1039-00003 · Torchlight Mining Corp · Insurance Coverage

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

FROM: Harrison Wexford, Responsible Partner, Calderwood & Harkness LLP Elliot Nguyen, Lead Associate, Calderwood & Harkness LLP

TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Douglas K. Prennell, CEO, Torchlight Mining Corp.

DATE: December 12, 2024

RE: Directors' and Officers' Liability Insurance Coverage Assessment — Clearwater Mutual Insurance, Ltd., Policy No. CMI-DO-2023-10221 — EPA Multi-Site Enforcement Action (Civil Action No. 9:24-cv-00087-DWM)

MATTER NO.: 1039-00003

This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in anticipation of litigation and for the purpose of rendering legal advice to Torchlight Mining Corp. This memorandum and its contents should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Torchlight Mining Corp. Disclosure to any third party may result in waiver of applicable privileges.

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I. Executive Summary

Calderwood & Harkness LLP ("C&H") has been engaged by Torchlight Mining Corp. ("TMC" or the "Company") to assess the availability of directors' and officers' ("D&O") liability insurance coverage under the policy issued by Clearwater Mutual Insurance, Ltd. ("Clearwater Mutual" or the "Carrier"), Policy No. CMI-DO-2023-10221 (the "Policy"), in connection with the multi-site environmental enforcement action commenced by the United States Department of Justice ("DOJ"), on behalf of the United States Environmental Protection Agency ("EPA"), and the co-plaintiff States of Montana, Nevada, and West Virginia (collectively, the "Government"), captioned United States of America, et al. v. Torchlight Mining Corp., et al., Civil Action No. 9:24-cv-00087-DWM (D. Mont.) (the "Enforcement Action"). This memorandum also addresses the ongoing consent decree negotiations and the potential for future derivative, securities, and individual criminal proceedings arising from or related to the Enforcement Action.

The Policy was issued by Clearwater Mutual Insurance, Ltd., a Bermuda exempted company domiciled in Hamilton, Bermuda, with its U.S. managing agent, Clearwater Mutual Services, Inc., located at 1345 Avenue of the Americas, Suite 3200, New York, NY 10105. The account manager assigned to the TMC account is Brendan Forsythe. All notices, correspondence, and claims-related communications should be directed to Mr. Forsythe in the first instance, with copies to Clearwater Mutual's Hamilton offices as specified in the Policy's notice provisions.

Key Conclusions. Based on our review of the Policy, the underlying Enforcement Action, and the potential individual exposure of TMC's directors and officers, we reach the following principal conclusions:

1. Side A Coverage (Non-Indemnifiable Loss): Coverage is likely available under the Policy's Side A insuring agreement for certain individual exposure scenarios, most critically in the event of (a) individual criminal prosecution under the Resource Conservation and Recovery Act ("RCRA") or the Clean Water Act ("CWA"), where TMC may be legally precluded from indemnifying criminal fines or penalties; (b) a shareholder derivative action resulting in a finding of intentional misconduct that precludes corporate indemnification; or (c) TMC's financial inability to indemnify its directors and officers. Side A coverage is the most favorable insuring agreement from the perspective of individual insureds and should be affirmatively preserved.

2. Side B Coverage (Corporate Reimbursement): Side B is potentially triggered to reimburse TMC for defense costs it advances to individual officers and directors in connection with covered "Claims," provided that the underlying proceedings qualify as "Claims" against individual "Insured Persons" rather than solely against the corporate entities. At present, the Enforcement Action names only TMC and its corporate subsidiaries and affiliates as defendants. Side B coverage may therefore not be immediately triggered, but would become operative if individual directors or officers are named in future proceedings or if the Enforcement Action is amended to include individual defendants.

3. Side C Coverage (Entity Coverage): Side C provides entity-level coverage but is limited to "securities claims" under the Policy. The Enforcement Action is a regulatory environmental matter and does not constitute a "securities claim." However, the significant financial exposure associated with the consent decree — approximately $409.9 million in nominal obligations — and the potential gap between TMC's current environmental remediation reserve of approximately US$251.4 million and the nominal consent decree obligation (a shortfall of approximately US$158.5 million) could give rise to a securities class action alleging material misrepresentation or omission in TMC's public disclosures. Such a securities action would likely trigger Side C coverage.

4. Exclusion Risk: There is significant risk that the Policy's regulatory/government action exclusion and pollution/environmental exclusion could operate to bar coverage for the underlying environmental violations and associated penalties. However, defense costs may be covered depending on the specific exclusion language, and Side A coverage may be carved out from the pollution exclusion — a critical issue that we analyze in detail below.

Recommendation. We strongly recommend that TMC provide prompt written notice of circumstances to Clearwater Mutual to preserve its coverage rights under the Policy. A notice letter has been separately prepared and is dated December 15, 2024, for transmission to Brendan Forsythe at Clearwater Mutual Services, Inc. Delay in providing notice creates a material risk that Clearwater Mutual will assert a late-notice defense, particularly in light of the EPA Notice of Violation issued on September 12, 2023, and the DOJ complaint filed on January 18, 2024. This risk is amplified by TMC's recent experience with Meridian Environmental Insurance Company's denial of coverage under PLL Policy MEI-ENV-2021-04738 based in part on a late-notice theory.

II. Background — The Underlying Enforcement Action

A. Factual Summary

On January 18, 2024, the United States Department of Justice, acting on behalf of the EPA, filed a multi-count civil enforcement complaint in the United States District Court for the District of Montana, Missoula Division, under Civil Action No. 9:24-cv-00087-DWM, before the Honorable Donald W. Molloy, United States District Judge. The complaint was filed jointly with the States of Montana, Nevada, and West Virginia as co-plaintiffs.

Defendants. The named defendants in the Enforcement Action are the following TMC corporate entities:

• Torchlight Mining Corp. (the Canadian parent company);

• Torchlight Mining (U.S.) Inc. (the U.S. holding company subsidiary);

• Torchlight Specialty Chemicals, Inc. (operator of chemical processing facilities);

• Ridgecrest Mine Holdings, LLC (owner and operator of the Ridgecrest Mine); and

• Bonanza Creek Mining, LLC (owner and operator of the Bonanza Creek Mine).

No individual directors, officers, or employees of TMC or its subsidiaries are currently named as defendants in the Enforcement Action. However, as discussed in Section II.C below, the DOJ complaint contains numerous references to individual conduct and decision-making by senior TMC personnel, and the possibility of future individual actions remains a material concern.

Affected Sites. The Enforcement Action involves alleged environmental violations at four operational sites across three states:

1. Ridgecrest Copper-Molybdenum Mine (Drummond, Granite County, Montana) — An open-pit copper and molybdenum mine that has been in continuous operation since 1978. The complaint alleges ongoing acid mine drainage from the main pit and from the South Tailings Storage Facility, resulting in contamination of Clark Fork River tributaries and surrounding groundwater. The complaint further alleges improper storage and disposal of hazardous waste generated from the flotation concentration process in violation of RCRA.

2. Gallatin Chemical Works (Belgrade, Gallatin County, Montana) — A specialty chemical manufacturing facility that processes molybdenum concentrates from the Ridgecrest Mine. The complaint alleges unpermitted discharges of process wastewater containing elevated concentrations of molybdenum, selenium, and sulfate to the East Gallatin River in violation of the facility's MPDES/NPDES permit and CWA § 301.

3. Bonanza Creek Gold Mine (Lander County, Nevada) — A heap-leach gold mining operation. The complaint alleges violations of RCRA §§ 3004 and 3005 arising from the operation of a cyanide heap-leach pad without adequate liner systems and the improper management of spent heap-leach materials constituting hazardous waste. Additional allegations involve mortality of migratory birds at the cyanide solution ponds in violation of the Migratory Bird Treaty Act.

4. Kanawha Bend Chemical Plant (Institute, Kanawha County, West Virginia) — A chemical manufacturing facility that produces mining reagents and flotation chemicals. The complaint alleges RCRA violations arising from the improper storage of hazardous waste, including a 2020 sulfuric acid release that resulted in an emergency response action, as well as CERCLA § 107 liability for historical contamination at the site requiring remediation.

Statutory Bases. The Government's complaint asserts claims under the following federal statutes:

• Clean Water Act ("CWA") § 301 (33 U.S.C. § 1311) — unpermitted discharges of pollutants;

• Resource Conservation and Recovery Act ("RCRA") §§ 3004 and 3005 (42 U.S.C. §§ 6924, 6925) — treatment, storage, and disposal of hazardous waste without a permit or in violation of permit conditions;

• Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") § 107 (42 U.S.C. § 9607) — liability for response costs incurred by the EPA; and

• Migratory Bird Treaty Act (16 U.S.C. §§ 703–712) — take of migratory birds.

Government Counsel. The Enforcement Action is being prosecuted by the DOJ Environment and Natural Resources Division ("ENRD"), with Philip Orenstein and Katherine Rowe-Halpern (supervising) serving as lead DOJ counsel, and Margaret Coulson of the EPA Office of Enforcement and Compliance Assurance ("OECA") serving as the EPA's lead enforcement attorney. The co-plaintiff States are represented by Annika Hedstrom, Assistant Attorney General of Montana; Ricardo Fuentes, Deputy Attorney General of Nevada; and Loretta May Hatcher, Assistant Attorney General of West Virginia.

Consent Decree Negotiations. The parties have been engaged in intensive consent decree negotiations since approximately March 2024. A proposed consent decree is expected to be lodged with the Court in the first quarter of 2025, subject to a public comment period under 28 C.F.R. § 50.7 and CERCLA § 122(d)(2). The terms of the proposed consent decree are addressed in Section II.B below.

B. Financial Exposure

The total estimated financial obligation under the proposed consent decree is approximately $409.9 million (nominal), broken down as follows:

The remediation obligations — which constitute the vast majority of the consent decree's financial burden — are expected to be performed over a period of approximately fifteen to twenty years at the Ridgecrest Mine and seven to ten years at the remaining three sites.

Financial Assurance Requirements. The proposed consent decree will require TMC to provide financial assurance in the aggregate amount of $245.0 million, structured as follows:

• A surety bond of $165.0 million to be issued by Ironbark Surety of America; and

• A remediation trust fund of $80.0 million to be established at Larchfield Trust Company, N.A., with annual contributions over five years.

These financial assurance requirements represent a significant commitment of TMC's capital and creditworthiness and will materially impact the Company's balance sheet and borrowing capacity.

C. Potential Individual Officer/Director Exposure

Although no individual directors or officers are currently named as defendants in the Enforcement Action, the DOJ complaint contains extensive references to individual conduct and decision-making by senior TMC personnel. Moreover, the nature and severity of the alleged violations create a realistic possibility that individual officers or directors could face personal liability in several contexts. The individual exposure analysis for each key officer and director is as follows:

Douglas K. Prennell, Chief Executive Officer. As CEO, Mr. Prennell bears ultimate oversight responsibility for TMC's environmental compliance program. The DOJ complaint references internal TMC memoranda and board presentations in which Mr. Prennell acknowledged environmental compliance challenges at the Ridgecrest Mine and the Kanawha Bend Chemical Plant. In the event of a shareholder derivative action, Mr. Prennell would be a primary target for allegations that he failed to ensure the Company maintained an adequate environmental compliance program.

Gareth Linford, Vice President — Environmental Health & Safety. Mr. Linford has direct operational responsibility for EHS compliance at all four affected sites and is the signatory on various environmental permits and regulatory filings submitted to the EPA and state environmental agencies. Mr. Linford's exposure to individual criminal prosecution is the most acute of any TMC officer, given his direct involvement in the operational decisions that are the subject of the Enforcement Action. If DOJ were to pursue individual criminal charges under RCRA § 3008(d) (knowing treatment, storage, or disposal in violation of a permit or applicable regulation) or CWA § 309(c) (knowing or negligent violation of effluent limitations or permit conditions), Mr. Linford would likely be the primary individual target.

