MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc.
CC: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc. Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc.
FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP Yuki Nakamura, Associate, Calderwood & Harkness LLP
DATE: June 6, 2022
RE: Adequacy of D&O Insurance Tower Limits — Nexford Industrial Holdings Inc.
Matter No.: 1005-00003
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I. Executive Summary
Calderwood & Harkness LLP ("C&H") has been engaged by Nexford Industrial Holdings Inc. (the "Company" or "Nexford") to assess whether the current $55 million aggregate directors and officers ("D&O") liability insurance tower maintained by the Company provides adequate protection for the Company's directors and officers in light of Nexford's current risk profile as a privately held, private-equity-backed industrial holding company. This memorandum sets forth our analysis and conclusions.
Our assessment incorporates four principal analytical frameworks: (1) peer company benchmarking against eight comparable private, PE-backed industrial companies; (2) maximum probable loss ("MPL") scenario modeling across four distinct claim categories; (3) evaluation of the Company's clean five-year D&O loss history, during which zero paid losses have been recorded; and (4) consideration of the potential impact of a contemplated initial public offering ("IPO") in the 2023–2024 timeframe, which would materially alter the Company's D&O risk profile by introducing securities-litigation exposure.
Overall Conclusion: Based on the totality of the analysis described in this memorandum, it is our determination that the $55 million aggregate D&O tower limit is adequate for Nexford in its current status as a privately held company. The current tower is positioned at or above the median of the peer benchmarking set, is capable of absorbing all four modeled MPL scenarios without full exhaustion, and reflects a competitive rate-on-line of 2.48% ($1,363,450 total annual premium ÷ $55,000,000 aggregate limit), which is consistent with the Company's favorable loss experience.
However, we emphasize that the D&O tower should be materially reassessed — and likely increased — in connection with any IPO or other public offering. The transition from private to public status would introduce securities-litigation exposure under the Securities Act of 1933 and the Securities Exchange Act of 1934, significantly altering the Company's risk profile and necessitating a restructured and expanded D&O program. Industry benchmarking for newly public industrial companies of comparable size suggests post-IPO limits in the $75 million to $125 million or greater range.
This memorandum should be read in conjunction with three companion memoranda prepared by C&H: (i) the Preliminary Coverage Gap Memorandum — D&O Tower, dated May 27, 2022; (ii) the Side-A DIC Policy Analysis Memorandum, dated June 3, 2022; and (iii) the Indemnification Agreement Review Memorandum, dated June 4, 2022. A fourth companion memorandum, the Regulatory Investigation Coverage Memorandum — D&O, is expected to follow on June 14, 2022. Collectively, these memoranda provide a comprehensive assessment of Nexford's D&O insurance program.
II. Background — Nexford Corporate Profile and Governance Structure
A. Corporate Overview
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The Company serves as the parent holding entity for a portfolio of three operating subsidiaries engaged in various segments of the industrial manufacturing sector. These subsidiaries are as follows:
1. Nexford Conveyor Systems, LLC — A Delaware limited liability company with principal operations in Joliet, Illinois. Nexford Conveyor Systems is the Company's largest operating subsidiary, specializing in the design, engineering, manufacture, and installation of heavy-duty conveyor systems for mining, aggregate processing, and bulk material handling applications. For fiscal year 2021, Nexford Conveyor Systems generated approximately $795.2 million in revenue, representing approximately 56% of the Company's consolidated revenue.
2. Triton Fastener Corp. — An Illinois corporation with principal operations in Rockford, Illinois. Triton Fastener manufactures a comprehensive range of industrial fasteners, including high-strength bolts, specialty anchoring systems, and proprietary fastening solutions for the construction, infrastructure, and heavy equipment industries. For fiscal year 2021, Triton Fastener generated approximately $397.6 million in revenue, representing approximately 28% of the Company's consolidated revenue.
3. Marlowe Asset Management Precision Machining, Inc. — An Ohio corporation with principal operations in Akron, Ohio. Marlowe Asset Management Precision Machining provides precision-machined components and sub-assemblies for the aerospace, defense, and energy industries, utilizing advanced CNC machining, multi-axis milling, and Swiss-type turning capabilities. For fiscal year 2021, Marlowe Asset Management Precision Machining generated approximately $227.2 million in revenue, representing approximately 16% of the Company's consolidated revenue.
For fiscal year 2021, Nexford reported consolidated revenue of $1.42 billion and EBITDA of $218 million, based on audited financial statements prepared by Pemberton & Associates CPAs, LLP, the Company's independent auditor. The Company maintains total funded debt of approximately $1.05 billion, consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. This debt level represents a leverage ratio of approximately 4.8x EBITDA.
The Company's estimated current enterprise value is approximately $2.6 billion, reflecting meaningful value creation since the leveraged buyout ("LBO") at which the acquisition was consummated on June 15, 2018, at an initial enterprise value of approximately $2.1 billion. The revenue mix across the three subsidiaries, the Company's scale of operations, and its position within the industrial manufacturing value chain are each relevant factors in assessing D&O exposure and limits adequacy.
B. Ownership and Sponsor Dynamics
Nexford is a portfolio company of Veltrano Capital Partners Fund IV, LP, a Delaware limited partnership with offices in Charlotte, North Carolina and New York, New York. The ownership structure of the Company is as follows:
Veltrano Capital Partners Fund IV, LP ("Fund IV") is a 2017 vintage fund with $4.8 billion in committed capital. Nexford is Fund IV's largest portfolio company by enterprise value, a factor that is relevant to the D&O analysis insofar as the sponsor's significant economic exposure to Nexford may affect governance dynamics, including the extent to which the sponsor exercises operational and strategic influence over the Company's management team and board of directors.
