PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 155 North Wacker Drive, Suite 4200 Chicago, Illinois 60606
June 17, 2022
TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc.
CC: Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc. Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc. Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
FROM: Naomi Petersen, Lead Associate Yuki Nakamura, Working Associate
RE: Comprehensive Review — Directors & Officers Liability Insurance Tower (Policy Period: July 1, 2021 – July 1, 2022)
Matter No.: 1005-00003
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation and in connection with the rendering of legal advice. This document is not intended for distribution beyond the named addressees and copied parties without the prior written consent of Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of any applicable privilege.
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This memorandum presents the results of Calderwood & Harkness LLP's ("C&H") comprehensive review of the directors and officers ("D&O") liability insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford," "NIH," or the "Company"), a Delaware-incorporated, Illinois-headquartered industrial holding company. The review was undertaken in connection with the 2022–2023 renewal cycle, with the current policy period expiring on July 1, 2022.
This engagement was opened on April 26, 2022, pursuant to an engagement letter dated April 22, 2022, executed by Douglas Fairchild, Responsible Partner at C&H, and Priya Sundaram, General Counsel & Corporate Secretary of Nexford, under the standing outside counsel agreement between C&H and Nexford dated January 15, 2020. The scope of the engagement encompasses a full-tower wording review, identification of coverage gaps and inconsistencies, analysis of tower coordination mechanics, assessment of the adequacy of coverage in light of Nexford's ownership structure and risk profile, and development of actionable recommendations for the upcoming renewal.
This report expands upon and supersedes the preliminary coverage gap memorandum delivered to the above-named addressees on May 27, 2022, which identified fourteen (14) coverage gaps or areas of concern. Following additional analysis, including review of supplementary policy endorsements provided by the broker on June 3, 2022, and consultation with the Company's risk management team, we have expanded the scope of identified issues to eighteen (18) discrete gaps or concerns, each of which is analyzed in detail in this report and summarized in Section XVI.
Tower Structure. Nexford currently maintains a D&O liability insurance tower consisting of five layers — a primary layer, three excess layers, and a dedicated Side-A Difference-in-Conditions ("DIC") policy — providing a total aggregate limit of $55 million at a total annual premium of $1,363,450, representing a rate-on-line of 2.48%. The tower is structured as follows:
• Primary Layer: Vandermeer National Insurance Company — $10M x $10M
• 1st Excess Layer: Commonwealth Indemnity Group — $10M x $10M xs $10M
• 2nd Excess Layer: Graystone Mutual Assurance Co. — $10M x $10M xs $20M
• 3rd Excess Layer: Pinnacle Re Insurance Ltd. — $10M x $10M xs $30M
• Side-A DIC: Harrington Specialty Insurance Co. — $15M x $15M (dedicated, non-eroding)
Key Areas of Analysis. Our review focused on the following areas of principal concern: (i) wording comparison and definitional consistency across all five layers; (ii) drop-down and erosion mechanics, including the interplay between defense costs within limits and excess-layer activation triggers; (iii) priority of payment provisions and their adequacy to protect individual directors and officers; (iv) allocation provisions and their impact on mixed-party and mixed-coverage claims; (v) the "Insured vs. Insured" exclusion, which is particularly critical given Veltrano Capital Partners Fund IV, LP's 68.5% ownership interest and the five sponsor-appointed directors comprising a majority of the nine-member board; (vi) regulatory investigation coverage, in light of the Company's manufacturing operations and pending product-liability litigation; (vii) prior acts and retroactive date restrictions; (viii) severability of the insurance application; (ix) coordination between the D&O tower and the Company's product-liability insurance tower; and (x) pre-IPO considerations, given the Company's contemplated initial public offering in the 2023–2024 timeframe.
Overview of Conclusions. The D&O tower is generally well-structured for a private, PE-backed industrial holding company of Nexford's size and complexity. The primary layer (Vandermeer) contains modern, insured-favorable wording that reflects current best practices for private-company D&O coverage. The Side-A DIC policy (Harrington) is the tower's strongest component and provides critical backstop protection for individual directors and officers, particularly in light of the sponsor-control dynamics inherent in Veltrano's majority ownership position.
However, several specific wording inconsistencies, coverage gaps, and coordination issues have been identified, the most significant of which are concentrated in the 2nd excess layer (Graystone Mutual Assurance Co., $20M–$30M band). The Graystone policy contains a narrower "Insured Person" definition than the primary, ambiguous drop-down language, no priority of payment clause, partial (rather than full) severability of the application, and an automatic-termination change-of-control provision — collectively rendering the $20M–$30M band the weakest link in the tower. Additionally, the Commonwealth 1st excess layer imposes a retroactive date of June 15, 2018 (the LBO closing date) that is absent from the primary layer, creating a potential $10M gap for pre-LBO wrongful acts.
Our specific remediation recommendations for the upcoming renewal effective July 1, 2022, are set forth in detail in Section XVII and include, among other items, replacement of the Graystone 2nd excess layer, broadening of the Vandermeer primary "Claim" definition, removal or modification of the Commonwealth retroactive date, and a recommended increase of the Side-A DIC limit from $15M to $20M.
II. BACKGROUND
A. Nexford Corporate Structure and Ownership
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The Company maintains its registered agent at c/o Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801. Its federal employer identification number is 83-2174650.
Nexford is a diversified industrial holding company operating in the engineered products and components sector. For fiscal year 2021, the Company reported consolidated revenue of $1.42 billion and consolidated EBITDA of $218 million, as reflected in audited financial statements prepared by Pemberton & Associates CPAs, LLP, Chicago, Illinois. The Company's estimated current enterprise value is approximately $2.6 billion, based on Veltrano Capital Partners' most recent internal valuation. By way of comparison, the original leveraged buyout enterprise value at the June 15, 2018 closing was approximately $2.1 billion, reflecting substantial value creation during the sponsor's holding period.
