PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP One Liberty Plaza, 55th Floor New York, New York 10006
SETTLEMENT AUTHORITY MEMORANDUM RECOMMENDED SETTLEMENT PARAMETERS
MEMORANDUM
PRIVILEGE NOTICE: This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared in anticipation of litigation and/or arbitration and for the sole purpose of providing legal advice to Quorum Insurance Holdings Corp. and its subsidiaries. This memorandum contains the mental impressions, conclusions, opinions, and legal theories of counsel. It should not be disclosed to any third party — including but not limited to regulators, auditors, rating agencies, intermediaries, or counterparties — without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege.
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I. EXECUTIVE SUMMARY
The purpose of this memorandum is to provide the Board Audit Committee of Quorum Insurance Holdings Corp. ("QIH") with a comprehensive analysis of the reinsurance recoverable dispute with Pinnacle Atlantic Reinsurance Ltd. ("Pinnacle Atlantic" or "PARL") and to recommend settlement authority parameters for use by QIH's General Counsel, Rachel Sondergaard, in connection with any negotiation, mediation, or arbitration resolution of this matter.
By pre-suit demand letter dated February 14, 2026, transmitted by Pinnacle Atlantic's outside counsel Hargrove, Fitch & Calloway LLP ("HFC") — lead partner Nathaniel R. Calloway III — Pinnacle Atlantic demanded the return of $78,400,000 in previously paid reinsurance recoverables, together with $12,600,000 in accrued interest (calculated at approximately 8% per annum over an average period of twenty-four months), for a total claimed amount of $91,000,000. Pinnacle Atlantic threatens to commence litigation in New York Supreme Court, Commercial Division, if QIH's subsidiary, Quorum Casualty & Surety Company ("QC&S"), does not agree to the full disgorgement within sixty days of the demand letter.
The disputed recoverables arise under the aggregate excess-of-loss reinsurance treaty between QC&S (as cedent) and Pinnacle Atlantic (as reinsurer), designated Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty" or the "2019 Treaty"). Specifically, Pinnacle Atlantic challenges the validity of cessions totaling $69,700,000 for Treaty Year ("TY") 2022 and $8,700,000 for TY 2023, aggregating to the full $78,400,000 recoverable that Pinnacle Atlantic previously paid across seven billing installments between October 15, 2022 and March 29, 2024.
Pinnacle Atlantic advances four grounds for recovery: (1) late notice of the Meridian Docks mass tort cluster under Treaty Article 7; (2) misallocation of $22.3 million in incurred but not reported ("IBNR") reserves under Treaty Article 5; (3) a challenge to the follow-the-fortunes doctrine as applied to the Veridian Financial Services E&O settlement cluster under Treaty Article 11; and (4) alleged inaccurate premium reporting and resulting premium underpayment under Treaty Article 3.
After a thorough analysis of the merits of each of Pinnacle Atlantic's claims, the potential exposure under various litigation and arbitration scenarios, the financial impact on QC&S's statutory surplus and QIH's consolidated GAAP financials, estimated litigation costs, and strategic considerations, Calderwood & Harkness LLP ("C&H") recommends the following:
The Board Audit Committee should authorize a settlement range of $15,000,000 to $28,000,000 (inclusive of interest offsets and premium adjustments), with a target settlement of $20,000,000 to $22,000,000. This recommended range represents a risk-adjusted compromise that preserves the substantial majority of QC&S's $78.4 million recoverable while accounting for genuine litigation uncertainty on the IBNR allocation issue — the single claim that presents meaningful risk to QC&S's position.
We further recommend that QC&S pursue arbitration under Treaty Article 22 (ARIAS-U.S. Rules) as the proper dispute resolution forum, and that QC&S propose mediation as a preliminary step, with the authorized settlement authority available for deployment at any stage of the process.
The analysis supporting these recommendations is set forth in detail below.
II. BACKGROUND OF THE DISPUTE
A. The Parties
1. Quorum Insurance Holdings Corp.
Quorum Insurance Holdings Corp. ("QIH") is a Delaware corporation headquartered at 200 Constitution Plaza, Suite 3400, Hartford, Connecticut 06103. QIH's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "QIHC." QIH is a diversified, multi-line insurance holding company that underwrites commercial property and casualty insurance, specialty lines, and personal lines coverage through its principal insurance subsidiaries. QIH also operates a proprietary fintech platform known as "QuorumEdge," which provides data analytics, automated underwriting, and digital distribution capabilities. Martin Galbraith serves as QIH's Chief Executive Officer, and Rachel Sondergaard serves as General Counsel and Corporate Secretary.
For fiscal year 2025, QIH reported gross written premiums of $4.18 billion and net earned premiums of $2.93 billion. As of February 28, 2026, QIH's market capitalization was approximately $6.7 billion, based on a closing share price of $52.17 and approximately 128.4 million diluted shares outstanding. QIH is a constituent of the S&P MidCap 400 Index.
2. Quorum Casualty & Surety Company
Quorum Casualty & Surety Company ("QC&S") is a New York-domiciled stock property and casualty insurance company, NAIC No. 24891, and the principal insurance subsidiary of QIH. QC&S is licensed in all fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. QC&S underwrites commercial general liability, excess and umbrella liability, professional liability (errors and omissions and directors and officers), commercial automobile, workers' compensation, and commercial property coverages.
QC&S maintains an insurer financial strength rating of A (Excellent) with a Stable outlook from A.M. Ridgeway Rating Services, Inc. ("A.M. Ridgeway"). As of December 31, 2025, QC&S reported statutory surplus of $1.42 billion and total admitted assets of $8.74 billion. Diana Kessler-Hoff serves as Vice President, Claims & Reinsurance Recoveries, and Tobias Engström serves as Senior Vice President, Reinsurance & Capital Markets. Both have been intimately involved in the management of the Treaty and the disputed cessions at issue in this matter.
3. Pinnacle Atlantic Reinsurance Ltd.
Pinnacle Atlantic Reinsurance Ltd. ("PARL" or "Pinnacle Atlantic") is a Bermuda-domiciled Class 4 insurer registered with the Bermuda Monetary Authority under Registration No. BMA-4R-2008-0331. Pinnacle Atlantic's registered office is located at Clarendon House, 14 Church Street, Hamilton HM 11, Bermuda. Pinnacle Atlantic maintains a United States office at 1285 Avenue of the Americas, 28th Floor, New York, New York 10019.
