PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP MEMORANDUM
TO: Douglas Fairchild, Esq., Responsible Partner
FROM: Naomi Petersen, Lead Associate, M&A Department (New York) Yuki Nakamura, Working Associate, Litigation (General) Department (Chicago)
DATE: June 10, 2022
RE: Cross-Liability and Intercompany Coverage Analysis — Product-Liability Insurance Tower — Nexford Industrial Holdings Inc.
MATTER NO.: 1005-00003
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in connection with Calderwood & Harkness LLP's representation of Nexford Industrial Holdings Inc. It is not intended for disclosure to any third party and should not be distributed, copied, or otherwise disseminated without the express written consent of Calderwood & Harkness LLP. Disclosure of this memorandum to any third party may result in waiver of the attorney-client privilege and work product protection.
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I. Executive Summary
The purpose of this memorandum is to analyze the cross-liability and intercompany coverage provisions across the Nexford Industrial Holdings Inc. ("Nexford" or "NIH") product-liability insurance tower for the current policy period (July 1, 2021 through July 1, 2022), and to assess whether the existing tower adequately addresses potential claims between and among Nexford's three operating subsidiaries: Nexford Conveyor Systems, LLC ("NCS"), Triton Fastener Corp. ("Triton"), and Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"). This analysis is undertaken in anticipation of the July 1, 2022 renewal and is intended to inform the renewal negotiation strategy.
This issue has assumed particular urgency in light of the intercompany supply-chain relationships among the Nexford subsidiaries. Most significantly, Triton manufactures industrial fasteners — including Grade 8 and specialty hex bolts, structural fasteners, and anchoring systems — that are incorporated as components into NCS conveyor system assemblies, including the Model NCS-7200 series. This creates a realistic and potentially significant scenario in which NCS (or its downstream customers and end-users) could assert product-liability claims against Triton arising from fastener failure in conveyor equipment. Additionally, Marlowe Asset Management supplies precision-machined components (bearings, shafts, and couplings) to both NCS and Triton, creating further intercompany supply-chain exposure that compounds the cross-liability risk across all three operating entities.
Our analysis yields the following key findings:
1. Midland Casualty Primary GL/PL Policy: The primary policy contains a standard "Separation of Insureds" or "Severability of Interests" clause that treats each Named Insured as if separately insured for purposes of evaluating claims. The Midland primary does not contain a specific "insured vs. insured" or cross-suit exclusion. Accordingly, intercompany product-liability claims between subsidiaries would be covered under the primary policy, subject to the shared $5 million per occurrence / $10 million aggregate limits. While this is a favorable provision, all named insureds compete for the same aggregate, and $8.3 million in open reserves already erode the available limits.
2. Great Basin First Excess/Umbrella: The Great Basin umbrella policy contains a specific Cross-Suit Exclusion (Endorsement GB-XS-2021-044, Section III.F) that excludes from coverage "any Claim or Suit brought by or on behalf of any Insured against any other Insured." This exclusion contains no carve-out for product-liability claims or for claims arising from arm's-length component-supply relationships between affiliated entities. This is a critical gap: even though the Midland primary permits cross-liability claims, the Great Basin excess layer would deny coverage for those same intercompany claims once they exceed the $10 million Midland attachment point.
3. Cornerstone and Allegheny Pacific Excess Layers: Both the Cornerstone Reinsurance Corp. second excess layer ($25M xs $35M) and the Allegheny Pacific Underwriters, Inc. third excess layer ($15M xs $60M) follow form to the Great Basin excess terms and conditions, thereby importing the Cross-Suit Exclusion into their respective layers. Moreover, Allegheny Pacific contains an independent "Related Entities" exclusion (Section IV.3) that would separately bar intercompany claims even if the follow-form provision were construed differently. Neither excess layer would respond to intercompany product-liability claims.
4. Recommendations: We recommend that the upcoming July 1, 2022 renewal be used as an opportunity to negotiate the removal or modification of the Cross-Suit Exclusion in the Great Basin umbrella, with corresponding amendments to the Cornerstone and Allegheny Pacific excess layers. Detailed recommendations for renewal negotiation priorities, fallback positions, and structural alternatives are set forth in Section IX below.
This memorandum should be read in conjunction with the Preliminary Coverage Gap Memorandum — Product-Liability Tower dated May 27, 2022, which identified the cross-suit exclusion issue among subsidiaries as Gap Item No. 7. The present memorandum provides a comprehensive analysis of that identified gap and expands upon the preliminary assessment.
II. Background and Factual Context
A. Nexford Corporate Structure and Named Insureds
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173 (EIN 83-2174650). Nexford serves as the parent holding company for a portfolio of three industrial manufacturing subsidiaries acquired and consolidated under a platform investment strategy. Nexford is majority owned by Veltrano Capital Partners Fund IV, LP, which holds approximately 68.5% of the equity. Management rollover participants hold approximately 19.3% of the equity, and various co-investors account for the remaining 12.2%.
For the fiscal year ended December 31, 2021, Nexford reported consolidated revenue of approximately $1.42 billion and adjusted EBITDA of approximately $218 million. The company's three operating subsidiaries — each of which is a Named Insured under the product-liability insurance tower at issue — are as follows:
Nexford Conveyor Systems, LLC ("NCS"). NCS is a Delaware limited liability company with its principal manufacturing facility located at 4500 Industrial Parkway, Joliet, Illinois 60436 (EIN 83-2174651). NCS designs, manufactures, and sells heavy-duty belt and roller conveyor systems for use in mining, aggregate processing, grain handling, and general industrial applications. NCS accounts for approximately 56% of Nexford's consolidated revenue, or approximately $795.2 million for FY2021. NCS operates three manufacturing lines and employs approximately 1,850 full-time employees at its Joliet facility.
