COMPREHENSIVE PRODUCT-LIABILITY TOWER REVIEW REPORT
Prepared by
CALDERWOOD & HARKNESS LLP 155 North Wacker Drive, Suite 4200 Chicago, Illinois 60606
Prepared for
NEXFORD INDUSTRIAL HOLDINGS INC. 2200 Corporate Center Drive, Suite 800 Schaumburg, Illinois 60173
Date: June 17, 2022 Matter No.: 1005-00003
CLASSIFICATION: ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT — This document was prepared by Calderwood & Harkness LLP at the direction of and for the exclusive use of Nexford Industrial Holdings Inc. and is protected from disclosure by the attorney-client privilege and the work product doctrine. This document should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Nexford Industrial Holdings Inc. Any unauthorized disclosure may result in waiver of applicable privileges.
Authors:
• Naomi Petersen, Lead Associate, Mergers & Acquisitions Department (New York Office)
• Yuki Nakamura, Working Associate, Litigation (General) Department (Chicago Office)
Supervising Partner:
• Douglas Fairchild, Responsible Partner, Real Estate Department (Chicago Office)
Billing Partner:
• Angela Fontaine, Real Estate Department (Chicago Office), Billing Code AFO-7724
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I. EXECUTIVE SUMMARY
A. Purpose and Engagement Background
This Comprehensive Product-Liability Tower Review Report (this "Report") sets forth the findings and recommendations of Calderwood & Harkness LLP ("C&H" or the "Firm") with respect to the product-liability and general-liability insurance tower (the "PL Tower") maintained by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") for the policy period commencing July 1, 2021, and expiring July 1, 2022 (the "Current Policy Period"). This Report has been prepared in connection with the Company's 2022-2023 insurance renewal cycle and is intended to provide a comprehensive assessment of the PL Tower's structural adequacy, coverage scope, wording consistency, and responsiveness to the Company's current and foreseeable risk profile.
This engagement was opened on April 26, 2022, pursuant to the engagement letter executed by the Company on April 22, 2022, and is governed by the standing outside counsel agreement between Nexford and C&H dated January 15, 2020 (the "OCA"). The scope of the engagement, the applicable billing arrangements, and the staffing plan were set forth in detail in the engagement letter and are not reproduced here.
This Report supplements, and should be read in conjunction with, the Preliminary Coverage Gap Memorandum — Product-Liability Tower (the "Preliminary Memorandum") delivered by C&H to the Company on May 27, 2022. The Preliminary Memorandum identified eleven (11) coverage gaps across the four layers of the PL Tower that warranted further analysis. This Report provides the complete analysis of those gaps, along with additional findings developed through the comprehensive review process, and sets forth specific recommendations for the upcoming renewal cycle.
B. Company Overview
Nexford Industrial Holdings Inc. is a Delaware-incorporated industrial holding company headquartered in Schaumburg, Illinois. The Company operates through three wholly-owned operating subsidiaries:
(i) Nexford Conveyor Systems, LLC ("NCS"), a Delaware limited liability company with principal operations in Joliet, Illinois, engaged in the design, manufacture, and sale of heavy-duty conveyor systems for use in industrial processing, grain handling, mining, and logistics applications;
(ii) Triton Fastener Corp. ("Triton"), an Illinois corporation headquartered in Rockford, Illinois, engaged in the manufacture and distribution of industrial fasteners, structural bolts, anchoring systems, and related hardware for construction, infrastructure, and heavy industrial applications; and
(iii) Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"), an Ohio corporation headquartered in Akron, Ohio, engaged in the precision machining of automotive, aerospace, and construction components supplied on an OEM basis to major manufacturers.
For the fiscal year ended December 31, 2021, the Company reported consolidated revenue of $1.42 billion and EBITDA of $218 million, as reflected in the audited financial statements prepared by Pemberton & Associates CPAs, LLP. Revenue is distributed among the three subsidiaries as follows: NCS accounts for approximately 56% of consolidated revenue ($795.2 million), Triton accounts for approximately 28% ($397.6 million), and Marlowe Asset Management accounts for approximately 16% ($227.2 million). Across all three subsidiaries, the Company ships approximately 42,000 stock-keeping units ("SKUs") annually.
C. Ownership and Capital Structure
The Company is majority-owned (68.5%) by Veltrano Capital Partners Fund IV, LP ("Veltrano" or the "Sponsor"), a private equity fund of 2017 vintage with $4.8 billion in total committed capital. Veltrano acquired Nexford in a leveraged buyout that closed on June 15, 2018, at an enterprise valuation of $2.1 billion. The Company's estimated current enterprise value is approximately $2.6 billion, reflecting operational improvements and organic revenue growth since the acquisition.
The Company's capital structure includes total funded debt of approximately $1.05 billion, consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. The Company's debt-to-EBITDA ratio of approximately 4.8x is relevant to the insurance analysis because highly leveraged companies in the industrial sector may face heightened scrutiny from excess carriers regarding financial stability, and certain coverage provisions in the upper layers of the PL Tower contain financial interest or insolvency-related conditions.
D. PL Tower Summary
The Company's PL Tower consists of four layers providing a total aggregate limit of $75 million across the tower. The total annual premium for the Current Policy Period is $2,642,900, yielding a rate-on-line of 3.52% ($2,642,900 ÷ $75,000,000). When combined with the Company's directors' and officers' liability ("D&O") program, total D&O and PL premiums are $4,006,350, representing 0.282% of the Company's consolidated FY2021 revenue.
The four layers of the PL Tower are summarized below and are analyzed in detail in Sections IV through VII of this Report:
E. Key Findings
Based on the comprehensive review described in this Report, C&H has determined that the PL Tower is structurally sound and provides broadly adequate coverage for the Company's current operations and risk profile. However, the review has identified several wording inconsistencies, follow-form gaps, and sub-limit inadequacies that require attention at the upcoming renewal. Additionally, aggregate erosion under the Midland primary policy warrants close monitoring given $8.3 million in open reserves against the $10 million aggregate, and the Company's total five-year incurred product-liability losses of $15.12 million indicate an increasing claims frequency and severity trend that may impact renewal terms and carrier appetite.