Carolyn Bracebridge, Chief Financial Officer. Ms. Bracebridge faces potential exposure related to the adequacy of TMC's environmental remediation reserves and the accuracy of the Company's financial disclosures. TMC recorded an environmental remediation reserve of C$340.0 million (approximately US$251.4 million at current exchange rates) as of Q3 2024. The proposed consent decree obligation of approximately US$409.9 million nominal represents a potential shortfall of approximately US$158.5 million relative to the recorded reserve. If shareholders or securities regulators were to allege that TMC materially understated its environmental liabilities in its financial statements, Ms. Bracebridge could face personal liability for her role in establishing and certifying those reserves.

Miriam Soo-Hwan Park, General Counsel. Ms. Park has oversight responsibility for TMC's regulatory compliance reporting and has been involved in the Company's responses to EPA information requests and enforcement proceedings. While General Counsel exposure in environmental enforcement matters is typically more limited than that of operational officers, Ms. Park could face claims in a derivative or securities action relating to the adequacy of the Company's regulatory compliance disclosures and legal risk assessments.

Board of Directors (Generally). TMC's board members face potential exposure for breach of their fiduciary duties to ensure that the Company maintained adequate environmental compliance programs and made accurate and complete public disclosures regarding its environmental liabilities. TMC is dual-listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") under the ticker symbol "TRC" and has an approximate market capitalization of C$7.6 billion. As a dual-listed public company, TMC is subject to the disclosure requirements of both Canadian securities regulators and the U.S. Securities and Exchange Commission ("SEC"), which heightens the risk that alleged disclosure deficiencies could give rise to securities claims implicating the board.

It is important to emphasize that while no individual directors or officers are currently named as defendants, the DOJ complaint's references to individual conduct and decision-making, combined with the magnitude of the financial exposure, create a significant possibility of future individual actions — including potential shareholder derivative claims, securities class actions, and individual criminal proceedings — arising from or related to the Enforcement Action.

III. Policy Overview — Clearwater Mutual D&O Policy

A. Policy Identification

The D&O liability insurance policy at issue is identified as follows:

The Policy is a claims-made D&O liability insurance policy providing coverage through three standard insuring agreements: Side A (Direct Coverage for Non-Indemnifiable Loss), Side B (Corporate Reimbursement), and Side C (Entity Coverage for Securities Claims). Each insuring agreement is discussed in detail below.

B. Insuring Agreements — Side A, B, and C Coverage

The Policy contains three distinct insuring agreements, each of which serves a different function in the overall D&O coverage structure. Understanding the scope and applicability of each insuring agreement is critical to assessing the availability of coverage in connection with the Enforcement Action and any related future proceedings.

Side A — Direct Coverage for Non-Indemnifiable Loss. The Side A insuring agreement provides direct coverage to individual directors and officers for "Loss" (including defense costs) arising from "Claims" alleging "Wrongful Acts," where TMC cannot or does not indemnify them. Side A coverage operates without any corporate retention or deductible — it provides first-dollar coverage to individual insureds. Side A is the most favorable insuring agreement from the perspective of individual directors and officers and represents their personal safety net against unindemnified liability.

Side A coverage is triggered in situations where corporate indemnification is either legally prohibited (e.g., indemnification for criminal fines or penalties, or in jurisdictions that preclude indemnification for certain types of misconduct) or factually unavailable (e.g., the corporation is insolvent or otherwise financially unable to indemnify). The Side A insuring agreement is particularly important in the context of the Enforcement Action because of the potential for individual criminal prosecution under RCRA and CWA criminal provisions, where TMC may be legally precluded from indemnifying any resulting criminal fines.

Side B — Corporate Reimbursement. The Side B insuring agreement reimburses TMC for amounts it pays to indemnify its directors and officers for covered "Loss" arising from covered "Claims." Unlike Side A, Side B coverage is subject to a corporate retention (deductible) that TMC must satisfy before coverage attaches. Side B effectively protects the Company's balance sheet by transferring the financial burden of indemnification to the Carrier.

Side B coverage is triggered only when the Company has in fact indemnified an individual director or officer for a covered loss. It does not cover the Company's own liability for claims brought directly against the corporate entity. This distinction is critical in the context of the Enforcement Action, which currently names only corporate defendants: Side B will not be triggered unless and until individual directors or officers are named in a covered "Claim" and TMC indemnifies them for their defense costs and any resulting liability.

Side C — Entity Coverage for Securities Claims. The Side C insuring agreement covers TMC (the corporate entity) itself for "Loss" arising from "securities claims." The term "securities claims" is defined in the Policy and typically encompasses claims alleging violations of federal or state securities laws, including claims under the Securities Exchange Act of 1934 (for U.S. purposes) and corresponding Canadian securities legislation. Side C does not cover the corporate entity for non-securities claims, including regulatory enforcement actions under environmental statutes.

The current Enforcement Action is an environmental regulatory matter and does not fall within the definition of a "securities claim" under the Policy. Accordingly, Side C coverage is not currently triggered. However, as analyzed in Sections IV.C and VIII.B below, the potential for a future securities class action — arising from alleged misstatements or omissions regarding TMC's environmental liabilities in its SEC filings, TSX continuous disclosure documents, or financial statements — could trigger Side C coverage.

C. Key Policy Definitions

The following key Policy definitions are central to the coverage analysis:

"Claim." The Policy defines "Claim" broadly to include any civil, criminal, administrative, or regulatory proceeding commenced against an Insured Person, as well as written demands for monetary or non-monetary relief. The critical question is whether the Enforcement Action — which names only corporate defendants — constitutes a "Claim" against individual "Insured Persons" within the meaning of the Policy. Our preliminary analysis indicates that the Enforcement Action, as currently styled, does not constitute a "Claim" against any individual Insured Person. However, the EPA Notice of Violation ("NOV") issued on September 12, 2023, which preceded the DOJ complaint, and the consent decree itself, could potentially be characterized as "circumstances that may give rise to a Claim" against individual officers and directors — a distinction that is critical for notice purposes.

Additionally, the DOJ complaint's references to individual decision-making by TMC officers raise the question of whether the complaint, although it does not name individuals, is tantamount to a "Claim" against those individuals. We recommend a conservative interpretation that treats the Enforcement Action as giving rise to "circumstances" warranting notice, even if it does not yet constitute a formal "Claim" against individual Insured Persons.

"Loss." The Policy defines "Loss" to include defense costs, judgments, and settlements arising from covered Claims. A critical issue is whether civil penalties — specifically, the $31.5 million in civil penalties contemplated by the proposed consent decree — constitute covered "Loss" under the Policy. As a general matter, fines and penalties imposed by governmental authorities are considered uninsurable as a matter of public policy in most jurisdictions, on the ground that permitting insurance for penalties would undermine their deterrent effect. We anticipate that the $31.5 million civil penalty component of the consent decree would be excluded from the definition of "Loss" under the Policy, either by the express terms of the definition or by operation of applicable public policy principles.

Defense costs, by contrast, are expressly included within the definition of "Loss" and are the category of expenditure most likely to be covered under the Policy in connection with the Enforcement Action and any related individual proceedings.

"Insured Person." The Policy defines "Insured Person" to include the directors and officers of TMC and its subsidiaries. The question of whether the definition extends to certain senior managers below the officer level requires careful analysis of the Policy's specific language. Vice President-level executives such as Gareth Linford (VP Environmental Health & Safety) and General Counsel Miriam Soo-Hwan Park should qualify as "Insured Persons" under most standard D&O policy definitions, which typically encompass officers of the company at the vice president level and above, as well as any person who holds a position analogous to that of a director or officer. However, this determination depends on the specific Policy language and may require confirmation with Clearwater Mutual.

"Wrongful Act." The Policy defines "Wrongful Act" to include any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by an Insured Person in their capacity as a director or officer of TMC or any of its subsidiaries. This definition is broad and would encompass the types of alleged failures of oversight and compliance that could form the basis of derivative or securities claims against TMC's directors and officers in connection with the Enforcement Action.

D. Policy Period and Limits

The Policy number — CMI-DO-2023-10221 — suggests issuance in 2023. The precise policy period, including any renewal or extended reporting period provisions, must be confirmed against the Policy declarations page and any endorsements. This is particularly important given the timeline of relevant events: the EPA NOV was issued on September 12, 2023, and the DOJ complaint was filed on January 18, 2024, both of which likely fall within the current policy period or the immediately preceding period.

The Policy provides per-claim and aggregate limits of liability, as well as a corporate retention (deductible) applicable to Side B and Side C coverage. The specific dollar amounts of these limits and the retention are set forth in the Policy declarations page and are summarized in Appendix A. We note that defense costs are typically eroded against the Policy's limits (i.e., the Policy is a "wasting" or "burning limits" policy), which means that defense expenditures reduce the amount of coverage available for indemnity payments.

The Policy contains defense-cost advancement provisions that require Clearwater Mutual to advance defense costs to Insured Persons on an ongoing basis as they are incurred, subject to an undertaking to repay such amounts if it is ultimately determined that the costs are not covered under the Policy. This is a critical distinction from a "duty to defend" policy, under which the insurer assumes direct control of the defense: under the Policy's advancement provisions, the Insured Persons retain the right to select their own counsel and control the defense, with Clearwater Mutual reimbursing defense costs as incurred. This arrangement preserves the Insured Persons' autonomy in the defense of any claims against them.

IV. Coverage Analysis — Applicability to the EPA Enforcement Action

A. Side A Coverage — Individual Non-Indemnifiable Loss

Side A coverage is the most likely source of meaningful D&O coverage in connection with the Enforcement Action and related proceedings. Side A is designed to protect individual directors and officers in precisely the situations that may arise from the Enforcement Action — situations where the corporate entity cannot or does not indemnify them for their personal liability or defense costs. We have identified three principal scenarios in which Side A coverage would be triggered:

Scenario 1: Individual Criminal Prosecution. If DOJ were to bring individual criminal charges against one or more TMC officers — most likely Gareth Linford, given his direct operational responsibility for EHS compliance — under RCRA's knowing-endangerment provisions (42 U.S.C. § 6928(e)) or the CWA's criminal provisions (33 U.S.C. § 1319(c)), TMC may be legally precluded from indemnifying any resulting criminal fines or penalties. Under the corporate laws of most jurisdictions, including the Canada Business Corporations Act (under which TMC is incorporated) and the laws of the U.S. states in which TMC's subsidiaries are organized, indemnification for criminal fines and penalties is generally either prohibited or subject to significant limitations. In this scenario, Side A coverage would be triggered to cover the individual officer's defense costs and, potentially, any non-penalty loss arising from the criminal proceeding.

This scenario represents the most critical potential application of Side A coverage in this matter. The possibility of individual criminal prosecution is not merely theoretical: the DOJ complaint identifies specific instances of alleged knowing violations by TMC personnel, and DOJ ENRD has been increasingly aggressive in pursuing individual criminal charges in environmental enforcement matters. We assess the probability of individual criminal prosecution as moderate but not negligible, particularly with respect to Mr. Linford.

Scenario 2: Shareholder Derivative Action with Finding of Intentional Misconduct. If a shareholder derivative action were brought against TMC's directors and officers alleging breach of fiduciary duty for failing to oversee environmental compliance (a Caremark-type claim), and if the court were to find that the defendants engaged in intentional misconduct, TMC may be precluded from indemnifying the defendants under applicable corporate law. In this scenario, Side A coverage would apply to cover the unindemnified defense costs and any damages award against the individual defendants.

Even in the absence of a finding of intentional misconduct, Side A coverage could be triggered if the derivative action results in a settlement that TMC is unable or unwilling to fund, or if the terms of the settlement preclude corporate indemnification.

Scenario 3: Corporate Insolvency. If TMC's environmental liabilities were to impair its financial position to the point of insolvency, the Company would be unable to indemnify its directors and officers for defense costs and liability arising from any claims against them. In this scenario, Side A coverage would serve as a personal safety net for directors and officers, providing direct coverage without reliance on corporate indemnification.