Triton Fastener Corp. ("Triton"). Triton is an Illinois corporation with its principal manufacturing facility located at 1010 Whitman Avenue, Rockford, Illinois 61101 (EIN 36-4892103). Triton manufactures industrial fasteners, bolts, and anchoring systems for construction, infrastructure, and heavy-equipment applications. Triton's product line includes Grade 5 and Grade 8 hex bolts, structural anchor bolts, specialty tension-control fasteners, and custom-engineered anchoring systems. Triton accounts for approximately 28% of Nexford's consolidated revenue, or approximately $397.6 million for FY2021. Triton employs approximately 920 full-time employees across its Rockford operations.
Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"). Marlowe Asset Management is an Ohio corporation with its principal manufacturing facility located at 775 Summit Industrial Boulevard, Akron, Ohio 44311 (EIN 31-1784529). Marlowe Asset Management provides precision-machined components for the automotive, construction equipment, and industrial machinery sectors, including bearings, shafts, couplings, gear assemblies, and custom-tolerance parts. Marlowe Asset Management accounts for approximately 16% of Nexford's consolidated revenue, or approximately $227.2 million for FY2021. Marlowe Asset Management employs approximately 640 full-time employees at its Akron facility.
Collectively, the three operating subsidiaries ship approximately 42,000 stock-keeping units ("SKUs") annually across a diverse customer base spanning North America and select international markets. All three subsidiaries, together with the parent holding company Nexford Industrial Holdings Inc., are Named Insureds under the product-liability insurance tower analyzed in this memorandum.
B. Intercompany Supply Relationships
The intercompany supply-chain relationships among the Nexford subsidiaries are central to the cross-liability analysis. These relationships create genuine product-liability cross-exposure that the insurance tower must address.
Triton-to-NCS Supply Relationship. Triton supplies Grade 8 and specialty hex bolts, structural fasteners, and anchoring systems that are incorporated into NCS conveyor system assemblies. The most significant product integration involves the NCS Model NCS-7200 heavy-duty belt conveyor system, which utilizes Triton-manufactured structural fasteners in its frame assembly, drive housing, and emergency stop mechanism components. In FY2021, Triton supplied approximately $18.4 million in fastener products to NCS on an intercompany basis, representing approximately 4.6% of Triton's total revenue. These fasteners are safety-critical components: a failure of a structural fastener in a conveyor system operating under load could result in catastrophic equipment failure, physical injury, or death.
Marlowe Asset Management-to-NCS Supply Relationship. Marlowe Asset Management machines precision components — including bearings, drive shafts, and couplings — that are used in NCS conveyor drive systems. These components are essential to the safe and reliable operation of conveyor systems, particularly in high-load applications such as mining and aggregate processing. In FY2021, Marlowe Asset Management supplied approximately $12.7 million in precision-machined components to NCS.
Marlowe Asset Management-to-Triton Supply Relationship. Marlowe Asset Management also machines precision components used in Triton's automated fastener production equipment. While this supply relationship is primarily relevant to Triton's manufacturing operations rather than its end-user products, a defect in a Marlowe Asset Management-machined component used in Triton's production equipment could cause manufacturing defects in Triton's fastener products, creating an indirect but potentially significant chain of product-liability exposure. In FY2021, Marlowe Asset Management supplied approximately $5.2 million in machined components to Triton.
These intercompany supply arrangements are governed by internal transfer pricing agreements that establish arm's-length pricing consistent with Section 482 of the Internal Revenue Code. However, these transfer pricing agreements do not include robust indemnification or hold-harmless provisions that would allocate product-liability risk between the subsidiaries in a manner that substitutes for insurance coverage. The transfer pricing agreements were structured primarily for tax compliance purposes and do not reflect a considered allocation of tort liability risk.
The critical implication of these intercompany supply relationships is that a failure of a Triton fastener in an NCS conveyor system could generate a chain of product-liability claims: (i) the end-user or injured party would assert claims against NCS as the manufacturer of the conveyor system; (ii) NCS would in turn assert indemnity or contribution claims against Triton as the manufacturer of the defective component; and (iii) if Marlowe Asset Management-machined components contributed to the failure, claims could extend to Marlowe Asset Management as well. The insurance tower must be structured to address this chain of claims, and the cross-suit exclusions in the excess layers create a significant gap in coverage for the intercompany portion of such claims.
C. Relevant Claims History Illustrating Cross-Liability Risk
Two pending product-liability claims illustrate the cross-liability risk and underscore the urgency of this analysis.
*Higgins v. Nexford Conveyor Systems, LLC et al.*, Case No. 2021-L-04382, Circuit Court of Will County, Illinois. This action was filed on September 14, 2021, and arises from a catastrophic crush injury sustained by Michael Higgins, a plant operator at a grain processing facility in Channahon, Illinois. The plaintiff alleges that a defective emergency stop mechanism on a Model NCS-7200 conveyor system failed to engage, resulting in the plaintiff's arm being drawn into the conveyor roller assembly. The complaint names NCS as a defendant and seeks damages of $14.5 million, including compensatory damages for past and future medical expenses, lost wages, pain and suffering, and disability, as well as punitive damages.
While the complaint names only NCS as a defendant, the factual record developed in discovery may implicate Triton-supplied fasteners or Marlowe Asset Management-machined components in the emergency stop mechanism assembly. Specifically, preliminary engineering analysis conducted by Nexford's internal product safety team has identified the possibility that a structural fastener in the stop mechanism's linkage assembly may have experienced fatigue failure under operating loads. If that fastener is a Triton-manufactured component, NCS may have grounds to assert third-party claims or cross-claims against Triton for contribution or indemnification. Similarly, if the stop mechanism's actuator shaft — a Marlowe Asset Management-machined component — contributed to the failure, intercompany claims could extend as well. The case is currently in the discovery phase, with document production substantially completed and depositions expected to commence in Q3 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. This action was filed on November 2, 2021, and arises from the alleged structural failure of Grade 8 hex bolts manufactured by Triton that were used in a commercial building construction project in Milwaukee, Wisconsin. The plaintiff, a building materials distributor, alleges that the failure of Triton's hex bolts caused a partial wall collapse during construction, resulting in property damage and construction delays. Damages of $6.8 million are sought. Triton's motion to dismiss for failure to state a claim was denied on February 11, 2022, and the case is proceeding through discovery.