The principal findings and recommendations are organized into three tiers of priority:
Critical Findings (Requiring Immediate Attention at Renewal):
1. Product recall sub-limit is inadequate at $2.5 million per occurrence / $5 million aggregate (Section IX)
2. "Other insurance" clause conflict between Midland primary and Great Basin umbrella (Sections V.D and VIII)
3. Pollution exclusion inconsistency between Midland and Great Basin (Section V.C)
4. Cross-liability provisions unclear for intercompany claims between subsidiaries (Section XI)
5. Completed operations 10-year tail insufficient for NCS and Triton products (Section X)
6. Aggregate erosion risk — $8.3M in open reserves against $10M Midland aggregate (Section XIII)
Important Findings (Recommended for Renewal Negotiation):
7. Additional insured endorsements do not consistently extend to completed operations across all layers (Section XII)
8. Definition inconsistencies for "Occurrence" and "Bodily Injury" between layers (Sections IV.B, V.B, and Appendix E)
9. Excess layers should confirm follow-form on completed operations tail (Section X.C)
10. Vendor/contractor downstream coverage gaps in excess layers (Section XII.B)
11. Defense cost erosion treatment should be clarified and made consistent across tower (Section XIV)
Monitoring Items:
12. Total five-year incurred of $15.12M — claims frequency increasing; annual monitoring recommended (Section XIII.A)
13. Pending litigation outcomes may significantly impact renewal terms (Section XIII.C)
14. Kessler Quinn IBNR estimate of $2.1M to be updated quarterly (Section XIII.A)
15. Pre-IPO PL tower reassessment if 2023-2024 IPO timeline proceeds (Section XVI.C)
Each of these findings is discussed in detail in the body of this Report, with specific remediation recommendations and cross-references to supporting memoranda delivered during the engagement.
II. SCOPE AND METHODOLOGY
II.A. Scope of Review
The scope of this engagement encompassed a comprehensive review of the Company's PL Tower for the Current Policy Period. Specifically, C&H reviewed all policies, binders, endorsements, and declarations pages for all four layers of the PL Tower — the Midland Casualty primary GL/PL policy, the Great Basin first excess/umbrella policy, the Cornerstone Reinsurance second excess policy, and the Allegheny Pacific third excess policy. The review included an analysis of all policy forms, endorsement schedules, and declarations, as well as any manuscript endorsements or coverage modifications negotiated during the placement process.
In addition to the policy documentation, C&H reviewed the broker marketing submission prepared and circulated on May 3, 2022, by Ashford Breckinridge LLP ("Ashford Breckinridge" or the "Broker"). The submission was prepared under the supervision of Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, Manufacturing & Industrial. The marketing submission provided relevant background on the Company's operations, loss history, and risk management practices, and served as the basis for renewal negotiations with incumbent and prospective carriers.
C&H also reviewed the Company's loss runs and claims files for all reported product-liability claims during the five-year period from July 1, 2017 through the present, with particular attention to the two pending product-liability lawsuits: Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, Circuit Court of Will County, Illinois, and Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois. Historical claims data, including paid loss amounts, reserves, and defense cost expenditures, were reviewed to support the aggregate erosion analysis presented in Section XIII.
C&H coordinated its review with the following parties:
Kessler Quinn Advisory Group ("Kessler Quinn"). Kessler Quinn is an independent insurance advisory and actuarial consulting firm retained by Veltrano Capital Partners to provide loss-modeling and adequacy-of-limits analysis for the Company's insurance programs. C&H worked with Arthur Kessler, Managing Director, and Diana Cho, Vice President, Actuarial Services, to obtain and analyze Kessler Quinn's actuarial inputs, including incurred-but-not-reported ("IBNR") estimates, loss-development factors, and probability-weighted catastrophic loss scenarios. Kessler Quinn's actuarial report was provided to C&H on June 3, 2022, and is summarized in Appendix F.
Hollander Byrne & Strauss LLP ("HBS"). HBS is outside litigation counsel handling the two pending product-liability lawsuits on behalf of the Company and the relevant subsidiary defendants. C&H coordinated with Catherine Byrne, Partner, and Rafael Mendez, Senior Associate, at HBS to obtain current case assessments, litigation budgets, and defense cost expenditure reports for both pending matters. HBS also provided input on potential coverage issues raised by the pending lawsuits and the carriers' reservation-of-rights letters.
Nexford Risk Management. C&H obtained information and input from the Company's internal risk management team, including Trevor Haines, Vice President of Risk Management, and Donna Kowalski, Director of Insurance and Claims. Mr. Haines and Ms. Kowalski provided operational context, historical recall documentation, certificate of insurance records, and contractual insurance requirement analyses that informed the assessments in this Report.
II.B. Methodology
C&H's review of the PL Tower employed the following analytical framework:
Policy-by-Policy Wording Analysis. Each policy in the PL Tower was subjected to a detailed wording analysis against C&H's proprietary coverage checklist for manufacturing and industrial product-liability programs. The checklist consists of more than 200 coverage points organized across eight major categories: coverage grants, definitions, exclusions, conditions, endorsements, additional insured provisions, defense cost treatment, and aggregate structure. The checklist has been refined over the course of more than fifteen years of practice in this area and reflects current market practices, recent judicial developments, and common coverage disputes in the industrial manufacturing sector.
Layer-by-Layer Follow-Form Analysis. C&H performed a systematic comparison of each excess layer's terms against the underlying primary policy to identify deviations from follow-form structure. This analysis focused on identifying excess policy terms that are broader or narrower than the corresponding primary terms, as well as terms that do not follow form at all and instead impose independent conditions or exclusions. The results of this analysis are summarized in the Follow-Form Gap Analysis Matrix attached as Appendix E.