While TMC's current financial indicators suggest that it remains well-capitalized (FY2023 EBITDA of approximately US$843 million, with a Harborstone revolving credit facility of C$750.0 million and environmental covenant headroom of C$425.6 million), the magnitude of the consent decree obligation ($409.9 million nominal) and the ongoing operational costs of remediation create a remote but non-trivial risk of financial distress. Side A coverage should be preserved against this contingency.

Assessment. Side A is the most likely source of meaningful D&O coverage in this matter and should be treated as the highest-priority coverage to preserve. The most critical immediate step is to ensure that the consent decree language does not contain any admissions or stipulations that could be characterized as findings of intentional or criminal conduct by individual officers or directors, as such findings could trigger conduct exclusions under the Policy and erode the availability of Side A coverage.

B. Side B Coverage — Corporate Reimbursement

TMC is currently indemnifying its officers and directors for defense costs related to the Enforcement Action pursuant to TMC's bylaws and the individual indemnification agreements that TMC has entered into with each of its directors and officers. These indemnification obligations represent a direct financial cost to TMC, and Side B coverage is designed to reimburse the Company for such costs.

However, the threshold question for Side B coverage is whether the Enforcement Action constitutes a "Claim" against individual "Insured Persons" within the meaning of the Policy. As noted above, the Enforcement Action names only corporate entities as defendants. The defense costs currently being incurred by TMC are primarily the costs of defending the corporate entities in the Enforcement Action and negotiating the consent decree — they are not costs incurred to defend individual directors or officers against personal claims.

The distinction is critical: Side B reimburses TMC for amounts it pays to indemnify individual directors and officers for their personal defense costs and liability. If the underlying claim is directed solely at the corporate entity, and the defense costs are incurred in defending the entity rather than any individual, Side B is not triggered.

There are, however, several arguments that could support a Side B coverage claim:

• TMC's officers and directors are devoting substantial time and effort to responding to the Enforcement Action in their individual capacities — preparing for depositions, reviewing and certifying compliance documents, and participating in settlement negotiations. To the extent that TMC compensates or indemnifies them for their individual time and personal legal exposure in connection with these activities, those amounts could arguably constitute indemnification payments covered by Side B.

• If the Enforcement Action is expanded to include individual defendants, or if individual officers or directors receive target letters or are named in individual enforcement proceedings, Side B would be clearly triggered for the defense costs that TMC advances on their behalf.

• If a derivative action or securities class action is filed naming individual directors and officers as defendants, the defense costs incurred by TMC in indemnifying those individuals would fall squarely within Side B coverage.

Retention Analysis. Side B coverage is subject to a corporate retention (deductible) specified in the Policy declarations. TMC must satisfy this retention before Clearwater Mutual's Side B reimbursement obligation attaches. Given the significant defense costs already being incurred in connection with the Enforcement Action and consent decree negotiations — C&H's fees alone have exceeded $3.2 million to date, and TMC's total legal and consulting costs related to the Enforcement Action are estimated at approximately $12.5 million through year-end 2024 — the retention may already have been satisfied or substantially eroded, depending on the applicable retention amount and the allocation of costs between entity defense and individual defense.

C. Side C Coverage — Entity Securities Claims

Side C coverage insures TMC itself (the corporate entity) for "Loss" arising from "securities claims." The Enforcement Action is an environmental regulatory matter, not a securities claim, and therefore does not trigger Side C coverage.

However, the financial magnitude of the consent decree obligation ($409.9 million nominal) and the potential gap between TMC's recorded environmental remediation reserve and the actual liability exposure create a significant risk that a securities class action could be filed against TMC and its officers and directors. Specifically:

• TMC recorded an environmental remediation reserve of C$340.0 million (approximately US$251.4 million at current exchange rates) as of Q3 2024. The proposed consent decree obligation of approximately US$409.9 million nominal represents a shortfall of approximately US$158.5 million relative to the recorded reserve.

• If shareholders were to allege that TMC materially understated its environmental liabilities in its SEC filings (Form 20-F), its TSX continuous disclosure documents, its risk factors, or its financial statements, such allegations would constitute a "securities claim" within the meaning of the Policy and would trigger Side C entity coverage.

• The adequacy of TMC's environmental remediation reserve involves complex accounting judgments under ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). TMC's external auditor, Ridgeline Accounting Partners LLP (engagement partner Frances Whitmore), has been consulted on the reserve methodology, and a draft financial statement footnote is being prepared to address the consent decree obligation. These accounting issues are outside the scope of this D&O coverage assessment but are directly relevant to the securities litigation risk that could trigger Side C coverage.

Assessment. Side C is not currently triggered but should be actively monitored. TMC's management and board should be aware that the public announcement of the consent decree — including the significant reserve shortfall — could serve as the catalyst for a securities class action. If such a claim is filed, prompt additional notice to Clearwater Mutual under the D&O Policy will be required.

V. Exclusion Analysis

Even where the insuring agreements are otherwise triggered, coverage may be barred or limited by the Policy's exclusions. We have identified six categories of exclusions that are potentially relevant to the coverage analysis. Each is analyzed below.

A. Regulatory / Government Action Exclusion

Many D&O policies contain exclusions for fines, penalties, or sanctions imposed by or at the direction of governmental or regulatory bodies. The Policy should be examined for such an exclusion and, if present, its precise scope must be carefully analyzed.

Penalties. The $31.5 million in civil penalties contemplated by the proposed consent decree are almost certainly excluded from coverage under the Policy, regardless of whether the Policy contains a specific regulatory action exclusion. As noted above, civil penalties imposed by governmental authorities are generally uninsurable as a matter of public policy, because allowing insurance for penalties would undermine their deterrent purpose. Courts in virtually all U.S. jurisdictions have held that insurance coverage for government-imposed penalties is against public policy and unenforceable. Accordingly, we do not expect the $31.5 million civil penalty to be covered under any provision of the Policy.

Defense Costs. The more critical question is whether defense costs incurred in connection with the regulatory enforcement proceeding are also excluded, or whether they are carved out from any regulatory action exclusion. Many D&O policies include a "defense cost carve-back" that preserves coverage for defense costs even where the underlying fines or penalties are excluded. If the Policy contains such a carve-back, defense costs incurred by individual directors and officers in defending against the Enforcement Action (or any related individual proceedings) would remain covered notwithstanding the exclusion of penalties.

Conduct Exclusion Interplay. Certain regulatory action exclusions are linked to or incorporate language from the Policy's conduct exclusion (discussed in Section V.C below), requiring a "final adjudication" of wrongful conduct before the exclusion is triggered. If the regulatory action exclusion contains a "final adjudication" trigger, it would not bar coverage for defense costs incurred prior to any such adjudication, and a consent decree settlement (which does not constitute a final adjudication of liability) would not activate the exclusion.

B. Pollution / Environmental Exclusion

The pollution exclusion is the single most significant potential barrier to coverage under the Policy in connection with the Enforcement Action. D&O policies frequently contain pollution exclusions, and the scope of these exclusions varies widely.

Total Pollution Exclusion vs. Claims-Based Pollution Exclusion. Pollution exclusions in D&O policies generally fall into two categories: (1) a "total" or "absolute" pollution exclusion, which bars coverage for any claim arising out of, based upon, or attributable to any actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants; and (2) a more limited "claims-based" pollution exclusion, which bars coverage only for specific types of pollution-related claims (e.g., claims for bodily injury or property damage caused by pollution). The breadth of the exclusion in Policy CMI-DO-2023-10221 must be determined by reference to the specific policy language.

If the Policy contains a total pollution exclusion, it could potentially bar all coverage for the Enforcement Action and any related claims, on the ground that the underlying allegations arise out of environmental contamination at the four sites.

Side A Carve-Out. Critically, many D&O policies — particularly modern policies negotiated for publicly traded companies — contain a carve-out that exempts Side A coverage from the pollution exclusion. This carve-out reflects the insurance market's recognition that individual directors and officers should not be left without personal liability protection simply because the underlying claims involve pollution or environmental contamination. If the Policy contains a Side A carve-out from the pollution exclusion, individual defense costs in any future criminal or individual enforcement proceeding would remain covered under Side A, even if Side B and Side C coverage were barred by the exclusion.

This is a critical issue for TMC's individual officers and directors, and particularly for Gareth Linford, whose individual exposure to criminal prosecution is the most acute. We recommend that the Policy be reviewed with particular attention to the pollution exclusion language and any Side A carve-out.

Application to the Enforcement Action. If the pollution exclusion applies broadly and there is no Side A carve-out, coverage for all claims arising from the Enforcement Action would likely be barred. If the pollution exclusion applies but with a Side A carve-out, coverage would be preserved for individual non-indemnifiable losses (particularly defense costs in any criminal prosecution) but would be barred for Side B corporate reimbursement and Side C entity coverage. This is the outcome we consider most likely based on current market-standard policy language, but confirmation against the specific Policy terms is essential.

C. Conduct Exclusions (Intentional / Fraudulent / Criminal Conduct)

The Policy contains a standard conduct exclusion that bars coverage for loss arising from claims based upon, arising out of, or attributable to any dishonest, fraudulent, or criminal act, or any willful violation of law, by an Insured Person. The critical question is the trigger for this exclusion — specifically, whether it operates on a "final adjudication" standard or an "in fact" standard.

"Final Adjudication" vs. "In Fact" Standard. Under a "final adjudication" standard, the conduct exclusion is triggered only upon a final, non-appealable adjudication (typically a judgment or verdict) establishing that the Insured Person engaged in the excluded conduct. Under this standard, defense costs incurred prior to any final adjudication would be covered, and a settlement (including a consent decree) would generally not constitute a "final adjudication" that triggers the exclusion.

Under an "in fact" standard, the conduct exclusion is triggered if the Insured Person did "in fact" engage in the excluded conduct, regardless of whether there has been a formal adjudication. This is a more restrictive standard from the insured's perspective, because the insurer can assert the exclusion based on evidence of actual conduct without waiting for a court finding.

Application to the Enforcement Action. If DOJ were to pursue criminal charges against individual officers under RCRA § 3008(d) (knowing treatment, storage, or disposal violations) or CWA § 309(c) (knowing or negligent violations), a criminal conviction would constitute a "final adjudication" of knowing or willful criminal conduct that would trigger the conduct exclusion and bar coverage for any loss arising from the criminal proceeding. However, defense costs incurred prior to any such conviction should be covered under the Policy's advancement provisions, which require Clearwater Mutual to advance defense costs pending the outcome of the proceeding.

The consent decree itself — a civil settlement of the Enforcement Action — should not constitute a "final adjudication" of intentional or criminal conduct by any individual officer or director. Consent decrees typically contain language stating that they are entered for settlement purposes and do not constitute an admission of liability. Provided that the consent decree language is drafted carefully to avoid any characterization as a finding of intentional misconduct, the conduct exclusion should not be triggered by the entry of the consent decree.

Recommendation. It is critical that the consent decree language be reviewed to ensure that it does not contain any admissions, stipulations, or findings that could be characterized as establishing intentional or criminal conduct by individual officers or directors. Any such language could trigger the conduct exclusion and jeopardize D&O coverage for individual insureds. This recommendation is addressed further in Section IX.A below.

D. Prior Knowledge / Prior Acts Exclusion

The Policy may contain a prior-knowledge or prior-acts exclusion that bars coverage for claims arising from facts, circumstances, or conditions known to the insured prior to the inception of the Policy. This exclusion is potentially significant given the longstanding nature of the environmental conditions at several of the affected sites.