Although this case directly targets Triton and does not involve NCS as a party, it is relevant to the cross-liability analysis because NCS conveyor systems also use Grade 8 hex bolts from the same Triton product line. If the hex bolts at issue in the Consolidated Builders case reflect a systemic manufacturing defect — for example, improper heat treatment or metallurgical composition — the same defect could be present in hex bolts supplied by Triton to NCS, potentially affecting the structural integrity of NCS conveyor systems in the field. This would create a scenario in which NCS could face product-liability claims from its own customers arising from the same Triton manufacturing defect, generating intercompany cross-claims.
Claims Reserves and Loss History. Total open product-liability reserves across both pending claims stand at $8.3 million, allocated under the Midland Casualty primary layer. Over the past five years, the Nexford subsidiaries have reported twelve product-liability claims, of which nine have been closed with total paid losses of $4.72 million. Three claims remain open, with reserves of $8.3 million. Kessler Quinn Advisory Group, the company's actuarial consultant, has estimated incurred but not reported ("IBNR") losses at approximately $2.1 million. Total incurred losses over the five-year period are $15.12 million.
Litigation counsel for both pending matters is Hollander Byrne & Strauss LLP, with Catherine Byrne, Partner, and Rafael Mendez, Senior Associate, serving as lead defense counsel.
D. The Product-Liability Tower Structure
The Nexford product-liability insurance tower provides aggregate limits of $75 million across four layers, with a total annual premium for the 2021-2022 policy period of $2,642,900, representing a rate-on-line of 3.52%. The self-insured retention ("SIR") under the primary GL/PL policy is $500,000 per occurrence. The tower is structured as follows:
The Midland Casualty primary policy includes a product recall sub-limit of $2.5 million per occurrence / $5 million aggregate, which is relevant to the cross-liability analysis as discussed in Section VII below. The Great Basin first excess layer provides coverage on an excess follow-form basis with a "difference in conditions" feature for certain specified coverages. The Cornerstone and Allegheny Pacific layers are excess follow-form policies that incorporate the terms and conditions of the immediately underlying policies by reference.
III. Cross-Liability Provisions: Layer-by-Layer Analysis
A. Midland Casualty Primary GL/PL Policy (MCS-GL-2021-55671)
1. Severability of Interests / Cross-Liability Clause
The Midland Casualty primary GL/PL policy includes a standard "Separation of Insureds" or "Severability of Interests" clause set forth in Section IV of the policy's Commercial General Liability Conditions. The operative language of the clause provides, in pertinent part:
"Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:
(a) As if each Named Insured were the only Named Insured; and
(b) Separately to each insured against whom claim is made or 'suit' is brought."
The practical effect of this clause is that the Midland primary policy treats each Named Insured — Nexford Industrial Holdings Inc., NCS, Triton, and Marlowe Asset Management — as if it were the only insured under the policy for purposes of evaluating whether a claim is covered. This means that a claim by NCS against Triton would be evaluated from Triton's perspective as if Triton had its own separate CGL policy: the policy would assess whether the claim constitutes "bodily injury" or "property damage" caused by an "occurrence" and whether any exclusion applies, without regard to the fact that the claimant (NCS) is also a Named Insured under the same policy.
This is a favorable provision for Nexford. It means that a product-liability claim by one subsidiary against another is not automatically excluded simply because both entities are named insureds under the same policy. The severability clause ensures that the policy responds to intercompany claims in the same manner as it would respond to claims by unrelated third parties, subject to the limitations discussed below.
The severability clause is a standard provision in ISO-form commercial general liability policies and is widely recognized by courts as permitting cross-claims between co-insureds. See, e.g., American Family Mut. Ins. Co. v. American Girl, Inc., 268 Wis. 2d 16 (2004) (holding that separation of insureds clause required insurer to treat each insured separately for purposes of determining coverage); Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751 (2002) (interpreting severability clause to permit coverage for cross-claims between co-insureds).
2. "Insured vs. Insured" or Cross-Suit Exclusion
Critically, the Midland Casualty primary policy does not contain a specific "insured vs. insured" or cross-suit exclusion. This is consistent with standard market practice for commercial general liability and product-liability policies, which generally do not include such exclusions. The "insured vs. insured" exclusion is a feature most commonly associated with directors and officers ("D&O") liability policies, where it serves the distinct purpose of preventing the corporation from manufacturing claims against its own directors and officers to access D&O insurance proceeds.
The absence of a cross-suit exclusion in the Midland primary is a significant favorable factor in the coverage analysis, as it means that the primary layer will respond to intercompany product-liability claims subject to the standard terms and conditions of the policy.
However, three standard CGL exclusions require analysis in the context of intercompany claims:
Exclusion (j) — "Damage to Property." This exclusion precludes coverage for property damage to property owned, rented to, or occupied by the insured. In an intercompany context, this exclusion could limit coverage for property damage claims between subsidiaries where they share equipment, facilities, or other property. For example, if Marlowe Asset Management supplies a defective component that damages NCS-owned manufacturing equipment, Exclusion (j) would need to be analyzed to determine whether the NCS equipment qualifies as property "owned" by the insured (Marlowe Asset Management) within the meaning of the exclusion. Given that NCS and Marlowe Asset Management are separate legal entities — NCS being a Delaware LLC and Marlowe Asset Management being an Ohio corporation — the property owned by NCS should not be treated as property owned by Marlowe Asset Management for purposes of Exclusion (j), even though both are subsidiaries of the same parent company. The severability clause reinforces this analysis by requiring the policy to be applied separately to each insured. Nevertheless, the analysis could be more complicated in the case of shared or co-owned equipment at a common facility.
