MEMORANDUM — CONFIDENTIAL
TO: Board of Directors, Nexford Industrial Holdings Inc.
FROM: Calderwood & Harkness LLP Douglas Fairchild, Responsible Partner Naomi Petersen, Lead Associate
DATE: June 22, 2022
RE: Insurance Tower Review Summary — D&O and Product-Liability Programs; 2022-2023 Renewal Recommendations
MATTER NO.: 1005-00003
Distribution Note: This memorandum has been prepared for the June 22, 2022 meeting of the Board of Directors of Nexford Industrial Holdings Inc., Gerald "Gerry" Whitcomb, Chairman, presiding. The Board comprises nine directors (four independent, five sponsor-appointed by Veltrano Capital Partners Fund IV, LP). Celeste Brogan, Partner, Portfolio Operations, Veltrano Capital Partners, LLC, attends as board observer. This memorandum is a privileged and confidential attorney-client communication and should not be distributed beyond the Board and its designated advisors without the prior consent of Calderwood & Harkness LLP and counsel to Nexford Industrial Holdings Inc.
I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H") was engaged on April 22, 2022 (matter formally opened April 26, 2022) to conduct a comprehensive review of the Directors & Officers ("D&O") liability insurance tower and the product-liability ("PL") insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") and its subsidiaries in connection with the upcoming July 1, 2022 renewal cycle. The engagement was undertaken at the direction of Priya Sundaram, General Counsel & Corporate Secretary, and in coordination with Ashford Breckinridge LLP, the Company's insurance broker of record.
The scope of C&H's review encompassed the following principal workstreams: (a) an analysis of the adequacy of limits across both the D&O and PL insurance towers; (b) a comprehensive gap analysis identifying coverage deficiencies, ambiguities, and inconsistencies within and across policy layers; (c) a detailed policy wording comparison across all layers of both programs, with particular attention to definitional inconsistencies, exclusion scope variances, and coordination provisions; (d) an evaluation of the coordination and interplay between the D&O and PL programs, including with respect to potential overlap and gap scenarios; and (e) renewal support, including review of the broker marketing submission, evaluation of carrier quotes, development of negotiation points, and formulation of renewal bind recommendations.
Key deliverables completed in connection with this engagement include the following:
• Preliminary Coverage Gap Memoranda (D&O and PL) — delivered May 27, 2022
• Comprehensive Tower Review Reports (D&O and PL) — delivered June 17, 2022
• Side-A DIC Policy Analysis Memorandum — delivered June 3, 2022
• Indemnification Agreement Review Memorandum — delivered June 4, 2022
• D&O Limits Adequacy Memorandum — delivered June 6, 2022
• Product Recall Sub-Limit Adequacy Memorandum — delivered June 7, 2022
• PL Limits Adequacy Memorandum — delivered June 8, 2022
• Carrier Quote Comparison Matrices (D&O and PL) — delivered June 10, 2022
• Renewal Negotiation Points Memorandum — delivered June 13, 2022
Through this review, C&H identified 14 coverage gaps or concerns in the D&O program and 11 coverage gaps or concerns in the PL program. The most significant of these findings are summarized in Sections V and VI of this memorandum, with the complete analyses set forth in the Comprehensive Tower Review Reports referenced in the attached appendices listing.
With respect to the 2022-2023 renewal, carrier quotes were received between May 18 and June 8, 2022, following Ashford Breckinridge LLP's marketing submission, which was circulated to the carrier market on May 3, 2022. C&H reviewed the marketing submission prior to circulation and identified three factual corrections and two presentation recommendations, each of which was incorporated prior to distribution.
The recommended renewal terms, as described in detail in Section VII, result in a combined annual premium of $4,483,700, representing an increase of $477,350 (11.91%) over the 2021-2022 combined annual premium of $4,006,350. This increase reflects general market hardening in the D&O and PL segments, the Company's pending litigation profile, and two affirmative coverage enhancements recommended by C&H and adopted by management.
The two key C&H recommendations adopted by management and reflected in the renewal structure are:
1. Increase the Side-A DIC limit from $15 million to $20 million — to provide enhanced dedicated personal protection for individual directors and officers, with particular importance given Veltrano Capital Partners' 68.5% equity ownership, the five sponsor-appointed directors on a nine-member board, and the potential IPO contemplated in the 2023-2024 timeframe.
2. Increase the product recall sub-limit from $2.5 million per occurrence / $5 million aggregate to $5 million per occurrence / $10 million aggregate — in light of the Company's historical recall and advisory costs totaling $1.44 million across just two events and industry benchmarking data supporting a higher sub-limit for a diversified industrial manufacturer shipping approximately 42,000 SKUs annually.
C&H recommends that the Board authorize the binding of both the D&O and PL renewal towers effective July 1, 2022, with the combined annual premium not to exceed $4,600,000. The target binding date is June 28, 2022, to ensure continuity of coverage from the expiration of the incumbent program on July 1, 2022.
II. COMPANY OVERVIEW AND INSURANCE CONTEXT
A. Corporate Structure
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 company for three wholly-owned operating subsidiaries, each of which is a named insured under both the D&O and PL insurance programs. The operating subsidiaries and their respective business profiles are as follows:
1. Nexford Conveyor Systems, LLC — A Delaware limited liability company with principal operations in Joliet, Illinois. Nexford Conveyor Systems ("NCS") designs, manufactures, and distributes heavy-duty belt and roller conveyor systems for use in range industrial applications, including mining, grain processing, manufacturing, and logistics. NCS is the Company's largest operating subsidiary, contributing approximately 56% of consolidated revenue ($795.2 million) for fiscal year 2021. NCS products are sold throughout North America and in select international markets, with installation and aftermarket service operations supporting a substantial installed base.