Pinnacle Atlantic is a wholly owned subsidiary of Pinnacle Atlantic Group Holdings Ltd. ("PAGH"), a Bermuda-domiciled holding company that operates a diversified global reinsurance platform. Sir Edmund Haverford serves as Chief Executive Officer of both PAGH and Pinnacle Atlantic. Lorraine Metcalf serves as Chief Claims Officer, and Conrad Hesse serves as Senior Vice President, Treaty Disputes & Recoveries. Mr. Hesse has been Pinnacle Atlantic's primary point of contact on disputed cessions since the first indications of disagreement surfaced in mid-2024.
For fiscal year 2025, Pinnacle Atlantic reported gross reinsurance assumed of $9.6 billion, making it one of the larger Bermuda-based professional reinsurers. Pinnacle Atlantic is rated A+ (Superior), Stable outlook by A.M. Ridgeway. Pinnacle Atlantic's financial strength and market position are relevant to the strategic considerations discussed in Section VII below, as the dispute involves a significant and sophisticated counterparty with ample resources to pursue litigation or arbitration.
Pinnacle Atlantic's outside counsel in this matter is Hargrove, Fitch & Calloway LLP ("HFC"), with its principal office at 599 Lexington Avenue, New York, New York 10022. Nathaniel R. Calloway III, a name partner and co-chair of HFC's reinsurance disputes practice, is the lead partner on the matter. HFC is well-regarded in the reinsurance dispute resolution space, and Mr. Calloway has served as arbitrator and party-appointed arbitrator in numerous ARIAS-U.S. proceedings. His involvement signals that Pinnacle Atlantic views this matter seriously and is prepared to proceed to arbitration or litigation if a pre-hearing settlement is not reached.
B. The 2019 Treaty
The aggregate excess-of-loss reinsurance treaty at the center of this dispute is designated Treaty No. PA-QCS-2019-EXL-0044 (the "Treaty" or the "2019 Treaty"). The Treaty was placed effective July 1, 2019.
The Treaty provides aggregate excess-of-loss reinsurance coverage on a treaty-year basis, covering losses arising under commercial general liability, excess and umbrella liability, and professional liability (errors and omissions) policies issued or renewed by QC&S during each treaty year. The Treaty does not cover property, commercial automobile, workers' compensation, or other specialty lines, which are subject to separate reinsurance arrangements.
The initial term of the Treaty was five years, running from July 1, 2019 through June 30, 2024, with automatic annual extensions unless either party provided written notice of non-renewal at least ninety (90) days prior to the end of the then-current term. The Treaty was automatically extended for two additional one-year periods: July 1, 2024 through June 30, 2025, and July 1, 2025 through June 30, 2026. By letter dated October 1, 2025, Pinnacle Atlantic delivered notice of non-renewal, and the Treaty will accordingly lapse on June 30, 2026. The non-renewal notice was delivered prior to — and independent of — the present dispute, although it is worth noting that the relationship had become strained by that time due to the emerging disagreements over the cessions at issue.
The key economic terms of the Treaty are as follows:
• Retention: $120,000,000 per treaty year in aggregate net incurred losses, as defined in Article 5.2 of the Treaty.
• Cession Limit: $200,000,000 per treaty year, covering aggregate net incurred losses from $120,000,000 to $320,000,000.
• Provisional Premium Rate: 42% of ceded earned premium, subject to a sliding-scale adjustment with a minimum rate of 35% and a maximum rate of 52%, calculated in accordance with the premium adjustment formulas set forth in Article 3.
• Losses Covered: All aggregate net incurred losses, including paid losses, allocated loss adjustment expenses ("ALAE"), case reserves, and incurred but not reported ("IBNR") reserves, arising under covered lines of business during the applicable treaty year.
The Treaty designates Broadreach Intermediaries Inc. ("Broadreach") as the intermediary responsible for billing, premium accounting, and communication between the cedent and the reinsurer, pursuant to Treaty Article 9. The designated Broadreach account executive for the QC&S–Pinnacle Atlantic relationship is Jamie Castellano, who has served in that capacity since the Treaty's inception.
Treaty Article 16 specifies that the Treaty shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict-of-laws principles that would result in the application of the law of any other jurisdiction.
Treaty Article 22 provides for the resolution of disputes by arbitration. Specifically, Article 22 requires that any dispute arising out of or in connection with the Treaty shall be resolved by a panel of three arbitrators, selected and operating in accordance with the ARIAS-U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes then in effect. The seat of arbitration is New York, New York.
C. The Disputed Cessions
The dispute concerns cessions made under the Treaty for two consecutive treaty years:
Treaty Year 2022 (July 1, 2022 – June 30, 2023): QC&S calculated aggregate net incurred losses of $189,700,000 for TY 2022, which exceeded the Treaty's $120,000,000 retention by $69,700,000. Accordingly, QC&S ceded $69,700,000 to Pinnacle Atlantic under the Treaty, which amount was within the Treaty's per-treaty-year cession limit of $200,000,000.
Treaty Year 2023 (July 1, 2023 – June 30, 2024): QC&S calculated aggregate net incurred losses of $128,700,000 for TY 2023, exceeding the retention by $8,700,000. QC&S ceded $8,700,000 to Pinnacle Atlantic.
The total disputed recoverable is $78,400,000, representing the sum of the TY 2022 cession ($69,700,000) and the TY 2023 cession ($8,700,000).
Pinnacle Atlantic paid the full $78,400,000 across seven billing installments submitted by QC&S through Broadreach Intermediaries, covering the period from October 15, 2022 through March 29, 2024. Each installment was processed through Broadreach in the ordinary course, and Pinnacle Atlantic made each payment without reservation of rights, qualification, or contemporaneous objection. It was not until approximately four months after the final installment — in correspondence dated July 22, 2024 from Conrad Hesse to Tobias Engström — that Pinnacle Atlantic first raised questions about the validity of the TY 2022 cession. The formal pre-suit demand letter from HFC followed on February 14, 2026.
Pinnacle Atlantic's demand seeks the full return of $78,400,000, plus $12,600,000 in accrued interest. The interest claim is calculated at approximately 8% per annum over an average period of twenty-four months, apparently based on a weighted-average calculation from the dates of each installment payment. Pinnacle Atlantic's asserted basis for the interest rate appears to be the Treaty's late-payment interest provision in Article 8.3, which specifies interest at the prime rate plus 3.5% for late payments. The aggregate demand is therefore $91,000,000.