Exclusion (k) — "Your Product." This exclusion precludes coverage for property damage to "your product" arising out of it or any part of it. In an intercompany context, the question is whether a Triton fastener, once incorporated into an NCS conveyor system, remains "your product" of Triton or whether the integrated conveyor system becomes solely NCS's product. Under the severability clause, when evaluating a claim against Triton, "your product" refers to Triton's product — i.e., the fastener. Once the fastener is incorporated into the NCS conveyor system, the conveyor system as a whole is NCS's product, not Triton's product. Accordingly, if a Triton fastener fails within an NCS conveyor system and causes property damage to the conveyor system itself, Exclusion (k) should apply only to damage to the fastener itself (which is "Triton's product"), not to damage to the broader conveyor system (which is "NCS's product"). This is consistent with the prevailing interpretation of the "your product" exclusion in component-supplier contexts.
Exclusion (l) — "Your Work." A parallel analysis applies to the "your work" exclusion, which precludes coverage for property damage to "your work" arising out of it or any part of it. For Marlowe Asset Management precision-machined components incorporated into NCS or Triton products, "your work" would refer to Marlowe Asset Management's machining work on the specific component, not to the larger product into which the component is incorporated. This exclusion should not bar coverage for damage to the broader NCS conveyor system or Triton fastener product caused by a defective component.
In summary, the standard CGL exclusions in the Midland primary policy should not operate as a bar to intercompany product-liability claims in the component-supply context presented by the Nexford subsidiaries, provided that the severability clause is given its intended effect and each insured is evaluated separately.
3. Cross-Liability and Aggregate Limits
While the Midland primary's cross-liability provisions are favorable in permitting intercompany claims, a critical practical limitation must be recognized: the severability clause expressly carves out the "Limits of Insurance" from its scope. This means that although each Named Insured is treated as if separately insured for coverage evaluation purposes, all Named Insureds share a single set of policy limits — $5 million per occurrence and $10 million in the aggregate.
The consequence of this shared-aggregate structure is that an intercompany claim would erode the same aggregate that covers third-party claims. In a scenario involving both third-party product-liability claims and intercompany contribution or indemnification claims, all claims compete for the same $10 million aggregate.
To illustrate: if the Higgins v. NCS claim (in which $14.5 million in damages is sought) triggers NCS's coverage under the Midland primary, and NCS in turn asserts a contribution claim against Triton for faulty fasteners in the emergency stop mechanism, both the third-party claim payment and the intercompany claim payment would draw from the same $10 million aggregate. If the third-party claim settles for $7 million (within the aggregate), only $3 million of aggregate would remain for the intercompany contribution claim — and any other product-liability claims reported during the policy period. With $8.3 million in open reserves already allocated against the Midland primary aggregate, the practical availability of the aggregate for intercompany claims is severely constrained.
This aggregate-erosion concern underscores the importance of obtaining cross-liability coverage in the excess layers: even if the Midland primary permits intercompany claims, the $10 million aggregate may be insufficient to respond meaningfully to such claims, particularly in the context of the pending litigation.
B. Great Basin First Excess/Umbrella ($25M xs $10M)
1. Follow-Form and Cross-Suit Exclusion
The Great Basin Insurance Company umbrella policy provides coverage on an excess follow-form basis with a "broader than" or "difference in conditions" ("DIC") feature for certain specified coverages. The DIC feature applies to enumerated coverage extensions and is designed to "drop down" and provide primary-like coverage in circumstances where the underlying policy does not provide coverage for a loss that falls within the DIC coverage grants. However, the DIC feature does not override the Great Basin policy's own exclusions.
The Great Basin policy contains a specific Cross-Suit Exclusion set forth in Endorsement GB-XS-2021-044, Section III.F. The operative language of the exclusion provides:
"This policy does not apply to any Claim or Suit brought by or on behalf of any Insured against any other Insured, including but not limited to any cross-claim, counterclaim, third-party claim, contribution claim, indemnity claim, or subrogation claim asserted by or on behalf of any Insured against any other Insured under this policy."
This exclusion is unambiguous and sweeping in its scope. It excludes from coverage any claim or suit — regardless of the form of action — in which one Named Insured (or its representatives) asserts a claim against another Named Insured. The exclusion expressly covers cross-claims, counterclaims, third-party claims, contribution claims, indemnity claims, and subrogation claims, which are precisely the types of claims that would arise in an intercompany product-liability context.
This is a critical gap in the insurance tower. Even though the Midland Casualty primary policy permits cross-liability claims between subsidiaries, the Great Basin excess policy would deny coverage for those same intercompany claims once they exceed the $10 million Midland attachment point. For a large intercompany claim — such as an NCS contribution or indemnity claim against Triton arising from a catastrophic conveyor failure caused by defective fasteners — coverage would be available only up to the $10 million Midland primary aggregate, and the remaining $25 million Great Basin layer would be entirely unavailable.
2. Definition of "Insured" in Cross-Suit Exclusion
The scope of the Great Basin Cross-Suit Exclusion is further broadened by the policy's definition of "Insured," which is set forth in Section I (Definitions) of the policy. The Great Basin policy defines "Insured" to include:
(a) All Named Insureds listed in the declarations page, including Nexford Industrial Holdings Inc., Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc.;
(b) Any subsidiary or affiliated entity of any Named Insured, whether now existing or hereafter formed or acquired, to the extent such entity would qualify as an insured under the underlying insurance;
(c) The respective directors, officers, employees, and agents of any Named Insured or affiliated entity, but only while acting within the scope of their duties for such Named Insured or affiliated entity; and
(d) Any person or organization to whom the Named Insured is obligated by written contract or agreement to provide insurance coverage, but only with respect to operations performed by or on behalf of the Named Insured.
Three aspects of this definition are particularly significant for purposes of the cross-liability analysis:
First, the definition includes all four Named Insureds without distinction, treating the parent holding company and each operating subsidiary identically. There is no carve-out for subsidiaries or affiliated entities that operate as separate, independent businesses with distinct product lines and customer bases.
Second, the definition extends to directors, officers, employees, and agents of the Named Insureds acting within the scope of their duties. This means that a claim brought by an NCS employee acting in his or her capacity as an agent of NCS against Triton would also fall within the Cross-Suit Exclusion, further broadening the scope of excluded intercompany claims.