As of the date of this report, Nexford 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, 383 Madison Avenue, 24th Floor, New York, New York 10179, serving as administrative agent.
Nexford conducts its operations through three wholly owned operating subsidiaries, each of which is a Named Insured under the D&O tower:
(i) Nexford Conveyor Systems, LLC ("NCS"). NCS is a Delaware limited liability company with its principal manufacturing facility at 4500 Industrial Parkway, Joliet, Illinois 60436 (EIN 83-2174651). NCS designs, manufactures, and distributes heavy-duty belt and roller conveyor systems for industrial, mining, and aggregate applications. NCS is Nexford's largest operating subsidiary, generating approximately 56% of consolidated revenue ($795.2 million in FY2021).
(ii) Triton Fastener Corp. ("Triton"). Triton is an Illinois corporation with its principal manufacturing facility at 1010 Whitman Avenue, Rockford, Illinois 61101 (EIN 36-4892103). Triton manufactures industrial fasteners, bolts, and anchoring systems for the construction, infrastructure, and heavy equipment markets. Triton generates approximately 28% of consolidated revenue ($397.6 million in FY2021).
(iii) Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"). Marlowe Asset Management is an Ohio corporation with its principal manufacturing facility at 775 Summit Industrial Boulevard, Akron, Ohio 44311 (EIN 31-1784529). Marlowe Asset Management produces precision-machined automotive and construction components through a combination of CNC machining, forging, and casting operations. Marlowe Asset Management generates approximately 16% of consolidated revenue ($227.2 million in FY2021).
Collectively, the three operating subsidiaries ship approximately 42,000 SKUs annually across a diversified customer base in the industrial, construction, mining, and automotive sectors.
B. Ownership and Governance
Nexford's equity ownership is divided among three constituencies:
(i) Veltrano Capital Partners Fund IV, LP — 68.5% of total equity. Veltrano Capital Partners Fund IV, LP is a Delaware limited partnership whose general partner is Veltrano Capital Partners, LLC, headquartered at 301 South Tryon Street, Suite 2800, Charlotte, North Carolina 28202. 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. The founding Managing Partner of Veltrano Capital Partners is Jonathan Veltrano.
(ii) Management Rollover Equity — 19.3% of total equity. Certain members of Nexford's senior management team, including CEO Sandra Elliston and CFO Marcus Delacroix, hold rollover equity in connection with the 2018 leveraged buyout transaction.
(iii) Co-Investor Equity — 12.2% of total equity. Co-investors participated in the 2018 acquisition alongside Fund IV.
Nexford is governed by a nine-member board of directors. Five directors are appointed by Veltrano Capital Partners (the "Sponsor-Appointed Directors"), and four directors serve as independent directors. The Chairman of the Board is Gerald "Gerry" Whitcomb, a Veltrano-appointed director. In addition to the nine voting directors, Celeste Brogan, Partner, Portfolio Operations at Veltrano Capital Partners, LLC, serves as a non-voting board observer.
The Company's senior executive team relevant to this review includes Sandra Elliston, Chief Executive Officer, and Marcus Delacroix, Chief Financial Officer.
The ownership and governance structure is significant for D&O insurance purposes for several reasons. First, the sponsor's supermajority ownership and board control create the potential for claims by minority equity holders (management rollover and co-investors) against the sponsor-appointed directors, or vice versa. Second, the "Insured vs. Insured" exclusion analysis (discussed at length in Section VIII) requires careful consideration of the sponsor's ability to direct Company action through its board majority. Third, the presence of five sponsor-appointed directors and four independent directors creates a dynamic in which the independent directors' personal liability exposure may be elevated, underscoring the importance of robust Side-A coverage.
C. Key Personnel Involved in Review
The following individuals and entities have been involved in or contributed to this review:
Nexford Internal Team:
• Priya Sundaram, General Counsel & Corporate Secretary
• Trevor Haines, Vice President, Risk Management
• Donna Kowalski, Director of Insurance and Claims
Insurance Broker:
• Ashford Breckinridge LLP, 321 South Plymouth Court, Suite 1500, Chicago, Illinois 60604 (broker of record since 2019)
• Phillip Garza, Senior Vice President, Executive Risk Practice
• Tamara Fisk, Account Executive, Manufacturing & Industrial
Sponsor-Retained Insurance Consultant:
• Kessler Quinn Advisory Group, 55 Farmington Avenue, Suite 700, Hartford, Connecticut 06105
• Arthur Kessler, Managing Director
• Diana Cho, Vice President, Actuarial Services
Outside Litigation Counsel (Product-Liability Matters):
• Hollander Byrne & Strauss LLP, 70 West Madison Street, Suite 3600, Chicago, Illinois 60602
• Catherine Byrne, Partner
• Rafael Mendez, Senior Associate
We have coordinated with Ashford Breckinridge throughout this review and have utilized their policy wording comparison chart as a baseline for our independent analysis. We have also consulted with Kessler Quinn regarding actuarial inputs for the erosion scenario models set forth in Section V.C and Appendix B, and with Hollander Byrne & Strauss regarding the potential D&O implications of pending product-liability matters.
D. D&O Claims History
Nexford's five-year D&O loss history reflects a favorable claims experience. During the five-year period ending June 17, 2022, only one D&O claim has been reported: a shareholder demand letter received in 2020, which was resolved without payment. There have been zero paid losses under the D&O tower during this period. This clean claims history has contributed to favorable pricing in the current and prior renewal cycles.