2. Triton Fastener Corp. — An Illinois corporation with principal operations in Rockford, Illinois. Triton Fastener Corp. ("Triton") manufactures and distributes industrial fasteners, bolts, and anchoring systems for use in construction, infrastructure, heavy equipment, and general industrial applications. Triton's products are sold through both direct sales channels and a network of industrial distributors. Triton contributed approximately 28% of consolidated revenue ($397.6 million) for fiscal year 2021. Triton's products are used in structural and safety-critical applications, a factor that is material to the Company's product-liability risk profile.
3. Marlowe Asset Management Precision Machining, Inc. — An Ohio corporation with principal operations in Akron, Ohio. Marlowe Asset Management Precision Machining ("Marlowe Asset Management") produces precision-machined components for the automotive and construction equipment sectors, serving original equipment manufacturers and Tier 1 suppliers. Pemberton Investors approximately 16% of consolidated revenue ($227.2 million) for fiscal year 2021. Marlowe Asset Management's operations involve tight-tolerance manufacturing processes, and its products are incorporated into end-use applications that carry inherent product-liability exposure.
All three subsidiaries are named insureds under both the D&O and PL insurance towers. The corporate structure presents insurance considerations related to cross-subsidiary claims (particularly given that Triton fasteners are used in certain NCS conveyor systems), as well as potential for aggregate erosion across multiple subsidiaries from unrelated product-liability events.
B. Ownership and Governance
Nexford Industrial Holdings Inc. is majority-owned (68.5%) by Veltrano Capital Partners Fund IV, LP, a 2017 vintage fund with $4.8 billion of committed capital. Veltrano acquired control of Nexford through a leveraged buyout transaction that closed on June 15, 2018, at a total enterprise value of approximately $2.1 billion. The remaining equity is held by management rollover participants (19.3%) and co-investors (12.2%).
The estimated current enterprise value of the Company is approximately $2.6 billion, reflecting growth in revenue and EBITDA since the 2018 acquisition. This valuation is relevant to the assessment of D&O limits adequacy, as it establishes the potential magnitude of shareholder claims in the event of an adverse governance event.
The Board of Directors consists of nine members: four independent directors and five directors appointed by Veltrano Capital Partners Fund IV, LP. This composition is significant from a D&O coverage perspective for several reasons: (a) the sponsor-appointed directors constitute a board majority, raising potential conflicts in the context of the Insured vs. Insured exclusion; (b) the independent directors have a heightened need for robust personal protection through the Side-A DIC layer; and (c) the governance dynamics typical of PE-backed companies necessitate careful attention to D&O policy provisions that may not have been drafted with PE ownership structures in mind.
The Company has a potential initial public offering ("IPO") contemplated in the 2023-2024 timeframe, the timing and pursuit of which will depend on market conditions and the fund's exit strategy. This potential transaction is directly relevant to D&O tower adequacy, as a public company D&O program will require substantially different limits, structures, and policy forms. C&H's recommendations account for this eventuality, and a pre-IPO tower reassessment has been flagged as a required workstream.
C. Key Financial Metrics
The following financial metrics are relevant to the insurance program assessment:
The audited financial statements for fiscal year 2021 were prepared by Pemberton & Associates CPAs, LLP. Total funded debt of $1.05 billion under the Term Loan B and Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent, is relevant to both the D&O analysis (potential lender claims, breach of covenant scenarios) and the general creditworthiness and financial stability of the insured entity.
The combined D&O and PL insurance spend of $4,006,350, representing 0.282% of consolidated revenue on a 2021-2022 basis, is within the expected range for a mid-market PE-backed industrial manufacturer, though it falls slightly below the peer median. Under the recommended renewal terms, insurance spend as a percentage of revenue would increase modestly to approximately 0.316%.
D. Product Volume
Across all three operating subsidiaries, the Company ships approximately 42,000 stock-keeping units (SKUs) annually. This breadth of product offering, combined with the safety-critical nature of many of the Company's products (conveyor systems, structural fasteners, and precision-machined components for automotive and construction applications), is a key factor in the assessment of product-liability exposure, product recall risk, and the adequacy of applicable sub-limits.
III. INCUMBENT TOWER SUMMARY (2021-2022 POLICY YEAR: JULY 1, 2021 – JULY 1, 2022)
A. D&O Tower — Incumbent Structure
The following table summarizes the incumbent D&O liability insurance tower for the 2021-2022 policy year (July 1, 2021 through July 1, 2022):
Total D&O aggregate limit: $55 million (comprised of $40 million across the four ABC layers plus $15 million of dedicated Side-A DIC coverage).
Total D&O annual premium: $1,363,450.
D&O rate-on-line: 2.48% (calculated as total premium divided by total aggregate limit).
The entity coverage self-insured retention ("SIR") under the Vandermeer National primary policy is $1,000,000. The Side-A DIC policy issued by Harrington Specialty Insurance Co. carries no SIR, which is consistent with market practice for dedicated individual director and officer protection. The Side-A DIC is designed to respond when the underlying D&O tower fails to pay a covered loss to an individual insured person by reason of the insurer's insolvency, the insurer's refusal to indemnify, or the application of an exclusion in the underlying policy that does not apply under the DIC form.
B. Product-Liability Tower — Incumbent Structure
The following table summarizes the incumbent product-liability insurance tower for the 2021-2022 policy year:
Total PL aggregate limit: $75 million.
Total PL annual premium: $2,642,900.
PL rate-on-line: 3.52% (calculated as total premium divided by total aggregate limit).
The PL tower carries an SIR of $500,000 per occurrence under the Midland Casualty primary policy. The product recall sub-limit under the incumbent Midland Casualty primary is $2.5 million per occurrence / $5 million aggregate, a sub-limit that C&H has identified as inadequate and has recommended be increased, as discussed in detail in Section VI.A and Section VIII.B below.
C. Combined Incumbent Premium
The combined annual premium for both the D&O and PL towers under the incumbent 2021-2022 program is:
D&O tower premium: $1,363,450 PL tower premium: $2,642,900 Combined premium: $4,006,350
This combined premium serves as the baseline against which the 2022-2023 renewal premium recommendations should be evaluated.