Third, and most critically, the definition contains no carve-out for claims arising from an insured's capacity as a customer or downstream purchaser of another insured's product. In the Nexford context, NCS is both a co-insured and a customer of Triton — it purchases fasteners from Triton in arm's-length commercial transactions. A well-drafted cross-suit exclusion might carve out claims where the claimant insured's relationship to the defendant insured is that of a customer or purchaser, recognizing that such claims are functionally identical to third-party claims and do not implicate the collusion concerns that cross-suit exclusions are designed to address. The Great Basin exclusion contains no such carve-out.
3. Impact on Tower Integrity
The Great Basin Cross-Suit Exclusion effectively creates a $10 million ceiling on intercompany product-liability coverage — limited to the Midland Casualty primary aggregate — rather than the full $75 million tower that is available for third-party claims. This breaks the intended continuity of the product-liability tower for intercompany claims and creates a material gap in coverage.
The significance of this gap cannot be overstated. Triton fasteners are incorporated into NCS conveyor systems representing $795.2 million in annual revenue. A systemic defect in Triton's fastener product line — such as improper heat treatment of Grade 8 hex bolts, which is precisely the type of defect alleged in the Consolidated Builders litigation — could generate intercompany claims far exceeding the $10 million Midland primary aggregate. A catastrophic conveyor failure resulting in multiple fatalities at a mining or grain processing facility could generate claims in the tens of millions of dollars, a substantial portion of which could take the form of NCS contribution or indemnity claims against Triton. Under the current tower structure, none of that intercompany exposure would be covered above $10 million.
C. Cornerstone Reinsurance Corp. Second Excess ($25M xs $35M)
The Cornerstone Reinsurance Corp. second excess policy (Policy No. CR-XS-2021-3318) provides $25 million in coverage excess of $35 million and follows form to the Great Basin excess policy's terms and conditions. The follow-form provision in the Cornerstone policy states that coverage is provided "on the same terms and conditions as the Immediately Underlying Insurance," defined as the Great Basin policy, "except as otherwise provided herein."
Because the Cornerstone policy follows form to Great Basin, the Cross-Suit Exclusion set forth in Endorsement GB-XS-2021-044, Section III.F, is incorporated into the Cornerstone layer by reference. The Cornerstone policy does not independently modify, narrow, or override the Cross-Suit Exclusion, nor does it contain any carve-out for product-liability intercompany claims.
Additionally, an independent analysis of the Cornerstone policy's "Maintenance of Underlying Insurance" condition is warranted. This condition requires that the Named Insured maintain in force the underlying insurance (including the Great Basin layer) with limits no less than those specified in the Cornerstone declarations. The condition further provides that the Cornerstone layer responds only after the "collectible" or "available" underlying limits have been exhausted by the payment of covered claims.
The question presented is whether, in a scenario where the Great Basin layer is unavailable for an intercompany claim due to the Cross-Suit Exclusion, the Cornerstone layer would "drop down" and respond at the $10 million attachment point (i.e., directly above the Midland primary). Our analysis concludes that the answer is no. The "Maintenance of Underlying Insurance" condition requires that the underlying limits be "collectible" or "available," and an excluded claim is not a claim for which coverage is "available" under the underlying policy. The Great Basin Cross-Suit Exclusion does not represent a failure of the underlying insurer to pay — it represents a policy provision that removes the claim from coverage entirely. Accordingly, the Cornerstone layer does not drop down, and the $25 million Cornerstone layer is also unavailable for intercompany claims.
This interpretation is consistent with the weight of authority on drop-down provisions in excess policies. See Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928); Pemberton Corporation v. Certain Underwriters at Lloyd's, London, 161 Cal. App. 4th 184 (2008) (excess insurer's obligation is triggered only when underlying limits are exhausted by payment, not when underlying coverage is excluded).
D. Allegheny Pacific Underwriters Third Excess ($15M xs $60M)
The Allegheny Pacific Underwriters, Inc. third excess policy (Policy No. APU-XS-2021-7702) provides $15 million in coverage excess of $60 million. Like the Cornerstone layer, Allegheny Pacific follows form to the underlying policies, incorporating the Cross-Suit Exclusion from the Great Basin layer through the follow-form chain.
However, the Allegheny Pacific policy presents an additional concern: Section IV.3 of the Allegheny Pacific policy contains an independent "Related Entities" exclusion that separately addresses intercompany claims. The operative language of this exclusion provides:
"This policy shall not apply to any Claim, Suit, or loss arising out of or in connection with any claim, demand, action, or proceeding brought by or on behalf of any entity that is under common ownership or control with the Named Insured, or by or on behalf of any entity that directly or indirectly controls, is controlled by, or is under common control with the Named Insured. For purposes of this exclusion, 'control' means the direct or indirect ownership of more than fifty percent (50%) of the voting securities or equity interests of an entity, or the right to elect or appoint a majority of the board of directors or equivalent governing body of an entity."
This "Related Entities" exclusion would independently bar intercompany claims between the Nexford subsidiaries, regardless of how the follow-form provision is construed. Because Nexford Industrial Holdings Inc. directly or indirectly owns 100% of the equity of NCS, Triton, and Marlowe Asset Management, all three operating subsidiaries are under "common ownership or control" within the meaning of the exclusion. Any claim by one subsidiary against another would be a claim by an entity under common control with the Named Insured and would be excluded under Section IV.3.
The independent "Related Entities" exclusion in the Allegheny Pacific policy is broader in certain respects than the Great Basin Cross-Suit Exclusion. While the Great Basin exclusion is framed in terms of claims between "Insureds" under the policy, the Allegheny Pacific exclusion is framed in terms of claims between entities under "common ownership or control" — which could potentially extend to entities that are not Named Insureds under the policy but are nevertheless affiliates of the Named Insured. For purposes of the current analysis, however, the practical effect is the same: the $15 million Allegheny Pacific layer is unavailable for intercompany product-liability claims.
In summary, the entire excess tower above the Midland Casualty primary — comprising $65 million in aggregate limits across the Great Basin, Cornerstone, and Allegheny Pacific layers — is unavailable for intercompany product-liability claims. This reduces the effective intercompany product-liability coverage from $75 million to $10 million.