Because Nexford is a privately held company, it does not face the securities-class-action exposure that constitutes the primary D&O risk for public companies. However, the Company remains exposed to a range of D&O claims that are relevant to privately held, PE-backed enterprises, including employment practices claims, regulatory enforcement actions, creditor claims (particularly in light of the Company's $1.05 billion funded debt), and derivative or demand claims by equity holders.
Two pending product-liability matters are relevant to the D&O tower because of their potential to give rise to derivative or governance claims against Nexford's directors and officers:
(i) Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, Circuit Court of Will County, Illinois (filed September 14, 2021). This matter involves a catastrophic crush injury allegedly caused by a defective emergency stop mechanism on a heavy-duty belt conveyor system manufactured by NCS. The plaintiff seeks damages of approximately $14.5 million. The case is in active discovery and no trial date has been set.
(ii) Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois (filed November 2, 2021). This matter involves allegations of structural failure of an anchoring system manufactured by Triton, resulting in a partial building collapse at a commercial construction site. The plaintiff seeks damages of approximately $6.8 million. A motion to dismiss was denied on February 11, 2022, and the case is proceeding through the initial stages of discovery.
While these product-liability claims are addressed primarily by Nexford's separate product-liability insurance tower, they are relevant to this D&O review because they could serve as the factual predicate for derivative claims, shareholder demand letters, or regulatory investigations that would implicate the D&O tower. The intersection between these matters and the D&O tower's pending/prior litigation exclusion is analyzed in Section XII, and the coordination between the D&O and product-liability towers is addressed in Section XIV.
III. TOWER STRUCTURE — LAYER-BY-LAYER SUMMARY
A. Overview Table
The following table sets forth the complete structure of Nexford's D&O liability insurance tower for the policy period July 1, 2021 through July 1, 2022:
The aggregate rate-on-line for the tower is calculated as $1,363,450 ÷ $55,000,000 = 2.48%. This rate-on-line is within the range observed for private, PE-backed industrial companies of comparable size and risk profile. The D&O Limits Adequacy Memorandum dated June 6, 2022, provides a detailed benchmarking analysis against eight comparable companies, which confirms that the 2.48% rate-on-line falls at approximately the 45th percentile of the peer group range.
The Named Insured under all five layers is Nexford Industrial Holdings Inc. and all subsidiaries, including NCS, Triton, and Marlowe Asset Management. The policy period for all layers is July 1, 2021 through July 1, 2022.
It is important to note that the Side-A DIC policy (Harrington) is structured as a dedicated, non-eroding layer. Its $15 million limit is available exclusively for the personal liability of individual directors and officers and is not reduced by payments made under any other layer of the tower. The remaining four layers provide a $40 million shared tower (primary plus three excess layers), with the Side-A DIC providing an additional $15 million of protection, for a combined aggregate of $55 million.
B. Vandermeer Primary Layer — Key Terms
Policy Number: VNI-DO-2021-88473
Carrier: Vandermeer National Insurance Company, a Connecticut-domiciled stock insurance company rated A (Excellent) by A.M. Best and A+ (Strong) by Standard & Poor's.
Limits: $10,000,000 per Claim and $10,000,000 in the aggregate.
Self-Insured Retention: $1,000,000 applicable to entity coverage (Side-B reimbursement and entity coverage for equity holder/creditor claims); $0 applicable to individual director and officer claims (Side-A).
Policy Trigger: Claims-made-and-reported. The policy covers Claims first made against an Insured during the Policy Period and reported to the Insurer during the Policy Period or within the sixty (60) day extended reporting period following expiration. This trigger requirement is standard for D&O policies and underscores the importance of timely claim reporting by the Company's risk management team.
Definition of "Claim." The Vandermeer primary defines "Claim" to include: (a) a written demand for monetary or non-monetary relief; (b) a civil, criminal, or administrative proceeding commenced by the service of a complaint or similar pleading, the return of an indictment, or the filing of a notice of charges; and (c) a formal investigation of an Insured Person by a governmental body, regulatory agency, or self-regulatory organization, but only upon the issuance of a formal order of investigation, subpoena, or similar compulsory process specifically identifying the Insured Person. As discussed in Section IV.B.1 and Section XI, this definition excludes informal regulatory inquiries, which represents a coverage gap relative to the broader definition in the Harrington Side-A DIC policy.
Definition of "Insured Person." The Vandermeer primary defines "Insured Person" as "any past, present or future director, officer, or employee acting in a supervisory or managerial capacity of the Company." This is a relatively broad definition for a private company D&O policy, extending coverage beyond directors and officers to include supervisory and managerial employees. This breadth of coverage is significant given the operational nature of Nexford's business and the potential for plant managers, division heads, and other supervisory personnel to face management-liability claims.
Key Exclusions. The Vandermeer primary contains the following principal exclusions:
(a) Prior/Pending Litigation Exclusion. Excludes Claims based upon, arising from, or in any way involving the same or related Wrongful Acts alleged or which could have been alleged in litigation or proceedings pending on or before the Policy Inception Date. (Analyzed in detail in Section XII.)
(b) Bodily Injury/Property Damage Exclusion. Excludes Claims for bodily injury, sickness, disease, death, or damage to or destruction of tangible property. This exclusion delineates the boundary between the D&O tower and the product-liability tower. (Analyzed in Section XIV.)