IV. CLAIMS HISTORY AND PENDING LITIGATION
A thorough understanding of the Company's claims history and pending litigation is essential to the assessment of tower adequacy, the evaluation of renewal terms, and the identification of potential coverage issues that may arise in connection with the transition to the renewal policy period.
A. Product-Liability Claims — Five-Year History
Over the five-year period examined by C&H, the Company and its subsidiaries have reported a total of 12 product-liability claims under the PL tower. Of these, nine claims have been closed, with total paid losses of $4.72 million. Three claims remain open, with combined open reserves of $8.3 million. Two of the three open claims correspond to the pending lawsuits described in Section IV.B below; the third is an additional open claim that has not matured into litigation.
The incurred-but-not-reported ("IBNR") estimate, as prepared by the Kessler Quinn Advisory Group (Diana Cho, Vice President, Actuarial Services), is $2.1 million. This IBNR estimate reflects the actuarial assessment of claims that may have been incurred during the relevant period but have not yet been reported to the Company or its insurers.
The total five-year incurred losses are therefore:
Paid losses: $4,720,000 Open reserves: $8,300,000 IBNR estimate: $2,100,000 Total five-year incurred: $15,120,000
This claims history reflects a measurable and increasing frequency trend that C&H has taken into account in its limits adequacy analysis. While the total five-year incurred amount remains well within the $75 million aggregate PL tower limit, the concentration of pending exposure in two active lawsuits and the IBNR estimate warrant ongoing monitoring of aggregate erosion, particularly at the Midland Casualty primary level.
B. Pending Product-Liability Lawsuits
Two product-liability lawsuits are currently pending against the Company's subsidiaries. Both matters are being defended by Hollander Byrne & Strauss LLP, with Catherine Byrne serving as lead trial counsel and Rafael Mendez serving as senior associate.
1. *Higgins v. Nexford Conveyor Systems, LLC et al.*, Case No. 2021-L-04382, Circuit Court of Will County, Illinois.
This action was filed on September 14, 2021, by the plaintiff, an employee of a grain processing facility in Joliet, Illinois, who alleges a catastrophic crush injury resulting from an allegedly defective emergency stop mechanism on a Model NCS-7200 belt conveyor system manufactured and sold by Nexford Conveyor Systems, LLC. The complaint alleges negligence, strict product liability, and breach of implied warranty of fitness. Damages sought total $14.5 million, inclusive of past and future medical expenses, lost wages, pain and suffering, and loss of normal life. The matter is currently in active discovery, with fact depositions scheduled to commence in September 2022. No trial date has been set.
2. *Consolidated Builders Supply Co. v. Triton Fastener Corp.*, Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois.
This action was filed on November 2, 2021, by Consolidated Builders Supply Co., a commercial construction company, which alleges structural failure of Grade 8 hex bolts manufactured and distributed by Triton Fastener Corp. The complaint alleges that the bolt failure caused a partial wall collapse during construction of a commercial building project, resulting in $6.8 million in claimed property damage and business interruption losses. The complaint asserts claims for strict product liability, negligence, and breach of express and implied warranties. The defendant's motion to dismiss was denied on February 11, 2022, and the case is proceeding through discovery. Jurisdictional diversity is based on the parties' citizenship in different states.
Both lawsuits represent material pending claims against the PL tower and have been taken into account in the renewal marketing process, the carrier underwriting analysis, and C&H's limits adequacy assessment. Combined claimed damages in the two pending matters total $21.3 million.
C. Prior Product Recalls
The Company's subsidiaries have experienced two product recall or advisory events within the review period:
1. Triton Fastener Corp. Voluntary Product Recall. Initiated on March 12, 2020, this voluntary recall involved a specific lot of Grade 5 carriage bolts that were identified as having been manufactured with an incorrect heat treatment specification. The recall encompassed approximately 18,000 units distributed through multiple channels. Total cost of the recall, including notification, retrieval, replacement, and associated administrative expenses, was $1.1 million. The recall cost was borne within the then-applicable product recall sub-limit.
2. Nexford Conveyor Systems Advisory Notice. Issued on August 7, 2020, this advisory notice (not a formal recall) related to a recommended inspection and preventive maintenance protocol for a specific model of roller bearing assembly used in NCS conveyor systems manufactured during a particular production period. The advisory notice resulted in costs of $340,000, principally comprised of customer notification, field engineering support, and replacement part distribution.
The combined historical recall and advisory costs total $1.44 million across these two events. This figure represents more than 57% of the current $2.5 million per-occurrence product recall sub-limit from just two events, neither of which involved a large-scale or high-profile recall. This historical experience is the primary basis for C&H's recommendation to increase the product recall sub-limit, as discussed in Sections VI.A and VIII.B.
D. D&O Claims — Five-Year History
Over the five-year period examined, there has been one reported claim under the D&O program: a shareholder demand letter received in 2020. The demand letter was addressed and resolved without the payment of any loss or defense costs. There have been zero paid D&O losses in the five-year claims history. This favorable claims experience is reflected in the Company's D&O premium positioning relative to peers and provides a strong baseline for the renewal, although it does not diminish the need for robust D&O limits given the nature of the Company's operations, ownership structure, and potential IPO.
V. KEY FINDINGS — D&O TOWER GAP ANALYSIS
C&H identified 14 coverage gaps or concerns in the D&O program through its comprehensive tower review. The complete analysis is set forth in the Comprehensive D&O Tower Review Report dated June 17, 2022 (Appendix B). The following is a summary of the principal findings for the Board's consideration.