"Other Insurance" Clause Comparison. C&H performed a side-by-side comparison of the "other insurance" clauses in all four layers of the PL Tower to identify conflicting provisions that could create circular priority issues or coverage gaps. The full text of each clause, with comparative annotations, is set forth in Appendix D.
Aggregate Erosion Modeling. Based on the Company's five-year loss history and the actuarial inputs provided by Kessler Quinn, C&H modeled aggregate erosion scenarios under the Midland primary policy and assessed the likelihood of attachment of the excess layers during the Current Policy Period and prospective renewal periods. This analysis incorporated both the two pending lawsuits and probability-weighted catastrophic loss scenarios.
Industry Benchmarking. C&H benchmarked the Company's PL Tower — including limits, premiums, rate-on-line, retention levels, and coverage terms — against comparable private-equity-backed industrial companies. Benchmarking data was obtained from Kessler Quinn, Ashford Breckinridge, and C&H's own experience advising similarly situated clients.
Cross-Reference to D&O Tower Review. This Report was prepared concurrently with C&H's review of the Company's directors' and officers' liability insurance tower. The D&O Tower Review Report is being delivered to the Company on the same date as this Report. Section XV of this Report addresses the coordination between the PL Tower and the D&O Tower, including overlap scenarios and gap analysis.
II.C. Documents Reviewed
The following documents were reviewed in connection with the preparation of this Report:
1. Midland Casualty & Surety Company, Commercial General Liability / Products Liability Policy, Policy No. MCS-GL-2021-55671, effective July 1, 2021 to July 1, 2022, including all endorsements and declarations pages (47 pages total)
2. Great Basin Insurance Company, First Excess / Umbrella Liability Policy, effective July 1, 2021 to July 1, 2022, including all endorsements and declarations pages (32 pages total)
3. Cornerstone Reinsurance Corp., Second Excess Liability Policy, effective July 1, 2021 to July 1, 2022, including all endorsements and declarations pages (18 pages total)
4. Allegheny Pacific Underwriters, Inc., Third Excess Liability Policy, effective July 1, 2021 to July 1, 2022, including all endorsements and declarations pages (14 pages total)
5. Ashford Breckinridge LLP, Broker Marketing Submission — Nexford Industrial Holdings Inc. Product Liability / General Liability Insurance Program, dated May 3, 2022 (28 pages plus exhibits)
6. Five-Year Loss Runs, Product-Liability and General-Liability Claims, July 1, 2017 — May 31, 2022, provided by Midland Casualty and Nexford Risk Management
7. Complaint and discovery materials, Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, Circuit Court of Will County, Illinois
8. Complaint, motion to dismiss briefing, and order denying motion to dismiss (dated February 11, 2022), Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914, U.S. District Court for the Northern District of Illinois
9. Kessler Quinn Advisory Group, Actuarial Analysis and Adequacy-of-Limits Report — Nexford Industrial Holdings Inc. Product-Liability Program, dated June 3, 2022
10. Nexford Industrial Holdings Inc., corporate organizational documents, including certificates of formation, operating agreements, articles of incorporation, and bylaws for Nexford Industrial Holdings Inc., Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc.
11. Triton Fastener Corp., Voluntary Product Recall Documentation — Grade 8 Hex Bolt Batch, initiated March 12, 2020, including recall notification, CPSC correspondence, and cost accounting records (total cost: $1.1 million)
12. Nexford Conveyor Systems, LLC, Product Advisory Notice — Model NCS-7200 Conveyor System, issued August 7, 2020, including internal investigation report and customer notification records (total cost: $340,000)
13. Calderwood & Harkness LLP, Preliminary Coverage Gap Memorandum — Product-Liability Tower, dated May 27, 2022
14. Calderwood & Harkness LLP, Product Recall Sub-Limit Adequacy Memorandum, dated June 7, 2022
15. Calderwood & Harkness LLP, Cross-Liability and Intercompany Coverage Memorandum, dated June 10, 2022
16. Calderwood & Harkness LLP, Letter to Hollander Byrne & Strauss LLP re Coverage Coordination, dated May 25, 2022
17. Email from Yuki Nakamura (C&H) to Trevor Haines (Nexford) re Defense Cost Tracking Protocol, dated June 15, 2022
18. Midland Casualty & Surety Company, reservation-of-rights letters regarding Higgins v. NCS (dated October 8, 2021) and Consolidated Builders v. Triton (dated December 3, 2021)
19. Various certificates of insurance issued by Ashford Breckinridge on behalf of Nexford and its subsidiaries during the Current Policy Period
III. TOWER STRUCTURE OVERVIEW
III.A. Tower Architecture
The Company's PL Tower for the Current Policy Period is constructed as a four-layer program with a total aggregate limit of $75 million. The tower is structured as follows:
Total Aggregate Limit: $75,000,000
Total Annual Premium: $2,642,900
Rate-on-Line: 3.52% ($2,642,900 ÷ $75,000,000)
Policy Period: July 1, 2021 — July 1, 2022
The tower is structured on a traditional excess-over-underlying basis, with each layer attaching only after exhaustion of all underlying limits. The primary layer is written on a commercial general liability form with a products-completed operations coverage part, subject to a $500,000 per occurrence self-insured retention. The first excess layer is written as an umbrella policy with both follow-form and independent coverage grants. The second and third excess layers are written as pure excess follow-form policies.
A visual diagram of the tower architecture, showing attachment points, limits, and carrier relationships, is attached as Appendix A.
III.B. Named Insureds and Additional Insureds
Named Insureds. All four layers of the PL Tower list the following entities as Named Insureds:
• Nexford Industrial Holdings Inc. (EIN: 83-2174650)
• Nexford Conveyor Systems, LLC (EIN: 83-2174651)
• Triton Fastener Corp. (EIN: 36-4892103)
• Marlowe Asset Management Precision Machining, Inc. (EIN: 31-1784529)
C&H has reviewed the "Named Insured" definition in each policy to confirm consistency across all four layers. The Midland primary policy defines "Named Insured" by reference to the declarations page and includes "any subsidiary of the Named Insured that is organized under the laws of any state of the United States and in which the Named Insured owns, directly or indirectly, more than 50% of the voting securities." This definition is broad enough to encompass all three operating subsidiaries and would automatically capture any future domestic subsidiaries created or acquired during the policy period, provided the ownership threshold is met.