IV. Hypothetical Intercompany Claim Scenarios
To illustrate the practical impact of the cross-liability coverage gap identified in Section III, we present three hypothetical claim scenarios that are informed by the actual intercompany supply relationships and pending litigation described in Section II.
A. Scenario 1: Triton Fastener Failure in NCS Conveyor System
Assumed Facts. A Grade 8 hex bolt manufactured by Triton and supplied to NCS on an intercompany basis fails in a Model NCS-7200 conveyor system installed at a customer's mining operation. The fastener failure causes a catastrophic collapse of the conveyor frame under load, resulting in a severe crush injury to a plant worker. The injured worker files a product-liability action against NCS as the manufacturer of the conveyor system, seeking $18 million in damages. NCS settles the third-party claim for $12 million (after the $500,000 SIR) and subsequently asserts a contribution and indemnity claim against Triton as the manufacturer of the defective fastener, seeking $8 million in indemnification.
Coverage Analysis.
Primary Coverage (Midland Casualty). The Midland primary's severability clause applies, and both the third-party claim against NCS and the contribution claim by NCS against Triton are evaluated as if each subsidiary were separately insured. The third-party settlement of $12 million would exhaust the Midland primary's $5 million per occurrence limit (with the remaining $7 million passing to the excess layers) and substantially erode the $10 million aggregate. The intercompany contribution claim of $8 million would also be a covered claim under the Midland primary, but the aggregate may be insufficient to respond fully — if the third-party claim has already consumed $5 million of the $10 million aggregate, only $5 million of aggregate remains for the intercompany claim. Moreover, multiple occurrences and other claims during the policy period further erode the available aggregate.
Excess Coverage (Great Basin, Cornerstone, Allegheny Pacific). The third-party claim by the injured worker against NCS would be covered under the excess layers in the ordinary course. However, the intercompany contribution claim by NCS against Triton would be excluded under the Great Basin Cross-Suit Exclusion, and the follow-form exclusion in the Cornerstone and Allegheny Pacific layers would similarly bar coverage.
Gap Identified. For the intercompany portion of the loss — NCS's $8 million contribution claim against Triton — coverage is available only under the Midland primary aggregate, which may already be substantially eroded by the third-party claim and other reported claims. The excess tower provides no coverage for the intercompany claim. In a scenario where the combined exposure exceeds $10 million (which is the case here, given $12 million in third-party damages and $8 million in intercompany claims), the intercompany portion has no excess coverage.
B. Scenario 2: Marlowe Asset Management Precision Component Defect Affecting Both NCS and Triton
Assumed Facts. A defective precision-machined bearing supplied by Marlowe Asset Management fails in both NCS conveyor drive systems and Triton fastener production equipment. The bearing failure in NCS conveyor systems causes multiple conveyor malfunctions at customer sites, triggering product recalls and two third-party injury claims totaling $9 million. Separately, the bearing failure in Triton's production equipment causes manufacturing defects in a batch of Grade 8 hex bolts, which are shipped to both NCS (for use in conveyor systems) and external customers. The defective hex bolts cause additional product failures and injuries, generating a further $6 million in third-party claims against Triton. NCS asserts a contribution claim against Marlowe Asset Management for the defective bearings ($5 million); Triton asserts a contribution claim against Marlowe Asset Management for the defective bearings that caused the production equipment failure and resulting fastener defects ($4 million); and NCS asserts a claim against Triton for the defective hex bolts produced with the faulty equipment ($3 million).
Coverage Analysis.
Primary Coverage (Midland Casualty). Multiple cross-liability claims would compete for the same $10 million aggregate: (i) NCS v. Marlowe Asset Management ($5 million); (ii) Triton v. Marlowe Asset Management ($4 million); and (iii) NCS v. Triton ($3 million). The combined intercompany claims total $12 million, which exceeds the $10 million aggregate even before accounting for the $15 million in third-party claims that are also competing for the aggregate. The Midland primary is grossly insufficient to address this multi-subsidiary intercompany exposure scenario.
Excess Coverage (Great Basin, Cornerstone, Allegheny Pacific). All three intercompany claims would be excluded under the Cross-Suit Exclusion and Related Entities exclusion.
Gap Identified. This scenario illustrates the compounding effect of the cross-suit exclusion when a single component defect triggers multiple intercompany claims. The $10 million Midland primary aggregate is wholly inadequate to address the combined exposure, and no excess coverage is available for any of the intercompany claims. Total uninsured intercompany exposure in this scenario: at least $12 million.
C. Scenario 3: Interaction with Pending Litigation
Assumed Facts. In Higgins v. NCS (Case No. 2021-L-04382, damages sought: $14.5 million), discovery reveals that the emergency stop mechanism failure was caused by a combination of (i) fatigue failure of a Triton-supplied Grade 8 hex bolt in the stop mechanism linkage assembly, and (ii) excessive wear on a Marlowe Asset Management-machined actuator shaft that contributed to misalignment of the stop mechanism under load. NCS asserts third-party claims against both Triton and Marlowe Asset Management in the Higgins litigation, seeking contribution and indemnification for 60% of any judgment or settlement (based on the relative fault of the component suppliers).
Coverage Analysis.
Primary Coverage (Midland Casualty). The $14.5 million demand in the Higgins case alone exceeds the Midland primary's $5 million per occurrence limit and approaches the $10 million aggregate. Open reserves of $8.3 million across both pending claims already substantially erode the Midland primary aggregate. If the Higgins claim is resolved for anywhere near the demanded amount, the Midland primary aggregate will be exhausted by the third-party claim alone, leaving no aggregate available for NCS's intercompany contribution claims against Triton and Marlowe Asset Management.
Excess Coverage. The third-party claim by the injured plaintiff against NCS would attach to the Great Basin excess layer after the Midland primary is exhausted. However, NCS's cross-claims against Triton and Marlowe Asset Management would be excluded under the Great Basin Cross-Suit Exclusion, and no excess coverage would be available for the intercompany portion of the loss.
