becomes a "series" triggering the obligation, or how the cedent is to determine whether aggregate losses are "reasonably likely" to exceed the Retention when claims are in their early stages and reserves are developing. This ambiguity creates a question of interpretation that turns on both the Treaty's text and the surrounding circumstances, including the reasonableness of QC&S's assessment at the time the claims were first reserved.
We note that the phrase "reasonably likely" is a forward-looking standard that inherently involves judgment and estimation. It does not require certainty or even probability; rather, it requires a reasonable assessment at the time the relevant information is available. The question is whether, as of March 15, 2021, it was "reasonably likely" that the aggregate of all incurred losses under the Treaty (not just the Meridian Docks claims) would exceed $120,000,000. At that time, total TY 2021 aggregate losses were approximately $60,000,000, and the 31 Meridian Docks claims were collectively reserved at a fraction of the $120,000,000 Retention. QC&S's position that aggregate breach was not "reasonably likely" at that time is defensible on these facts.
C. New York Law on Late Notice in Reinsurance
New York reinsurance law applies a prejudice-based standard for late notice. Unlike the traditional "no-prejudice" rule that was historically applied to direct insurance policies in New York (under which late notice operated as an absolute defense regardless of whether the insurer was prejudiced), the standard applicable to reinsurance contracts requires the reinsurer to demonstrate that it suffered actual prejudice from the late notice. This distinction reflects the sophistication of the parties in the reinsurance market, the inherent delays in claims reporting that are common in the industry, and the different risk-allocation dynamics of reinsurance as compared to direct insurance.
Under the prejudice standard, Pinnacle Atlantic must show that the 14-month delay (assuming, arguendo, that notice was indeed late) materially impaired its ability to defend, investigate, monitor claims handling, or otherwise protect its interests. New York courts have identified several categories of prejudice that may be relevant in the reinsurance context, including:
• The loss of the opportunity to investigate or participate in the defense of the underlying claims;
• The loss of the ability to monitor the cedent's claims handling and settlement activity;
• The impairment of the reinsurer's ability to establish or maintain appropriate reserves;
• The loss of the opportunity to negotiate or provide input on settlement terms; and
• Demonstrable financial harm attributable to the delay in notice.
New York courts have held that in reinsurance disputes, the sophistication of the parties and the nature of the reinsurance relationship weigh against strict enforcement of notice conditions without a showing of prejudice. The notice condition in a reinsurance treaty is generally treated as a condition that must be substantially, not strictly, complied with. See Christiania Gen. Ins. Corp. v. Aldermere Assurance, 979 F.2d 268 (2d Cir. 1992) (applying New York law and holding that late notice in reinsurance context requires showing of prejudice); Unigard Sec. Ins. Co. v. Greaves Specialty Insurance, 79 N.Y.2d 576 (1992).
We also note the distinction between the notice obligations in Articles 7.1 and 7.3. Article 7.1 is a clear, objective trigger: the cedent must provide notice when individual claim reserves reach $1,000,000. Article 7.3, by contrast, involves a forward-looking assessment of whether the aggregate is "reasonably likely" to exceed the Retention. This forward-looking standard inherently involves judgment and is more difficult to enforce on a strict-compliance basis.
D. Interaction with Pinnacle Atlantic's Ground No. 1 (Late Notice)
To prevail on Ground No. 1, Pinnacle Atlantic must establish both (a) a treaty violation (i.e., that QC&S failed to provide timely notice under Article 7.1 or Article 7.3) and (b) actual prejudice resulting from the late notice. QC&S's defense strategy on this ground is multi-layered:
First, QC&S should argue that there was no violation of Article 7.1 because individual Meridian Docks claims were reserved below $1,000,000 until Q1 2022, when reserves were increased. QC&S provided notice on May 22, 2022, within approximately 60 days of the threshold being triggered. This notice was "prompt" under Article 7.1, particularly in the context of mass tort claims where reserve increases may affect multiple claims simultaneously and require internal review before notification.
Second, QC&S should argue that Article 7.3 was not triggered in March 2021 because aggregate losses exceeding the $120,000,000 Retention were not yet "reasonably likely" at that time. With total TY 2021 aggregate losses at approximately $60,000,000 and the Meridian Docks claims individually reserved at low amounts, a reasonable cedent in QC&S's position would not have concluded that the aggregate was "reasonably likely" to breach the Retention based on the information available as of March 15, 2021.
Third, even if notice was late, Pinnacle Atlantic has not and cannot establish actual prejudice. QC&S provided notice on May 22, 2022, well before any billing was submitted to Pinnacle Atlantic (the first billing installment was submitted on October 15, 2022). Pinnacle Atlantic had approximately five months between receiving notice and receiving the first bill, during which time it had the opportunity to investigate, monitor, and evaluate the Meridian Docks claims. Moreover, Pinnacle Atlantic's role under an aggregate excess-of-loss treaty is to respond to aggregate loss experience, not to participate in the defense or settlement of individual underlying claims. The nature of the reinsurance structure limits the categories of prejudice that Pinnacle Atlantic can plausibly assert.