The Great Basin umbrella policy contains a substantially similar Named Insured definition. However, the Cornerstone second excess policy defines Named Insured solely by reference to the entities "listed in the Schedule of Named Insureds" attached to the policy, without any automatic subsidiary coverage provision. While all four entities are listed in the Cornerstone schedule, this definitional approach could create a gap if the Company acquires or creates a new subsidiary during the policy period. We recommend that the Cornerstone Named Insured definition be amended at renewal to include automatic subsidiary coverage consistent with the Midland and Great Basin policies.
The Allegheny Pacific third excess policy follows the Cornerstone approach and similarly limits the Named Insured definition to scheduled entities. The same recommendation applies.
Additional Insureds. The Midland primary policy includes an additional insured endorsement that extends insured status to downstream customers, vendors, and landlords as required by written contract. The additional insured endorsement on the Midland primary provides coverage for liability arising out of the Named Insured's ongoing operations, but as discussed in Section XII, does not clearly extend to completed operations — a significant gap given the nature of the Company's products.
Veltrano Capital Partners Fund IV, LP is listed as an additional insured on the Midland primary policy pursuant to a manuscript endorsement negotiated at the time of the 2018 acquisition. C&H has confirmed that Veltrano's additional insured status extends to the Great Basin first excess/umbrella layer, which follows the primary's additional insured provisions. However, the Cornerstone and Allegheny Pacific policies do not explicitly confirm Veltrano's additional insured status, and their follow-form language is ambiguous as to whether the primary's additional insured endorsements are incorporated by reference. C&H recommends that Veltrano's additional insured status be explicitly confirmed on all excess layers at renewal.
III.C. Self-Insured Retention
The Midland primary GL/PL policy is subject to a self-insured retention ("SIR") of $500,000 per occurrence. The SIR applies to all covered claims, including product-liability and general-liability claims, and must be exhausted by the Named Insured before the Midland policy's limits begin to respond.
Defense Cost Application. The Midland policy provides that defense costs are included within the SIR — that is, defense costs paid by the Company count toward satisfying the $500,000 per occurrence retention. This is a significant structural feature, as it means that in claims involving substantial pre-trial defense activity, the SIR may be satisfied through defense cost expenditures alone, without any indemnity payment. Conversely, it means that the Company's SIR obligation is effectively larger than $500,000 in claims where defense costs are modest relative to the indemnity exposure.
Product Recall Sub-Limit. The Midland policy's product recall sub-limit of $2.5 million per occurrence / $5 million aggregate is subject to its own retention structure. The SIR applies separately to product recall claims, meaning that the Company must satisfy the $500,000 SIR before the recall sub-limit responds. Given that the sub-limit is already inadequate (as discussed in Section IX), the application of the SIR further reduces the effective recall coverage available to the Company.
SIR Exhaustion Requirements. The Midland policy requires actual payment by the Named Insured to satisfy the SIR; reserves or accruals do not constitute payment. The SIR must be satisfied on a per-occurrence basis, and no aggregation of SIR payments across occurrences is permitted. The Great Basin first excess/umbrella layer does not attach until the Midland primary aggregate is exhausted through actual payment of covered claims; if the Midland aggregate exhausts, the Great Basin policy drops down, but only after the Company has satisfied the applicable SIR for each occurrence giving rise to the exhausting claims.
IV. PRIMARY LAYER ANALYSIS — MIDLAND CASUALTY & SURETY COMPANY
IV.A. Coverage Grants
The Midland primary policy, Policy No. MCS-GL-2021-55671, is written on a commercial general liability ("CGL") coverage form that provides broad coverage for third-party bodily injury and property damage claims arising out of the Named Insured's operations, premises, and products. The coverage form includes two principal coverage parts: Coverage A (Bodily Injury and Property Damage Liability) and Coverage B (Personal and Advertising Injury Liability). This Report focuses on the Coverage A provisions as they relate to product-liability exposure.
Products-Completed Operations Hazard Coverage
The Midland policy includes coverage for liability arising out of the "products-completed operations hazard," which is defined in the policy to encompass bodily injury or property damage occurring away from premises the Named Insured owns or rents and arising out of the Named Insured's product or work. The products-completed operations hazard is broadly drafted and, based on C&H's review, is applicable to each subsidiary's operations:
• NCS Conveyor Systems: Coverage extends to bodily injury and property damage caused by defects in NCS's conveyor systems after the systems have been delivered, installed, and commissioned at customer facilities. This includes injuries sustained by end-users, maintenance personnel, and bystanders at facilities where NCS equipment is in operation.
• Triton Fastener Corp.: Coverage extends to bodily injury and property damage caused by defects in Triton's fasteners, bolts, and anchoring systems after delivery to distributors or end-users. This includes structural failures in buildings or infrastructure where Triton products are incorporated.
• Marlowe Asset Management Precision Machining: Coverage extends to bodily injury and property damage caused by defects in Marlowe Asset Management's precision-machined components after delivery to OEM customers and incorporation into finished products. This includes downstream failures in automotive, aerospace, and construction equipment containing Pemberton Investors.
Aggregate Structure. The Midland policy provides a general aggregate limit of $10,000,000 and a products-completed operations aggregate of $10,000,000. Critically, the products-completed operations aggregate is shared with the general aggregate — that is, the policy provides a single $10 million aggregate that applies to all covered claims, whether arising from premises/operations or from products-completed operations. This aggregate sharing structure means that non-product claims (e.g., a slip-and-fall at a Company facility) erode the same aggregate pool that is available for product-liability claims.