Ridgecrest Mine. The Ridgecrest Copper-Molybdenum Mine has been in continuous operation since 1978, and the acid mine drainage and tailings storage issues that are the subject of the Enforcement Action have been known for many years. TMC entered into an Administrative Order on Consent ("AOC") with the EPA regarding the Ridgecrest Mine on September 15, 2022 — a date that likely precedes the inception of the current Policy. If the prior-knowledge exclusion is triggered by TMC's knowledge of the Ridgecrest environmental conditions at the time the Policy was placed, coverage for claims arising from the Ridgecrest site could be barred.

Kanawha Bend Chemical Plant. The 2020 sulfuric acid release at the Kanawha Bend Chemical Plant predates the Policy period by several years. If the prior-knowledge exclusion is drafted broadly to encompass knowledge of conditions or events that could give rise to a claim, TMC's knowledge of the 2020 release and its aftermath could trigger the exclusion with respect to claims arising from the Kanawha Bend site.

EPA Notice of Violation (September 12, 2023). The EPA issued a Notice of Violation on September 12, 2023, which preceded the filing of the DOJ complaint on January 18, 2024. Depending on the Policy inception date, the NOV may have been issued during the current policy period or during a prior policy period. If the NOV was issued during a prior policy period and was not reported to Clearwater Mutual at that time, it could be treated as a "prior claim" that exhausts or precludes coverage under the current Policy.

Ridgecrest AOC (September 15, 2022). Similarly, the Ridgecrest AOC, entered on September 15, 2022, may constitute a "prior claim" or "prior circumstance" that was required to be reported under a prior policy period. If it was not reported, coverage for claims arising from the Ridgecrest site could be jeopardized.

Assessment. The prior-knowledge and prior-acts exclusion is a significant risk factor that must be carefully analyzed against the specific Policy language. TMC's applications for D&O coverage — including any representations made in the policy application regarding known environmental liabilities, pending or threatened enforcement actions, or existing administrative orders — should be reviewed to determine whether TMC's disclosures in the application process were complete and accurate. Any material misrepresentation or omission in the application could provide an additional basis for Clearwater Mutual to deny coverage.

E. Insured vs. Insured Exclusion

The Policy likely contains an "insured vs. insured" exclusion that bars coverage for claims brought by one insured against another insured. This exclusion is designed to prevent collusive claims between the company and its directors/officers. However, the exclusion is relevant in the context of the Enforcement Action because of the potential for a shareholder derivative action — which is technically brought by the corporation (through a derivative plaintiff acting on its behalf) against its own directors and officers.

Standard D&O policies include carve-outs from the insured vs. insured exclusion for (a) shareholder derivative actions brought by shareholders without the instigation or participation of any insured; and (b) actions brought by a bankruptcy trustee or receiver. These carve-outs are critical to ensuring that derivative claims — the most common type of D&O claim — are not excluded from coverage.

Assessment. If a shareholder derivative action is filed against TMC's directors and officers in connection with the Enforcement Action, the insured vs. insured exclusion should not bar coverage, provided that the derivative action falls within the standard carve-out for bona fide shareholder derivative suits. However, the specific carve-out language must be reviewed to confirm its scope and applicability.

F. Contractual Liability Exclusion

Certain D&O policies contain an exclusion for "contractual liability" — liability assumed by the insured under a contract or agreement. A potential question is whether the consent decree constitutes a "contractual liability" that is excluded from coverage under this provision.

The strongest argument against the application of a contractual liability exclusion to the consent decree is that the consent decree is not a purely voluntary contractual undertaking but rather a court-approved settlement of a government enforcement action. Consent decrees are entered as orders of the court and are enforceable through the court's contempt power, not merely through contract remedies. Courts have generally treated consent decrees as judicial orders rather than contracts for purposes of insurance coverage analysis, and we believe the contractual liability exclusion should not bar coverage for loss arising from the consent decree.

Nevertheless, the specific language of any contractual liability exclusion in the Policy should be reviewed to determine whether it could be interpreted to encompass consent decree obligations. If the exclusion is drafted broadly (e.g., "liability assumed under any contract or agreement"), there is a risk that Clearwater Mutual could argue that the remediation and payment obligations under the consent decree constitute "assumed" contractual liabilities.

VI. Notice Requirements and Timing

Timely notice to the insurer is a fundamental prerequisite to coverage under any claims-made D&O policy. The Policy contains specific notice provisions that require the Named Insured to provide written notice to Clearwater Mutual of any "Claim" made against an Insured Person, or of any "circumstances that may give rise to a Claim," within the policy period or any applicable extended reporting period.

Timeline of Relevant Events. The following timeline is relevant to the notice analysis:

Analysis. The critical question is whether TMC has provided (or can still provide) timely notice to Clearwater Mutual. The Enforcement Action was commenced on January 18, 2024 — nearly twelve months before the planned notice letter. If the Policy requires notice "as soon as practicable" after the insured becomes aware of a Claim or circumstances that may give rise to a Claim, a twelve-month delay could be characterized by Clearwater Mutual as untimely.

However, several factors may mitigate the late-notice risk:

1. The Enforcement Action currently names only corporate defendants, not individual Insured Persons. There is a reasonable argument that the obligation to provide notice of a "Claim" under the D&O Policy was not triggered because no "Claim" has been made against any individual Insured Person.

2. The notice being provided is a notice of "circumstances that may give rise to a Claim" — i.e., TMC is alerting Clearwater Mutual to the Enforcement Action as a circumstance that could lead to future claims against individual directors and officers. Many policies provide a longer window for notice of circumstances than for notice of actual claims.

3. In many jurisdictions, late notice does not automatically vitiate coverage; rather, the insurer must demonstrate prejudice resulting from the delay. If Clearwater Mutual cannot demonstrate that it was materially prejudiced by the delay in receiving notice, a late-notice defense may be rejected by the court.

Parallel to Meridian PLL Coverage Denial. We note that TMC is currently facing a coverage denial by Meridian Environmental Insurance Company under the PLL Policy (MEI-ENV-2021-04738) based in part on a late-notice theory. Meridian's claims adjuster, Sheila Grantham, asserted in her denial letter that TMC failed to provide timely notice of the Kanawha Bend pollution incident, and that Meridian was prejudiced by the delay. The experience with the Meridian PLL Policy underscores the importance of providing prompt notice to Clearwater Mutual to avoid a similar outcome.

Recommendation. We strongly recommend that the notice of circumstances letter be transmitted to Brendan Forsythe at Clearwater Mutual Services, Inc. no later than December 15, 2024. The letter has been drafted to provide comprehensive notice of the Enforcement Action and the potential for future claims against individual directors and officers. The letter should be sent by overnight courier with a confirmation copy by email, and TMC should retain proof of delivery. If possible, TMC should also make a follow-up phone call to Mr. Forsythe to confirm receipt and to establish a cooperative dialogue with the Carrier regarding coverage.

VII. Interaction with Other Insurance Policies

A. Meridian PLL Policy (Policy No. MEI-ENV-2021-04738)

TMC maintains a Pollution Legal Liability ("PLL") insurance policy with Meridian Environmental Insurance Company under Policy No. MEI-ENV-2021-04738. The PLL Policy provides per-occurrence coverage of $50.0 million and aggregate coverage of $75.0 million, subject to a self-insured retention ("SIR") of $5.0 million per occurrence.

Coverage Dispute. Meridian has denied coverage for two of the four sites involved in the Enforcement Action:

• Ridgecrest Mine: Meridian denied coverage based on the policy's known-conditions exclusion, asserting that the acid mine drainage and tailings contamination at Ridgecrest were known conditions at the time the PLL Policy was placed.

• Kanawha Bend Chemical Plant: Meridian denied coverage based on late notice, asserting that TMC failed to provide timely notice of the 2020 sulfuric acid release and the subsequent EPA enforcement activity.

• Gallatin Chemical Works and Bonanza Creek Gold Mine: Meridian has acknowledged coverage for the Gallatin and Bonanza Creek sites, subject to the per-occurrence SIR of $5.0 million.

Estimated Recovery. Based on the assessment prepared by Northspire Capital Markets (Managing Director Vivian Okafor), TMC's estimated recovery under the Meridian PLL Policy, taking into account the coverage denials and the SIR, is approximately $45.0 million to $55.0 million. This recovery, if obtained, would offset a portion of the $343.5 million remediation obligation under the proposed consent decree.

D&O vs. PLL Coverage Distinction. The D&O Policy and the PLL Policy cover fundamentally different risks. The PLL Policy covers remediation costs and third-party bodily injury or property damage arising from pollution conditions at covered sites. The D&O Policy covers the personal liability of directors and officers for claims alleging wrongful acts in their capacity as directors and officers. The two policies are not duplicative, and the D&O Policy is properly characterized as excess of and non-overlapping with the PLL Policy.

However, the "other insurance" provisions in both policies — which address the allocation of coverage when multiple policies may apply to the same claim or loss — should be reviewed to confirm that there are no priority or allocation disputes between the two policies. Specifically, if an individual officer or director is named in a future claim that also implicates the PLL Policy (e.g., a derivative action alleging that the officer's failure to remediate pollution conditions caused harm to the Company), both policies could arguably be triggered, and the "other insurance" provisions would govern the priority and allocation of coverage between them.

B. TMC Corporate Indemnification Obligations

TMC's bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by the Canada Business Corporations Act and the laws of the jurisdictions in which TMC's subsidiaries are organized. In addition, TMC has entered into individual indemnification agreements with each of its directors and officers that provide for indemnification on terms at least as broad as the bylaws.

Impact on Side A vs. Side B. The existence and scope of TMC's indemnification obligations directly affect the allocation of coverage between Side A and Side B. Where TMC indemnifies its directors and officers, Side B (corporate reimbursement) is the applicable insuring agreement. Where TMC cannot or does not indemnify — either because indemnification is legally prohibited or because TMC is financially unable to indemnify — Side A (direct individual coverage) applies.

Financial Capacity to Indemnify. TMC's financial capacity to indemnify its directors and officers is currently adequate. For the fiscal year ended December 31, 2023, TMC reported revenue of C$4.82 billion and EBITDA of C$1.14 billion (approximately US$843 million). TMC maintains a C$750.0 million revolving credit facility with Harborstone Financial Corporation, with current environmental covenant headroom of C$425.6 million. However, the magnitude of the consent decree obligation ($409.9 million nominal) and the associated financial assurance requirements ($245.0 million) will place significant pressure on TMC's financial resources and could, over time, erode its capacity to indemnify directors and officers. If TMC's financial condition deteriorates to the point where indemnification becomes impracticable, Side A coverage would become the primary source of protection for individual directors and officers.

VIII. Potential Future Claims Triggering D&O Coverage

While the current Enforcement Action does not, by itself, constitute a "Claim" against individual Insured Persons under the D&O Policy, the Enforcement Action creates significant risk of future proceedings that would directly trigger D&O coverage. We have identified four principal categories of future claims.

A. Shareholder Derivative Litigation

There is a material risk that one or more TMC shareholders will file a derivative action against TMC's directors and officers alleging breach of fiduciary duty in connection with the environmental violations at the four sites. Such a derivative action would likely be styled as a Caremark-type claim — i.e., a claim that the directors and officers breached their duty of oversight by failing to implement and monitor an adequate environmental compliance program.

The potential allegations in a derivative action would include:

• The board and senior management knew or should have known of the environmental violations at the Ridgecrest Mine, the Gallatin Chemical Works, the Bonanza Creek Gold Mine, and the Kanawha Bend Chemical Plant;

• The board and senior management failed to take adequate corrective action despite receiving reports, internal memoranda, and regulatory notices indicating serious environmental compliance deficiencies;

• As a result of the board's and management's failure to act, TMC incurred approximately $409.9 million in penalties, remediation costs, and related obligations under the consent decree; and

• The directors and officers are personally liable to the Company for the damages caused by their breach of fiduciary duty.