D. Pinnacle Atlantic's Four Grounds
Pinnacle Atlantic's demand letter advances four independent but overlapping grounds for recovery, each of which is analyzed in detail in Section III below. We summarize them here for convenience:
Ground 1 — Late Notice (Article 7): Pinnacle Atlantic alleges that QC&S violated Article 7 of the Treaty by failing to provide timely notice of the Meridian Docks mass tort cluster, which encompasses thirty-one (31) commercial general liability bodily injury claims arising from toxic contamination at the Meridian Docks industrial waterfront redevelopment project in Newark, New Jersey (Policy No. CGL-2020-09844, insured: Meridian Docks Development Partners LLC). QC&S first established reserves for the Meridian Docks claims on March 15, 2021. Notice to Pinnacle Atlantic was transmitted via Broadreach on May 22, 2022, representing a delay of fourteen months and seven days. Pinnacle Atlantic contends that this delay prejudiced its ability to participate in claims handling and reserve-setting for a cluster that ultimately generated net incurred losses of $41.2 million across all thirty-one claims.
Ground 2 — Misallocation of IBNR (Article 5): Pinnacle Atlantic alleges that $22.3 million in IBNR reserve strengthening was improperly allocated to TY 2022 when it should have been allocated to TY 2021 (accident-year 2021 exposures). If the IBNR were reallocated to TY 2021, the aggregate net incurred loss for TY 2021 would increase from $104,600,000 to $126,900,000, which would breach the retention by only $6,900,000 — but would correspondingly reduce TY 2022 aggregate net incurred losses from $189,700,000 to $167,400,000, thereby reducing the TY 2022 cession from $69,700,000 to $47,400,000. This would result in a net reduction of $22,300,000 in total cessions across the two affected treaty years.
Ground 3 — Follow-the-Fortunes / Settlements (Article 11): Pinnacle Atlantic challenges the follow-the-fortunes application to the Veridian Financial Services E&O cluster settlement. The Veridian cluster involved three related errors and omissions claims (Claim A: $14,200,000; Claim B: $12,800,000; Claim C: $7,500,000) under Policy No. PL-2021-15327, which QC&S settled in aggregate for $34,500,000 on September 8, 2023. Pinnacle Atlantic alleges that QC&S settled at inflated amounts without meaningful litigation exposure analysis, with the purpose of pushing TY 2023 aggregate losses above the $120,000,000 retention, thereby triggering $8,700,000 in reinsurance cessions that QC&S would not otherwise have been entitled to recover.
Ground 4 — Inaccurate Premium Reporting (Article 3): Pinnacle Atlantic alleges that QC&S underreported ceded earned premium by $6,800,000 for TY 2022, reporting $38,400,000 against Pinnacle Atlantic's own calculation of $45,200,000. This alleged discrepancy results in a claimed treaty premium underpayment of $2,856,000 (calculated as 42% × $6,800,000). Pinnacle Atlantic asserts that the underreporting constitutes a material breach of Article 3 and triggers both an offset right and a termination right under the Treaty.
III. MERITS ASSESSMENT — CLAIM-BY-CLAIM ANALYSIS
This section provides C&H's assessment of the merits of each of Pinnacle Atlantic's four claims, including the positions likely to be advanced by each party, the applicable legal standards, the strength of the evidence as currently understood, and probability-weighted assessments of likely outcomes. These assessments are based on our review of the Treaty, the Pinnacle Atlantic demand letter, QC&S's internal claims files, correspondence between the parties and Broadreach, applicable New York statutory and common law, and relevant arbitral precedent.
A. Late Notice — Meridian Docks Mass Tort Cluster (Article 7)
1. Pinnacle Atlantic's Position
Pinnacle Atlantic contends that QC&S violated Article 7 of the Treaty by failing to provide notice of the Meridian Docks mass tort cluster for fourteen months and seven days following the initial establishment of reserves. Article 7 of the Treaty requires QC&S to provide "prompt notice" to Pinnacle Atlantic through the intermediary of any individual claim or loss occurrence that may reasonably be expected to involve the Treaty or to exceed the individual claim reporting threshold specified in Exhibit B to the Treaty.
According to the internal claims records maintained by Diana Kessler-Hoff's department, QC&S first established an initial case reserve of $850,000 for the earliest-reported Meridian Docks claim on March 15, 2021. Additional claims were reported in the ensuing months, and by December 2021, QC&S had established aggregate case reserves across eighteen of the thirty-one ultimately reported claims totaling approximately $14.6 million. Despite the growing magnitude of the cluster, no notice was transmitted to Pinnacle Atlantic (through Broadreach or otherwise) until May 22, 2022.
Pinnacle Atlantic argues that the delay deprived it of the opportunity to participate in critical claims-handling decisions during the formative stages of the Meridian Docks litigation, including the retention and supervision of defense counsel, the development of the defense strategy for the underlying toxic contamination claims, the evaluation and negotiation of early settlement demands from plaintiffs, and the assessment and establishment of case-specific reserves. Pinnacle Atlantic further contends that the delay prejudiced its ability to evaluate the cluster's potential impact on the aggregate treaty-year loss calculation and to exercise its rights under Article 12 of the Treaty to associate in the defense and settlement of individual claims exceeding certain thresholds.
The Meridian Docks cluster ultimately generated net incurred losses of $41.2 million across all thirty-one claims, making it the single largest component of TY 2022's aggregate net incurred loss.
2. QC&S's Defense
QC&S's defense to the late-notice claim rests on three principal grounds.
First, QC&S contends that Article 7 of the Treaty must be read in conjunction with Exhibit B, which establishes an individual claim reporting threshold of $1,000,000 per claim. None of the individual Meridian Docks claims exceeded $1,000,000 in case reserves until reserve increases were posted in the first quarter of 2022. Prior to that point, each claim was individually below the threshold that would trigger a reporting obligation under Article 7, and the Treaty does not contain an independent aggregate-cluster reporting requirement. When individual claim reserves were increased above the $1,000,000 threshold in Q1 2022, QC&S provided notice within approximately sixty days, which QC&S maintains constitutes "prompt" notice within the meaning of Article 7.
Second, QC&S will argue that under New York law — which governs the Treaty — a reinsurer seeking to avoid liability based on late notice must demonstrate actual prejudice resulting from the delay. This is consistent with the weight of authority in New York courts and arbitral panels applying New York law to reinsurance agreements. See, e.g., Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 584 (1992) (applying prejudice requirement in the reinsurance context). Pinnacle Atlantic has not articulated, and C&H does not believe Pinnacle Atlantic can demonstrate, specific and quantifiable prejudice arising from the delay period. The underlying Meridian Docks claims were competently handled by QC&S's claims department and defense counsel throughout the notice-delay period, and the ultimate loss experience is consistent with the exposure profile of the claims regardless of when notice was provided to the reinsurer.