C&H notes that some manufacturers negotiate a dedicated products-completed operations aggregate that is separate from and in addition to the general aggregate. A dedicated aggregate would provide additional limit capacity for product-liability claims and would insulate the product-liability aggregate from erosion by non-product claims. C&H recommends that the Company explore the availability and cost of a dedicated products-completed operations aggregate at renewal.
Product Recall Sub-Limit
The Midland policy includes a product recall sub-limit of $2,500,000 per occurrence and $5,000,000 in the aggregate, subject to the $500,000 SIR. This sub-limit provides coverage for costs associated with product recalls, including investigation costs, consumer notification, product retrieval, product disposal, and regulatory compliance costs. The recall sub-limit is analyzed in detail in Section IX of this Report.
Completed Operations Tail
The Midland policy provides that completed operations coverage extends for a period of ten (10) years following delivery of the product or completion of the work. The adequacy of this tail provision is analyzed in detail in Section X.
IV.B. Key Definitions
C&H has reviewed the key definitions in the Midland primary policy that are most relevant to the Company's product-liability exposure. The following definitions warrant specific comment:
"Occurrence." The Midland policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." This is the standard ISO CGL occurrence definition and is broadly construed by Illinois courts to encompass not only sudden, discrete accidents but also gradual or progressive harm resulting from product defects. The inclusion of "continuous or repeated exposure" language is important for the Company because certain product-liability claims — particularly those involving structural fastener failures or long-term degradation of conveyor components — may involve harm that develops over time rather than in a single discrete event.
C&H notes that the "continuous or repeated exposure" language raises questions about how multiple related claims should be aggregated for purposes of the per-occurrence limit and the SIR. For example, if a batch of defective Triton fasteners is distributed to multiple construction projects and results in failures at several sites, whether those failures constitute a single "occurrence" (the manufacture of the defective batch) or multiple "occurrences" (one per failure site) could significantly affect coverage. Under Illinois law, the "cause" theory generally prevails, meaning that the relevant occurrence is the underlying cause (here, the manufacture of the defective batch) rather than each manifestation of injury. However, the application of this principle is fact-specific and could be disputed by the carrier.
"Bodily Injury." The Midland policy defines "bodily injury" as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." This definition is standard and encompasses both traumatic injuries (such as the crush injury alleged in Higgins v. NCS) and latent or progressive conditions. The temporal trigger for "bodily injury" under the Midland policy is the date on which the bodily injury "occurs" — that is, the policy in effect at the time the injury manifests is the triggered policy. This is consistent with the "injury-in-fact" trigger applied by Illinois courts in most CGL coverage disputes.
"Property Damage." The Midland policy defines "property damage" as "(a) physical injury to tangible property, including all resulting loss of use of that property, or (b) loss of use of tangible property that is not physically injured." This definition is relevant to claims like Consolidated Builders v. Triton, which alleges both physical damage to tangible property (the partial wall collapse) and economic losses arising from business interruption. The "loss of use" prong of the definition may extend coverage to business interruption losses, but this is subject to the "economic loss" doctrine under applicable state law, which may limit recovery for purely economic harm in the absence of physical injury to tangible property.
"Product." The Midland policy does not contain a standalone definition of "product" but instead defines the "products-completed operations hazard" by reference to "your product" and "your work." C&H has confirmed that the definition of "your product" is broad enough to encompass all product categories manufactured and sold by the three subsidiaries, including NCS conveyor systems and components, Triton fasteners and anchoring hardware, and Marlowe Asset Management precision-machined components.
"Your Product" and "Your Work." The Midland policy distinguishes between "your product" (goods or products manufactured, sold, handled, distributed, or disposed of by the Named Insured) and "your work" (work or operations performed by or on behalf of the Named Insured, including materials, parts, or equipment furnished in connection with such work). This distinction is relevant for NCS, which not only manufactures conveyor systems but also performs installation and commissioning services at customer facilities. Claims arising from installation defects may fall under "your work" rather than "your product," which could affect the application of certain exclusions (discussed below in Section IV.C).
"Insured Contract." The Midland policy defines "insured contract" broadly to include any contract or agreement under which the Named Insured assumes the tort liability of another. This definition is important because the Company's standard customer contracts and purchase orders frequently contain indemnification provisions under which the Company assumes liability for product-related claims. The "insured contract" definition enables the Company to look to the Midland policy for coverage of its contractual indemnification obligations, subject to the contractual liability exclusion and its exceptions (discussed below).
IV.C. Exclusions
The Midland primary policy contains the standard CGL exclusions, as well as several manuscript exclusions that are specific to the Company's program. C&H has analyzed each exclusion for its impact on the Company's product-liability coverage and has identified the following exclusions as warranting particular attention:
Products-Completed Operations Exclusion Carve-Backs. The Midland policy excludes coverage for certain types of damage related to the Named Insured's products and work but includes standard carve-backs that preserve coverage for bodily injury and property damage caused by product defects to third-party property and persons. These carve-backs are essential to the Company's product-liability coverage and are appropriately drafted.
Sistership/Recall Exclusion. The Midland policy contains a sistership exclusion that excludes coverage for the cost of recalling, withdrawing, inspecting, repairing, replacing, or disposing of the Named Insured's product when such action is necessitated by a known or suspected defect. This exclusion operates in conjunction with the product recall sub-limit endorsement, which effectively buys back limited coverage for recall expenses. C&H has confirmed that the recall sub-limit endorsement provides coverage for the specific recall expenses that are otherwise excluded by the sistership exclusion, including investigation costs, consumer notification, product retrieval, and disposal. However, the interaction between the exclusion and the endorsement is not seamless: the endorsement carves back coverage only for specific enumerated recall expenses and does not cover lost profits, reputational harm, or consequential damages arising from a recall. The adequacy of the recall sub-limit is addressed in Section IX.