A shareholder derivative action would constitute a "Claim" against individual "Insured Persons" under the D&O Policy and would be covered under Side A (if TMC cannot or does not indemnify) and Side B (if TMC does indemnify), subject to the insured vs. insured exclusion carve-out for derivative actions. The defense costs and any resu

MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
FROM: Harrison Wexford, Responsible Partner, Calderwood & Harkness LLP Elliot Nguyen, Lead Associate, Calderwood & Harkness LLP
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Douglas K. Prennell, CEO, Torchlight Mining Corp.
DATE: December 12, 2024
RE: Directors' and Officers' Liability Insurance Coverage Assessment — Clearwater Mutual Insurance, Ltd., Policy No. CMI-DO-2023-10221 — EPA Multi-Site Enforcement Action (Civil Action No. 9:24-cv-00087-DWM)
MATTER NO.: 1039-00003
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in anticipation of litigation and for the purpose of rendering legal advice to Torchlight Mining Corp. This memorandum and its contents should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Torchlight Mining Corp. Disclosure to any third party may result in waiver of applicable privileges.
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I. Executive Summary
Calderwood & Harkness LLP ("C&H") has been engaged by Torchlight Mining Corp. ("TMC" or the "Company") to assess the availability of directors' and officers' ("D&O") liability insurance coverage under the policy issued by Clearwater Mutual Insurance, Ltd. ("Clearwater Mutual" or the "Carrier"), Policy No. CMI-DO-2023-10221 (the "Policy"), in connection with the multi-site environmental enforcement action commenced by the United States Department of Justice ("DOJ"), on behalf of the United States Environmental Protection Agency ("EPA"), and the co-plaintiff States of Montana, Nevada, and West Virginia (collectively, the "Government"), captioned United States of America, et al. v. Torchlight Mining Corp., et al., Civil Action No. 9:24-cv-00087-DWM (D. Mont.) (the "Enforcement Action"). This memorandum also addresses the ongoing consent decree negotiations and the potential for future derivative, securities, and individual criminal proceedings arising from or related to the Enforcement Action.
The Policy was issued by Clearwater Mutual Insurance, Ltd., a Bermuda exempted company domiciled in Hamilton, Bermuda, with its U.S. managing agent, Clearwater Mutual Services, Inc., located at 1345 Avenue of the Americas, Suite 3200, New York, NY 10105. The account manager assigned to the TMC account is Brendan Forsythe. All notices, correspondence, and claims-related communications should be directed to Mr. Forsythe in the first instance, with copies to Clearwater Mutual's Hamilton offices as specified in the Policy's notice provisions.
Key Conclusions. Based on our review of the Policy, the underlying Enforcement Action, and the potential individual exposure of TMC's directors and officers, we reach the following principal conclusions:
1. Side A Coverage (Non-Indemnifiable Loss): Coverage is likely available under the Policy's Side A insuring agreement for certain individual exposure scenarios, most critically in the event of (a) individual criminal prosecution under the Resource Conservation and Recovery Act ("RCRA") or the Clean Water Act ("CWA"), where TMC may be legally precluded from indemnifying criminal fines or penalties; (b) a shareholder derivative action resulting in a finding of intentional misconduct that precludes corporate indemnification; or (c) TMC's financial inability to indemnify its directors and officers. Side A coverage is the most favorable insuring agreement from the perspective of individual insureds and should be affirmatively preserved.
2. Side B Coverage (Corporate Reimbursement): Side B is potentially triggered to reimburse TMC for defense costs it advances to individual officers and directors in connection with covered "Claims," provided that the underlying proceedings qualify as "Claims" against individual "Insured Persons" rather than solely against the corporate entities. At present, the Enforcement Action names only TMC and its corporate subsidiaries and affiliates as defendants. Side B coverage may therefore not be immediately triggered, but would become operative if individual directors or officers are named in future proceedings or if the Enforcement Action is amended to include individual defendants.
3. Side C Coverage (Entity Coverage): Side C provides entity-level coverage but is limited to "securities claims" under the Policy. The Enforcement Action is a regulatory environmental matter and does not constitute a "securities claim." However, the significant financial exposure associated with the consent decree — approximately $409.9 million in nominal obligations — and the potential gap between TMC's current environmental remediation reserve of approximately US$251.4 million and the nominal consent decree obligation (a shortfall of approximately US$158.5 million) could give rise to a securities class action alleging material misrepresentation or omission in TMC's public disclosures. Such a securities action would likely trigger Side C coverage.
4. Exclusion Risk: There is significant risk that the Policy's regulatory/government action exclusion and pollution/environmental exclusion could operate to bar coverage for the underlying environmental violations and associated penalties. However, defense costs may be covered depending on the specific exclusion language, and Side A coverage may be carved out from the pollution exclusion — a critical issue that we analyze in detail below.
Recommendation. We strongly recommend that TMC provide prompt written notice of circumstances to Clearwater Mutual to preserve its coverage rights under the Policy. A notice letter has been separately prepared and is dated December 15, 2024, for transmission to Brendan Forsythe at Clearwater Mutual Services, Inc. Delay in providing notice creates a material risk that Clearwater Mutual will assert a late-notice defense, particularly in light of the EPA Notice of Violation issued on September 12, 2023, and the DOJ complaint filed on January 18, 2024. This risk is amplified by TMC's recent experience with Meridian Environmental Insurance Company's denial of coverage under PLL Policy MEI-ENV-2021-04738 based in part on a late-notice theory.
II. Background — The Underlying Enforcement Action
A. Factual Summary
On January 18, 2024, the United States Department of Justice, acting on behalf of the EPA, filed a multi-count civil enforcement complaint in the United States District Court for the District of Montana, Missoula Division, under Civil Action No. 9:24-cv-00087-DWM, before the Honorable Donald W. Molloy, United States District Judge. The complaint was filed jointly with the States of Montana, Nevada, and West Virginia as co-plaintiffs.
Defendants. The named defendants in the Enforcement Action are the following TMC corporate entities:
• Torchlight Mining Corp. (the Canadian parent company);
• Torchlight Mining (U.S.) Inc. (the U.S. holding company subsidiary);
• Torchlight Specialty Chemicals, Inc. (operator of chemical processing facilities);
• Ridgecrest Mine Holdings, LLC (owner and operator of the Ridgecrest Mine); and
• Bonanza Creek Mining, LLC (owner and operator of the Bonanza Creek Mine).
No individual directors, officers, or employees of TMC or its subsidiaries are currently named as defendants in the Enforcement Action. However, as discussed in Section II.C below, the DOJ complaint contains numerous references to individual conduct and decision-making by senior TMC personnel, and the possibility of future individual actions remains a material concern.
Affected Sites. The Enforcement Action involves alleged environmental violations at four operational sites across three states:
1. Ridgecrest Copper-Molybdenum Mine (Drummond, Granite County, Montana) — An open-pit copper and molybdenum mine that has been in continuous operation since 1978. The complaint alleges ongoing acid mine drainage from the main pit and from the South Tailings Storage Facility, resulting in contamination of Clark Fork River tributaries and surrounding groundwater. The complaint further alleges improper storage and disposal of hazardous waste generated from the flotation concentration process in violation of RCRA.
2. Gallatin Chemical Works (Belgrade, Gallatin County, Montana) — A specialty chemical manufacturing facility that processes molybdenum concentrates from the Ridgecrest Mine. The complaint alleges unpermitted discharges of process wastewater containing elevated concentrations of molybdenum, selenium, and sulfate to the East Gallatin River in violation of the facility's MPDES/NPDES permit and CWA § 301.
3. Bonanza Creek Gold Mine (Lander County, Nevada) — A heap-leach gold mining operation. The complaint alleges violations of RCRA §§ 3004 and 3005 arising from the operation of a cyanide heap-leach pad without adequate liner systems and the improper management of spent heap-leach materials constituting hazardous waste. Additional allegations involve mortality of migratory birds at the cyanide solution ponds in violation of the Migratory Bird Treaty Act.
4. Kanawha Bend Chemical Plant (Institute, Kanawha County, West Virginia) — A chemical manufacturing facility that produces mining reagents and flotation chemicals. The complaint alleges RCRA violations arising from the improper storage of hazardous waste, including a 2020 sulfuric acid release that resulted in an emergency response action, as well as CERCLA § 107 liability for historical contamination at the site requiring remediation.
Statutory Bases. The Government's complaint asserts claims under the following federal statutes:
• Clean Water Act ("CWA") § 301 (33 U.S.C. § 1311) — unpermitted discharges of pollutants;
• Resource Conservation and Recovery Act ("RCRA") §§ 3004 and 3005 (42 U.S.C. §§ 6924, 6925) — treatment, storage, and disposal of hazardous waste without a permit or in violation of permit conditions;
• Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") § 107 (42 U.S.C. § 9607) — liability for response costs incurred by the EPA; and
• Migratory Bird Treaty Act (16 U.S.C. §§ 703–712) — take of migratory birds.
Government Counsel. The Enforcement Action is being prosecuted by the DOJ Environment and Natural Resources Division ("ENRD"), with Philip Orenstein and Katherine Rowe-Halpern (supervising) serving as lead DOJ counsel, and Margaret Coulson of the EPA Office of Enforcement and Compliance Assurance ("OECA") serving as the EPA's lead enforcement attorney. The co-plaintiff States are represented by Annika Hedstrom, Assistant Attorney General of Montana; Ricardo Fuentes, Deputy Attorney General of Nevada; and Loretta May Hatcher, Assistant Attorney General of West Virginia.
Consent Decree Negotiations. The parties have been engaged in intensive consent decree negotiations since approximately March 2024. A proposed consent decree is expected to be lodged with the Court in the first quarter of 2025, subject to a public comment period under 28 C.F.R. § 50.7 and CERCLA § 122(d)(2). The terms of the proposed consent decree are addressed in Section II.B below.
B. Financial Exposure
The total estimated financial obligation under the proposed consent decree is approximately $409.9 million (nominal), broken down as follows:
The remediation obligations — which constitute the vast majority of the consent decree's financial burden — are expected to be performed over a period of approximately fifteen to twenty years at the Ridgecrest Mine and seven to ten years at the remaining three sites.
Financial Assurance Requirements. The proposed consent decree will require TMC to provide financial assurance in the aggregate amount of $245.0 million, structured as follows:
• A surety bond of $165.0 million to be issued by Ironbark Surety of America; and
• A remediation trust fund of $80.0 million to be established at Larchfield Trust Company, N.A., with annual contributions over five years.
These financial assurance requirements represent a significant commitment of TMC's capital and creditworthiness and will materially impact the Company's balance sheet and borrowing capacity.
C. Potential Individual Officer/Director Exposure
Although no individual directors or officers are currently named as defendants in the Enforcement Action, the DOJ complaint contains extensive references to individual conduct and decision-making by senior TMC personnel. Moreover, the nature and severity of the alleged violations create a realistic possibility that individual officers or directors could face personal liability in several contexts. The individual exposure analysis for each key officer and director is as follows:
Douglas K. Prennell, Chief Executive Officer. As CEO, Mr. Prennell bears ultimate oversight responsibility for TMC's environmental compliance program. The DOJ complaint references internal TMC memoranda and board presentations in which Mr. Prennell acknowledged environmental compliance challenges at the Ridgecrest Mine and the Kanawha Bend Chemical Plant. In the event of a shareholder derivative action, Mr. Prennell would be a primary target for allegations that he failed to ensure the Company maintained an adequate environmental compliance program.
Gareth Linford, Vice President — Environmental Health & Safety. Mr. Linford has direct operational responsibility for EHS compliance at all four affected sites and is the signatory on various environmental permits and regulatory filings submitted to the EPA and state environmental agencies. Mr. Linford's exposure to individual criminal prosecution is the most acute of any TMC officer, given his direct involvement in the operational decisions that are the subject of the Enforcement Action. If DOJ were to pursue individual criminal charges under RCRA § 3008(d) (knowing treatment, storage, or disposal in violation of a permit or applicable regulation) or CWA § 309(c) (knowing or negligent violation of effluent limitations or permit conditions), Mr. Linford would likely be the primary individual target.
Carolyn Bracebridge, Chief Financial Officer. Ms. Bracebridge faces potential exposure related to the adequacy of TMC's environmental remediation reserves and the accuracy of the Company's financial disclosures. TMC recorded an environmental remediation reserve of C$340.0 million (approximately US$251.4 million at current exchange rates) as of Q3 2024. The proposed consent decree obligation of approximately US$409.9 million nominal represents a potential shortfall of approximately US$158.5 million relative to the recorded reserve. If shareholders or securities regulators were to allege that TMC materially understated its environmental liabilities in its financial statements, Ms. Bracebridge could face personal liability for her role in establishing and certifying those reserves.