The management rollover equity represents equity retained by certain members of the Company's management team at the time of the LBO, which was rolled over into the post-acquisition capital structure. Co-investor equity is held by a limited number of institutional and individual co-investors who participated alongside Fund IV in the acquisition. The existence of minority equity holders — both management rollover participants and co-investors — introduces potential for investor disputes that could give rise to D&O claims, as discussed further in Section VI below.
C. Board Composition
The Company's board of directors consists of nine members. Of these, five are appointed by Veltrano Capital Partners in its capacity as controlling equity sponsor, and four serve as independent directors. The chairman of the board is Gerald "Gerry" Whitcomb, who is a Veltrano-appointed director. In addition, Celeste Brogan, a Partner in Veltrano Capital Partners' Portfolio Operations group, serves as a board observer, attending board meetings in a non-voting capacity.
The board composition and the attendant sponsor-control dynamics are significant considerations in the D&O adequacy analysis for several reasons:
• Insured vs. Insured Exclusion Concerns: The majority sponsor-appointed board creates a heightened risk that claims between directors — or between the sponsor-controlled entity and individual officers — may be caught by the Insured vs. Insured ("IvI") exclusion, effectively reducing the usable coverage available under the tower. This issue is discussed in detail in Section IX below.
• Side-A DIC Criticality for Independent Directors: Because independent directors serve on a board that is controlled by the PE sponsor, the availability of dedicated Side-A difference-in-conditions ("DIC") coverage — which is not subject to the IvI exclusion and provides independent, non-eroding limits — is particularly important. The current $15 million Side-A DIC limit and the recommendation to increase it to $20 million are analyzed in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022.
• Board Observer Status: While Celeste Brogan's status as a board observer, rather than a voting director, may limit her "insured person" status under the D&O tower, her attendance at board meetings and potential access to confidential board materials could give rise to coverage questions that warrant monitoring.
The governance structure, including the interplay between sponsor control, independent director oversight, and management authority, shapes the universe of potential D&O claims and is integral to the adequacy determination.
III. Current D&O Tower Structure (2021–2022 Policy Year)
A. Tower Summary Table
The Company's D&O insurance program for the current policy year (July 1, 2021 – July 1, 2022) consists of a four-layer ABC tower and a dedicated Side-A DIC policy, as summarized in the following table:
The total aggregate limit available under the D&O program is $55 million, consisting of $40 million in the ABC tower (primary plus three excess layers) and $15 million in dedicated Side-A DIC coverage. The total annual premium for the program is $1,363,450.
B. Key Structural Features
The current D&O program incorporates the following structural features that are relevant to the adequacy analysis:
Entity Coverage (Side-C Equivalent). Because Nexford is a privately held company, the D&O tower includes entity coverage — functionally equivalent to Side-C coverage in a public-company program — within the primary and all three excess layers. Entity coverage provides coverage for claims made directly against the Company, in addition to claims against individual directors and officers. Entity coverage is subject to a self-insured retention ("SIR") of $1,000,000 per claim. The inclusion of entity coverage in the tower is standard for private-company D&O programs but has the effect of potentially accelerating erosion of the aggregate limits, since both entity-level and individual-level claims draw upon the same pool of coverage.
Side-A DIC — Dedicated, Non-Eroding Limits. The Side-A DIC policy issued by Harrington Specialty Insurance Co. provides $15 million in dedicated, non-eroding coverage for individual directors and officers only. The Side-A DIC does not carry any SIR. This policy responds when: (a) the Company is unable to indemnify its directors and officers (for example, due to insolvency or legal prohibition); (b) the underlying ABC tower denies, exhausts, or otherwise fails to respond to a claim; or (c) the primary or excess carriers become insolvent. The Side-A DIC is a critical component of the D&O program, particularly for independent directors, and its adequacy is addressed in detail in the companion Side-A DIC Policy Analysis Memorandum dated June 3, 2022.
Rate-on-Line. The overall rate-on-line for the D&O program is calculated as follows:
$1,363,450 (total annual premium) ÷ $55,000,000 (total aggregate limit) = 2.48%
This rate-on-line is a key metric for evaluating both the cost-effectiveness of the program and its positioning relative to peers. As discussed in Section V below, Nexford's 2.48% rate-on-line compares favorably to the peer benchmarking set.
D&O Premium as Percentage of Total Executive Risk Spend. The D&O program premium of $1,363,450 represents 34.0% of the Company's combined D&O and professional liability ("PL") insurance expenditure of $4,006,350. This allocation is consistent with the general expectation that D&O coverage represents a significant but not dominant share of total executive risk insurance spend for a company of Nexford's profile.
Insurance Spend as Percentage of Revenue. The Company's combined D&O and PL insurance expenditure of $4,006,350 represents 0.282% of Nexford's $1.42 billion in consolidated revenue, a ratio that falls within the range generally observed for PE-backed industrial companies. This metric provides a useful high-level reference point but should not be viewed in isolation, as the adequacy of limits depends on the nature and severity of potential claims rather than simply the ratio of premium to revenue.
IV. Five-Year D&O Loss History
A thorough review of the Company's D&O claims experience over the preceding five-year period (policy years 2017–2018 through 2021–2022) reveals the following:
• Reported Claims. A single D&O claim has been reported during the five-year period. In 2020, the Company received a shareholder demand letter from a co-investor raising concerns about certain board decisions related to capital allocation and subsidiary-level management compensation. Nexford provided timely notice to Vandermeer National Insurance Company, the primary carrier, in accordance with the policy's notice provisions. The matter was resolved without any payment by the Company, its directors or officers, or any insurer. No formal litigation was commenced, and no coverage was ultimately triggered under the D&O program.