Practical Impact. NCS's ability to pursue contribution and indemnity claims against its sister subsidiaries would be limited by the practical reality that any intercompany recovery would come directly from Nexford subsidiaries' assets — without insurance coverage to fund those recoveries — and would simply shift losses within the Nexford corporate family. This outcome undermines the risk-transfer function of the insurance tower and leaves the consolidated enterprise bearing the full intercompany loss.
Coordination with Defense Strategy. As discussed further in Section IX.C, it will be important to coordinate with Catherine Byrne at Hollander Byrne & Strauss LLP regarding the timing and strategy of any cross-claims in the Higgins litigation, to avoid premature assertion of intercompany claims that could trigger the Cross-Suit Exclusion and potentially prejudice coverage positions, particularly if the cross-suit exclusion is successfully amended at the July 1, 2022 renewal.
V. "Other Insurance" and Priority Issues
The interaction of "other insurance" clauses across the product-liability tower layers must be considered in the context of intercompany claims.
Midland Casualty Primary. The Midland primary contains a standard "other insurance" provision that establishes priority rules when the insured has other applicable insurance. The provision includes both excess and pro-rata methods, depending on the type of other insurance. For intercompany claims between subsidiaries that are all named insureds on the same policy, the "other insurance" provision should not create complications. Because all subsidiaries are insured under the same Midland policy, there is no "other insurance" at issue — the claim is covered under a single policy, and the "other insurance" provision is not triggered. The severability clause does not create separate "policies" for purposes of the "other insurance" analysis; it merely applies the policy's terms separately to each insured.
Great Basin Excess. The more significant question is whether the Great Basin Cross-Suit Exclusion transforms what would otherwise be an insured claim into an uninsured claim, creating gaps in the tower that cannot be filled by "other insurance." The answer, as discussed in Section III.B above, is that the Cross-Suit Exclusion removes intercompany claims from coverage entirely under the Great Basin layer, and no "other insurance" provision can restore that coverage. The Nexford subsidiaries do not maintain any separate intercompany liability policies that would serve as alternative sources of coverage.
Absence of Intercompany Liability Insurance. We note that Nexford does not currently maintain any separate intercompany product-liability policies for its subsidiaries. The product-liability tower analyzed in this memorandum is the sole source of product-liability insurance for all four Named Insureds. Accordingly, the cross-suit exclusion gap identified herein cannot be bridged by reference to any other insurance program.
Internal Indemnification and Transfer Pricing Arrangements. The intercompany transfer pricing agreements between the Nexford subsidiaries do not constitute "other insurance" within the meaning of any layer of the product-liability tower. These contractual arrangements are internal risk-allocation mechanisms that may affect the practical allocation of loss between subsidiaries but do not provide the named insureds with insurance coverage that could respond to product-liability claims. Moreover, as noted in Section II.B above, the transfer pricing agreements were structured primarily for tax compliance purposes and do not include robust indemnification or hold-harmless provisions. Even if such provisions were included, contractual indemnification between wholly-owned subsidiaries of the same parent company merely shifts losses within the corporate family — it does not transfer risk to an external party as insurance does.
VI. Completed Operations and Cross-Liability
The cross-liability analysis must account for the extended temporal dimension of completed operations exposure in an intercompany component-supply context.
The Midland Casualty primary policy provides completed operations coverage extending ten years post-delivery, consistent with the Products-Completed Operations Hazard as defined in the policy. This extended coverage period is significant because the intercompany supply of components may create completed operations exposure that manifests years after the initial delivery of the component from one subsidiary to another.
Consider the following timeline, which is representative of the Triton-to-NCS supply chain:
• Year 1 (2019): Triton manufactures and delivers a batch of Grade 8 hex bolts to NCS's Joliet facility pursuant to the intercompany supply agreement.
• Year 2 (2020): NCS incorporates the Triton hex bolts into Model NCS-7200 conveyor system assemblies at its manufacturing facility.
• Year 3 (2021): NCS delivers the completed Model NCS-7200 conveyor systems to end-user customers for installation at mining and grain processing facilities.
• Year 5 (2023): A Triton hex bolt experiences fatigue failure in a conveyor system, causing injury to an end-user.
In this scenario, the relevant date for determining when the completed operations coverage period begins to run is the date of NCS's delivery of the completed conveyor system to the end-user (Year 3, 2021), not the date of Triton's delivery of the fastener component to NCS (Year 1, 2019). This is because the Products-Completed Operations Hazard applies to products after they have been delivered to the end-user and are no longer in the insured's possession or control. For NCS, the "product" is the completed conveyor system, and the completed operations period runs from its delivery to the customer. For Triton, the "product" is the hex bolt, and the completed operations period runs from the time the hex bolt is incorporated into the NCS conveyor system and delivered to the end-user — not from the time the hex bolt is shipped from Triton's Rockford facility to NCS's Joliet facility.
The practical implication is that Triton's completed operations exposure with respect to fasteners supplied to NCS extends well beyond the date of delivery to NCS, because those fasteners remain in the field as components of NCS conveyor systems for the useful life of those systems. A fastener delivered by Triton to NCS in 2019 could give rise to a completed operations claim in 2029 — ten years after delivery of the completed conveyor system to the end-user.
Cross-liability claims arising from completed operations — such as an NCS contribution claim against Triton for a fastener failure in a conveyor system delivered to an end-user years earlier — are subject to the same cross-suit exclusion limitations in the excess layers. The cross-suit exclusions in the Great Basin, Cornerstone, and Allegheny Pacific layers do not distinguish between claims arising from current operations and claims arising from completed operations. Accordingly, the completed operations tail extends the period during which intercompany product-liability claims may arise, compounding the exposure created by the cross-suit exclusion gap.
VII. Product Recall Sub-Limit and Cross-Liability
The Midland Casualty primary policy includes a product recall sub-limit of $2.5 million per occurrence / $5 million aggregate. This sub-limit provides coverage for costs associated with product recall events, including notification costs, transportation and disposal costs, and certain third-party recall expenses. The product recall sub-limit operates within, and does not increase, the policy's overall per-occurrence and aggregate limits.