(c) Fraud/Dishonesty Exclusion. Excludes Claims based upon, arising from, or attributable to any Insured Person gaining any profit, remuneration, or advantage to which such person was not legally entitled, or the commission of any deliberate criminal or deliberate fraudulent act. This exclusion is subject to an adjudication severability provision, meaning it applies only after a final, non-appealable adjudication establishing such conduct — a favorable provision that prevents the carrier from invoking the exclusion at the pleading stage.
(d) ERISA Fiduciary Duty Exclusion. Excludes Claims alleging breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended. ERISA fiduciary liability is addressed under separate fiduciary liability insurance.
(e) Professional Services Exclusion. Excludes Claims arising from the rendering of or failure to render professional services. This exclusion is not expected to be material given Nexford's manufacturing operations.
(f) Pollution Exclusion. Excludes Claims arising from the actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants. Environmental liability is addressed under separate environmental insurance policies.
Entity Coverage. Because Nexford is a privately held company, it does not have traditional "Side-C" securities claims coverage as that term is used in public-company D&O policies. However, the Vandermeer primary includes entity coverage for Claims brought against the Company by equity holders (including Veltrano Capital Partners Fund IV, LP, management rollover equity holders, and co-investors) and by creditors alleging Wrongful Acts of the Company. This entity coverage is subject to the $1,000,000 SIR.
Severability of Application. The Vandermeer primary contains a full severability provision: the insurance application is deemed to be a separate application by each Insured Person. No statements, representations, or knowledge of any one Insured Person shall be imputed to any other Insured Person for the purpose of determining coverage. This is the most favorable form of severability and is the standard against which we measure the excess layers.
Defense Costs Within Limits. Defense costs are within limits (eroding) and reduce the available aggregate limit. This structure is standard for D&O policies but creates the risk that defense costs may exhaust the primary limit before indemnity payments are made, as discussed in Section V.
C. Commonwealth 1st Excess Layer — Key Terms
Policy Number: CIG-XS-2021-40291
Carrier: Commonwealth Indemnity Group, a Pennsylvania-domiciled mutual insurance company rated A- (Excellent) by A.M. Best.
Limits: $10,000,000 excess of $10,000,000 (excess of the Vandermeer primary).
Form: Follow-form to the Vandermeer primary policy, subject to specific deviations noted below.
The Commonwealth 1st excess layer generally follows the form and terms of the Vandermeer primary. However, our review has identified the following notable deviation:
Prior Acts / Retroactive Date. The Commonwealth policy contains a retroactive date of June 15, 2018, which is the closing date of Veltrano Capital Partners' leveraged buyout of Nexford. Claims arising from Wrongful Acts occurring before June 15, 2018 are excluded under the Commonwealth policy. This retroactive date is not present in the Vandermeer primary, which provides full prior acts coverage without limitation. The implications of this inconsistency are analyzed in detail in Section X.
Drop-Down Provisions. The Commonwealth policy provides that it will "drop down" and respond upon exhaustion of the Underlying Limit "by reason of payment of Loss thereunder." Because the term "Loss" as defined in the Vandermeer primary (which the Commonwealth follows) includes defense costs, this drop-down provision should be triggered by exhaustion of the primary limit through defense cost payments alone, without requiring exhaustion through indemnity payments. This interpretation is confirmed by the plain language of the provision and is consistent with the majority approach in applicable case law.
D. Graystone 2nd Excess Layer — Key Terms
Policy Number: GMA-XS-2021-77145
Carrier: Graystone Mutual Assurance Co., an Ohio-domiciled mutual insurance company rated A- (Excellent) by A.M. Best.
Limits: $10,000,000 excess of $20,000,000 (excess of the Vandermeer primary and Commonwealth 1st excess).
Form: Nominally follow-form to the Vandermeer primary, but with a significantly greater number of independent provisions than the other excess layers.
The Graystone 2nd excess layer is the most problematic layer in the tower. Although it is denominated as a "follow-form" excess policy, it contains its own definitions for several critical terms, its own allocation clause, its own severability provision, and its own change-of-control clause, each of which deviates from the Vandermeer primary in ways that are less favorable to the insureds. The specific deviations identified in our review include:
(i) "Insured Person" Definition. Graystone employs its own definition of "Insured Person": "any natural person who was, is, or becomes a director or officer of the Company." This definition is narrower than the Vandermeer primary definition in two material respects: first, it excludes employees acting in a supervisory or managerial capacity; and second, it omits the "future" language that expressly covers persons who become directors or officers after the policy inception date. The implications of this narrower definition are discussed in Section IV.B.2 and constitute Gap No. 3 in the preliminary memorandum.
(ii) Drop-Down Language. Graystone provides that it will drop down upon "exhaustion of all Underlying Insurance by payment of claims." The use of the word "claims" rather than "Loss" creates ambiguity as to whether exhaustion of the underlying limits through defense cost payments alone is sufficient to trigger the Graystone layer. This ambiguity is discussed in Section V.B.
(iii) Priority of Payment. Graystone is silent on priority of payment, which could result in pro rata allocation among entity and individual insureds in the event of insufficient limits at the $20M–$30M band. This issue is discussed in Section VI.C.
(iv) Severability. Graystone provides only partial severability: no imputation of knowledge or misstatements for individual (Side-A equivalent) coverage, but entity coverage may be voided based on a material misrepresentation by any officer. This issue is discussed in Section IX.B.
(v) Change of Control. Graystone provides for automatic termination of the policy upon a change of control (defined to include an IPO), with only a sixty (60) day extended reporting period. This is less favorable than the Vandermeer primary, which provides for automatic conversion to a tail/run-off policy upon an IPO. This issue is discussed in Section XV.D.