• Paid Losses. Zero paid D&O losses have been recorded across all layers of the tower over the five-year history. No defense costs, settlements, judgments, or other loss payments have been made under the D&O program during this period.
• Regulatory Actions. No regulatory actions, investigations, or proceedings by any federal, state, or local government agency have given rise to D&O coverage triggers during the five-year period. While the Company operates in regulated industries and is subject to oversight by agencies including the Occupational Safety and Health Administration ("OSHA") and the Consumer Product Safety Commission ("CPSC"), among others, no regulatory matters have escalated to a level implicating D&O coverage.
• Employment Practices Claims. No employment practices claims, including wrongful termination, discrimination, harassment, or wage-and-hour claims, have been made against individual directors or officers during the five-year period in a manner that would trigger D&O coverage. We note that certain employment-related claims may be covered under the Company's separate Employment Practices Liability Insurance ("EPLI") program rather than the D&O tower; this memorandum addresses only claims falling within the scope of D&O coverage.
• Creditor Claims. No claims by creditors, lenders, or counterparties alleging breach of fiduciary duty, fraudulent transfer, or similar causes of action against Nexford's directors or officers have been asserted during the five-year period.
The Company's clean D&O loss history is a favorable factor in the adequacy assessment. It contributes to the relatively competitive rate-on-line that Nexford enjoys in the current market and reflects positively on the Company's governance practices, risk management infrastructure, and the quality of its board oversight. However, we caution that the absence of historical losses should not be taken as a basis for reducing limits or complacency regarding D&O risk. D&O claims are characteristically low-frequency but high-severity events. A single significant claim — such as a creditor action following a financial distress event, a regulatory enforcement matter with individual exposure, or, in the event of an IPO, a securities class action — could rapidly consume a substantial portion of the tower. The adequacy of limits must therefore be assessed with reference to potential future exposures, not merely past experience.
V. Peer Benchmarking Analysis
A. Methodology. To provide an empirical benchmark against which to evaluate the adequacy of Nexford's $55 million D&O aggregate limit, C&H, in consultation with Kessler Quinn Advisory Group ("Kessler Quinn"), identified eight comparable private, PE-backed industrial companies (the "Peer Companies") for benchmarking purposes. The Kessler Quinn engagement was led by Arthur Kessler, Managing Director, and Diana Cho, Vice President, Actuarial Services.
The selection criteria for Peer Companies were as follows:
(i) Privately held with a private equity sponsor as controlling or significant equity holder;
(ii) Operating within the industrial manufacturing sector, including companies engaged in heavy equipment manufacturing, industrial components, industrial distribution, and related segments;
(iii) Annual revenue within the range of $750 million to $3.0 billion, bracketing Nexford's $1.42 billion in consolidated revenue;
(iv) Domiciled in the United States; and
(v) Leveraged capital structures consistent with PE-backed acquisition financing.
Data sources for the benchmarking analysis included: (a) the Kessler Quinn proprietary database of D&O program placements for PE-backed portfolio companies, which encompasses placement data provided by Kessler Quinn's broker and carrier network; (b) market intelligence provided by Ashford Breckinridge LLP ("Ashford Breckinridge"), the Company's insurance broker, through its Executive Risk Practice (Phillip Garza, Senior Vice President, and Tamara Fisk, Account Executive, Manufacturing & Industrial); and (c) publicly available premium survey data from industry sources.
In accordance with confidentiality obligations and market convention, all Peer Company identities have been anonymized and are presented as Peer Companies A through H. Revenue and enterprise value figures are presented in ranges rather than exact figures to further protect confidentiality.
B. Benchmarking Results — Summary Table
The following table summarizes the key D&O program metrics for each of the eight Peer Companies, alongside Nexford's current program for comparison:
The key findings from the peer benchmarking analysis are as follows:
• D&O Aggregate Limits Range: Among the eight Peer Companies, D&O aggregate limits range from $35 million (Peer C) to $75 million (Peer E).
• Median and Mean D&O Aggregate: The median D&O aggregate limit among the Peer Companies is $50 million. The mean D&O aggregate limit is approximately $53 million. Nexford's $55 million aggregate is slightly above the median and approximately at the mean, positioning the Company in the middle-to-upper portion of the peer set.
• Rate-on-Line Comparison: Rate-on-line among the Peer Companies ranges from 1.95% (Peer C) to 3.80% (Peer E). The median peer rate-on-line is approximately 2.78%. Nexford's rate-on-line of 2.48% is below the median peer rate-on-line, reflecting the Company's clean loss history and the competitive terms obtained in the most recent placement cycle.
• Premium as Percentage of Revenue: D&O-only premium as a percentage of revenue among the Peer Companies ranges from approximately 0.08% to 0.18%. Nexford's D&O-only spend as a percentage of revenue is $1,363,450 ÷ $1,420,000,000 = 0.096%, which falls within the peer range and is positioned toward the lower end, further indicating cost-effectiveness.
C. Benchmarking Observations
Several observations from the benchmarking data merit specific discussion in the context of the adequacy analysis:
Peer Companies with Higher Limits. Three Peer Companies (B, E, and G) maintain D&O aggregate limits above Nexford's $55 million, with limits ranging from $60 million to $75 million. Each of these companies exhibited one or more distinguishing characteristics that help explain the higher limits:
(a) Peer E, which maintains the highest aggregate limit ($75 million) and the highest rate-on-line (3.80%), is subject to pending securities-related litigation arising from a pre-acquisition matter, which has materially elevated its risk profile and premium structure;
(b) Peers B and E both have boards exceeding ten members, which expands the universe of insured persons and, all else being equal, increases the expected frequency and severity of D&O claims; and
(c) Peers B, E, and G each report revenue exceeding $1.5 billion, and Peer E reports revenue in the $2.0 billion to $2.5 billion range, placing these companies at the higher end of the comparables by revenue scale.