A comprehensive analysis of the late notice defense, including case law on the prejudice standard, factual development recommendations, and argument templates, is set forth in the Late Notice Defense Analysis Memorandum (Matter No. 1025-00005-A).
VI. Article 9 — Intermediary Clause
A. Text and Structure of Article 9
Article 9 of the Treaty designates Broadreach Intermediaries Inc. ("Broadreach") as the authorized intermediary broker for all transactions under the Treaty. Article 9 consists of four subsections.
Article 9.1 — Broadreach as Authorized Intermediary. Article 9.1 provides that all notices, premium payments, loss billings, and claims-settlement transmittals under the Treaty are to be made through Broadreach. This provision establishes Broadreach as the sole authorized channel of communication between QC&S and Pinnacle Atlantic for all Treaty-related matters. Neither party is obligated to deal directly with the other; all dealings are to be conducted through Broadreach.
Article 9.2 — The Intermediary Clause. Article 9.2 contains the operative intermediary clause, which serves two critical functions. First, it provides that payment of reinsurance premium by QC&S to Broadreach constitutes payment to Pinnacle Atlantic for all purposes under the Treaty. Second, it provides that payment of reinsurance recoveries by Pinnacle Atlantic to Broadreach constitutes payment to QC&S for all purposes under the Treaty. This clause is a standard feature of brokered reinsurance transactions and allocates the credit risk of the intermediary between the parties.
Article 9.3 — Record-Keeping. Article 9.3 provides that Broadreach is responsible for maintaining accurate records of all transactions and transmittals made through it under the Treaty, including copies of all notices, premium bordereaux, loss reports, and billing statements.
Article 9.4 — Credit Risk Allocation. Article 9.4 addresses the allocation of credit risk in the event of Broadreach's insolvency or failure to remit payments. It provides that, to the extent Broadreach fails to remit payments to the party entitled to receive them, the paying party's obligation is deemed satisfied upon payment to Broadreach. In other words, the risk of Broadreach's insolvency falls on the party entitled to receive the payment, not the party that made the payment. This allocation is consistent with the standard intermediary clause construct, under which the broker is deemed the agent of the reinsurer for purposes of premium receipt and the agent of the cedent for purposes of loss recovery receipt.
B. Key Interpretive Questions
The intermediary clause has dual significance in the present dispute. First, it defines the mechanism through which notice obligations under Article 7 are satisfied. Second, it allocates the credit risk of the intermediary, though the credit risk issue is not presently in dispute.
As to the notice dispute, the relevant facts are as follows: QC&S's notice of the Meridian Docks claims was given "via Broadreach" on May 22, 2022. Article 7.4 confirms that notice under Article 7 is to be given through Broadreach in accordance with Article 9. The question arises: for purposes of determining whether QC&S's notice was timely under Article 7, does the date of QC&S's communication to Broadreach control, or does the date of Broadreach's onward communication to Pinnacle Atlantic control?
This question is significant because if there was any delay between QC&S's communication to Broadreach and Broadreach's forwarding of the notice to Pinnacle Atlantic, that delay should not be attributed to QC&S. Under the intermediary clause construct, QC&S satisfies its notice obligation when it provides notice to Broadreach; any subsequent delay in Broadreach's transmission is Broadreach's responsibility, not QC&S's.
Under standard reinsurance intermediary clause construction, notice to Broadreach should be deemed notice to Pinnacle Atlantic as of the date QC&S communicates to Broadreach. This is because Article 9.2 establishes Broadreach as the agent of Pinnacle Atlantic for purposes of receiving communications from QC&S, including notice under Article 7. Just as payment to Broadreach constitutes payment to Pinnacle Atlantic, notice to Broadreach should constitute notice to Pinnacle Atlantic.
C. New York Law on Intermediary Clauses
New York law recognizes and enforces the standard reinsurance intermediary clause. Under New York law, the intermediary is treated as the agent of the reinsurer for purposes of premium receipt and as the agent of the cedent for purposes of loss recovery receipt. See In re Ridgeline Assurance, 167 A.D.2d 75 (1st Dep't 1991) (discussing the intermediary clause and the allocation of credit risk in brokered reinsurance transactions). This agency relationship is contractual, arising from the terms of the intermediary clause itself, and governs the timing and effectiveness of communications made through the broker.
As to the timing of notice, New York courts have generally held that the timing of notice through an intermediary is measured from the date the cedent provides notice to the intermediary, not the date the intermediary forwards the notice to the reinsurer. This principle follows logically from the agency relationship established by the intermediary clause: if the intermediary is the reinsurer's agent for purposes of receiving communications, then receipt by the intermediary is receipt by the reinsurer. Any delay by the intermediary in forwarding the notice does not prejudice the cedent's compliance with its notice obligations.
This principle is particularly important in the present dispute, as the Demand Letter does not address the intermediary clause or the timing of Broadreach's onward communication. If Broadreach delayed in forwarding QC&S's May 22, 2022 notice to Pinnacle Atlantic, that delay is not attributable to QC&S and does not support a finding of late notice.