Non-Renewal Notice Provision. Graystone requires ninety (90) days' written notice of non-renewal, as compared to sixty (60) days in the Vandermeer primary. This extended notice period is favorable to the insured but represents a minor inconsistency in the tower.
E. Pinnacle Re 3rd Excess Layer — Key Terms
Policy Number: PRI-XS-2021-03087
Carrier: Pinnacle Re Insurance Ltd., a Bermuda-domiciled reinsurance company rated A (Excellent) by A.M. Best.
Limits: $10,000,000 excess of $30,000,000 (excess of all underlying layers).
Form: Follow-form to the Vandermeer primary policy.
The Pinnacle Re 3rd excess layer generally follows the form and terms of the Vandermeer primary without the deviations that characterize the Graystone 2nd excess layer. However, our review has identified two provisions of note:
(i) Arbitration Clause. Pinnacle Re contains an arbitration clause for coverage disputes, requiring arbitration seated in London, England, with English law governing procedural matters. The choice-of-law clause for substantive coverage issues specifies New York law. This arbitration requirement creates a potential conflict with the litigation-based resolution mechanisms in the underlying layers: if a coverage dispute involving the primary and excess layers arises, the insured could be forced to litigate against Vandermeer, Commonwealth, and Graystone in court while simultaneously arbitrating the same dispute against Pinnacle Re in London. This procedural bifurcation increases the cost and complexity of coverage litigation and creates the risk of inconsistent outcomes.
(ii) Extended Reporting Period. Pinnacle Re provides a ninety (90) day extended reporting period following expiration, as compared to sixty (60) days in the Vandermeer primary. While this is technically more favorable, the inconsistency in reporting deadlines across layers creates a risk that the insured may miss the shorter primary reporting deadline while assuming the longer excess deadline applies uniformly.
Choice of Law. The Pinnacle Re policy specifies New York law as the governing law for substantive coverage matters. The Vandermeer primary is governed by the law of the state in which the Named Insured is incorporated (Delaware) or where the Named Insured maintains its principal offices (Illinois), depending on the specific provision at issue. This potential choice-of-law divergence is noted as a monitoring item but is not expected to create material coverage differences for the issues addressed in this report.
F. Harrington Side-A DIC — Key Terms
Policy Number: HSI-DIC-2021-00342
Carrier: Harrington Specialty Insurance Co., a Delaware-domiciled specialty insurance company rated A (Excellent) by A.M. Best. Harrington is a recognized leader in Side-A DIC coverage for private equity-backed and public companies.
Limits: $15,000,000 per Claim and $15,000,000 in the aggregate. The Harrington limits are dedicated and non-eroding — they are not reduced by payments made under any other layer of the D&O tower.
Self-Insured Retention: None. There is no SIR or deductible applicable to any claim under the Side-A DIC policy.
Coverage Scope: The Harrington Side-A DIC provides coverage exclusively for individual directors and officers. No entity coverage is provided. This focused coverage scope is by design: the purpose of the Side-A DIC is to provide a dedicated layer of protection for directors' and officers' personal assets in circumstances where the underlying D&O tower does not respond.
Coverage Triggers. The Harrington Side-A DIC is triggered in any of the following circumstances:
(1) Underlying Insurer Insolvency or Bankruptcy. If any underlying insurer becomes insolvent, is placed in receivership, or files for bankruptcy, and is therefore unable to pay covered Loss, the Harrington DIC drops down and responds as if no underlying insurance existed.
(2) Underlying Insurer Wrongful Refusal to Pay. If any underlying insurer wrongfully refuses to pay covered Loss under the terms of the underlying policy, the Harrington DIC drops down and responds. The insured is not required to obtain a judicial determination of the underlying insurer's wrongful refusal before making a claim under the DIC; a good-faith dispute with the underlying insurer is sufficient.
(3) Gap in Coverage. If a Claim would be covered under the Harrington DIC but is excluded under the underlying D&O program due to an exclusion, condition, or limitation not present in the Harrington DIC, the Harrington DIC drops down and fills the gap.
Difference-in-Conditions Coverage Grants. The Harrington DIC provides broader coverage than the underlying program in several important respects:
(a) Regulatory Investigations. The Harrington DIC defines "Claim" to include both formal and informal regulatory inquiries, target letters, subpoenas issued to the Company where an individual insured is the subject of the inquiry, and voluntary interviews. This is significantly broader than the Vandermeer primary definition, which requires a formal order of investigation, subpoena, or similar compulsory process specifically identifying the Insured Person.
(b) Personal Conduct Exclusion. The Harrington DIC's personal conduct (fraud/dishonesty) exclusion requires a final, non-appealable adjudication in the underlying proceeding — not merely an admission or stipulation. This is the most protective standard available.
(c) Definition of "Loss." The Harrington DIC defines "Loss" to include certain civil fines and penalties where insurable under applicable law. This is broader than the Vandermeer primary definition and may provide coverage for regulatory penalties that would not be covered under the underlying tower.
(d) No "Insured vs. Insured" Exclusion. The Harrington DIC does not contain an "Insured vs. Insured" exclusion. This is critically important in the Nexford context given Veltrano's 68.5% ownership and five sponsor-appointed directors, as discussed in Section VIII.
The Harrington Side-A DIC is the single most important layer in the tower from the perspective of individual director and officer protection. Its combination of dedicated limits, no SIR, difference-in-conditions triggers, and absence of an IvI exclusion makes it an essential component of the D&O program, and we recommend that its limits be increased from $15M to $20M at renewal.