Peer Companies with Lower Limits. Two Peer Companies (C and H) maintain D&O aggregate limits below $45 million ($35 million and $40 million, respectively). Both of these companies have materially lower revenue (in the $750 million to $1.0 billion range) and smaller board sizes (seven members each), consistent with a lower overall D&O risk profile.
Nexford's Positioning. When evaluated against the full peer set, Nexford's $55 million aggregate is well-positioned given the Company's $1.42 billion in revenue, approximately $2.6 billion estimated enterprise value, and nine-member board of directors. The Company's limits are proportionate to its scale and complexity, and neither materially over- nor under-insured relative to similarly situated companies.
Side-A DIC Limits. Side-A DIC limits among the Peer Companies range from $10 million to $25 million. The median Side-A DIC limit is $17.5 million. Nexford's current Side-A DIC limit of $15 million falls below the median, a finding that supports the recommendation set forth in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022, to increase the Side-A DIC limit to $20 million at the next renewal. Such an increase would bring Nexford's Side-A DIC coverage more closely in line with the upper portion of the peer set and provide enhanced protection for individual directors and officers, which is particularly important given the PE sponsor control dynamics discussed in Section IX below.
VI. Maximum Probable Loss Scenario Analysis
A. Methodology. To supplement the peer benchmarking analysis with a risk-based assessment, C&H modeled four hypothetical loss scenarios designed to represent the most significant categories of D&O claims that could reasonably be expected to arise in the context of a private, PE-backed industrial company. These scenarios were developed in consultation with Kessler Quinn Advisory Group, which provided actuarial analysis and loss-severity distribution data, and with input from Catherine Byrne, Partner at Hollander Byrne & Strauss LLP, who contributed litigation experience data derived from her firm's defense of directors and officers in analogous matters.
Each scenario presents a range of estimated D&O exposure encompassing both defense costs and potential indemnity exposure (settlements or judgments). The estimates are informed by historical claim data for similar companies and claim types, adjusted for Nexford's specific risk characteristics. We note that securities-litigation scenarios are excluded from the current analysis, as they are not applicable to Nexford's present status as a privately held company; the impact of securities-litigation exposure in connection with a potential IPO is addressed separately in Section VII.
B. Scenario 1 — Regulatory Enforcement Action (OSHA/CPSC)
Hypothetical Facts: The Occupational Safety and Health Administration ("OSHA") and/or the Consumer Product Safety Commission ("CPSC") initiates an investigation into workplace safety practices or product-safety compliance at one or more of Nexford's manufacturing facilities. The investigation identifies systemic deficiencies and escalates to a formal enforcement action. Individual directors and/or officers are named in connection with allegations of personal culpability — for example, that certain officers knew of or should have known about unsafe conditions or product defects and failed to take adequate corrective action.
Estimated Exposure:
• Defense costs: $3,000,000 – $6,000,000
• Potential penalties, fines, or disgorgement attributable to individual directors/officers: $1,000,000 – $3,000,000
• Total estimated D&O exposure: $4,000,000 – $9,000,000
Tower Response: The estimated exposure under this scenario falls entirely within the $10 million primary layer issued by Vandermeer National Insurance Company. The $1,000,000 entity coverage SIR would apply to any portion of the loss attributable to entity-level coverage. Even at the upper end of the estimated range ($9 million), the loss would not penetrate the first excess layer.
Assessment: The current tower is adequate for this scenario. A regulatory enforcement action of this nature, while potentially significant in terms of reputational impact and management distraction, would not pose a meaningful threat to the aggregate limits of the D&O program.
C. Scenario 2 — Creditor/Lender Claims (Post-Default)
Hypothetical Facts: In a distressed scenario, the Company experiences a financial downturn sufficient to cause a default under the $1.05 billion credit facility administered by Broadleaf Capital Markets, LLC. Following the default, creditors — including the syndicate of lenders under the credit facility, unsecured trade creditors, and potentially a trustee or committee appointed in a bankruptcy proceeding — assert breach of fiduciary duty claims against individual directors and officers. The claims allege that the directors and officers engaged in mismanagement, failed to maintain adequate financial controls, approved transactions constituting fraudulent transfers, or pursued a strategy of deepening insolvency that enriched equity holders (principally Veltrano Capital Partners) at the expense of creditors.
Estimated Exposure:
• Defense costs: $5,000,000 – $12,000,000
• Potential settlement or judgment exposure: $10,000,000 – $30,000,000
• Total estimated D&O exposure: $15,000,000 – $42,000,000
Tower Response: This scenario would engage multiple layers of the D&O tower. At the lower end of the range ($15 million), the loss would consume the full primary layer and penetrate into the first excess layer issued by Commonwealth Indemnity Group. At the upper end of the range ($42 million), the loss would consume the entire $40 million ABC tower and require the Company's directors and officers to look to the $15 million Side-A DIC for remaining protection. In that severe scenario, the $42 million loss would represent approximately 76% of the $55 million aggregate limit. If entity-level coverage were implicated — which is likely in a creditor action where the Company itself is also a target — the ABC tower could be consumed more rapidly, with the Side-A DIC providing the critical remaining layer of protection for individual insureds.