Professional Services Exclusion. The Midland policy contains an exclusion for liability arising out of the rendering of or failure to render "professional services." This exclusion warrants attention with respect to Marlowe Asset Management's operations. Marlowe Asset Management provides precision machining services that frequently require the development of detailed technical specifications, tolerances, and engineering drawings in consultation with OEM customers. To the extent that Marlowe Asset Management's work could be characterized as the rendering of "professional services" — particularly the specification and design consultation aspects — the professional services exclusion could potentially apply to exclude coverage for claims arising from specification errors.
C&H has reviewed the exclusion language and concludes that, under the most probable reading, the professional services exclusion is directed at traditional professional services such as legal, medical, accounting, architectural, and engineering services, and would not encompass Marlowe Asset Management's manufacturing and machining activities, even where those activities involve technical specifications. However, the exclusion language is not entirely free from ambiguity, and a carrier could potentially argue that Marlowe Asset Management's specification and design consultation work constitutes "professional services" within the meaning of the exclusion. C&H recommends that the Company seek a manuscript endorsement at renewal clarifying that the professional services exclusion does not apply to the manufacturing, machining, and specification activities of any Named Insured.
Expected or Intended Injury Exclusion. The Midland policy excludes coverage for bodily injury or property damage that is "expected or intended from the standpoint of the insured." This is a standard exclusion and is unlikely to apply to the Company's typical product-liability claims, which involve alleged manufacturing or design defects rather than intentional conduct. However, in claims involving allegations that the Company knew of a product defect and failed to issue a recall (such as could be alleged in connection with the Triton Grade 8 hex bolt issue), a carrier could potentially invoke this exclusion. C&H notes that Illinois courts generally apply a subjective standard to the "expected or intended" exclusion, requiring the carrier to demonstrate that the specific insured actually expected or intended the resulting harm, rather than merely that a reasonable person would have foreseen the risk. This is a favorable standard for the Company, but the risk should be monitored.
Pollution Exclusion. The Midland primary policy contains a standard absolute pollution exclusion with a hostile fire exception. The exclusion bars coverage for bodily injury or property damage arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of "pollutants." "Pollutants" are defined to include any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. This exclusion is standard for CGL policies and is not unusual in the context of the Company's program.
However, as discussed in detail in Section V.C, the Great Basin umbrella policy contains a potentially broader pollution exclusion that may not follow form to the Midland exclusion. The interaction between the two pollution exclusions is a significant coverage concern and is identified as a Critical Finding in this Report.
Contractual Liability Exclusion. The Midland policy excludes coverage for bodily injury or property damage for which the Named Insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. However, this exclusion is subject to an important exception: it does not apply to liability assumed under an "insured contract." Because the Company's standard customer contracts generally meet the definition of "insured contract" (as discussed in Section IV.B), the contractual liability exclusion exception preserves coverage for the Company's contractual indemnification obligations in most circumstances.
Damage to "Your Product" / "Your Work" Exclusions. The Midland policy contains separate exclusions for damage to "your product" and damage to "your work." The "your product" exclusion bars coverage for property damage to the Named Insured's own product arising out of the product or any part of it. The "your work" exclusion bars coverage for property damage to the Named Insured's own work arising out of the work or any part of it. These exclusions are standard and are designed to prevent the CGL policy from functioning as a product warranty. They do not bar coverage for damage that a defective product causes to other property or for bodily injury caused by a defective product.
The "your product" and "your work" exclusions have implications for warranty-type claims asserted against the Company, particularly claims by OEM customers alleging that Pemberton Investors failed and damaged the OEM's finished product. If the Pemberton Investors is treated as "your product" and the OEM's finished product is treated as "other property," then damage to the OEM's finished product would be covered. However, if the OEM's finished product is treated as the Named Insured's "work" (on the theory that the Pemberton Investors is an integral part of the finished product), coverage could be excluded. The distinction is fact-specific and should be monitored on a claim-by-claim basis.
Workers' Compensation / Employer's Liability Crossover Exclusion. The Midland policy contains a standard exclusion for bodily injury to an employee of the Named Insured arising out of and in the course of employment. This exclusion is designed to prevent overlap between the CGL policy and the Company's workers' compensation and employer's liability insurance. However, in certain product-liability scenarios — for example, where a Company employee is injured by a defective product manufactured by a different subsidiary — the interplay between this exclusion and the cross-liability provisions (discussed in Section XI) could create coverage issues.
IV.D. Conditions
The Midland primary policy contains standard CGL policy conditions. C&H has reviewed the following conditions as they relate to the Company's product-liability program:
Notice Provisions. The Midland policy requires the Named Insured to provide notice of any occurrence, offense, claim, or suit "as soon as practicable." Notice must be provided in writing to Midland Casualty & Surety Company, Claims Department, 300 East Randolph Street, Suite 2800, Chicago, Illinois 60601, Attention: Elizabeth Chow, Senior Claims Manager. The policy does not specify a fixed time period for notice (e.g., 30 or 60 days), but the "as soon as practicable" standard is interpreted under Illinois law to require notice within a reasonable time after the Named Insured becomes aware of the occurrence or claim.
Illinois law generally requires the carrier to demonstrate actual prejudice resulting from late notice before it may disclaim coverage based on a notice violation. This "notice-prejudice" rule is favorable to the Company and mitigates the risk of a technical notice defense. Nevertheless, C&H recommends that the Company maintain rigorous notice protocols and provide notice to all carriers promptly upon learning of any occurrence or claim that may implicate the PL Tower.
Duty to Cooperate. The Midland policy requires the Named Insured to cooperate with the carrier in the investigation, defense, and settlement of covered claims. This cooperation obligation has implications for the Company's relationship with HBS, which is serving as defense counsel in the two pending product-liability lawsuits. To the extent that Midland has reserved its rights with respect to either pending claim, the duty to cooperate requires the Company to keep Midland informed of case developments, provide access to relevant documents and witnesses, and refrain from taking actions that could prejudice the carrier's interests. C&H's letter to HBS dated May 25, 2022, addressed the coverage coordination protocols necessary to satisfy this obligation.