A. Severability of the Application
C&H identified inconsistencies across the D&O tower layers with respect to severability provisions governing the insurance application. Severability provisions address the critical question of whether a misrepresentation or omission in the insurance application by one insured person can void coverage for other, innocent insureds. The Vandermeer National primary policy contains a "full severability" provision that treats the application as if it had been submitted separately by each insured person, so that the knowledge and conduct of one insured cannot be imputed to others for purposes of rescission or voiding of coverage. However, certain excess layers contain weaker severability language that could, in theory, permit the insurer to void coverage for all insureds based on the conduct of a single insured. This inconsistency creates a risk that innocent directors and officers could be deprived of coverage in a scenario involving alleged misrepresentation by another insured, particularly in higher excess layers where the financial exposure is greatest. C&H has negotiated improved severability language in the renewal terms, as discussed in Section VIII.C.
B. Definition of "Insured Person"
C&H's layer-by-layer policy wording comparison revealed inconsistent definitions of "Insured Person" across the five policies comprising the D&O tower. The Vandermeer National primary policy (VNI-DO-2021-88473) uses a broad definition that encompasses current and former directors, officers, employees (in certain specified capacities), and shadow directors. The Commonwealth Indemnity Group 1st excess layer, the Graystone Mutual Assurance Co. 2nd excess layer, the Pinnacle Re Insurance Ltd. 3rd excess layer, and the Harrington Specialty Insurance Co. Side-A DIC each employ varying definitions that differ in their treatment of former officers, employees serving in fiduciary capacities, and individuals serving at the request of the Company on the boards of other entities. The narrowest definition in any excess layer will effectively control the scope of coverage at that level of the tower, creating the potential for a gap where an individual who qualifies as an "Insured Person" under the primary policy does not qualify as such under the excess layer called upon to respond. C&H has identified specific definitional alignment requirements that have been communicated to carriers through the renewal negotiation process.
C. Prior Acts Exclusion
The Commonwealth Indemnity Group 1st excess layer contains a prior acts exclusion whose scope is broader than necessary to achieve its intended purpose. As currently drafted, the exclusion has the potential to exclude claims arising from conduct that predates the June 15, 2018 leveraged buyout transaction, even where such conduct may give rise to claims that are properly reportable and covered under the current policy period. This is of particular concern given that the Company's operating subsidiaries have been in continuous operation for periods substantially predating the LBO, and the potential for legacy product-liability claims or regulatory actions implicating pre-acquisition conduct is not inconsequential. C&H has recommended that the prior acts exclusion be narrowed in the renewal to apply only to matters actually known to the insureds as of the inception date, consistent with standard market practice for claims-made policies.
D. Insured vs. Insured Exclusion
The Insured vs. Insured ("IvI") exclusion is of critical importance in the context of Nexford's ownership and governance structure. With Veltrano Capital Partners holding 68.5% of the Company's equity and appointing five of nine directors to the Board, the potential for claims between or among insureds — including derivative actions, internal investigations, employment disputes, and governance-related claims — is heightened relative to a widely held public company.
C&H's review identified that the incumbent IvI exclusion provisions across the tower layers do not contain adequate carve-backs for the following categories of claims: (a) derivative actions brought by shareholders (or by the Company at the direction of shareholders); (b) whistleblower claims and qui tam actions; and (c) employment practices claims brought by insured persons in their capacity as employees. In the PE context, where the sponsor effectively controls the board and has the ability to cause the entity to bring claims against individual directors and officers, the absence of robust carve-backs could leave individual insureds without coverage in scenarios where coverage is most needed. C&H has negotiated carve-back language that addresses each of these categories, as reflected in the renewal terms.
E. Coordination with Side-A DIC
C&H identified a gap between the Vandermeer National primary D&O policy's coverage trigger and the Harrington Specialty Insurance Co. Side-A DIC policy's trigger provisions. The Side-A DIC is designed to "drop down" and provide coverage to individual directors and officers when the underlying ABC policy fails to respond — whether due to insurer insolvency, insurer refusal to pay, or the application of an exclusion in the underlying policy that does not apply under the DIC form. However, C&H's analysis revealed that the trigger provisions in the Harrington DIC form contain language that could be interpreted to require exhaustion of the underlying ABC tower before the DIC responds, even in circumstances where the underlying policy has refused to pay due to an exclusion. This interpretation would undermine the fundamental purpose of the DIC layer. C&H has addressed this gap through negotiation of clarifying trigger language in the Harrington DIC renewal, ensuring that the DIC drops down seamlessly when the underlying policy fails to respond due to insurer insolvency, coverage denial, or exclusion application.
F. Regulatory Investigation Coverage
The definition of "Claim" in the Vandermeer National primary D&O policy (VNI-DO-2021-88473) is drafted in a manner that may not encompass informal regulatory inquiries from agencies such as the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), or state attorneys general. As a manufacturer of industrial products used in safety-critical applications, Nexford and its subsidiaries are subject to ongoing regulatory oversight, and the potential for regulatory investigations — including informal inquiries, information requests, and subpoenas — is a material component of the Company's risk profile. The failure of the D&O policy to respond to defense costs incurred in connection with such inquiries prior to the issuance of a formal enforcement action could leave the Company and its directors and officers with significant uninsured exposure during the critical early stages of a regulatory matter. C&H has negotiated a broadened definition of "Claim" in the Vandermeer renewal form, although the issued form is narrower than the agreed terms, requiring a post-bind corrective endorsement as described in Section XII.
G. Priority of Payment / Allocation
The allocation provisions across the D&O tower layers vary in their approach to the priority of payment between individual directors and officers and the insured entity in the context of a "mixed" claim — i.e., a claim involving both covered individual insured persons and the entity itself. In a mixed claim scenario, it is critical that the D&O policy prioritize payments to individual directors and officers before entity claims, to ensure that the limited policy proceeds are directed to the insureds who face personal liability and who cannot otherwise self-insure. C&H's review found that certain excess layers do not contain explicit priority-of-payment provisions favoring individual insureds, and that the allocation methodology varies across layers, creating potential for disputes with carriers in the event of a large, multi-layered claim. C&H has addressed these concerns through the negotiation of consistent allocation and priority-of-payment language across the renewal tower.