Third, and significantly, Pinnacle Atlantic paid all seven billing installments on the TY 2022 cession — totaling $69,700,000 — after receiving the May 22, 2022 notice of the Meridian Docks cluster. The first billing installment was processed on October 15, 2022, nearly five months after Pinnacle Atlantic received full notice. Pinnacle Atlantic made each subsequent payment without any reservation of rights, contemporaneous objection, or qualification regarding the adequacy or timeliness of QC&S's notice. This payment conduct constitutes strong evidence of waiver of the late-notice objection, or at a minimum, estoppel against Pinnacle Atlantic's assertion of the defense at this stage.
3. Probability Assessment
Based on our analysis, we assess the probabilities as follows:
• Likelihood Pinnacle Atlantic prevails on late notice as a complete bar to recovery of TY 2022 cessions: Low (15–20%). New York courts and reinsurance arbitration panels generally require a showing of actual prejudice in the reinsurance context, and the burden of establishing prejudice falls on the reinsurer. Pinnacle Atlantic's subsequent payment conduct — seven installments over eighteen months, all without reservation of rights — substantially undermines the late-notice defense and provides QC&S with a compelling waiver and/or estoppel argument.
• Likelihood Pinnacle Atlantic prevails on partial reduction based on demonstrated prejudice with respect to a subset of Meridian Docks claims: Low-Moderate (20–30%). There is a possibility that Pinnacle Atlantic could identify specific claims within the Meridian Docks cluster where the delay in notice resulted in quantifiable prejudice — for example, missed settlement opportunities or inflated defense costs during the notice-gap period. However, even in this scenario, the likely magnitude of any reduction would be modest relative to the overall $41.2 million Meridian Docks incurred loss.
• Expected impact on settlement value: Minimal. The late-notice issue does not materially drive the settlement calculus, though it provides Pinnacle Atlantic with an additional negotiating talking point and contributes to the overall atmosphere of dispute.
B. IBNR Allocation — $22.3 Million (Article 5)
1. Pinnacle Atlantic's Position
The IBNR allocation issue is the core of Pinnacle Atlantic's claim and the primary driver of the disputed recoverable amount. Pinnacle Atlantic contends that $22.3 million in IBNR reserve strengthening that QC&S allocated to TY 2022 (the treaty year running from July 1, 2022 to June 30, 2023) in fact relates to accident-year 2021 loss exposures and should have been allocated to TY 2021 (the treaty year running from July 1, 2021 to June 30, 2022).
The significance of this reallocation is as follows: for TY 2021, QC&S calculated aggregate net incurred losses of $104,600,000, which fell below the $120,000,000 retention. Consequently, no losses were ceded to Pinnacle Atlantic for TY 2021. If the $22.3 million IBNR development were reallocated to TY 2021, the revised TY 2021 aggregate net incurred loss would be $126,900,000, exceeding the retention by only $6,900,000 and generating a modest cession — but correspondingly reducing TY 2022 aggregate net incurred loss from $189,700,000 to $167,400,000, with a resulting reduction in the TY 2022 cession from $69,700,000 to $47,400,000.
The net effect would be a reduction of $22,300,000 in total cessions across TY 2021 and TY 2022 (a new $6,900,000 cession for TY 2021 offset against a $22,300,000 reduction in TY 2022, for a net decrease of $15,400,000 in Pinnacle Atlantic's aggregate liability, before accounting for the TY 2021 cession). However, Pinnacle Atlantic appears to assert the full $22.3 million reduction in TY 2022 without acknowledging the offsetting TY 2021 cession that would arise, which is a point that QC&S should press in negotiations or arbitration.
Pinnacle Atlantic's position is supported by a report from its retained actuarial consultant (identity not yet disclosed in the demand letter, though we suspect it may be Millward-Drake Actuarial LLC based on HFC's prior engagements) asserting that the development patterns and claim emergence profiles indicate that the relevant loss exposures originated in accident year 2021, and that QC&S's allocation of the IBNR strengthening to TY 2022 was inconsistent with actuarial standards of practice and the Treaty's loss-allocation provisions.
2. QC&S's Defense
QC&S's defense rests on the analysis performed by its independent actuarial consultants, Velthorn Actuarial Advisors LLC ("Velthorn"), under the direction of Dr. Stephen Tanaka, FCAS, MAAA. Dr. Tanaka's analysis concluded that the $22.3 million IBNR development relates to accident-year 2022 loss exposures — specifically, claims whose loss development factors crystallized during TY 2022, meaning the losses emerged and became reportable during the July 1, 2022 to June 30, 2023 period, even though some underlying claim events may have occurred during the prior accident year.
QC&S will argue that its allocation is consistent with Article 5.2 of the Treaty, which defines "losses incurred" for purposes of the aggregate net incurred loss calculation. Article 5.2 uses the phrase "losses incurred during the treaty year," which QC&S interprets to include all IBNR reserve changes that are recognized and posted during the relevant treaty year, regardless of the accident year to which the underlying claims relate. This interpretation is supported by the Treaty's premium and loss accounting provisions, which operate on a treaty-year (not accident-year) basis, and by the actuarial methodology that Velthorn applied, which is consistent with Actuarial Standards of Practice No. 36 and No. 43.
QC&S will further argue that the allocation methodology it employed has been used consistently since the Treaty's inception and was applied without objection by Pinnacle Atlantic for TY 2019, TY 2020, and TY 2021, during which Pinnacle Atlantic had the benefit of this allocation approach (because IBNR development in those years either did not breach the retention or was allocated in a manner that Pinnacle Atlantic did not challenge). Pinnacle Atlantic's belated objection to the methodology — raised only after TY 2022 produced a substantial cession — suggests an opportunistic rather than principled challenge.
3. Probability Assessment
This is the most substantively contested issue in the dispute and the primary driver of settlement value. IBNR allocation between accident years and treaty years in the context of aggregate excess-of-loss reinsurance treaties is an area where legitimate technical disagreement exists among actuaries and reinsurance professionals. The Treaty's language in Article 5.2, while not ambiguous on its face, admits of reasonable competing interpretations that sophisticated arbitrators could resolve in either direction.
• Likelihood Pinnacle Atlantic prevails on full IBNR reallocation ($22.3 million shift to TY 2021): Moderate (35–45%). An arbitration panel with reinsurance industry expertise could reasonably conclude that some or all of the $22.3 million IBNR development relates to accident-year 2021 exposures and should have been allocated accordingly. Pinnacle Atlantic will likely present a credible actuarial analysis supporting this position, and the question turns on the interpretation of "losses incurred during the treaty year" in Article 5.2 and the application of competing actuarial methodologies to the specific facts.
• Most likely outcome: Partial reallocation of approximately $10–15 million (roughly half of the disputed $22.3 million IBNR), reflecting the inherent ambiguity in the actuarial evidence and the tendency of reinsurance arbitration panels to reach compromise positions on technical allocation disputes. Under this scenario, the TY 2022 cession would be reduced by $10–15 million, partially offset by a modest increase in the TY 2021 cession (depending on the precise reallocation).