In an intercompany cross-liability context, the product recall sub-limit raises a distinct set of concerns. If a recall of NCS conveyor systems is triggered by defective Triton fasteners, the recall costs may be subject to the same cross-suit analysis that applies to product-liability claims. Specifically, NCS may seek to recover from Triton the costs of recalling conveyor systems that incorporated defective Triton fasteners. Such a claim by NCS against Triton would constitute an intercompany claim subject to the Cross-Suit Exclusion in the Great Basin and subsequent excess layers.
Under the Midland primary, the severability clause and absence of a cross-suit exclusion should permit NCS to recover recall costs from Triton's coverage under the policy, subject to the $2.5 million per occurrence / $5 million aggregate product recall sub-limit and the overall policy aggregate. However, the product recall sub-limit is relatively modest in comparison to the potential scope of a recall affecting NCS conveyor systems deployed across multiple customer sites.
We note that Triton's own separate recall event in March 2020 — involving a voluntary recall of a batch of structural anchor bolts due to non-conforming metallurgical specifications — cost approximately $1.1 million. That recall was handled under the prior policy period and did not involve an intercompany cross-liability claim, as the recalled products were sold to external customers. However, the March 2020 recall illustrates the types of manufacturing defects that can affect Triton's product line, and a similar defect in fasteners supplied to NCS could trigger a far more costly recall of NCS conveyor systems.
We cross-reference the Product Recall Sub-Limit Adequacy Memorandum dated June 7, 2022, which recommended increasing the product recall sub-limit to $5 million per occurrence / $10 million aggregate at the July 1, 2022 renewal. Even with increased sub-limits, however, cross-liability recall exposure would be constrained by the same excess tower cross-suit exclusions. An increase in the Midland primary's recall sub-limit would improve the availability of primary-layer coverage for intercompany recall costs, but would not address the fundamental gap in the excess layers.
VIII. Comparison with Industry Practice and Market Standards
To contextualize the cross-suit exclusion gap identified in the Nexford product-liability tower, it is useful to compare the current tower structure against industry practice and market standards for multi-subsidiary manufacturing groups.
Industry Practice. Most well-structured product-liability insurance programs for multi-subsidiary manufacturing groups — particularly those with intercompany component-supply relationships — include a carve-out from cross-suit exclusions for product-liability claims arising from component supply between affiliates. This is especially common in the private equity-backed industrial sector, where portfolio companies frequently consist of multiple operating subsidiaries with vertical integration or complementary supply relationships. The rationale for such carve-outs is straightforward: in a multi-subsidiary group where one subsidiary supplies components to another, intercompany product-liability claims are functionally equivalent to third-party claims in that they arise from genuine arm's-length commercial transactions between separate legal entities. Excluding such claims from coverage defeats the risk-transfer purpose of the insurance program.
Typical Carve-Out Language. The most common form of carve-out is a product-liability specific exception to the cross-suit exclusion. Representative language includes:
"This exclusion shall not apply to any Claim or Suit by one Insured against another Insured arising out of the products-completed operations hazard, provided that the Claim or Suit arises from a product manufactured, sold, handled, distributed, or disposed of by the Insured against whom the Claim or Suit is brought, and provided further that the Claim or Suit does not arise from an intentional breach of contract or a dispute over the terms of an intercompany supply agreement."
This type of carve-out preserves the core function of the cross-suit exclusion (preventing collusive claims and manufactured losses) while permitting the policy to respond to genuine product-liability claims arising from the intercompany supply of components.
Alternative Approaches. Some carriers address the intercompany product-liability issue through alternative mechanisms, including:
• "Unintentional Cross-Suit" Carve-Out: This approach permits coverage for intercompany claims where the claim arises from arm's-length commercial transactions between affiliates and is not the result of intentional or collusive conduct. The carve-out is designed to address the carrier's concern about manufactured claims while recognizing that genuine product-liability losses can occur between affiliated entities.
• "Separation of Insureds" Endorsement: Some carriers issue a specific endorsement that overrides the cross-suit exclusion for product-liability claims, effectively extending the Midland-style severability clause into the excess layers. This approach is the most favorable from the insured's perspective, as it treats each Named Insured as if separately insured for all purposes, including the excess layers.
• Sub-Limited Intercompany Coverage: Where carriers are unwilling to provide full cross-suit carve-outs, a sub-limited approach provides a specified sub-limit (e.g., $5 million or $10 million) within the excess layer for intercompany product-liability claims. This approach provides a measure of excess coverage for intercompany claims without exposing the full excess layer to intercompany loss.
Benchmarking Data. Kessler Quinn Advisory Group, in its annual survey of product-liability insurance programs for PE-backed industrial portfolio companies, reports that a majority of comparable programs — approximately 72% as of the 2021 survey — include some form of product-liability cross-suit carve-out in their excess towers. Among programs with intercompany component-supply relationships (comparable to the Triton-NCS and Marlowe Asset Management-NCS supply arrangements), the percentage rises to approximately 85%. The Nexford tower's lack of any cross-suit carve-out places it outside the market norm and below the standard of coverage that a sophisticated PE-backed industrial platform company should expect.
Conclusion. The current Nexford tower structure, which permits intercompany product-liability claims at the primary level but excludes them across all three excess layers, is inconsistent with industry practice and market standards. A cross-suit exclusion carve-out for product-liability claims should be readily obtainable in the current market, and the absence of such a carve-out in the existing tower likely reflects a gap in the original placement process rather than a deliberate underwriting decision.
IX. Recommendations
Based on the analysis set forth in this memorandum, we recommend the following actions in connection with the July 1, 2022 renewal and the ongoing management of the Nexford product-liability program.
A. Renewal Negotiation Priorities (for July 1, 2022 Renewal)
The following items should be designated as high-priority negotiation points for the upcoming renewal, and we recommend their inclusion in the Renewal Negotiation Points Memorandum to be prepared for the benefit of Ashford Breckinridge (the insurance broker) and the Nexford risk management team.
1.