Consent Requirements for Settlements. The Midland policy requires the Named Insured to obtain the carrier's consent before settling any claim for which coverage is sought under the policy. This consent requirement is standard and applies to settlements at or above the SIR level. The Company should ensure that any settlement discussions with plaintiffs in the pending lawsuits are conducted with appropriate carrier involvement and consent.
Subrogation and Recovery Rights. The Midland policy preserves the carrier's right of subrogation against third parties responsible for covered losses. This is relevant in the context of intercompany claims between the Company's subsidiaries — for example, if Midland pays a claim arising from a Triton fastener failure in an NCS conveyor system, Midland may assert a subrogation claim against Triton. The interaction between the subrogation provision and the cross-liability provisions is discussed in Section XI.
Other Insurance Clause. The Midland policy's "other insurance" clause is analyzed in detail in Section VIII, along with the corresponding clauses in the excess layers.
IV.E. Endorsements
The Midland primary policy includes a schedule of twenty-three (23) endorsements modifying the base CGL coverage form. C&H has reviewed each endorsement and provides the following summary of the most significant endorsements:
1. Product Recall Sub-Limit Endorsement: Provides $2.5M per occurrence / $5M aggregate sub-limit for product recall expenses (analyzed in Section IX).
2. Additional Insured — Customers and Vendors: Extends insured status to downstream customers and vendors as required by written contract (analyzed in Section XII).
3. Additional Insured — Veltrano Capital Partners Fund IV, LP: Manuscript endorsement extending insured status to the Sponsor.
4. Waiver of Subrogation — Scheduled Parties: Waives Midland's subrogation rights against certain scheduled parties as required by contract.
5. Completed Operations Tail — 10 Years: Extends completed operations coverage for 10 years post-delivery (analyzed in Section X).
6. Amendment of Pollution Exclusion — Hostile Fire Exception: Clarifies that the pollution exclusion does not apply to pollution caused by a hostile fire.
7. Amendment of "Other Insurance" Clause: Modifies the standard "other insurance" language (analyzed in Section VIII).
8. Aggregate Limit per Location Endorsement: Provides a separate aggregate limit for each Named Insured's scheduled location.
9. Cross-Liability / Severability of Interests Endorsement: Provides that the policy applies separately to each Named Insured as if separately insured, except with respect to the policy limits (analyzed in Section XI).
10. Defense Cost Provision — Within Limits: Clarifies that defense costs are within the policy limits and erode the per-occurrence and aggregate limits (analyzed in Section XIV).
C&H has identified no manuscript endorsements that improperly narrow coverage or add exclusions that are inconsistent with the Company's coverage expectations. However, certain endorsements — particularly the product recall sub-limit endorsement, the completed operations tail endorsement, and the cross-liability endorsement — contain limitations that are addressed in the relevant sections of this Report.
V. FIRST EXCESS / UMBRELLA LAYER ANALYSIS — GREAT BASIN INSURANCE COMPANY
V.A. Follow-Form vs. Independent Coverage Grants
The Great Basin policy is written as an umbrella liability policy, which means it provides both follow-form excess coverage (responding above the Midland primary limits on the same terms and conditions) and independent coverage grants (responding to certain claims that are not covered by the Midland primary policy). This hybrid structure distinguishes the Great Basin policy from the pure excess follow-form policies issued by Cornerstone and Allegheny Pacific at the second and third excess layers.
As a follow-form excess policy, the Great Basin policy provides $25 million per occurrence and $25 million in the aggregate excess of the $10 million Midland primary aggregate. The Great Basin policy attaches when the Midland primary aggregate is exhausted through payment of covered claims.
As an umbrella policy, the Great Basin policy also provides independent coverage for certain exposures that fall outside the scope of the Midland primary policy but within the Great Basin policy's own coverage grants. When the Great Basin policy responds on an independent (or "drop-down") basis, it is subject to a separate retained limit of $10,000, which the Named Insured must satisfy before the Great Basin policy's limits respond. The independent coverage grants are limited and are subject to the Great Basin policy's own exclusions, which in certain respects are broader than the Midland primary exclusions (as discussed below).
Drop-Down Scenarios. If the Midland primary aggregate exhausts during the policy period, the Great Basin policy drops down to respond as the first layer of coverage for subsequent claims. In this scenario, the Great Basin policy drops down to the $10,000 retained limit — not to first dollar — meaning that the Named Insured retains a $10,000 per-occurrence obligation for claims occurring after primary aggregate exhaustion. This is a favorable provision compared to policies that require the Named Insured to satisfy the full SIR ($500,000) before the umbrella responds in a drop-down scenario.
The attachment point of the Great Basin policy is confirmed at $10 million, corresponding to the Midland primary aggregate. C&H has verified that the Great Basin policy's attachment language is consistent with the Midland primary aggregate structure and that there are no gaps or inconsistencies in the transition from primary to first excess.
V.B. Follow-Form Mechanics
The Great Basin policy's follow-form provision states that the policy "follows the terms, conditions, definitions, and exclusions of the Immediately Underlying Insurance" except as otherwise provided in the Great Basin policy itself. "Immediately Underlying Insurance" is defined as the Midland Casualty primary policy. This follow-form provision incorporates by reference the Midland primary policy's coverage grants, definitions, conditions, and exclusions, except to the extent that the Great Basin policy contains its own provisions that explicitly deviate from or supplement the Midland terms.
C&H has identified the following areas where the Great Basin policy's terms deviate from the underlying Midland primary:
Exclusions. The Great Basin policy contains its own exclusion schedule, which includes several exclusions that are broader than the corresponding Midland exclusions. The most significant deviation is the pollution exclusion, which is discussed in detail in Section V.C below. In addition, the Great Basin policy contains a cyber liability exclusion that is not present in the Midland primary policy, a nuclear energy liability exclusion that is broader than the corresponding Midland exclusion, and a professional liability exclusion that uses different operative language than the Midland professional services exclusion.