H. Entity Coverage SIR
The entity coverage SIR of $1,000,000 under the Vandermeer National primary D&O policy is appropriate and consistent with market practice for a company of Nexford's size and profile. The Side-A DIC policy carries no SIR, which is the expected and appropriate structure for a dedicated individual protection layer. C&H recommends that these SIR levels be maintained in the renewal, and the recommended renewal terms preserve this structure.
VI. KEY FINDINGS — PRODUCT-LIABILITY TOWER GAP ANALYSIS
C&H identified 11 coverage gaps or concerns in the PL program through its comprehensive tower review. The complete analysis is set forth in the Comprehensive Product-Liability Tower Review Report dated June 17, 2022 (Appendix C). The following is a summary of the principal findings for the Board's consideration.
A. Product Recall Sub-Limit Inadequacy
The incumbent product recall sub-limit under the Midland Casualty primary policy is $2.5 million per occurrence / $5 million aggregate. C&H has determined that this sub-limit is inadequate in light of the Company's risk profile and historical experience. As noted in Section IV.C, the Company has incurred combined recall and advisory costs of $1.44 million from just two events — representing over 57% of the per-occurrence sub-limit from events that were relatively modest in scope. A single large-scale recall event — for example, a recall of structural fasteners identified as having a systemic manufacturing defect, or a recall of conveyor system components implicated in a serious safety incident — could easily exhaust or exceed the current sub-limit.
Industry benchmarking data compiled by C&H, including comparison to peer manufacturers of similar size and product profile, supports a higher sub-limit. The potential for concurrent or serial recall events across multiple subsidiaries (NCS, Triton, and Marlowe Asset Management) further underscores the need for additional capacity. C&H's recommendation, which has been adopted by management and reflected in the renewal terms, is to increase the product recall sub-limit to $5 million per occurrence / $10 million aggregate. The incremental premium for this enhancement is $67,000. A detailed analysis supporting this recommendation is set forth in the Product Recall Sub-Limit Adequacy Memorandum dated June 7, 2022 (Appendix E).
B. Completed Operations Tail
The PL tower provides completed operations coverage extending 10 years post-delivery, which is generally adequate for the Company's product lines. However, C&H identified gaps in how the completed operations tail interacts with the excess layers of the tower. Specifically, certain excess policies contain completed operations provisions that are less explicit than the Midland Casualty primary regarding the duration and scope of tail coverage, creating ambiguity as to whether claims arising from products delivered more than a specified number of years prior to the policy inception date would be covered in the excess layers. C&H has addressed this gap through negotiation of conforming completed operations provisions in the excess layer renewal forms.
C. Pollution Exclusion Breadth
The Great Basin Insurance Company 1st excess/umbrella policy contains a pollution exclusion that is materially broader than the corresponding exclusion in the Midland Casualty primary policy. This discrepancy creates a potential gap in coverage in a scenario where a product defect manufactured by a Nexford subsidiary causes a pollution-related loss — for example, a conveyor system failure that results in a chemical spill at a customer's facility, or a fastener failure in a containment structure leading to the release of hazardous materials. Under the current tower structure, such a loss could be covered under the Midland primary but excluded under the Great Basin excess, leaving the Company without excess coverage above the $10 million primary aggregate for pollution-related product-liability losses. C&H has flagged this inconsistency for negotiation with Great Basin and has recommended that the excess pollution exclusion be conformed to the scope of the primary exclusion to avoid this coverage gap.
D. Cross-Suit Exclusion Issues Among Subsidiaries
The Company's three operating subsidiaries have significant commercial interrelationships, most notably the use of Triton-manufactured fasteners in NCS conveyor systems. In the event of a product failure involving an NCS conveyor system that is attributed to a Triton fastener, the potential for cross-claims and indemnification demands between the two subsidiaries is substantial. C&H's review identified that the cross-liability provisions across the PL tower layers are inconsistent, with certain excess policies containing cross-suit or insured-versus-insured exclusions that could preclude coverage for claims between named insureds. This gap is of particular concern given the integrated nature of the Company's manufacturing operations and the resulting potential for inter-subsidiary product-liability disputes. C&H has negotiated improved cross-liability language in the renewal to ensure that claims between subsidiaries are treated as claims between separate insureds for coverage purposes.
E. "Other Insurance" Clause Conflicts
C&H identified conflicting "other insurance" clauses between the Midland Casualty primary policy and the Great Basin Insurance Company 1st excess/umbrella policy. The Midland primary contains a clause providing that it is excess over any other valid and collectible insurance, while the Great Basin excess contains a similar clause asserting its own excess status. In a scenario where both policies could apply to a loss (for example, a loss that implicates both the occurrence and aggregate limits of the primary), these conflicting clauses could result in each insurer asserting that the other should pay first, potentially delaying or impeding claims payment and requiring the insured to bear interim costs while the dispute between carriers is resolved. C&H has recommended that these clauses be harmonized in the renewal to establish a clear order of priority.
F. Additional Insured Obligations
The Company regularly enters into contracts with vendors, subcontractors, and customers that require the Company to name such parties as additional insureds under its PL program. C&H's review identified that the vendor and contractor downstream coverage provisions in the incumbent PL tower require tightening to ensure that the Company's contractual obligations to provide additional insured status are properly reflected in the policy, and that the scope of additional insured coverage does not extend beyond the Company's contractual commitments. C&H has recommended specific endorsement language to address these concerns.
G. Aggregate Erosion
As noted in Section IV.A, the Company's total five-year incurred product-liability losses amount to $15.12 million. While this figure is well within the $75 million tower aggregate, C&H has identified the need for active monitoring of aggregate erosion at the Midland Casualty primary level. The Midland primary carries a $10 million aggregate limit, and the defense costs incurred in the two pending lawsuits — Higgins v. NCS and Consolidated Builders v. Triton — are eroding this aggregate on an ongoing basis. Defense cost erosion must be tracked carefully to monitor the approach to the Great Basin excess attachment point of $10 million, at which point the excess tower would begin to respond. C&H has established defense cost reporting protocols with the Company's risk management team and litigation counsel to ensure timely notification to tower carriers as the primary aggregate is consumed.