IV. WORDING COMPARISON ACROSS LAYERS
A. Methodology
C&H conducted a side-by-side comparison of all five policies comprising the Nexford D&O tower, analyzing forty-two (42) key coverage terms across seven categories: (i) definitions; (ii) exclusion scope and carve-backs; (iii) conditions precedent to coverage; (iv) claim reporting obligations; (v) cooperation and subrogation provisions; (vi) allocation and priority of payment; and (vii) policy administration (extended reporting, change of control, non-renewal). The complete forty-two-term comparison matrix is set forth in Appendix A.
Our analysis utilized the Ashford Breckinridge policy wording comparison chart as a baseline. We then conducted an independent, provision-by-provision review of each policy to verify the accuracy of the broker's chart and to identify additional issues not captured therein. This independent review identified four (4) additional discrepancies not reflected in the broker's original chart, which were communicated to Phillip Garza and Tamara Fisk at Ashford Breckinridge on June 10, 2022.
The key definitional comparisons and the most significant findings of the wording comparison are summarized below. Readers seeking the granular, term-by-term analysis should refer to the full comparison matrix in Appendix A.
B. Key Definition Comparisons
1. "Claim". The definition of "Claim" is the gateway to coverage under a claims-made D&O policy. If a matter does not satisfy the definition of "Claim," it cannot trigger coverage, regardless of the underlying merits or severity of the exposure. Our comparison of the "Claim" definition across all five layers reveals a meaningful inconsistency in the scope of coverage for regulatory investigations:
Vandermeer Primary (VNI-DO-2021-88473): Defines "Claim" to include (a) a written demand for monetary or non-monetary relief, (b) a civil, criminal, or administrative proceeding, and (c) a formal investigation by a governmental body, but only upon the issuance of a formal order of investigation, subpoena, or similar compulsory process specifically identifying the Insured Person. The definition does not encompass informal regulatory inquiries, voluntary document requests, or civil investigative demands ("CIDs") issued to the Company without specifically naming an individual insured.
Commonwealth 1st Excess (CIG-XS-2021-40291): Follows form to the Vandermeer primary. Consistent.
Graystone 2nd Excess (GMA-XS-2021-77145): Follows form to the Vandermeer primary but adds "binding arbitration demand" as a covered Claim type. This addition is slightly broader than the primary definition but does not address the informal regulatory inquiry gap.
Pinnacle Re 3rd Excess (PRI-XS-2021-03087): Follows form to the Vandermeer primary. Consistent.
Harrington Side-A DIC (HSI-DIC-2021-00342): Broadest definition across the tower. In addition to the categories covered by Vandermeer, the Harrington DIC defines "Claim" to include (d) informal regulatory inquiries, (e) subpoenas issued to the Company where an individual insured is the subject of the inquiry, (f) target letters, and (g) voluntary interviews with governmental authorities. This definition represents the current market standard for premium Side-A DIC products.
Concern. The gap between the Vandermeer primary definition and the Harrington DIC definition creates a scenario in which a director or officer facing an informal OSHA inquiry or a CPSC voluntary document request relating to the pending product-liability litigation would not have coverage triggered under the primary or excess layers, but would have coverage under the Side-A DIC. While the Side-A DIC backstop mitigates the risk for individual insureds, the defense costs incurred in responding to such an inquiry — including counsel fees for document review, preparation of responses, and witness preparation — would not be covered under the primary or excess layers, even though the underlying facts may ultimately give rise to a formal Claim.
Recommendation. At renewal, negotiate an expansion of the Vandermeer primary "Claim" definition to include informal regulatory inquiries, consistent with the Harrington DIC definition. This broadening should apply uniformly across all excess layers through the follow-form mechanism.
2. "Insured Person"
The definition of "Insured Person" determines who is covered under the D&O tower. Inconsistencies in this definition across layers create the risk that certain individuals covered under one layer will lose coverage as losses penetrate higher layers of the tower. Our comparison reveals a significant inconsistency at the Graystone 2nd excess layer:
Vandermeer Primary: "Any past, present or future director, officer, or employee acting in a supervisory or managerial capacity of the Company." This definition covers three categories of individuals: (i) directors, (ii) officers, and (iii) supervisory/managerial employees. The inclusion of "future" language ensures that individuals who join the Company after the policy inception date are automatically covered.
Commonwealth 1st Excess: Follows form to the Vandermeer primary. Consistent.
Graystone 2nd Excess: Contains its own definition: "any natural person who was, is, or becomes a director or officer of the Company." This definition deviates from the Vandermeer primary in two material respects. First, it excludes employees acting in a supervisory or managerial capacity, limiting coverage at the $20M–$30M band to directors and officers only. Second, the absence of "future" language raises a question as to whether individuals who become directors or officers after the policy inception date are covered, although the "becomes" language partially addresses this concern.
Pinnacle Re 3rd Excess: Follows form to the Vandermeer primary. Consistent.
Harrington Side-A DIC: "Any natural person who was, now is, or shall become a duly elected or appointed director or duly elected or appointed officer." This definition is aligned with the Vandermeer primary as to directors and officers but does not extend coverage to supervisory or managerial employees. This is expected and appropriate for a Side-A DIC, which is designed to protect the personal assets of directors and officers specifically.
Concern. The Graystone definition creates a coverage gap at the $20M–$30M band: a supervisory or managerial employee (e.g., a plant manager, a division president, or a vice president below the officer level) who is covered under the Vandermeer primary ($0–$10M) and the Commonwealth 1st excess ($10M–$20M) would lose coverage at the Graystone 2nd excess layer. In a multi-claim scenario where losses exceed $20M, these individuals would face personal liability exposure without insurance protection in the $20M–$30M band, although coverage would resume at the Pinnacle Re 3rd excess layer ($30M–$40M), which follows form to the Vandermeer primary. This was identified as Gap No. 3 in the preliminary memorandum and remains a high-priority concern.