• Expected impact on settlement value: This is the primary driver. A partial reallocation of $10–15 million, combined with potential premium adjustments, produces a core settlement value in the $13–18 million range before interest components.
C. Follow-the-Fortunes — Veridian E&O Settlement (Article 11)
1. Pinnacle Atlantic's Position
Pinnacle Atlantic's third ground challenges QC&S's settlement of the Veridian Financial Services E&O cluster, which consisted of three related errors and omissions claims arising under QC&S Professional Liability Policy No. PL-2021-15327. The three claims, designated by QC&S as Claim A, Claim B, and Claim C, were settled in aggregate for $34,500,000 on September 8, 2023, structured as follows:
• Claim A (Veridian Financial Services Inc. v. Hargrove Capital Partners et al.): $14,200,000
• Claim B (In re Veridian Client Accounts Securities Litigation): $12,800,000
• Claim C (Veridian regulatory investigation, SEC File No. HO-14872): $7,500,000
After application of other reinsurance recoveries and deductibles, QC&S's net retained loss on the Veridian cluster was $26,100,000. The net amount ceded to the Treaty within TY 2023's aggregate loss calculation was $8,700,000 — which was the amount necessary to push TY 2023 aggregate losses from $120,000,000 (the retention) to $128,700,000.
Pinnacle Atlantic contends that QC&S settled the Veridian cluster at inflated amounts without conducting a meaningful litigation exposure analysis, with the purpose of inflating TY 2023 aggregate losses above the $120,000,000 retention and thereby generating reinsurance cessions that QC&S would not otherwise have been entitled to recover. In essence, Pinnacle Atlantic alleges that the Veridian settlement was not an arms-length, commercially reasonable claims-handling decision but rather a strategic effort to manipulate the Treaty's aggregate loss calculations.
Pinnacle Atlantic argues that the follow-the-fortunes doctrine embodied in Article 11 does not apply where the cedent's settlement decisions are tainted by bad faith, gross negligence, or fraud, and that the Veridian settlement amounts exceed the range of reasonable outcomes given the underlying litigation exposure.
2. QC&S's Defense
QC&S will vigorously defend the Veridian settlement on multiple grounds. The follow-the-fortunes doctrine is a bedrock principle of reinsurance law, well-established under New York law and consistently applied by reinsurance arbitration panels. Under this doctrine, a reinsurer is bound by the cedent's good-faith claims-handling decisions, including settlement decisions, and may not second-guess the cedent's exercise of business judgment absent evidence of bad faith, fraud, or gross negligence. See North River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134, 140 (2d Cir. 2004).
QC&S maintains that the Veridian settlement was commercially reasonable and made in the ordinary course of its claims operations. The settlement was negotiated and approved through QC&S's standard claims authority protocols, with appropriate oversight by senior claims management. The QC&S claims file documents a thorough exposure analysis conducted by outside counsel Whitfield & Mercer LLP (the firm retained to defend the underlying Veridian litigation), which concluded that the aggregate settlement demand of $34,500,000 was within the range of reasonable outcomes given the complexity of the Veridian claims, the potential for adverse jury verdicts in the E&O litigation, the regulatory exposure in the SEC investigation, and the costs of continued defense.
QC&S will note that the follow-the-fortunes doctrine places a heavy burden on the reinsurer to overcome the presumption that the cedent acted in good faith. Pinnacle Atlantic's challenge amounts to little more than a disagreement with QC&S's business judgment — the type of second-guessing that the follow-the-fortunes doctrine is specifically designed to prevent. The fact that the settlement had the incidental effect of pushing TY 2023 aggregate losses above the retention does not establish bad faith; it merely demonstrates the treaty's ordinary operation.
3. Probability Assessment
• Likelihood Pinnacle Atlantic prevails on follow-the-fortunes challenge: Low (10–15%). The bad-faith standard is extraordinarily difficult to meet in the absence of evidence of collusion, self-dealing, or manifest unreasonableness. Pinnacle Atlantic's demand letter does not identify specific evidence of bad faith beyond the allegation of inflated settlement amounts. Absent a "smoking gun" in QC&S's files (which we have not found and do not anticipate), the follow-the-fortunes defense should hold.
• Even if partially successful, impact is limited. The maximum exposure on the follow-the-fortunes claim is the $8,700,000 TY 2023 cession. However, even if the arbitration panel were to conclude that some portion of the Veridian settlement was unreasonable, it would more likely reduce the cession by a fraction of that amount rather than disallow it entirely.
• Expected impact on settlement value: De minimis. The follow-the-fortunes claim does not materially affect the settlement calculus but provides Pinnacle Atlantic with additional negotiating leverage when presented alongside the stronger IBNR allocation claim.
D. Premium Reporting — $6.8 Million Discrepancy (Article 3)
1. Pinnacle Atlantic's Position
Pinnacle Atlantic's fourth ground alleges that QC&S underreported ceded earned premium for TY 2022 by $6,800,000. QC&S reported ceded earned premium of $38,400,000 for TY 2022, while Pinnacle Atlantic calculates the correct amount as $45,200,000, based on its own analysis of the policies subject to the Treaty. At the provisional premium rate of 42%, this discrepancy results in a claimed treaty premium underpayment of $2,856,000 (42% × $6,800,000).
Pinnacle Atlantic characterizes the underreporting as a material breach of Article 3, and asserts that it triggers both an offset right (permitting Pinnacle Atlantic to deduct the $2,856,000 from amounts otherwise owed) and a termination right under Article 14 of the Treaty.
2. QC&S's Defense
QC&S contends that the $6,800,000 discrepancy arises entirely from Pinnacle Atlantic's improper inclusion of premiums attributable to a run-off portfolio transfer that QC&S completed during TY 2022. Article 3.4 of the Treaty expressly excludes "premiums attributable to portfolio transfers, novations, or run-off arrangements" from the definition of ceded earned premium. QC&S's reported figure of $38,400,000 correctly excludes $6,800,000 in premiums related to the run-off portfolio transfer, while Pinnacle Atlantic's calculation of $45,200,000 erroneously includes them.
Even assuming arguendo that a premium discrepancy existed, QC&S will argue that the appropriate remedy would be a premium adjustment or offset — not treaty termination or avoidance of the cessions. The Treaty does not provide for automatic termination based on premium reporting discrepancies; rather, Article 3.6 establishes a reconciliation procedure that permits either party to request an audit of premium calculations, with any discrepancies to be resolved through adjustment to subsequent premium statements. This reconciliation procedure is the exclusive remedy for premium disputes, and Pinnacle Atlantic cannot bootstrap a premium adjustment into a termination right or a ground for disgorging previously paid cessions.