Miriam Soo-Hwan Park, General Counsel. Ms. Park has oversight responsibility for TMC's regulatory compliance reporting and has been involved in the Company's responses to EPA information requests and enforcement proceedings. While General Counsel exposure in environmental enforcement matters is typically more limited than that of operational officers, Ms. Park could face claims in a derivative or securities action relating to the adequacy of the Company's regulatory compliance disclosures and legal risk assessments.
Board of Directors (Generally). TMC's board members face potential exposure for breach of their fiduciary duties to ensure that the Company maintained adequate environmental compliance programs and made accurate and complete public disclosures regarding its environmental liabilities. TMC is dual-listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") under the ticker symbol "TRC" and has an approximate market capitalization of C$7.6 billion. As a dual-listed public company, TMC is subject to the disclosure requirements of both Canadian securities regulators and the U.S. Securities and Exchange Commission ("SEC"), which heightens the risk that alleged disclosure deficiencies could give rise to securities claims implicating the board.
It is important to emphasize that while no individual directors or officers are currently named as defendants, the DOJ complaint's references to individual conduct and decision-making, combined with the magnitude of the financial exposure, create a significant possibility of future individual actions — including potential shareholder derivative claims, securities class actions, and individual criminal proceedings — arising from or related to the Enforcement Action.
III. Policy Overview — Clearwater Mutual D&O Policy
A. Policy Identification
The D&O liability insurance policy at issue is identified as follows:
The Policy is a claims-made D&O liability insurance policy providing coverage through three standard insuring agreements: Side A (Direct Coverage for Non-Indemnifiable Loss), Side B (Corporate Reimbursement), and Side C (Entity Coverage for Securities Claims). Each insuring agreement is discussed in detail below.
B. Insuring Agreements — Side A, B, and C Coverage
The Policy contains three distinct insuring agreements, each of which serves a different function in the overall D&O coverage structure. Understanding the scope and applicability of each insuring agreement is critical to assessing the availability of coverage in connection with the Enforcement Action and any related future proceedings.
Side A — Direct Coverage for Non-Indemnifiable Loss. The Side A insuring agreement provides direct coverage to individual directors and officers for "Loss" (including defense costs) arising from "Claims" alleging "Wrongful Acts," where TMC cannot or does not indemnify them. Side A coverage operates without any corporate retention or deductible — it provides first-dollar coverage to individual insureds. Side A is the most favorable insuring agreement from the perspective of individual directors and officers and represents their personal safety net against unindemnified liability.
Side A coverage is triggered in situations where corporate indemnification is either legally prohibited (e.g., indemnification for criminal fines or penalties, or in jurisdictions that preclude indemnification for certain types of misconduct) or factually unavailable (e.g., the corporation is insolvent or otherwise financially unable to indemnify). The Side A insuring agreement is particularly important in the context of the Enforcement Action because of the potential for individual criminal prosecution under RCRA and CWA criminal provisions, where TMC may be legally precluded from indemnifying any resulting criminal fines.
Side B — Corporate Reimbursement. The Side B insuring agreement reimburses TMC for amounts it pays to indemnify its directors and officers for covered "Loss" arising from covered "Claims." Unlike Side A, Side B coverage is subject to a corporate retention (deductible) that TMC must satisfy before coverage attaches. Side B effectively protects the Company's balance sheet by transferring the financial burden of indemnification to the Carrier.
Side B coverage is triggered only when the Company has in fact indemnified an individual director or officer for a covered loss. It does not cover the Company's own liability for claims brought directly against the corporate entity. This distinction is critical in the context of the Enforcement Action, which currently names only corporate defendants: Side B will not be triggered unless and until individual directors or officers are named in a covered "Claim" and TMC indemnifies them for their defense costs and any resulting liability.
Side C — Entity Coverage for Securities Claims. The Side C insuring agreement covers TMC (the corporate entity) itself for "Loss" arising from "securities claims." The term "securities claims" is defined in the Policy and typically encompasses claims alleging violations of federal or state securities laws, including claims under the Securities Exchange Act of 1934 (for U.S. purposes) and corresponding Canadian securities legislation. Side C does not cover the corporate entity for non-securities claims, including regulatory enforcement actions under environmental statutes.
The current Enforcement Action is an environmental regulatory matter and does not fall within the definition of a "securities claim" under the Policy. Accordingly, Side C coverage is not currently triggered. However, as analyzed in Sections IV.C and VIII.B below, the potential for a future securities class action — arising from alleged misstatements or omissions regarding TMC's environmental liabilities in its SEC filings, TSX continuous disclosure documents, or financial statements — could trigger Side C coverage.
C. Key Policy Definitions
The following key Policy definitions are central to the coverage analysis:
"Claim." The Policy defines "Claim" broadly to include any civil, criminal, administrative, or regulatory proceeding commenced against an Insured Person, as well as written demands for monetary or non-monetary relief. The critical question is whether the Enforcement Action — which names only corporate defendants — constitutes a "Claim" against individual "Insured Persons" within the meaning of the Policy. Our preliminary analysis indicates that the Enforcement Action, as currently styled, does not constitute a "Claim" against any individual Insured Person. However, the EPA Notice of Violation ("NOV") issued on September 12, 2023, which preceded the DOJ complaint, and the consent decree itself, could potentially be characterized as "circumstances that may give rise to a Claim" against individual officers and directors — a distinction that is critical for notice purposes.
Additionally, the DOJ complaint's references to individual decision-making by TMC officers raise the question of whether the complaint, although it does not name individuals, is tantamount to a "Claim" against those individuals. We recommend a conservative interpretation that treats the Enforcement Action as giving rise to "circumstances" warranting notice, even if it does not yet constitute a formal "Claim" against individual Insured Persons.
"Loss." The Policy defines "Loss" to include defense costs, judgments, and settlements arising from covered Claims. A critical issue is whether civil penalties — specifically, the $31.5 million in civil penalties contemplated by the proposed consent decree — constitute covered "Loss" under the Policy. As a general matter, fines and penalties imposed by governmental authorities are considered uninsurable as a matter of public policy in most jurisdictions, on the ground that permitting insurance for penalties would undermine their deterrent effect. We anticipate that the $31.5 million civil penalty component of the consent decree would be excluded from the definition of "Loss" under the Policy, either by the express terms of the definition or by operation of applicable public policy principles.
Defense costs, by contrast, are expressly included within the definition of "Loss" and are the category of expenditure most likely to be covered under the Policy in connection with the Enforcement Action and any related individual proceedings.
"Insured Person." The Policy defines "Insured Person" to include the directors and officers of TMC and its subsidiaries. The question of whether the definition extends to certain senior managers below the officer level requires careful analysis of the Policy's specific language. Vice President-level executives such as Gareth Linford (VP Environmental Health & Safety) and General Counsel Miriam Soo-Hwan Park should qualify as "Insured Persons" under most standard D&O policy definitions, which typically encompass officers of the company at the vice president level and above, as well as any person who holds a position analogous to that of a director or officer. However, this determination depends on the specific Policy language and may require confirmation with Clearwater Mutual.
"Wrongful Act." The Policy defines "Wrongful Act" to include any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by an Insured Person in their capacity as a director or officer of TMC or any of its subsidiaries. This definition is broad and would encompass the types of alleged failures of oversight and compliance that could form the basis of derivative or securities claims against TMC's directors and officers in connection with the Enforcement Action.
D. Policy Period and Limits
The Policy number — CMI-DO-2023-10221 — suggests issuance in 2023. The precise policy period, including any renewal or extended reporting period provisions, must be confirmed against the Policy declarations page and any endorsements. This is particularly important given the timeline of relevant events: the EPA NOV was issued on September 12, 2023, and the DOJ complaint was filed on January 18, 2024, both of which likely fall within the current policy period or the immediately preceding period.
The Policy provides per-claim and aggregate limits of liability, as well as a corporate retention (deductible) applicable to Side B and Side C coverage. The specific dollar amounts of these limits and the retention are set forth in the Policy declarations page and are summarized in Appendix A. We note that defense costs are typically eroded against the Policy's limits (i.e., the Policy is a "wasting" or "burning limits" policy), which means that defense expenditures reduce the amount of coverage available for indemnity payments.
The Policy contains defense-cost advancement provisions that require Clearwater Mutual to advance defense costs to Insured Persons on an ongoing basis as they are incurred, subject to an undertaking to repay such amounts if it is ultimately determined that the costs are not covered under the Policy. This is a critical distinction from a "duty to defend" policy, under which the insurer assumes direct control of the defense: under the Policy's advancement provisions, the Insured Persons retain the right to select their own counsel and control the defense, with Clearwater Mutual reimbursing defense costs as incurred. This arrangement preserves the Insured Persons' autonomy in the defense of any claims against them.
IV. Coverage Analysis — Applicability to the EPA Enforcement Action
A. Side A Coverage — Individual Non-Indemnifiable Loss
Side A coverage is the most likely source of meaningful D&O coverage in connection with the Enforcement Action and related proceedings. Side A is designed to protect individual directors and officers in precisely the situations that may arise from the Enforcement Action — situations where the corporate entity cannot or does not indemnify them for their personal liability or defense costs. We have identified three principal scenarios in which Side A coverage would be triggered:
Scenario 1: Individual Criminal Prosecution. If DOJ were to bring individual criminal charges against one or more TMC officers — most likely Gareth Linford, given his direct operational responsibility for EHS compliance — under RCRA's knowing-endangerment provisions (42 U.S.C. § 6928(e)) or the CWA's criminal provisions (33 U.S.C. § 1319(c)), TMC may be legally precluded from indemnifying any resulting criminal fines or penalties. Under the corporate laws of most jurisdictions, including the Canada Business Corporations Act (under which TMC is incorporated) and the laws of the U.S. states in which TMC's subsidiaries are organized, indemnification for criminal fines and penalties is generally either prohibited or subject to significant limitations. In this scenario, Side A coverage would be triggered to cover the individual officer's defense costs and, potentially, any non-penalty loss arising from the criminal proceeding.
This scenario represents the most critical potential application of Side A coverage in this matter. The possibility of individual criminal prosecution is not merely theoretical: the DOJ complaint identifies specific instances of alleged knowing violations by TMC personnel, and DOJ ENRD has been increasingly aggressive in pursuing individual criminal charges in environmental enforcement matters. We assess the probability of individual criminal prosecution as moderate but not negligible, particularly with respect to Mr. Linford.
Scenario 2: Shareholder Derivative Action with Finding of Intentional Misconduct. If a shareholder derivative action were brought against TMC's directors and officers alleging breach of fiduciary duty for failing to oversee environmental compliance (a Caremark-type claim), and if the court were to find that the defendants engaged in intentional misconduct, TMC may be precluded from indemnifying the defendants under applicable corporate law. In this scenario, Side A coverage would apply to cover the unindemnified defense costs and any damages award against the individual defendants.
Even in the absence of a finding of intentional misconduct, Side A coverage could be triggered if the derivative action results in a settlement that TMC is unable or unwilling to fund, or if the terms of the settlement preclude corporate indemnification.
Scenario 3: Corporate Insolvency. If TMC's environmental liabilities were to impair its financial position to the point of insolvency, the Company would be unable to indemnify its directors and officers for defense costs and liability arising from any claims against them. In this scenario, Side A coverage would serve as a personal safety net for directors and officers, providing direct coverage without reliance on corporate indemnification.