Recommendation. Replace Graystone at renewal with a carrier whose policy follows form to the Vandermeer primary definition of "Insured Person" without narrowing deviations. If Northfield Excess Insurance Company is selected as the replacement carrier, confirm that its "Insured Person" definition is at least as broad as the Vandermeer primary.
3. "Loss". The definition of "Loss" determines what types of monetary exposure are covered under the D&O tower. Our comparison focuses on whether each layer covers defense costs, judgments, settlements, pre-judgment and post-judgment interest, and punitive or exemplary damages (where insurable under applicable law):
Vandermeer Primary: Defines "Loss" to include damages, judgments (including pre-judgment and post-judgment interest), settlements, and defense costs. Punitive and exemplary damages are included to the extent insurable under the most favorable applicable law. The policy contains a "most favorable jurisdiction" provision directing that insurability of punitive damages be determined under the law of the jurisdiction most favorable to the insured, which in practice often means that Delaware law (which generally permits insurance coverage for punitive damages) would apply.
Commonwealth 1st Excess: Follows form. Consistent.
Graystone 2nd Excess: Follows form as to the categories of covered Loss but does not include the "most favorable jurisdiction" provision for punitive damages. This means that insurability of punitive damages at the $20M–$30M band would be determined under the law of the jurisdiction in which the claim is adjudicated, which may be less favorable than Delaware law.
Pinnacle Re 3rd Excess: Follows form. Consistent.
Harrington Side-A DIC: Broadest definition. In addition to all categories covered by Vandermeer, the Harrington DIC explicitly includes certain civil fines and penalties where insurable under applicable law. The DIC also includes a "most favorable jurisdiction" provision for both punitive damages and civil fines/penalties. This expanded definition may provide coverage for OSHA civil penalties, CPSC civil penalties, or other regulatory monetary sanctions that would not be covered under the primary or excess layers.
4. "Company". The definition of "Company" determines which entities are covered as Named Insureds under the D&O tower. All five layers include Nexford Industrial Holdings Inc. and its subsidiaries, but the definition of "subsidiary" varies:
Vandermeer Primary: Defines "Subsidiary" as any entity in which the Named Insured holds "a majority ownership or control interest, whether direct or indirect." The "control" standard is broader than a pure equity-ownership threshold and could encompass entities in which Nexford exercises control through contractual arrangements, management agreements, or non-voting equity.
Graystone 2nd Excess: Defines "Subsidiary" as any entity in which the Named Insured holds "more than 50% of the outstanding voting interest." This definition is narrower than the Vandermeer primary because it requires a majority of voting interest specifically, rather than control more broadly. A potential gap could arise if Nexford holds a non-voting control interest in an entity (e.g., through a preferred equity position with control rights but without voting power).
The remaining layers follow form to the Vandermeer primary definition.
Recommendation. Confirm that all three operating subsidiaries (NCS, Triton, and Marlowe Asset Management) fall squarely within all subsidiary definitions, including the narrower Graystone definition. Based on our review of the Company's organizational chart provided by Trevor Haines on May 16, 2022, all three subsidiaries are wholly owned by Nexford Industrial Holdings Inc. and satisfy even the narrowest subsidiary definition. However, this issue should be monitored if Nexford acquires additional entities or restructures its existing subsidiaries in connection with a potential IPO.
C. Summary Table of Definitional Inconsistencies
The following table summarizes the eight (8) definitional discrepancies identified across the five layers of the D&O tower:
V. DROP-DOWN AND EROSION MECHANICS
A. Erosion Within the Primary Layer
All layers of the Nexford D&O tower provide defense costs within limits (on an "eroding" basis). This means that every dollar spent on defense costs — including attorneys' fees, expert witness fees, document review costs, and other litigation expenses — reduces the available policy limits dollar-for-dollar. This structure is standard in the D&O market and distinguishes D&O coverage from most commercial general liability policies, which typically provide defense costs in addition to limits.
The $10 million primary limit of the Vandermeer policy is shared across all coverage parts: Side-A (individual director/officer liability not indemnified by the Company), Side-B (reimbursement of the Company's indemnification of directors and officers), and entity coverage for equity holder and creditor claims. In a multi-claim year, or in a single large claim with significant defense costs, this shared, eroding structure creates the risk that defense costs may exhaust the primary limit before any indemnity payments (judgments or settlements) are made. If the primary limit is exhausted, directors and officers face personal liability exposure unless the excess layers drop down and respond.
This risk is not merely theoretical. Defense costs in complex regulatory investigations, securities fraud cases, and multi-defendant commercial litigation routinely reach seven- and eight-figure levels. While Nexford's clean D&O claims history and private-company status reduce the probability of a claim reaching these levels, the potential for a significant OSHA investigation, a derivative claim arising from the pending product-liability litigation, or a post-IPO securities class action cannot be disregarded.
B. Drop-Down Provisions
A critical question in any excess tower is whether and when the excess layers will "drop down" and begin paying upon exhaustion of the underlying limits. Our review focuses specifically on whether each excess layer will drop down when the underlying limits are exhausted solely by defense cost payments, as opposed to requiring exhaustion through payment of indemnity claims (judgments and settlements):
Vandermeer Primary: Not applicable (primary layer).