3. Probability Assessment
• Likelihood Pinnacle Atlantic prevails on premium underreporting claim: Low (15–20%). The Article 3.4 exclusion for run-off portfolio transfer premiums appears clear on its face, and QC&S's premium reporting methodology is consistent with the exclusion. Pinnacle Atlantic's calculation appears to have been prepared without reference to the Article 3.4 exclusion, and its demand letter does not address or rebut the exclusion.
• Maximum exposure: If the premium discrepancy were somehow sustained, the maximum financial exposure is an offset of $2,856,000 against ceded losses. This is the cost of the premium adjustment at the provisional rate.
• Termination argument: Very low probability of success (5–10%). The Treaty does not provide for automatic termination based on premium discrepancies, and New York courts are reluctant to permit termination of reinsurance treaties based on disputes over premium accounting that are subject to contractual reconciliation procedures.
• Expected impact on settlement value: Modest. A premium offset of up to $2,856,000 may appropriately be conceded as part of a global settlement to resolve all outstanding accounting issues between the parties.
IV. RISK-ADJUSTED EXPOSURE ANALYSIS
A. Scenario Modeling
To quantify QC&S's risk-adjusted exposure and inform the recommended settlement authority, C&H has modeled four scenarios reflecting the range of potential outcomes in arbitration or litigation. Each scenario incorporates the claim-by-claim probability assessments set forth in Section III above and applies them to the financial parameters of the dispute. These scenarios are not predictions but rather probability-weighted reference points for settlement decision-making.
Scenario 1: Best Case (QC&S Full Defense Prevails)
Under this scenario, QC&S prevails on all four of Pinnacle Atlantic's claims. The arbitration panel or court concludes that: (a) QC&S's notice of the Meridian Docks cluster was timely or, alternatively, that Pinnacle Atlantic waived the late-notice defense through its subsequent payment conduct; (b) QC&S's allocation of the $22.3 million IBNR development to TY 2022 was proper under Article 5.2; (c) the follow-the-fortunes doctrine applies to the Veridian settlement and Pinnacle Atlantic has not met its burden of demonstrating bad faith; and (d) QC&S correctly excluded the run-off portfolio transfer premiums under Article 3.4.
• Outcome: $0 payment to Pinnacle Atlantic. QC&S retains the full $78,400,000 recoverable.
• Probability weight: 25–30%.
• Financial impact: No charge to QC&S's statutory surplus or QIH's GAAP financials. QC&S's statutory surplus remains at $1,420,000,000, with full $320,000,000 headroom over the $1,100,000,000 minimum surplus covenant. QIH reports no material litigation charge.
Scenario 2: Likely Case (Partial Concession on IBNR)
This scenario reflects what C&H considers the most probable outcome based on the current evidence and the tendencies of experienced reinsurance arbitration panels. The panel concludes that: (a) the late-notice defense fails or is waived; (b) a partial reallocation of IBNR is warranted, with approximately $10–15 million of the $22.3 million shifted from TY 2022 to TY 2021; (c) the follow-the-fortunes doctrine protects the Veridian settlement; and (d) a modest premium adjustment offset is appropriate, whether because the panel finds a partial discrepancy or as a practical resolution of the Article 3 dispute.
• Outcome: QC&S makes a net payment to Pinnacle Atlantic of approximately $13–18 million, representing the partial IBNR reallocation (reduced by any offsetting TY 2021 cession) plus a premium adjustment offset of approximately $2,856,000, and no recovery for Pinnacle Atlantic on the late-notice or follow-the-fortunes claims.
• Probability weight: 40–50%.
• Financial impact: QC&S statutory surplus decreases by approximately $13–18 million, from $1,420,000,000 to approximately $1,402,000,000–$1,407,000,000. Surplus headroom over the $1,100,000,000 covenant remains robust at approximately $302,000,000–$307,000,000. QIH GAAP after-tax impact (at a 21% federal corporate rate) of approximately $10,270,000–$14,220,000 in net income reduction, recorded in the quarter of resolution.
Scenario 3: Adverse Case (Substantial IBNR Reallocation Plus Minor Premium Offset)
Under this scenario, the panel adopts a more aggressive position on the IBNR allocation and orders full reallocation of the $22.3 million to TY 2021, combined with the premium offset and some modest recognition of prejudice on the late-notice claim. The follow-the-fortunes claim is rejected.
• Outcome: QC&S makes a net payment to Pinnacle Atlantic of approximately $25–30 million. This figure includes the full $22.3 million IBNR reallocation (partially offset by a new TY 2021 cession of approximately $6.9 million, for a net impact of approximately $15.4 million from the reallocation), the premium offset of $2,856,000, some modest interest component, and a minor prejudice-based reduction attributable to the late-notice period.
• Probability weight: 15–20%.
• Financial impact: QC&S statutory surplus decreases by $25–30 million, from $1,420,000,000 to approximately $1,390,000,000–$1,395,000,000. Surplus headroom over the $1,100,000,000 covenant is approximately $290,000,000–$295,000,000. QIH GAAP after-tax impact of approximately $19,750,000–$23,700,000.
Scenario 4: Worst Case (Pinnacle Atlantic Prevails on All Grounds)
Under this highly unlikely scenario, the panel or court accepts all four of Pinnacle Atlantic's claims and orders full disgorgement of all paid cessions plus accrued interest. This would require findings that: (a) the late notice constituted a material breach voiding the TY 2022 cession; (b) the full IBNR reallocation is warranted; (c) the follow-the-fortunes doctrine does not apply to the Veridian settlement due to bad faith; and (d) the premium underreporting constitutes a material breach. These findings would be largely inconsistent with each other (e.g., if Pinnacle Atlantic succeeds on IBNR reallocation, the late-notice defense becomes partially moot), but we include this scenario for completeness as a tail-risk assessment.
• Outcome: QC&S pays Pinnacle Atlantic $91,000,000 (the full $78,400,000 in recoverables plus $12,600,000 in accrued interest).
• Probability weight: 5–10%.
• Financial impact: QC&S statutory surplus falls from $1,420,000,000 to $1,329,000,000, with headroom over the $1,100,000,000 covenant narrowing to $229,000,000. While still above the covenant minimum, this would represent a significant reduction in QC&S's financial cushion and could attract scrutiny from A.M. Ridgeway and the New York Department of Financial Services. QIH GAAP pre-tax charge of up to $91,000,000; after-tax impact of approximately $71,890,000 (21% rate). In the context of QIH's approximately $6.7 billion market capitalization, the after-tax charge represents approximately 1.07% of market cap — potentially material for purposes of investor disclosure and market reaction.