Assessment: The current tower would be strained in a severe creditor action. However, several mitigating factors reduce the probability and likely severity of this scenario:
• Nexford's current leverage ratio of approximately 4.8x EBITDA ($1.05 billion funded debt ÷ $218 million EBITDA), while elevated, is within the range generally considered manageable for PE-backed industrial companies of this scale and is well below covenant thresholds;
• The Company's operating performance has been stable, with no current indicators of financial distress, declining revenue, or deteriorating margins;
• The credit facility matures in 2025, providing a runway for refinancing or debt reduction; and
• Veltrano Capital Partners, as the controlling sponsor with a significant equity stake, has strong incentives to support the Company's financial stability and avoid a distressed scenario.
Accordingly, while this scenario represents the most severe potential D&O exposure among the four modeled scenarios, it is assessed as low probability under current conditions. We recommend, however, that Nexford monitor its leverage and financial condition on an ongoing basis, as discussed further in Section XI.D below.
D. Scenario 3 — Employment Practices / Discrimination Class Action
Hypothetical Facts: A class-action employment discrimination claim is filed against the Company and certain individual officers, alleging systemic discrimination in hiring, promotion, or compensation practices at one or more of Nexford's operating subsidiaries. Alternatively, a wage-and-hour class action or collective action under the Fair Labor Standards Act is brought, naming individual officers who are alleged to have been responsible for setting or approving compensation policies that violated applicable law.
Estimated Exposure:
• Defense costs: $2,000,000 – $5,000,000
• Potential settlement or judgment exposure: $3,000,000 – $10,000,000
• Total estimated D&O exposure: $5,000,000 – $15,000,000
Tower Response: The estimated exposure under this scenario would fall within the primary layer and, at the upper end of the range, potentially penetrate into the first excess layer. The $1,000,000 entity coverage SIR would apply to any entity-level component of the loss. We note that certain employment practices claims may also be covered, in whole or in part, under the Company's separate EPLI program; the interaction between D&O and EPLI coverage in such circumstances would require careful analysis at the time of claim.
Assessment: The current tower is adequate for this scenario. Even at the upper bound of the estimated range ($15 million), the loss would be absorbed within the first two layers of the tower, leaving substantial headroom in the aggregate.
E. Scenario 4 — Multi-Claim / Aggregation Scenario
Hypothetical Facts: This scenario models the occurrence of concurrent claims during a single policy period. Specifically, the hypothetical involves a regulatory investigation — for example, an OSHA investigation into workplace safety practices — occurring simultaneously with a derivative action brought by a minority equity holder (a co-investor or management rollover participant) challenging one or more board-level decisions. The derivative action could allege, for example, that the sponsor-appointed board majority approved a transaction benefiting Veltrano Capital Partners at the expense of minority equity holders, such as a dividend recapitalization, a related-party transaction, or a strategic decision to delay an IPO.
Estimated Exposure:
• Combined defense costs: $8,000,000 – $15,000,000
• Combined potential settlement or judgment exposure: $10,000,000 – $25,000,000
• Total estimated D&O exposure: $18,000,000 – $40,000,000
Tower Response: This scenario would engage the primary and excess layers of the tower, potentially penetrating into the third excess layer at the upper end of the range. At the maximum estimated exposure of $40 million, the loss would consume the entire $40 million ABC tower but would leave the $15 million Side-A DIC intact to protect individual directors and officers against personal liability.
Assessment: The $55 million aggregate is capable of absorbing this scenario, though a worst-case concurrent claim environment would substantially erode the tower. The dedicated Side-A DIC provides a critical backstop for individual directors and officers, ensuring that personal liability protection remains available even if the ABC tower is significantly consumed. We note that the concurrent-claim scenario also raises questions about whether the claims might be treated as related claims under the policy's relatedness provisions and aggregated for purposes of the SIR and limits — a coverage question that should be analyzed at the time any such claims arise.
F. Scenario Summary and Conclusion
The following table summarizes the estimated D&O exposure for each of the four modeled scenarios:
In all four scenarios, the $55 million aggregate limit is sufficient, though in the most severe creditor-action or multi-claim scenarios, the tower would be significantly stressed. No single realistic scenario, modeled at reasonable severity levels, results in full exhaustion of the $55 million aggregate. The dedicated Side-A DIC acts as a critical safety valve for personal liability exposure, ensuring that individual directors and officers retain access to dedicated coverage even in scenarios that consume the ABC tower. The recommendation to increase the Side-A DIC from $15 million to $20 million, as set forth in the companion memorandum dated June 3, 2022, would further enhance this protection.
VII. Pre-IPO Considerations
A. Potential IPO Timeline
In discussions with C&H, Priya Sundaram, Nexford's General Counsel, has identified a potential IPO in the 2023–2024 timeframe as a component of Veltrano Capital Partners' exit strategy for the Nexford investment. While no formal IPO process has commenced — no underwriters have been retained, no registration statement has been prepared, and no board resolution authorizing an IPO has been adopted — the possibility of a public offering is a material consideration for the forward-looking component of this D&O adequacy analysis.
The prospect of a transition from private to public status fundamentally alters the Company's D&O risk profile and has significant implications for the adequacy of the current tower, the structure of the D&O program, and the level of premium expenditure. Accordingly, while the balance of this memorandum concludes that the current $55 million aggregate is adequate for Nexford's private-company risk profile, we address below the key considerations that would arise in connection with an IPO.