Commonwealth 1st Excess (CIG-XS-2021-40291): The Commonwealth policy provides that it will drop down upon "exhaustion of the Underlying Limit by reason of payment of Loss thereunder." The critical term is "Loss," which, under the Vandermeer primary definition that Commonwealth follows, includes defense costs. Accordingly, exhaustion of the Vandermeer primary limit through defense cost payments alone should trigger the Commonwealth layer. This interpretation is supported by the plain language of the provision and is consistent with the weight of authority in jurisdictions likely to adjudicate a coverage dispute under this tower.
Graystone 2nd Excess (GMA-XS-2021-77145): The Graystone policy provides that it will drop down upon "exhaustion of all Underlying Insurance by payment of claims." The use of the word "claims" rather than "Loss" introduces significant ambiguity. The term "claims" could be interpreted to require exhaustion through payment of claim amounts (i.e., indemnity payments such as judgments and settlements), as distinct from payment of defense costs, which are a component of "Loss" but are not themselves "claims" in common parlance. Under this interpretation, if the primary and 1st excess layers ($20M combined) were exhausted entirely by defense costs without any indemnity payments, Graystone could argue that the $20M underlying limit was not exhausted "by payment of claims" and therefore refuse to drop down.
Pinnacle Re 3rd Excess (PRI-XS-2021-03087): The Pinnacle Re policy provides that it will drop down upon "exhaustion of Underlying Insurance by payment of covered Loss." Because "Loss" includes defense costs under the Vandermeer primary definition, this provision should be triggered by defense cost exhaustion. This language is clearer than Graystone's and is consistent with Commonwealth's approach.
Harrington Side-A DIC (HSI-DIC-2021-00342): The Harrington DIC does not require exhaustion of the underlying tower as a condition of coverage. It provides independent coverage triggered by underlying insurer insolvency, wrongful refusal to pay, or gap in coverage. The DIC therefore functions as a freestanding source of protection for individual directors and officers, regardless of the status of the underlying tower.
Concern. Graystone's ambiguous drop-down language creates a potential coverage gap at the $20M–$30M band. In a scenario where the primary and 1st excess limits are exhausted entirely by defense costs (without any indemnity payments), Graystone could assert that its drop-down obligation has not been triggered, leaving a $10M gap in the tower. This would force directors and officers to either absorb defense costs personally or rely solely on the Harrington Side-A DIC (which has a $15M limit and covers individual insureds only, not entity claims).
Recommendation. At renewal, this issue should be addressed through one of the following approaches: (i) replace Graystone with a carrier (e.g., Northfield Excess Insurance Company) whose drop-down language expressly references exhaustion "by payment of Loss" (including defense costs); or (ii) if Graystone is retained, negotiate an endorsement clarifying that the drop-down is triggered upon exhaustion of underlying limits by payment of any component of Loss, including defense costs.
C. Multi-Claim Erosion Scenarios
To illustrate the practical impact of the tower's erosion and drop-down mechanics, we have modeled three hypothetical scenarios. Detailed financial projections for each scenario are set forth in Appendix B; the summaries below present the key findings:
Scenario 1: Single Large Regulatory Investigation.
A formal OSHA investigation of Nexford's conveyor manufacturing operations results in defense costs of $8 million (counsel fees, document review, expert consultants, witness preparation) and a negotiated settlement of $7 million, for a total Loss of $15 million. After application of the $1 million entity-coverage SIR, the Vandermeer primary absorbs $10 million (exhausting the primary limit), and $4 million penetrates the Commonwealth 1st excess layer. The Graystone 2nd excess and Pinnacle Re 3rd excess layers are not implicated. The Harrington Side-A DIC is not triggered because the underlying program is responding.
Key Takeaway: Even a single significant investigation could exhaust the primary layer and require excess-layer participation. The tower responds as designed in this scenario, with no gaps identified.
Scenario 2: Two Concurrent Employment Class Actions.
Two concurrent employment class actions (a wage-and-hour class action and a gender discrimination class action) result in combined defense costs of $12 million and combined settlements of $18 million, for a total Loss of $30 million. After application of the $1 million entity-coverage SIR (applicable to each claim), the Vandermeer primary absorbs $10 million (exhausting the primary limit), the Commonwealth 1st excess absorbs $10 million (exhausting the 1st excess limit), and $8 million penetrates the Graystone 2nd excess layer. If Graystone's drop-down language is interpreted to require exhaustion by "payment of claims" (i.e., indemnity payments only), Graystone could argue that defense costs should not count toward underlying exhaustion, potentially delaying or denying coverage at the $20M–$30M band.
Key Takeaway: This scenario highlights the practical risk created by Graystone's ambiguous drop-down language. In a realistic two-claim scenario, the Graystone ambiguity could result in a disputed $10M gap in coverage.
Scenario 3: SEC Investigation in Pre-IPO Context (Hypothetical).
In anticipation of an IPO, the SEC opens a formal investigation into Nexford's financial reporting. Defense costs (SEC counsel, forensic accounting, witness preparation, privilege review of hundreds of thousands of documents) total $22 million. Assuming the entire amount constitutes covered Loss, the primary ($10M), 1st excess ($10M), and a portion of the 2nd excess ($2M) would be exhausted. If the investigation ultimately results in a civil penalty of $5 million, the 2nd excess layer would absorb the remaining $8M of its limit ($2M defense costs + $5M penalty + an additional $1M in post-investigation defense costs), and the 3rd excess layer would be implicated. Total Loss in this scenario could exceed $30 million.
Key Takeaway: A pre-IPO SEC investigation could implicate the entire tower. The Harrington DIC's inclusion of civil fines and penalties in the definition of "Loss" provides critical additional protection not available under the underlying layers.
Each of these scenarios underscores the importance of clear, unambiguous drop-down language and consistent definitions across all layers of the tower.