B. Risk-Adjusted Expected Value of Exposure
Applying probability weights to the four scenarios described above, the risk-adjusted expected value of QC&S's exposure is calculated as follows:
The estimated risk-adjusted exposure falls in the range of approximately $12,000,000 to $20,000,000, depending on the precise probability weights assigned. This figure represents the expected monetary value of QC&S's exposure based on the probability-weighted average of all modeled outcomes.
It is important to note that this figure does not account for litigation and arbitration costs (estimated at $3,600,000–$5,500,000), management distraction and internal costs, public disclosure burdens associated with litigation, or the reputational and market-relationship considerations discussed in Section VII below. When these factors are taken into account, the total cost of the dispute — viewed holistically — may be significantly higher than the monetary exposure alone.
V. LITIGATION AND ARBITRATION COST ANALYSIS
A. Estimated Costs Through Resolution
C&H has prepared the following estimate of legal fees and costs through the conclusion of arbitration or litigation, organized by phase. These estimates assume a contested ARIAS-U.S. arbitration proceeding with a full evidentiary hearing, including witness and expert testimony. Actual costs will depend on the scope and duration of pre-hearing discovery, the number and complexity of dispositive motions, and the length of the evidentiary hearing.
In addition to C&H's legal fees, the following expert fees and costs are anticipated:
• Actuarial expert (Velthorn Actuarial Advisors LLC or similar): Retention, report preparation, hearing testimony — estimated $200,000–$350,000.
• Reinsurance industry practices expert: Retention, report on treaty interpretation and industry custom — estimated $125,000–$225,000.
• Damages/financial expert (if needed): Retention, calculation of offsets and interest — estimated $75,000–$125,000.
Total estimated expert fees and costs: $400,000–$700,000.
Total all-in estimated costs through hearing/trial: approximately $3,600,000–$5,500,000.
These estimates do not include the costs of the three-member arbitration panel (shared equally between the parties, estimated at $150,000–$250,000 for QC&S's half), administrative fees payable to ARIAS-U.S., travel expenses for witnesses and counsel, or internal costs incurred by QC&S management (principally the time of Diana Kessler-Hoff, Tobias Engström, and their teams) in supporting the litigation effort.
B. Billing Rates
C&H's current standard billing rates for the attorneys assigned to this matter, reflecting a 5% long-standing client discount applicable to QIH matters, are as follows:
The team may be supplemented by additional associates and support staff as the matter progresses, at rates consistent with C&H's prevailing rate structure. Any material changes to the team composition or rate structure will be communicated to QIH in advance.
C. Cost-Benefit Consideration
The cost analysis reinforces the case for pursuing a negotiated resolution within the recommended settlement range. If the risk-adjusted expected exposure is approximately $12,000,000–$20,000,000, and total litigation costs through hearing are approximately $3,600,000–$5,500,000, the total expected cost of a fully litigated matter is approximately $15,600,000–$25,500,000. This range is broadly consistent with the recommended settlement range of $15,000,000–$28,000,000, which would eliminate the entirety of the estimated $3,600,000–$5,500,000 in litigation costs.
A settlement at the target range of $20,000,000–$22,000,000 would represent a favorable resolution when compared to the total expected cost of litigation (exposure plus legal costs), while providing certainty of outcome, avoiding the risk of an adverse panel ruling, eliminating management distraction, and preserving confidentiality.
However, C&H recommends maintaining the credible threat of arbitration — and taking affirmative steps to initiate arbitration proceedings — as necessary leverage to achieve a settlement within the recommended range. Pinnacle Atlantic will be less inclined to compromise if it perceives that QC&S is eager to settle and unwilling to defend its position.
VI. FINANCIAL IMPACT ANALYSIS
A. QC&S Statutory Surplus Impact
The following table summarizes the impact on QC&S's statutory surplus under the settlement range and comparison scenarios:
In all modeled scenarios — including the worst case — QC&S's statutory surplus remains comfortably above the $1,100,000,000 minimum statutory surplus covenant contained in QIH's $750,000,000 senior secured revolving credit facility (the "Credit Facility"), which matures in June 2028 and is administered by Cartwright National Bank, N.A. (relationship manager: Andrew Bao, Managing Director, Insurance Finance Group).
Settlement within the recommended range ($15,000,000–$28,000,000) preserves approximately $292,000,000–$305,000,000 in headroom above the covenant minimum. This headroom level is substantially better than the $229,000,000–$241,600,000 that would result from a worst-case outcome and provides QC&S with robust financial flexibility for ongoing operations, organic growth, and potential future adverse development on other lines of business.
B. QIH GAAP Impact
From a GAAP perspective, a settlement within the recommended range would require QIH to record a pre-tax charge in the quarter of resolution. The after-tax impact, applying the 21% federal corporate income tax rate, is summarized below:
At the target settlement range of $20,000,000–$22,000,000, the after-tax net income reduction of approximately $15,800,000–$17,380,000 represents 0.24–0.26% of QIH's market capitalization. In the context of QIH's trailing twelve-month net income of approximately $412,000,000 (FY 2025), a settlement at the target range would reduce annual net income by approximately 3.8–4.2% — a material but manageable impact that is unlikely to trigger significant adverse market reaction if appropriately disclosed and contextualized.
By contrast, a full write-off of the $78.4 million recoverable would produce an after-tax charge of $61,936,000, representing approximately 15% of annual net income — a result that would likely require prominent disclosure, could prompt analyst downgrades, and might impact QIH's stock price.
C. Credit Facility Covenant Compliance
QIH's $750,000,000 senior secured revolving credit facility with Cartwright National Bank, N.A. (the "Cartwright Facility") contains, among other financial covenants, a requirement that QC&S maintain minimum statutory surplus of $1,100,000,000, tested quarterly. As demonstrated in the table above, a settlement within the recommended range maintains surplus well above the covenant minimum, with headroom of at least $292,000,000 even at the ceiling of the recommended range.
The Cartwright Facility also contains material litigation reporting provisions (Section 6.03(d)), which may require QIH to provide notice to Cartwright National Bank of the Pinnacle Atlantic dispute and any resulting arbitration or litigation. We recommend that Rachel Sondergaard coordinate with Andrew Bao regarding the timing and content of any required notice, and that C&H review the specific notification thresholds in Section 6.03(d) to determine whether and when notification is required. It is possible that the dispute, at its current pre-arbitration stage, falls below the materiality threshold for mandatory reporting, but this determination should be made promptly to avoid any inadvertent non-compliance.