B. Impact of Public-Company Status on D&O Exposure
The most significant consequence of an IPO, from a D&O insurance perspective, is the introduction of securities-litigation exposure. As a publicly traded company, Nexford and its directors and officers would be subject to potential liability under the federal securities laws, including:
• Sections 11, 12, and 15 of the Securities Act of 1933: These provisions impose strict liability (Section 11) and negligence-based liability (Section 12) on issuers, underwriters, directors, and officers who sign or otherwise participate in the preparation of a registration statement containing material misstatements or omissions. Section 15 provides for control-person liability.
• Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5: These provisions impose liability for fraudulent or deceptive conduct in connection with the purchase or sale of securities, including material misstatements or omissions made with scienter. Securities class actions under Section 10(b) and Rule 10b-5 are the most common and most costly form of D&O litigation for public companies.
The empirical data on securities class action defense costs and settlement values is well established and illustrative of the magnitude of the increased exposure:
• Average defense costs in securities class actions range from $10 million to $20 million or more, depending on the complexity of the case, the volume of discovery, and the duration of the litigation.
• Average settlement amounts in securities class actions for companies with market capitalizations in the $2.5 billion to $3.5 billion range — the approximate range of Nexford's anticipated public-market capitalization — range from approximately $15 million to $50 million or more, with outlier cases exceeding $100 million.
• The initial years following an IPO represent a period of heightened litigation risk, as newly public companies face scrutiny regarding the accuracy and completeness of their offering documents, and the stock price volatility that frequently accompanies a new listing can trigger class action claims.
In addition to the introduction of securities-litigation exposure, a post-IPO D&O program would need to be restructured from a private-company program (which typically includes entity coverage within the D&O tower) to a public-company program with separate and distinct coverage components:
• Side-A Coverage: Non-indemnifiable loss of individual directors and officers.
• Side-B Coverage: Reimbursement of the company for indemnification payments made to directors and officers.
• Side-C Coverage (Securities Entity Coverage): Coverage for the company itself in connection with securities claims.
Industry benchmarking for newly public industrial companies of comparable size — based on data from Kessler Quinn Advisory Group and Ashford Breckinridge — suggests that post-IPO D&O tower limits in the range of $75 million to $125 million or more would be appropriate, representing an increase of 36% to 127% over Nexford's current $55 million aggregate.
C. Recommendations for Pre-IPO Planning
Based on the foregoing, we recommend the following actions in connection with any potential IPO:
1. Early Engagement for Tower Redesign. At least 90 to 120 days before any contemplated IPO filing (i.e., before the filing of a registration statement on Form S-1 with the Securities and Exchange Commission), Nexford should engage C&H and Ashford Breckinridge to redesign the D&O tower. The redesign process involves transitioning from the current private-company program to a public-company program with dedicated Side-A, Side-B, and Side-C towers, identifying and approaching carriers experienced in providing post-IPO D&O coverage, and negotiating terms that account for the heightened risk profile of a newly public company.
2. Pre-IPO Tail Coverage. The Company should consider securing pre-IPO tail policies on the existing private-company program. Pre-IPO tail coverage protects directors and officers against claims that arise after the IPO but are based on pre-IPO conduct — a category of claims that is not uncommon and that may fall outside the scope of the post-IPO public-company program.
3. Side-A DIC Maintenance and Enhancement. The Side-A DIC should be maintained through and beyond the IPO, and the Company should consider further increasing the Side-A DIC limit beyond the currently recommended $20 million level. The heightened exposure associated with public-company status and the increased personal liability risk for individual directors and officers make robust Side-A DIC coverage essential.
4. Budget for Premium Increases. The Company should anticipate significant premium increases in connection with a transition to public-company D&O coverage. Post-IPO D&O premiums for comparable newly public industrial companies range from $2.5 million to $5.0 million or more per annum, representing an increase of approximately 80% to 250% or more over Nexford's current D&O premium of $1,363,450. The premium increase reflects the substantially greater exposure associated with public-company status, particularly during the initial years following an IPO.
5. Retention of Advisory Team. C&H and Ashford Breckinridge should be formally retained to lead the pre-IPO D&O tower redesign, with input from Kessler Quinn Advisory Group on actuarial matters and market intelligence.
VIII. Rate-on-Line and Premium Analysis
The rate-on-line and premium structure of Nexford's D&O program are relevant to the adequacy analysis insofar as they reflect market pricing of the Company's risk profile and provide context for assessing whether the current limits are reasonably priced and appropriately structured.
Overall Rate-on-Line. As noted in Section III.B above, the overall rate-on-line for the D&O program is 2.48%, calculated as total annual premium ($1,363,450) divided by total aggregate limit ($55,000,000). This rate-on-line is below the median rate-on-line of 2.78% observed among the eight-company peer benchmarking set, reflecting Nexford's clean D&O loss history and favorable risk profile.
Rate-on-Line by Layer. The rate-on-line varies across the tower layers, declining at higher attachment points as would be expected in a properly structured excess tower:
The primary layer carries the highest rate-on-line (4.88%), as it is the first layer exposed to loss and bears the greatest actuarial risk. Each successive excess layer carries a progressively lower rate-on-line, reflecting the declining probability that losses will reach higher attachment points. This declining rate structure is standard and appropriate for a multi-layered D&O tower.
The Side-A DIC carries a rate-on-line of 1.49%, which is slightly higher than the rate-on-line for the 3rd excess layer (1.41%). This modest premium reflects the dedicated, non-eroding nature of the Side-A DIC coverage and its broad trigger — which includes carrier insolvency, coverage denial, and exhaustion — as well as the absence of any SIR.
Premium Distribution and Proportionality. The premium distribution across the tower reflects appropriate risk allocation. The primary layer accounts for approximately 35.8% of total premium ($487,500 ÷ $1,363,450), consistent with its status as the most exposed layer. The three excess layers collectively account for approximately 47.8% of total premium, and the Side-A DIC accounts for approximately 16.4%.