VII. RECOMMENDED RENEWAL TERMS (JULY 1, 2022 – JULY 1, 2023)
A. D&O Tower — Renewal Structure
The following table summarizes the recommended D&O liability insurance tower for the 2022-2023 renewal policy year (July 1, 2022 through July 1, 2023):
Total D&O aggregate limit: $60 million — comprised of $40 million across the four ABC layers, plus $20 million of dedicated Side-A DIC coverage. The Side-A DIC limit increase from $15 million to $20 million provides an additional $5 million of dedicated individual director and officer protection that is not available to the entity and cannot be diminished by entity claims.
Total D&O renewal premium: $1,498,200.
Premium increase over 2021-2022: $134,750 (9.88%).
Carrier Change: The 2nd excess layer carrier has been changed from Graystone Mutual Assurance Co. to Northfield Excess Insurance Company. The basis for this change is twofold: (a) Northfield's coverage form is broader than Graystone's in several material respects, including a more favorable definition of "Insured Person," stronger severability provisions, and a broader definition of "Claim"; and (b) Northfield's premium of $221,000 is competitive relative to Graystone's incumbent premium of $198,750, with the $22,250 increase justified by the materially improved coverage terms. C&H supports this carrier substitution as a net-positive change for the program.
The entity coverage SIR of $1,000,000 is maintained under the Vandermeer National primary renewal policy. The Side-A DIC continues to carry no SIR.
B. Product-Liability Tower — Renewal Structure
The following table summarizes the recommended PL insurance tower for the 2022-2023 renewal policy year:
The Midland Casualty primary renewal includes the increased product recall sub-limit of $5 million per occurrence / $10 million aggregate (up from $2.5M/$5M), with an incremental premium of $67,000 allocated to this enhancement within the overall primary layer premium.
Total PL aggregate limit: $75 million (unchanged from the incumbent program).
Total PL renewal premium: $2,985,500.
Premium increase over 2021-2022: $342,600 (12.96%).
The PL SIR of $500,000 per occurrence is maintained under the Midland Casualty primary renewal policy.
C. Combined Renewal Premium
D&O tower renewal premium: $1,498,200 PL tower renewal premium: $2,985,500 Combined renewal premium: $4,483,700
Combined premium increase over 2021-2022: $477,350 (11.91%)
Combined prior year premium: $4,006,350
The combined premium increase of 11.91% reflects a combination of factors, including: (a) general market hardening in the D&O and PL segments, driven by increased claims frequency and severity across the insurance industry; (b) the Company's pending litigation profile, including two active product-liability lawsuits with combined claimed damages of $21.3 million; (c) the affirmative coverage enhancements adopted by management (Side-A DIC limit increase and product recall sub-limit increase), which together account for approximately $132,500 of the total premium increase; and (d) the substitution of Northfield Excess for Graystone Mutual in the D&O 2nd excess layer.
Insurance spend as a percentage of the Company's $1.42 billion in consolidated revenue under the recommended renewal terms is approximately 0.316%, an increase from the 2021-2022 level of 0.282% but consistent with industry benchmarks for mid-market PE-backed industrial manufacturers.
VIII. C&H KEY RECOMMENDATIONS — SUMMARY OF ACTIONS ADOPTED
A. Side-A DIC Limit Increase ($15M → $20M)
C&H recommended, and management has adopted, an increase in the Side-A DIC limit from $15 million to $20 million. The rationale for this recommendation is rooted in three principal considerations:
1. PE Sponsor Control Dynamics. Veltrano Capital Partners holds 68.5% of the Company's equity and appoints five of nine directors to the Board. This level of sponsor control creates governance dynamics that can give rise to claims between the sponsor (or sponsor-affiliated directors) and the Company's independent directors and officers. In such scenarios, the Side-A DIC layer provides the critical protection for individual insureds, as the underlying ABC policy may not respond due to the application of the Insured vs. Insured exclusion or other exclusionary provisions. The additional $5 million of dedicated Side-A coverage provides a meaningful increase in this essential protection.
2. Independent Director Protection. The four independent directors on the Board have a particularly acute need for robust personal protection. Unlike sponsor-appointed directors, who benefit from the indemnification and insurance resources of Veltrano Capital Partners, independent directors must rely on the Company's D&O program — and specifically the Side-A DIC — as their primary source of personal protection against claims arising from their board service. An increase in the Side-A DIC limit enhances the Company's ability to attract and retain qualified independent directors.
3. Potential IPO. If the Company proceeds with an IPO in the 2023-2024 timeframe, the pre-IPO Side-A DIC limit will serve as the foundation for the public company D&O program. Establishing a higher Side-A baseline now positions the Company favorably for the transition to a public company tower, which will require substantially enhanced limits across all layers.
The premium impact of this enhancement is an increase from $224,000 to $289,500, representing an incremental cost of $65,500. The Side-A DIC continues to carry no SIR, consistent with market practice.
B. Product Recall Sub-Limit Increase ($2.5M/$5M → $5M/$10M)
C&H recommended, and management has adopted, an increase in the product recall sub-limit under the Midland Casualty primary PL policy from $2.5 million per occurrence / $5 million aggregate to $5 million per occurrence / $10 million aggregate. The rationale for this recommendation includes:
1. Historical Recall Costs. The Company's combined historical recall and advisory costs of $1.44 million across two events represent over 57% of the incumbent $2.5 million per-occurrence sub-limit. Neither of these events involved a large-scale or high-profile recall. A single significant recall event could easily exhaust or exceed the incumbent sub-limit.
2. Industry Benchmarking. Benchmarking data compiled by C&H indicates that peer manufacturers of similar size and product profile generally maintain product recall sub-limits at or above the $5 million per occurrence level. The incumbent $2.5 million sub-limit placed the Company below the median of its peer group.