D. A.M. Ridgeway Rating Considerations
QC&S's current A.M. Ridgeway rating of A (Excellent) with a Stable outlook reflects, among other factors, QC&S's strong balance sheet position, including its statutory surplus and reserves adequacy. A settlement within the recommended range of $15,000,000–$28,000,000 is highly unlikely to impact QC&S's A.M. Ridgeway rating, as the surplus reduction is modest relative to QC&S's total statutory surplus and within normal operating volatility.
However, a worst-case outcome involving a $91,000,000 charge could prompt A.M. Ridgeway to initiate a review of QC&S's rating. While C&H does not believe that even a worst-case outcome would result in a downgrade (given QC&S's remaining surplus of $1,329,000,000 and overall financial profile), the mere initiation of a review could have adverse market perception effects. This consideration further supports the case for a negotiated resolution within the recommended range.
VII. ADDITIONAL STRATEGIC CONSIDERATIONS
A. Arbitration vs. Litigation Forum
C&H has prepared a separate, detailed memorandum analyzing the relative advantages and risks of the arbitration and litigation forums available for resolution of this dispute (the "Arbitration vs. Litigation Forum Analysis Memorandum," dated March 20, 2026, C&H Matter No. 1025-00005-002). The conclusions of that analysis are summarized here.
Treaty Article 22 contains a mandatory arbitration clause requiring that all disputes arising out of or in connection with the Treaty be resolved by arbitration under the ARIAS-U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes, before a panel of three arbitrators, with the seat of arbitration in New York, New York. C&H's analysis supports the enforcement of this clause and the pursuit of arbitration as the proper — and contractually mandated — dispute resolution forum.
In its demand letter, HFC asserted that Article 22 is inapplicable to the present dispute on the theory that Pinnacle Atlantic's claims sound in restitution and unjust enrichment rather than "arising out of or in connection with" the Treaty. This argument lacks merit under well-established New York law and the Federal Arbitration Act, 9 U.S.C. §§ 1–16. The Second Circuit has consistently held that arbitration clauses containing "arising out of or in connection with" language are to be interpreted broadly to encompass all disputes that have a significant relationship to the contract, including claims for restitution, unjust enrichment, and quasi-contractual relief that are rooted in the contractual relationship. See Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 20 (2d Cir. 1995). Pinnacle Atlantic's claims are self-evidently rooted in the Treaty and are subject to the arbitration clause.
Arbitration offers several significant advantages over litigation in New York Supreme Court:
• Confidentiality: Arbitration proceedings are private. Litigation in New York Supreme Court, Commercial Division, would involve public court filings — including the complaint, answer, discovery motions, and any hearing transcripts — that could become available to analysts, competitors, rating agencies, and the financial press. Public disclosure of the dispute details could adversely affect QIH's stock price and QC&S's market reputation.
• Industry-expert panelists: ARIAS-U.S. arbitration panels are typically composed of experienced reinsurance industry professionals — former executives, actuaries, and attorneys — who are familiar with the technical nuances of aggregate excess-of-loss treaty interpretation, IBNR allocation methodologies, and the follow-the-fortunes doctrine. A Commercial Division judge, however capable, would not bring the same depth of industry expertise to the IBNR allocation issue, which is the central contested question.
• Potentially faster resolution: Depending on panel availability and the parties' scheduling preferences, an ARIAS-U.S. arbitration could potentially reach a hearing within twelve to eighteen months. Commercial Division litigation, with its more crowded docket and more formal procedural requirements, may take longer to reach trial.
If Pinnacle Atlantic files an action in New York Supreme Court, Commercial Division (as threatened in the demand letter), C&H has prepared a draft motion to compel arbitration and stay litigation pursuant to CPLR 7503 and the Federal Arbitration Act. We are confident in the motion's likelihood of success and recommend filing promptly upon service of any complaint.
B. Mediation as Preliminary Step
C&H recommends that QC&S propose voluntary mediation with a neutral mediator experienced in reinsurance disputes as a preliminary step before formal arbitration proceedings are commenced. Mediation offers the potential for an early resolution of the dispute before significant legal costs are incurred, and a mediation proposal signals reasonableness and good faith — qualities that will serve QC&S well if the dispute proceeds to arbitration.
We have prepared a separate Mediation Proposal Letter addressed to HFC, proposing a one-day mediation session before a mutually agreed neutral mediator, with JAMS or the ARIAS-U.S. mediation program as the administering body. We recommend retaining a mediator with specific expertise in reinsurance disputes and IBNR allocation questions, such as the Hon. Robert A. Katzmann (Ret.) (JAMS), Patricia A. Sullivan (independent mediator, former General Counsel of Hollowell & Co.), or George T. Lobrano (ARIAS-U.S. certified mediator).
Mediation is a no-risk proposition for QC&S: if the mediator facilitates a settlement within the authorized range, the dispute is resolved efficiently; if mediation is unsuccessful, QC&S proceeds to arbitration with no prejudice to its position. The authorized settlement parameters would be available for deployment during mediation.
C. Disclosure Obligations
The dispute raises several disclosure obligations that must be carefully managed:
SEC Reporting (ASC 450 Loss Contingency Disclosure): QIH is a reporting company subject to the SEC's disclosure requirements. Under ASC 450 (formerly SFAS 5), QIH must assess whether the Pinnacle Atlantic dispute requires disclosure in the loss contingency footnotes to QIH's quarterly and annual financial statements (Form 10-Q and Form 10-K). This assessment depends on whether the loss is "probable," "reasonably possible," or "remote," and whether the amount is estimable.
C&H has prepared a separate Regulatory Disclosure Analysis Memorandum (dated March 22, 2026, C&H Matter No. 1025-00005-003) addressing the ASC 450 analysis in detail, in coordination with QIH's independent auditors at Meridian Whitcomb & Co. LLP (audit partner: Patricia Hernandez, CPA). At this stage — prior to the commencement of formal proceedings and with settlement discussions not yet initiated — C&H believes the loss is appropriately characterized as "reasonably possible" rather than "probable" for ASC 450 purposes. Under ASC 450-20-50, a reasonably possible loss contingency requires disclosure of the nature of the contingency and an estimate of the possible range of loss (or a statement that an estimate cannot be made), but does not require accrual. A settlement within the recommended range at this stage could potentially be structured and disclosed in a manner that minimizes the disclosure footprint.
We recommend prompt coordination with Patricia Hernandez to align on the appropriate ASC 450 characterization and disclosure language for QIH's upcoming first-quarter 2026 10-Q filing, which will be due approximately May 11, 2026.
NYDFS Notification: As a New York-domiciled insurer, QC&S may be required to notify the New York Department of Financial Services ("NYDFS") regarding material litigation or arbitration involving the company. The NYDFS notification requirements are set forth in NYIL § 1505 and the NYDFS's guidance on