D. Interaction with the Dispute
The intermediary clause supports QC&S's position that notice was timely provided when given to Broadreach on May 22, 2022. For purposes of Article 7 compliance, QC&S's notice obligation was satisfied as of that date, regardless of when Broadreach forwarded the notice to Pinnacle Atlantic.
Broadreach's records will be critical evidence in establishing the precise timeline. Broadreach's placement records, treaty slips, correspondence files, and internal transaction logs should document when QC&S provided the Meridian Docks notice, when Broadreach received it, and when Broadreach transmitted it to Pinnacle Atlantic. We recommend that these records be obtained promptly, either through cooperative request to Broadreach or, if necessary, through third-party subpoena.
We have prepared a Draft Third-Party Subpoena to Broadreach Intermediaries Inc. (Matter No. 1025-00005-G) for use in the event that Broadreach does not voluntarily produce its records. Given QC&S's ongoing commercial relationship with Broadreach, we recommend first pursuing a cooperative request through the account executive, Jamie Castellano, before resorting to compulsory process.
VII. Article 11 — Follow-the-Fortunes / Settlements
A. Text and Structure of Article 11
Article 11 of the Treaty sets forth the "follow-the-fortunes" and "follow-the-settlements" obligations of Pinnacle Atlantic as reinsurer. These obligations are among the most fundamental principles of the reinsurance relationship and are broadly recognized in the reinsurance industry and in New York law. Article 11 consists of four subsections.
Article 11.1 — Follow-the-Fortunes. Article 11.1 provides that Pinnacle Atlantic agrees to "follow the fortunes" of QC&S with respect to all losses ceded under the Treaty, including the cedent's good-faith determination of liability and quantum. This provision is a general statement of the follow-the-fortunes doctrine, which requires the reinsurer to share the same fate as the cedent with respect to losses arising under the covered business. Under Article 11.1, Pinnacle Atlantic is bound by QC&S's good-faith determinations regarding the existence and amount of liability under the underlying policies, even if Pinnacle Atlantic would have reached a different conclusion.
Article 11.2 — Follow-the-Settlements. Article 11.2 provides that the Reinsurer shall follow the cedent's settlements, including settlements made in the ordinary course of business, provided that such settlements meet three conditions: (a) the settlement was made in good faith; (b) the settlement is not inconsistent with the terms of the underlying policies; and (c) the settlement reflects the exercise of "businesslike" claims-handling judgment. These three conditions define the standard of conduct that QC&S must meet in settling claims; as long as these conditions are satisfied, Pinnacle Atlantic is bound by the settlement and may not challenge its terms or amount.
Article 11.3 — Exceptions. Article 11.3 sets forth the exceptions to the follow-the-fortunes and follow-the-settlements obligations. It provides that the Reinsurer shall not be bound by any settlement that is the product of fraud, collusion, bad faith, or gross negligence on the part of the Cedent. This provision establishes an intentionally narrow set of exceptions — only the most egregious categories of misconduct (fraud, collusion, bad faith, or gross negligence) relieve the reinsurer of its obligation to follow the cedent's fortunes. Mere disagreement with the settlement amount, strategic second-guessing, or the availability of a less expensive resolution does not fall within the Article 11.3 exceptions.
Article 11.4 — Documentation. Article 11.4 provides that the Cedent shall provide the Reinsurer with reasonable documentation supporting any settlement that results in a cession under the Treaty, upon request. This documentation obligation permits the Reinsurer to review the basis for the cedent's settlement decisions but does not create a veto right or a right of prior approval.
B. Key Interpretive Questions
The focus of the follow-the-fortunes dispute is QC&S's settlement of the Veridian Financial Services E&O cluster claims. The relevant facts are as follows:
The policyholder is Veridian Financial Services Inc., insured under QC&S Policy No. PL-2021-15327 (professional liability / errors and omissions). The underlying claims involve allegations of misrepresentation in the sale of structured financial products to institutional investors. Three related claims were asserted against Veridian:
• Claim A: Settled for $14,200,000
• Claim B: Settled for $12,800,000
• Claim C: Settled for $7,500,000
• Total Settlement: $34,500,000
The settlements were executed on September 8, 2023. After accounting for recoveries under QC&S's other reinsurance arrangements, QC&S's net retained loss from the Veridian cluster was $26,100,000. The portion of the Veridian loss that is ceded to the Treaty (within the TY 2023 aggregate) is $8,700,000 — the entire TY 2023 cession.
Pinnacle Atlantic, through the Demand Letter, alleges that QC&S settled the Veridian claims "without meaningful litigation exposure analysis, at inflated amounts, to push aggregate losses above the retention in TY 2023." This allegation, at its core, accuses QC&S of bad faith — specifically, of intentionally inflating settlement amounts in order to manufacture a cession under the Treaty. If proven, such conduct would fall within the Article 11.3 exception. However, the allegation is a serious one that requires specific factual support, and Pinnacle Atlantic's burden of proof is demanding.
The key interpretive questions are as follows:
What is the standard of review for "good faith" and "businesslike" claims-handling judgment unde

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

MATTER NO.: 1025-00005

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