3. Product Breadth and Multi-Subsidiary Risk. With approximately 42,000 SKUs shipped annually across three operating subsidiaries, the potential for concurrent or serial recall events affecting different product lines or different subsidiaries is meaningful. The increased aggregate sub-limit of $10 million (up from $5 million) provides additional capacity to address multiple recall events within a single policy year.
The premium impact of this enhancement is an incremental cost of $67,000.
C. Negotiated Policy Wording Improvements
C&H developed and pursued a total of 18 negotiation points across both towers — 10 items relating to the D&O program and 8 items relating to the PL program. These negotiation points were communicated to the carriers through Ashford Breckinridge LLP (Phillip Garza, Senior Vice President, Executive Risk Practice; Tamara Fisk, Account Executive), with C&H providing direct support on substantive policy wording discussions.
Key wording improvements achieved through this negotiation process include:
• Severability clarifications across all D&O tower layers, ensuring that misrepresentation by one insured cannot void coverage for innocent directors and officers
• Insured vs. Insured carve-backs for derivative actions, whistleblower and qui tam claims, and employment practices claims, tailored to the PE sponsor-controlled governance structure
• Cross-suit language improvements in the PL tower, ensuring that claims between subsidiaries (particularly claims involving Triton fasteners used in NCS conveyor systems) are properly covered
• Completed operations tail coordination across the PL excess layers, conforming tail provisions to the Midland Casualty primary
• Definition of "Insured Person" alignment across D&O tower layers, reducing the risk of gaps arising from narrower definitions in excess layers
• Priority-of-payment provisions favoring individual directors and officers over entity claims in mixed-claim scenarios
• Harmonization of "other insurance" clauses in the PL tower to establish clear priority and avoid inter-carrier disputes that could delay claims payment
The complete list of negotiation points and the status of carrier agreement is set forth in the Renewal Negotiation Points Memorandum dated June 13, 2022 (Appendix I).
D. Indemnification Agreement Updates
C&H's review of the Company's form director and officer indemnification agreements identified two provisions requiring update to ensure alignment with the D&O insurance program:
1. Advancement of Expenses Clause. The current form indemnification agreement's advancement of expenses clause does not align with the Harrington Side-A DIC trigger mechanism. Specifically, the indemnification agreement requires a determination of entitlement to indemnification prior to advancement, which could create a delay that triggers the DIC's "company refusal" provision. C&H has recommended that the advancement clause be revised to provide for immediate advancement upon request, subject to an undertaking to repay, consistent with Delaware law best practices.
2. Definition of "Proceeding." The form indemnification agreement's definition of "Proceeding" is narrower than the D&O policy's definition of "Claim," creating a potential gap where a matter constitutes a covered "Claim" under the policy but does not qualify as a "Proceeding" under the indemnification agreement. C&H has recommended that the definition of "Proceeding" be broadened to encompass all matters that would constitute a "Claim" under the D&O policy, including informal regulatory inquiries.
A separate memorandum addressing these indemnification agreement updates was provided on June 4, 2022 (Appendix J). The recommended revisions to the form indemnification agreement should be adopted by the Board at a subsequent meeting following review by the Company's General Counsel.
E. Pre-IPO Tower Reassessment
C&H's analysis confirms that the D&O tower of $55 million aggregate (increased to $60 million with the enhanced Side-A DIC) is adequate for the Company's current private-company status. This conclusion is supported by peer benchmarking against eight comparable private PE-backed industrial companies, each of which was analyzed for tower structure, limits, premium, and claims history. The Company's D&O tower is positioned at or slightly above the peer median.
However, C&H wishes to emphasize that if the Company proceeds with an IPO in the 2023-2024 timeframe, the D&O tower will require material and significant increases in limits. The securities litigation exposure associated with public company status fundamentally changes the D&O risk profile, and the current tower structure and limits would be wholly inadequate for a public company with an enterprise value of approximately $2.6 billion. C&H recommends that the Company engage C&H no later than 12 months prior to a potential IPO filing to conduct a pre-IPO D&O tower reassessment and develop a public company insurance program.
With respect to the PL tower, the $75 million aggregate limit is adequate but warrants ongoing monitoring. The total five-year incurred of $15.12 million, combined with the increasing claims frequency trend noted in the Kessler Quinn actuarial analysis, suggests that PL exposure is not static. C&H recommends continued annual review of PL limits adequacy in connection with each renewal cycle.
IX. RENEWAL MARKETING PROCESS SUMMARY
The following is a summary of the key milestones in the 2022-2023 renewal marketing process:
The marketing process was conducted by Ashford Breckinridge LLP, the Company's insurance broker of record, with Phillip Garza, Senior Vice President, Executive Risk Practice, serving as the lead broker and Tamara Fisk, Account Executive, providing day-to-day coordination. C&H provided legal oversight of the marketing process, including review of the submission for accuracy and completeness, evaluation of carrier quotes for coverage adequacy (as distinct from premium competitiveness), and development and negotiation of policy wording improvements. The carrier quote comparison matrices (Appendix H) provide a detailed side-by-side analysis of all quotes received.
X. PENDING CLAIMS TREATMENT AT RENEWAL
The treatment of pending claims at the renewal is a critical consideration to ensure continuity of coverage and avoid gaps in protection for the Company's existing liabilities.
Both Higgins v. Nexford Conveyor Systems, LLC et al. and Consolidated Builders Supply Co. v. Triton Fastener Corp. are occurrence-based claims that were properly triggered under the outgoing 2021-2022 policy period. Both claims arose from occurrences that took place during or prior to the current policy period and were timely reported to the Midland Casualty primary carrier. Accordingly, both claims will continue to be handled under the incumbent primary policy (Midland Casualty, Policy No. MCS-GL-2021-55671), and the excess tower carriers' obligations with respect to these claims, if triggered, will likewise be determined under the incumbent policy period.