Combined D&O and PL Premium. The combined D&O and professional liability insurance premium of $4,006,350 represents 0.282% of Nexford's $1.42 billion in consolidated revenue. This ratio is within the range observed for PE-backed industrial companies and does not suggest either over- or under-investment in executive risk insurance relative to the Company's revenue base.
IX. Insured vs. Insured Exclusion — Adequacy Implications
The Insured vs. Insured ("IvI") exclusion is a standard provision in D&O liability policies that excludes coverage for claims brought by one insured person against another insured person. The rationale for the exclusion is to prevent collusive or manufactured claims between insured persons. However, the practical effect of the IvI exclusion can be to deny coverage for legitimate claims, particularly in the context of PE-backed companies where sponsor-appointed and independent directors may come into conflict.
The IvI exclusion is particularly significant for Nexford given the Company's ownership and governance structure. Veltrano Capital Partners, through Fund IV, controls 68.5% of the Company's equity and appoints five of nine board members. This sponsor-control dynamic creates several scenarios in which the IvI exclusion could be triggered:
• Sponsor vs. Management Disputes. If a dispute arises between sponsor-appointed directors and the Company's management team (whose members are also insured persons under the D&O program), claims asserted by the sponsor-controlled board majority against management — or vice versa — could implicate the IvI exclusion.
• Independent Director Claims. If independent directors believe that sponsor-appointed directors have breached their fiduciary duties or have pursued transactions that benefit Veltrano Capital Partners at the expense of the Company or its other stakeholders, any resulting claim could be barred by the IvI exclusion.
• Company-Level Claims. If the Company itself, acting through its sponsor-controlled board, asserts claims against individual officers, the IvI exclusion could bar coverage for the defense of those officers under the ABC tower.
The current Vandermeer National primary policy contains an IvI exclusion with limited carve-backs. The specific scope of those carve-backs, and areas where they fall short of market-standard protections, are analyzed in detail in the Preliminary Coverage Gap Memorandum — D&O Tower dated May 27, 2022. As noted in that memorandum, strengthening the IvI carve-backs is a priority item for negotiation at the upcoming renewal.
For purposes of this adequacy analysis, the impact of the IvI exclusion is as follows: if the IvI exclusion is broadly construed and applied, it could effectively reduce the usable portion of the D&O tower for certain categories of claims, rendering a portion of the stated $55 million aggregate unavailable. In such circumstances, independent directors would be reliant on the Side-A DIC — which, as a dedicated Side-A policy, is not subject to the IvI exclusion — for their personal liability protection. This further underscores the importance of maintaining robust Side-A DIC limits and supports the recommendation to increase the Side-A DIC from $15 million to $20 million.
The adequacy analysis in this memorandum assumes that the IvI exclusion is narrowly construed and that the existing carve-backs provide reasonable coverage for the most likely claim scenarios. However, Nexford should be aware that the practical adequacy of the tower may be diminished if the IvI exclusion is invoked to bar coverage for a significant claim.
X. Coordination with Side-A DIC and Indemnification Agreements
The adequacy of the $55 million aggregate D&O tower must be assessed not in isolation, but in conjunction with two related components of the Company's director and officer protection framework: the Side-A DIC policy and the Company's indemnification agreements with its directors and officers.
Side-A DIC Coverage. As described in Section III above, the Side-A DIC policy issued by Harrington Specialty Insurance Co. provides $15 million in dedicated, non-eroding coverage for individual directors and officers. The Side-A DIC is a standalone policy that operates independently of the ABC tower and responds in circumstances where individual directors and officers are most vulnerable:
(a) The Company is unable to indemnify its directors and officers — for example, because the Company is insolvent, because applicable law prohibits indemnification (such as in certain regulatory or criminal proceedings), or because the Company's indemnification obligations are subject to dispute;
(b) The underlying ABC program denies coverage for a particular claim — for example, due to the application of an exclusion such as the IvI exclusion, or due to a coverage dispute with the primary or excess carriers;
(c) The ABC tower has been exhausted by prior claims during the policy period; or
(d) One or more of the primary or excess carriers becomes insolvent or is unable to pay covered losses.
The Side-A DIC Policy Analysis Memorandum dated June 3, 2022 provides a detailed analysis of the Harrington policy and concludes that the current $15 million limit is below the peer median of $17.5 million. That memorandum recommends increasing the Side-A DIC limit to $20 million at the upcoming renewal. With the recommended increase, individual directors and officers would have access to at least $20 million in dedicated Side-A coverage in addition to any remaining ABC tower limits, providing a meaningful layer of protection against personal liability exposure.
Indemnification Agreements. The Company maintains individual indemnification agreements with each of its directors and officers. These agreements set forth the Company's contractual obligation to indemnify each director and officer to the fullest extent permitted by applicable law, including the advancement of defense costs pending final disposition of a claim. The Indemnification Agreement Review Memorandum dated June 4, 2022 analyzed the Company's form indemnification agreement and identified two misalignments between the indemnification obligations and the D&O tower structure:
• First, the definition of "Proceeding" in the indemnification agreements is narrower than the definition of "Claim" in the Vandermeer primary D&O policy, creating a potential gap in which certain matters covered by the D&O policy would not be subject to the Company's indemnification obligation.
• Second, the advancement-of-costs provisions in the indemnification agreements contain a repayment undertaking that is more restrictive than the advancement provisions in the D&O tower, which could create timing mismatches between the Company's indemnification payments and the D&O carriers' reimbursement obligations.