While TMC's current financial indicators suggest that it remains well-capitalized (FY2023 EBITDA of approximately US$843 million, with a Harborstone revolving credit facility of C$750.0 million and environmental covenant headroom of C$425.6 million), the magnitude of the consent decree obligation ($409.9 million nominal) and the ongoing operational costs of remediation create a remote but non-trivial risk of financial distress. Side A coverage should be preserved against this contingency.
Assessment. Side A is the most likely source of meaningful D&O coverage in this matter and should be treated as the highest-priority coverage to preserve. The most critical immediate step is to ensure that the consent decree language does not contain any admissions or stipulations that could be characterized as findings of intentional or criminal conduct by individual officers or directors, as such findings could trigger conduct exclusions under the Policy and erode the availability of Side A coverage.
B. Side B Coverage — Corporate Reimbursement
TMC is currently indemnifying its officers and directors for defense costs related to the Enforcement Action pursuant to TMC's bylaws and the individual indemnification agreements that TMC has entered into with each of its directors and officers. These indemnification obligations represent a direct financial cost to TMC, and Side B coverage is designed to reimburse the Company for such costs.
However, the threshold question for Side B coverage is whether the Enforcement Action constitutes a "Claim" against individual "Insured Persons" within the meaning of the Policy. As noted above, the Enforcement Action names only corporate entities as defendants. The defense costs currently being incurred by TMC are primarily the costs of defending the corporate entities in the Enforcement Action and negotiating the consent decree — they are not costs incurred to defend individual directors or officers against personal claims.
The distinction is critical: Side B reimburses TMC for amounts it pays to indemnify individual directors and officers for their personal defense costs and liability. If the underlying claim is directed solely at the corporate entity, and the defense costs are incurred in defending the entity rather than any individual, Side B is not triggered.
There are, however, several arguments that could support a Side B coverage claim:
• TMC's officers and directors are devoting substantial time and effort to responding to the Enforcement Action in their individual capacities — preparing for depositions, reviewing and certifying compliance documents, and participating in settlement negotiations. To the extent that TMC compensates or indemnifies them for their individual time and personal legal exposure in connection with these activities, those amounts could arguably constitute indemnification payments covered by Side B.
• If the Enforcement Action is expanded to include individual defendants, or if individual officers or directors receive target letters or are named in individual enforcement proceedings, Side B would be clearly triggered for the defense costs that TMC advances on their behalf.
• If a derivative action or securities class action is filed naming individual directors and officers as defendants, the defense costs incurred by TMC in indemnifying those individuals would fall squarely within Side B coverage.
Retention Analysis. Side B coverage is subject to a corporate retention (deductible) specified in the Policy declarations. TMC must satisfy this retention before Clearwater Mutual's Side B reimbursement obligation attaches. Given the significant defense costs already being incurred in connection with the Enforcement Action and consent decree negotiations — C&H's fees alone have exceeded $3.2 million to date, and TMC's total legal and consulting costs related to the Enforcement Action are estimated at approximately $12.5 million through year-end 2024 — the retention may already have been satisfied or substantially eroded, depending on the applicable retention amount and the allocation of costs between entity defense and individual defense.
C. Side C Coverage — Entity Securities Claims
Side C coverage insures TMC itself (the corporate entity) for "Loss" arising from "securities claims." The Enforcement Action is an environmental regulatory matter, not a securities claim, and therefore does not trigger Side C coverage.
However, the financial magnitude of the consent decree obligation ($409.9 million nominal) and the potential gap between TMC's recorded environmental remediation reserve and the actual liability exposure create a significant risk that a securities class action could be filed against TMC and its officers and directors. Specifically:
• TMC recorded an environmental remediation reserve of C$340.0 million (approximately US$251.4 million at current exchange rates) as of Q3 2024. The proposed consent decree obligation of approximately US$409.9 million nominal represents a shortfall of approximately US$158.5 million relative to the recorded reserve.
• If shareholders were to allege that TMC materially understated its environmental liabilities in its SEC filings (Form 20-F), its TSX continuous disclosure documents, its risk factors, or its financial statements, such allegations would constitute a "securities claim" within the meaning of the Policy and would trigger Side C entity coverage.
• The adequacy of TMC's environmental remediation reserve involves complex accounting judgments under ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). TMC's external auditor, Ridgeline Accounting Partners LLP (engagement partner Frances Whitmore), has been consulted on the reserve methodology, and a draft financial statement footnote is being prepared to address the consent decree obligation. These accounting issues are outside the scope of this D&O coverage assessment but are directly relevant to the securities litigation risk that could trigger Side C coverage.
Assessment. Side C is not currently triggered but should be actively monitored. TMC's management and board should be aware that the public announcement of the consent decree — including the significant reserve shortfall — could serve as the catalyst for a securities class action. If such a claim is filed, prompt additional notice to Clearwater Mutual under the D&O Policy will be required.
V. Exclusion Analysis
Even where the insuring agreements are otherwise triggered, coverage may be barred or limited by the Policy's exclusions. We have identified six categories of exclusions that are potentially relevant to the coverage analysis. Each is analyzed below.
A. Regulatory / Government Action Exclusion
Many D&O policies contain exclusions for fines, penalties, or sanctions imposed by or at the direction of governmental or regulatory bodies. The Policy should be examined for such an exclusion and, if present, its precise scope must be carefully analyzed.
Penalties. The $31.5 million in civil penalties contemplated by the proposed consent decree are almost certainly excluded from coverage under the Policy, regardless of whether the Policy contains a specific regulatory action exclusion. As noted above, civil penalties imposed by governmental authorities are generally uninsurable as a matter of public policy, because allowing insurance for penalties would undermine their deterrent purpose. Courts in virtually all U.S. jurisdictions have held that insurance coverage for government-imposed penalties is against public policy and unenforceable. Accordingly, we do not expect the $31.5 million civil penalty to be covered under any provision of the Policy.
Defense Costs. The more critical question is whether defense costs incurred in connection with the regulatory enforcement proceeding are also excluded, or whether they are carved out from any regulatory action exclusion. Many D&O policies include a "defense cost carve-back" that preserves coverage for defense costs even where the underlying fines or penalties are excluded. If the Policy contains such a carve-back, defense costs incurred by individual directors and officers in defending against the Enforcement Action (or any related individual proceedings) would remain covered notwithstanding the exclusion of penalties.
Conduct Exclusion Interplay. Certain regulatory action exclusions are linked to or incorporate language from the Policy's conduct exclusion (discussed in Section V.C below), requiring a "final adjudication" of wrongful conduct before the exclusion is triggered. If the regulatory action exclusion contains a "final adjudication" trigger, it would not bar coverage for defense costs incurred prior to any such adjudication, and a consent decree settlement (which does not constitute a final adjudication of liability) would not activate the exclusion.
B. Pollution / Environmental Exclusion
The pollution exclusion is the single most significant potential barrier to coverage under the Policy in connection with the Enforcement Action. D&O policies frequently contain pollution exclusions, and the scope of these exclusions varies widely.
Total Pollution Exclusion vs. Claims-Based Pollution Exclusion. Pollution exclusions in D&O policies generally fall into two categories: (1) a "total" or "absolute" pollution exclusion, which bars coverage for any claim arising out of, based upon, or attributable to any actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants; and (2) a more limited "claims-based" pollution exclusion, which bars coverage only for specific types of pollution-related claims (e.g., claims for bodily injury or property damage caused by pollution). The breadth of the exclusion in Policy CMI-DO-2023-10221 must be determined by reference to the specific policy language.
If the Policy contains a total pollution exclusion, it could potentially bar all coverage for the Enforcement Action and any related claims, on the ground that the underlying allegations arise out of environmental contamination at the four sites.
Side A Carve-Out. Critically, many D&O policies — particularly modern policies negotiated for publicly traded companies — contain a carve-out that exempts Side A coverage from the pollution exclusion. This carve-out reflects the insurance market's recognition that individual directors and officers should not be left without personal liability protection simply because the underlying claims involve pollution or environmental contamination. If the Policy contains a Side A carve-out from the pollution exclusion, individual defense costs in any future criminal or individual enforcement proceeding would remain covered under Side A, even if Side B and Side C coverage were barred by the exclusion.
This is a critical issue for TMC's individual officers and directors, and particularly for Gareth Linford, whose individual exposure to criminal prosecution is the most acute. We recommend that the Policy be reviewed with particular attention to the pollution exclusion language and any Side A carve-out.
Application to the Enforcement Action. If the pollution exclusion applies broadly and there is no Side A carve-out, coverage for all claims arising from the Enforcement Action would likely be barred. If the pollution exclusion applies but with a Side A carve-out, coverage would be preserved for individual non-indemnifiable losses (particularly defense costs in any criminal prosecution) but would be barred for Side B corporate reimbursement and Side C entity coverage. This is the outcome we consider most likely based on current market-standard policy language, but confirmation against the specific Policy terms is essential.
C. Conduct Exclusions (Intentional / Fraudulent / Criminal Conduct)
The Policy contains a standard conduct exclusion that bars coverage for loss arising from claims based upon, arising out of, or attributable to any dishonest, fraudulent, or criminal act, or any willful violation of law, by an Insured Person. The critical question is the trigger for this exclusion — specifically, whether it operates on a "final adjudication" standard or an "in fact" standard.
"Final Adjudication" vs. "In Fact" Standard. Under a "final adjudication" standard, the conduct exclusion is triggered only upon a final, non-appealable adjudication (typically a judgment or verdict) establishing that the Insured Person engaged in the excluded conduct. Under this standard, defense costs incurred prior to any final adjudication would be covered, and a settlement (including a consent decree) would generally not constitute a "final adjudication" that triggers the exclusion.
Under an "in fact" standard, the conduct exclusion is triggered if the Insured Person did "in fact" engage in the excluded conduct, regardless of whether there has been a formal adjudication. This is a more restrictive standard from the insured's perspective, because the insurer can assert the exclusion based on evidence of actual conduct without waiting for a court finding.
Application to the Enforcement Action. If DOJ were to pursue criminal charges against individual officers under RCRA § 3008(d) (knowing treatment, storage, or disposal violations) or CWA § 309(c) (knowing or negligent violations), a criminal conviction would constitute a "final adjudication" of knowing or willful criminal conduct that would trigger the conduct exclusion and bar coverage for any loss arising from the criminal proceeding. However, defense costs incurred prior to any such conviction should be covered under the Policy's advancement provisions, which require Clearwater Mutual to advance defense costs pending the outcome of the proceeding.
The consent decree itself — a civil settlement of the Enforcement Action — should not constitute a "final adjudication" of intentional or criminal conduct by any individual officer or director. Consent decrees typically contain language stating that they are entered for settlement purposes and do not constitute an admission of liability. Provided that the consent decree language is drafted carefully to avoid any characterization as a finding of intentional misconduct, the conduct exclusion should not be triggered by the entry of the consent decree.
Recommendation. It is critical that the consent decree language be reviewed to ensure that it does not contain any admissions, stipulations, or findings that could be characterized as establishing intentional or criminal conduct by individual officers or directors. Any such language could trigger the conduct exclusion and jeopardize D&O coverage for individual insureds. This recommendation is addressed further in Section IX.A below.
D. Prior Knowledge / Prior Acts Exclusion
The Policy may contain a prior-knowledge or prior-acts exclusion that bars coverage for claims arising from facts, circumstances, or conditions known to the insured prior to the inception of the Policy. This exclusion is potentially significant given the longstanding nature of the environmental conditions at several of the affected sites.