Definitions. C&H has compared the key definitions in the Great Basin policy with the corresponding Midland definitions and has identified the following inconsistencies:
• "Occurrence": The Great Basin policy defines "occurrence" using substantially the same language as the Midland policy, including the "continuous or repeated exposure" language. C&H considers this definition to be consistent with the Midland definition, and no gap has been identified.
• "Bodily Injury": The Great Basin policy defines "bodily injury" to include "bodily injury, sickness, disease, disability, shock, mental anguish, mental injury, or humiliation." This definition is broader than the Midland definition in that it expressly includes mental anguish, mental injury, and humiliation, which are not expressly included in the Midland definition. This broader definition may create a scenario where the Great Basin policy provides coverage for certain emotional distress claims that are not covered by the Midland primary policy, triggering the Great Basin policy's independent umbrella coverage grant.
• "Property Damage": The Great Basin policy defines "property damage" using language that is substantially identical to the Midland definition. No gap has been identified.
Defense Cost Treatment. The Midland primary policy treats defense costs as within limits (eroding). The Great Basin policy provides that defense costs are payable as "Ultimate Net Loss," which is defined to include "all sums which the Insured becomes legally obligated to pay as damages, including defense costs and expenses." Accordingly, defense costs erode the Great Basin policy's $25 million per occurrence and $25 million aggregate limits. This is consistent with the Midland primary structure, and C&H does not identify a gap on this point. However, the Great Basin policy does not impose a duty to defend; it provides only a duty to indemnify, including indemnification for defense costs. This means that the Great Basin carrier does not have the right or obligation to select or control defense counsel at the umbrella layer; rather, the Named Insured (or the Midland primary carrier) controls the defense, and the Great Basin carrier reimburses covered defense costs as they are incurred.
V.C. Pollution Exclusion — Breadth Comparison
C&H has identified a significant inconsistency between the pollution exclusions in the Midland primary policy and the Great Basin umbrella policy. This inconsistency is identified as a Critical Finding in this Report.
Midland Primary Pollution Exclusion. The Midland policy contains a standard absolute pollution exclusion with a hostile fire exception. The exclusion bars coverage for bodily injury or property damage arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of "pollutants" at or from any premises, site, or location owned, rented, or occupied by the Named Insured, or at or from any premises, site, or location used by or for any insured for the handling, storage, disposal, processing, or treatment of waste. The hostile fire exception preserves coverage for pollution resulting from a fire that is not in a contained or expected location. "Pollutants" are defined in the Midland policy using the standard ISO definition.
Great Basin Umbrella Pollution Exclusion. The Great Basin policy contains a pollution exclusion that is broader than the Midland exclusion in several material respects. First, the Great Basin exclusion eliminates the hostile fire exception, meaning that pollution resulting from a hostile fire would be excluded under the Great Basin policy even though it would be covered under the Midland primary. Second, the Great Basin exclusion extends to pollution at or from "any location whatsoever," removing the limitation in the Midland exclusion that ties the exclusion to premises owned, rented, or occupied by the Named Insured. Third, the Great Basin exclusion includes a broader definition of "pollutants" that expressly encompasses "industrial manufacturing byproducts, particulate matter (including metal particulates, metal shavings, and metallic dust), lubricants, coolants, solvents, and hydraulic fluids."
This broader definition is particularly concerning for the Company's operations. NCS's conveyor manufacturing processes involve the use of metal cutting fluids, lubricants, and coolants that generate metal particulates and industrial waste. Triton's fastener manufacturing processes similarly involve metal forming, heat treatment, and surface finishing operations that generate metal particulates and chemical waste. Marlowe Asset Management's precision machining operations involve the use of cutting fluids, coolants, and solvents that could fall within the Great Basin exclusion's expanded definition of "pollutants."
Coverage Gap. The practical impact of this inconsistency is that claims involving industrial manufacturing byproducts, metal particulates, lubricant runoff, or similar substances could be covered by the Midland primary policy but excluded from coverage under the Great Basin umbrella. In such a scenario, if the claim exceeds the Midland primary limits, the Great Basin policy would deny coverage for the excess, and the Company would be exposed to the difference between the Midland primary limits and the Cornerstone second excess attachment point.
For example, in a hypothetical scenario where metal particulate contamination from an NCS conveyor system causes bodily injury at a customer's facility, the Midland primary policy would likely provide coverage (the standard pollution exclusion would not apply because the contamination does not involve "pollutants" as defined by the standard ISO definition). However, the Great Basin policy's broader pollution exclusion — which expressly encompasses metal particulates — could exclude coverage for the excess exposure.
Recommendation. C&H recommends that the Company seek a manuscript endorsement to the Great Basin policy at renewal that narrows the Great Basin pollution exclusion to match the Midland primary pollution exclusion in all material respects. Specifically, the endorsement should: (i) restore the hostile fire exception; (ii) limit the geographic scope of the exclusion to premises owned, rented, or occupied by the Named Insured; and (iii) adopt the standard ISO definition of "pollutants" in place of the expanded Great Basin definition. This recommendation is supported by market precedent: C&H has successfully negotiated similar manuscript endorsements in umbrella policies for other manufacturing clients.
V.D. Other Insurance Clause Conflict with Midland
C&H has identified a conflict between the "other insurance" clauses in the Midland primary policy and the Great Basin umbrella policy. This conflict is identified as a Critical Finding and is analyzed in detail in Section VIII. In summary, the Midland primary policy's "other insurance" clause provides that the policy is "excess over any other collectible insurance," while the Great Basin umbrella policy's "other insurance" clause provides that the policy is "excess over all other valid and collectible insurance." When both policies apply to the same claim, the "other insurance" clauses create a circular priority issue, with each policy asserting that it is excess over the other. This conflict could result in coverage delays or disputes between carriers in the event of a covered claim. C&H's recommendations for resolving this conflict are set forth in Section VIII.C.