These misalignments should be rectified through amendments to the form indemnification agreement, as recommended in the June 4 memorandum, to ensure seamless coordination between the Company's indemnification obligations and the D&O insurance program. Proper coordination between these components — the ABC tower, the Side-A DIC, and the indemnification agreements — is essential to ensuring that the stated limits of the D&O program translate into effective, usable protection for the Company's directors and officers.
XI. Conclusions and Recommendations
A. Adequacy Determination — Current Status
Based on the totality of the analysis set forth in this memorandum, it is our conclusion that the $55 million D&O aggregate limit is adequate for Nexford Industrial Holdings Inc. in its current status as a privately held, PE-backed industrial holding company.
This conclusion is supported by the following key factors:
1. Clean Loss History. The Company has recorded zero paid D&O losses in the five-year period from policy year 2017–2018 through the current policy year, with only a single reported claim (a shareholder demand letter in 2020 that was resolved without payment). This clean loss history reflects favorably on the Company's governance practices and current risk management framework.
2. Peer Benchmarking. Nexford's $55 million D&O aggregate is slightly above the median ($50 million) and approximately at the mean ($53 million) of the eight-company peer benchmarking set, positioning the Company in the middle-to-upper portion of the comparables. The Company's rate-on-line of 2.48% is below the peer median, reflecting the competitive terms achieved based on the Company's favorable risk profile.
3. MPL Scenario Analysis. The $55 million aggregate is sufficient to absorb all four modeled maximum probable loss scenarios without full tower exhaustion. While the most severe creditor-action and multi-claim scenarios would significantly stress the tower, these scenarios are assessed as low probability under current conditions, and the dedicated Side-A DIC provides a critical backstop for individual directors and officers.
4. Competitive Rate-on-Line. The overall rate-on-line of 2.48% is competitive relative to peers and reflects appropriate risk-based pricing across the tower layers, with declining rates at higher attachment points consistent with standard market practice.
B. Recommended Actions — Current Renewal Cycle
We recommend the following actions in connection with the upcoming July 1, 2022 renewal of the D&O program:
1. Increase Side-A DIC Limit from $15 Million to $20 Million. Consistent with the recommendation set forth in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022, the Company should increase the dedicated Side-A DIC limit by $5 million. This increase will bring the Side-A DIC coverage above the peer median and provide enhanced personal liability protection for individual directors and officers, which is particularly important given the PE sponsor control dynamics and the potential application of the IvI exclusion. The incremental premium for the additional $5 million in Side-A DIC capacity is estimated at approximately $55,000 to $75,000, based on current market pricing.
2. Negotiate Enhanced IvI Carve-Backs. The Company should seek enhanced carve-backs to the Insured vs. Insured exclusion in the primary and excess layers of the ABC tower. Priority carve-backs include: (a) a carve-back for claims brought by a bankruptcy trustee, receiver, or examiner; (b) a carve-back for claims brought by insured persons who are no longer serving in their capacity as directors or officers at the time the claim is made; and (c) a carve-back for claims brought by insured persons without the solicitation, participation, or assistance of any other insured person. Strengthening these carve-backs will maximize the usable limits of the tower and reduce the risk that legitimate claims are barred by the IvI exclusion.
3. Address Identified Coverage Gaps. The Preliminary Coverage Gap Memorandum — D&O Tower dated May 27, 2022 identified 14 specific coverage gaps and deficiencies in the current tower, including issues related to definition scope, notice provisions, allocation methodology, and severability. The Company should work with Ashford Breckinridge and C&H to address these gaps at renewal through policy endorsements or manuscript amendments, to ensure that the effective limits of the tower match the stated limits.
C. Recommended Actions — Pre-IPO
In the event Nexford proceeds with an IPO in the 2023–2024 timeframe, or initiates formal preparations for a public offering, we recommend the following actions:
1. Reassess D&O Tower Limits. At least 120 days before any IPO filing, the Company should undertake a comprehensive reassessment of D&O tower limits in light of the transition to public-company status. Based on industry benchmarking for newly public industrial companies of comparable size, the Company should anticipate increasing total D&O limits to the $75 million to $125 million or greater range.
2. Restructure D&O Program. The D&O program should be restructured from its current private-company format to a public-company program with dedicated Side-A, Side-B, and Side-C coverage towers. This restructuring requires careful analysis of coverage needs, carrier selection, and policy drafting to ensure comprehensive protection in the public-company environment.
3. Secure Pre-IPO Tail Policy. The Company should obtain pre-IPO tail coverage on the existing private-company program to protect directors and officers against claims arising after the IPO that are based on pre-IPO conduct. Pre-IPO tail coverage fills a gap that could otherwise leave directors and officers exposed to historical claims that are not covered by the post-IPO public-company program.
4. Budget for Premium Increases. The Company should budget for D&O premium increases of approximately 80% to 250% or more over current levels. Post-IPO D&O premiums for comparable newly public industrial companies range from $2.5 million to $5.0 million or more per annum, compared to the Company's current D&O premium of $1,363,450.
5. Retain Advisory Team. C&H and Ashford Breckinridge should be formally retained to lead the pre-IPO D&O tower redesign, with actuarial and market intelligence support from Kessler Quinn Advisory Group.
D. Ongoing Monitoring
In addition to the specific actions recommended above, we recommend the following ongoing monitoring activities to ensure continued adequacy of the D&O program:
• Annual Adequacy Review. The Company should continue to conduct an annual D&O limits adequacy review at each renewal cycle, incorporating updated peer benchmarking data, claims experience, and any changes to the Company's risk profile.