Ridgecrest Mine. The Ridgecrest Copper-Molybdenum Mine has been in continuous operation since 1978, and the acid mine drainage and tailings storage issues that are the subject of the Enforcement Action have been known for many years. TMC entered into an Administrative Order on Consent ("AOC") with the EPA regarding the Ridgecrest Mine on September 15, 2022 — a date that likely precedes the inception of the current Policy. If the prior-knowledge exclusion is triggered by TMC's knowledge of the Ridgecrest environmental conditions at the time the Policy was placed, coverage for claims arising from the Ridgecrest site could be barred.
Kanawha Bend Chemical Plant. The 2020 sulfuric acid release at the Kanawha Bend Chemical Plant predates the Policy period by several years. If the prior-knowledge exclusion is drafted broadly to encompass knowledge of conditions or events that could give rise to a claim, TMC's knowledge of the 2020 release and its aftermath could trigger the exclusion with respect to claims arising from the Kanawha Bend site.
EPA Notice of Violation (September 12, 2023). The EPA issued a Notice of Violation on September 12, 2023, which preceded the filing of the DOJ complaint on January 18, 2024. Depending on the Policy inception date, the NOV may have been issued during the current policy period or during a prior policy period. If the NOV was issued during a prior policy period and was not reported to Clearwater Mutual at that time, it could be treated as a "prior claim" that exhausts or precludes coverage under the current Policy.
Ridgecrest AOC (September 15, 2022). Similarly, the Ridgecrest AOC, entered on September 15, 2022, may constitute a "prior claim" or "prior circumstance" that was required to be reported under a prior policy period. If it was not reported, coverage for claims arising from the Ridgecrest site could be jeopardized.
Assessment. The prior-knowledge and prior-acts exclusion is a significant risk factor that must be carefully analyzed against the specific Policy language. TMC's applications for D&O coverage — including any representations made in the policy application regarding known environmental liabilities, pending or threatened enforcement actions, or existing administrative orders — should be reviewed to determine whether TMC's disclosures in the application process were complete and accurate. Any material misrepresentation or omission in the application could provide an additional basis for Clearwater Mutual to deny coverage.
E. Insured vs. Insured Exclusion
The Policy likely contains an "insured vs. insured" exclusion that bars coverage for claims brought by one insured against another insured. This exclusion is designed to prevent collusive claims between the company and its directors/officers. However, the exclusion is relevant in the context of the Enforcement Action because of the potential for a shareholder derivative action — which is technically brought by the corporation (through a derivative plaintiff acting on its behalf) against its own directors and officers.
Standard D&O policies include carve-outs from the insured vs. insured exclusion for (a) shareholder derivative actions brought by shareholders without the instigation or participation of any insured; and (b) actions brought by a bankruptcy trustee or receiver. These carve-outs are critical to ensuring that derivative claims — the most common type of D&O claim — are not excluded from coverage.
Assessment. If a shareholder derivative action is filed against TMC's directors and officers in connection with the Enforcement Action, the insured vs. insured exclusion should not bar coverage, provided that the derivative action falls within the standard carve-out for bona fide shareholder derivative suits. However, the specific carve-out language must be reviewed to confirm its scope and applicability.
F. Contractual Liability Exclusion
Certain D&O policies contain an exclusion for "contractual liability" — liability assumed by the insured under a contract or agreement. A potential question is whether the consent decree constitutes a "contractual liability" that is excluded from coverage under this provision.
The strongest argument against the application of a contractual liability exclusion to the consent decree is that the consent decree is not a purely voluntary contractual undertaking but rather a court-approved settlement of a government enforcement action. Consent decrees are entered as orders of the court and are enforceable through the court's contempt power, not merely through contract remedies. Courts have generally treated consent decrees as judicial orders rather than contracts for purposes of insurance coverage analysis, and we believe the contractual liability exclusion should not bar coverage for loss arising from the consent decree.
Nevertheless, the specific language of any contractual liability exclusion in the Policy should be reviewed to determine whether it could be interpreted to encompass consent decree obligations. If the exclusion is drafted broadly (e.g., "liability assumed under any contract or agreement"), there is a risk that Clearwater Mutual could argue that the remediation and payment obligations under the consent decree constitute "assumed" contractual liabilities.
VI. Notice Requirements and Timing
Timely notice to the insurer is a fundamental prerequisite to coverage under any claims-made D&O policy. The Policy contains specific notice provisions that require the Named Insured to provide written notice to Clearwater Mutual of any "Claim" made against an Insured Person, or of any "circumstances that may give rise to a Claim," within the policy period or any applicable extended reporting period.
Timeline of Relevant Events. The following timeline is relevant to the notice analysis:
Analysis. The critical question is whether TMC has provided (or can still provide) timely notice to Clearwater Mutual. The Enforcement Action was commenced on January 18, 2024 — nearly twelve months before the planned notice letter. If the Policy requires notice "as soon as practicable" after the insured becomes aware of a Claim or circumstances that may give rise to a Claim, a twelve-month delay could be characterized by Clearwater Mutual as untimely.
However, several factors may mitigate the late-notice risk:
1. The Enforcement Action currently names only corporate defendants, not individual Insured Persons. There is a reasonable argument that the obligation to provide notice of a "Claim" under the D&O Policy was not triggered because no "Claim" has been made against any individual Insured Person.
2. The notice being provided is a notice of "circumstances that may give rise to a Claim" — i.e., TMC is alerting Clearwater Mutual to the Enforcement Action as a circumstance that could lead to future claims against individual directors and officers. Many policies provide a longer window for notice of circumstances than for notice of actual claims.
3. In many jurisdictions, late notice does not automatically vitiate coverage; rather, the insurer must demonstrate prejudice resulting from the delay. If Clearwater Mutual cannot demonstrate that it was materially prejudiced by the delay in receiving notice, a late-notice defense may be rejected by the court.
Parallel to Meridian PLL Coverage Denial. We note that TMC is currently facing a coverage denial by Meridian Environmental Insurance Company under the PLL Policy (MEI-ENV-2021-04738) based in part on a late-notice theory. Meridian's claims adjuster, Sheila Grantham, asserted in her denial letter that TMC failed to provide timely notice of the Kanawha Bend pollution incident, and that Meridian was prejudiced by the delay. The experience with the Meridian PLL Policy underscores the importance of providing prompt notice to Clearwater Mutual to avoid a similar outcome.
Recommendation. We strongly recommend that the notice of circumstances letter be transmitted to Brendan Forsythe at Clearwater Mutual Services, Inc. no later than December 15, 2024. The letter has been drafted to provide comprehensive notice of the Enforcement Action and the potential for future claims against individual directors and officers. The letter should be sent by overnight courier with a confirmation copy by email, and TMC should retain proof of delivery. If possible, TMC should also make a follow-up phone call to Mr. Forsythe to confirm receipt and to establish a cooperative dialogue with the Carrier regarding coverage.
VII. Interaction with Other Insurance Policies
A. Meridian PLL Policy (Policy No. MEI-ENV-2021-04738)
TMC maintains a Pollution Legal Liability ("PLL") insurance policy with Meridian Environmental Insurance Company under Policy No. MEI-ENV-2021-04738. The PLL Policy provides per-occurrence coverage of $50.0 million and aggregate coverage of $75.0 million, subject to a self-insured retention ("SIR") of $5.0 million per occurrence.
Coverage Dispute. Meridian has denied coverage for two of the four sites involved in the Enforcement Action:
• Ridgecrest Mine: Meridian denied coverage based on the policy's known-conditions exclusion, asserting that the acid mine drainage and tailings contamination at Ridgecrest were known conditions at the time the PLL Policy was placed.
• Kanawha Bend Chemical Plant: Meridian denied coverage based on late notice, asserting that TMC failed to provide timely notice of the 2020 sulfuric acid release and the subsequent EPA enforcement activity.
• Gallatin Chemical Works and Bonanza Creek Gold Mine: Meridian has acknowledged coverage for the Gallatin and Bonanza Creek sites, subject to the per-occurrence SIR of $5.0 million.
Estimated Recovery. Based on the assessment prepared by Northspire Capital Markets (Managing Director Vivian Okafor), TMC's estimated recovery under the Meridian PLL Policy, taking into account the coverage denials and the SIR, is approximately $45.0 million to $55.0 million. This recovery, if obtained, would offset a portion of the $343.5 million remediation obligation under the proposed consent decree.
D&O vs. PLL Coverage Distinction. The D&O Policy and the PLL Policy cover fundamentally different risks. The PLL Policy covers remediation costs and third-party bodily injury or property damage arising from pollution conditions at covered sites. The D&O Policy covers the personal liability of directors and officers for claims alleging wrongful acts in their capacity as directors and officers. The two policies are not duplicative, and the D&O Policy is properly characterized as excess of and non-overlapping with the PLL Policy.
However, the "other insurance" provisions in both policies — which address the allocation of coverage when multiple policies may apply to the same claim or loss — should be reviewed to confirm that there are no priority or allocation disputes between the two policies. Specifically, if an individual officer or director is named in a future claim that also implicates the PLL Policy (e.g., a derivative action alleging that the officer's failure to remediate pollution conditions caused harm to the Company), both policies could arguably be triggered, and the "other insurance" provisions would govern the priority and allocation of coverage between them.
B. TMC Corporate Indemnification Obligations
TMC's bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by the Canada Business Corporations Act and the laws of the jurisdictions in which TMC's subsidiaries are organized. In addition, TMC has entered into individual indemnification agreements with each of its directors and officers that provide for indemnification on terms at least as broad as the bylaws.
Impact on Side A vs. Side B. The existence and scope of TMC's indemnification obligations directly affect the allocation of coverage between Side A and Side B. Where TMC indemnifies its directors and officers, Side B (corporate reimbursement) is the applicable insuring agreement. Where TMC cannot or does not indemnify — either because indemnification is legally prohibited or because TMC is financially unable to indemnify — Side A (direct individual coverage) applies.
Financial Capacity to Indemnify. TMC's financial capacity to indemnify its directors and officers is currently adequate. For the fiscal year ended December 31, 2023, TMC reported revenue of C$4.82 billion and EBITDA of C$1.14 billion (approximately US$843 million). TMC maintains a C$750.0 million revolving credit facility with Harborstone Financial Corporation, with current environmental covenant headroom of C$425.6 million. However, the magnitude of the consent decree obligation ($409.9 million nominal) and the associated financial assurance requirements ($245.0 million) will place significant pressure on TMC's financial resources and could, over time, erode its capacity to indemnify directors and officers. If TMC's financial condition deteriorates to the point where indemnification becomes impracticable, Side A coverage would become the primary source of protection for individual directors and officers.
VIII. Potential Future Claims Triggering D&O Coverage
While the current Enforcement Action does not, by itself, constitute a "Claim" against individual Insured Persons under the D&O Policy, the Enforcement Action creates significant risk of future proceedings that would directly trigger D&O coverage. We have identified four principal categories of future claims.
A. Shareholder Derivative Litigation
There is a material risk that one or more TMC shareholders will file a derivative action against TMC's directors and officers alleging breach of fiduciary duty in connection with the environmental violations at the four sites. Such a derivative action would likely be styled as a Caremark-type claim — i.e., a claim that the directors and officers breached their duty of oversight by failing to implement and monitor an adequate environmental compliance program.
The potential allegations in a derivative action would include:
• The board and senior management knew or should have known of the environmental violations at the Ridgecrest Mine, the Gallatin Chemical Works, the Bonanza Creek Gold Mine, and the Kanawha Bend Chemical Plant;
• The board and senior management failed to take adequate corrective action despite receiving reports, internal memoranda, and regulatory notices indicating serious environmental compliance deficiencies;
• As a result of the board's and management's failure to act, TMC incurred approximately $409.9 million in penalties, remediation costs, and related obligations under the consent decree; and
• The directors and officers are personally liable to the Company for the damages caused by their breach of fiduciary duty.
A shareholder derivative action would constitute a "Claim" against individual "Insured Persons" under the D&O Policy and would be covered under Side A (if TMC cannot or does not indemnify) and Side B (if TMC does indemnify), subject to the insured vs. insured exclusion carve-out for derivative actions. The defense costs and any resu

MEMORANDUM

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MATTER NO.: 1039-00003

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