The renewal policies properly address these claims as known claims. C&H's review has confirmed that no pending or prior litigation exclusion gap exists that would prevent continuity of coverage for these known matters under the renewal program. The renewal carriers have been placed on notice of the pending claims through the broker marketing submission, and no exclusionary endorsements relating to these specific matters have been imposed on the renewal policies.
Defense cost erosion tracking procedures have been established with Trevor Haines, Vice President, Risk Management, and Donna Kowalski, Director of Insurance and Claims, to monitor the consumption of the Midland Casualty primary aggregate in connection with defense costs being incurred in both pending lawsuits. Given the combined claimed damages of $21.3 million and the primary aggregate limit of $10 million, it is possible that defense costs and any indemnity payments under these matters could exhaust the primary aggregate and trigger the Great Basin excess layer during the policy period. Timely notification to the excess carriers of the approach to the attachment point is essential to ensure seamless transition of coverage.
Coverage coordination protocols have been established with Hollander Byrne & Strauss LLP (Catherine Byrne, lead trial counsel; Rafael Mendez, senior associate), the firm defending both pending lawsuits, regarding: (a) insurer cooperation obligations, including timely reporting of defense activities and case developments; (b) settlement consent requirements applicable under the primary and excess policies; and (c) defense cost reporting procedures to support the aggregate erosion tracking described above. These protocols are designed to avoid any inadvertent coverage forfeiture resulting from failure to comply with policy conditions.
A claims reporting compliance checklist was provided to the Company's risk management team on June 1, 2022, setting forth the specific notice requirements for each carrier in the D&O and PL towers upon renewal. This checklist ensures that proper notice is given to all tower carriers at the inception of the renewal period, preserving the Company's rights under each policy.
XI. ADEQUACY OF LIMITS — KEY CONCLUSIONS
A. D&O Tower ($55M / $60M with Enhanced Side-A DIC)
C&H concludes that the D&O tower is adequate for the Company's current private-company status. This conclusion is supported by the following analysis:
Peer Benchmarking. C&H conducted a peer benchmarking analysis against eight comparable private PE-backed industrial companies, examining tower structure, aggregate limits, premium levels, rate-on-line, and claims experience. The companies were selected based on comparable enterprise value ($1.5 billion to $4.0 billion), industry classification (diversified industrials / manufacturing), and ownership structure (PE-controlled). Nexford's D&O tower limit of $55 million (now $60 million with the enhanced Side-A DIC) is positioned at or slightly above the peer median, which C&H considers appropriate given the Company's pending litigation profile and potential IPO.
Maximum Probable Loss Scenarios. C&H analyzed three maximum probable loss scenarios for the D&O program: (a) a derivative action arising from an alleged breach of fiduciary duty in connection with a leveraged recapitalization or dividend; (b) a regulatory investigation and enforcement action by OSHA or CPSC resulting in individual director/officer exposure; and (c) a securities fraud class action in a post-IPO context. The first two scenarios yielded estimated maximum probable losses within the current tower limits; the third scenario, applicable only in the post-IPO context, confirmed the need for a material increase in limits in connection with any public offering.
Favorable Claims History. The Company's zero paid D&O losses over the five-year review period provide a favorable baseline and support the conclusion that current limits are adequate on a retrospective basis. However, past claims experience is not dispositive of future risk, particularly in light of the potential IPO and evolving regulatory landscape.
Pre-IPO Caveat. As discussed in Section VIII.E, the current D&O tower limits must be revisited and likely increased substantially in connection with any IPO. Securities litigation exposure in the public company context represents a fundamentally different risk profile, and the current tower would be inadequate for a public company of Nexford's size and enterprise value.
The detailed D&O limits adequacy analysis is set forth in the D&O Limits Adequacy Memorandum dated June 6, 2022 (Appendix F).
B. PL Tower ($75M)
C&H concludes that the PL tower is adequate but requires ongoing monitoring. This conclusion is supported by the following analysis:
Catastrophic Loss Scenarios. C&H analyzed three catastrophic loss scenarios for the PL program: (a) a conveyor system fatality at a customer facility resulting in wrongful death claims, OSHA investigation, and associated regulatory and litigation exposure; (b) a mass fastener failure involving a systemic manufacturing defect in Triton-produced structural fasteners, resulting in property damage, bodily injury, and product recall across multiple customer sites; and (c) a multi-claimant product defect scenario involving Marlowe Asset Management precision-machined components in an automotive application, resulting in a vehicle recall and associated claims. Each scenario was analyzed for estimated maximum probable loss, and the results indicate that the $75 million tower provides adequate coverage for each individual scenario, though the mass fastener failure and automotive component scenarios approach the upper range of the tower.
Industry Loss Data and Actuarial Inputs. C&H incorporated industry loss data from publicly available sources and proprietary actuarial inputs provided by the Kessler Quinn Advisory Group (Arthur Kessler, Managing Director; Diana Cho, Vice President, Actuarial Services). The Kessler Quinn analysis confirms that the $75 million tower is within the expected range for a manufacturer of Nexford's size and product profile, though it notes an increasing claims frequency trend that warrants continued monitoring.
IBNR Estimate. The IBNR estimate of $2.1 million, as prepared by Kessler Quinn, reflects the actuarial assessment of unreported claims and is incorporated into the total five-year incurred figure of $15.12 million. While the IBNR estimate is modest relative to the tower limits, it is a reminder that the Company's reported claims history may understate the true scope of its product-liability exposure.
Increasing Claims Frequency Trend. C&H notes an increasing trend in claims frequency over the five-year review period. While the total five-year incurred remains well within the tower limits, continued growth in claims frequency could necessitate a limit increase in future renewal cycles. C&H recommends annual review of PL limits adequacy as a standing item in the renewal process.
The detailed PL limits adequacy analysis is set forth in the PL Limits Adequacy Memorandum dated June 8, 2022 (Appendix G).