preliminary-gap-memo-do-tower.docx

1005-00003 · Calderwood & Harkness LLP · Coverage Analysis

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MEMORANDUM

TO: Douglas Fairchild, Responsible Partner

FROM: Naomi Petersen, Lead Associate, M&A Department Yuki Nakamura, Working Associate, Litigation (General) Department

DATE: May 27, 2022

RE: Preliminary Coverage Gap Memorandum — Directors & Officers Liability Insurance Tower, Nexford Industrial Holdings Inc. (2021–2022 Policy Year)

MATTER NO.: 1005-00003

CLIENT: Nexford Industrial Holdings Inc.

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I. EXECUTIVE SUMMARY

The purpose of this memorandum is to identify and catalog coverage gaps, ambiguities, and concerns in the current Directors & Officers ("D&O") liability insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford" or "NIH" or the "Company") in advance of the July 1, 2022 renewal. This preliminary review is designed to inform renewal negotiation strategy and to flag areas requiring immediate attention by the broker, Ashford Breckinridge LLP, and the Company's risk management team.

In the course of our review, we have identified fourteen (14) distinct coverage gaps or concerns across the Company's five-layer D&O tower program. Each gap has been assessed and rated by severity according to the following scale:

• Critical: The gap presents a material risk that coverage will be unavailable or substantially impaired in a plausible loss scenario. Immediate remediation is recommended prior to or concurrent with renewal.

• Moderate: The gap presents a meaningful risk of coverage dispute, delay, or limitation in certain loss scenarios. Remediation at renewal is strongly recommended.

• Low: The gap presents a limited or theoretical risk under current circumstances but could become material given changes in the Company's profile, operations, or transaction activity. Remediation at renewal is advisable.

Of the fourteen identified gaps, four (4) are rated Critical (Gap Nos. 1, 2, 4, and 6), six (6) are rated Moderate (Gap Nos. 3, 5, 7, 8, 9, and 12), and four (4) are rated Low (Gap Nos. 10, 11, 13, and 14).

This memorandum is based on our review of all policies, binders, endorsements, and related documents collected pursuant to our April 28, 2022 document request to Donna Kowalski, Vice President of Risk Management at Nexford, and Trevor Haines, Deputy General Counsel at Nexford. We have also had the benefit of discussions with Ashford Breckinridge LLP, specifically Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, on May 9 and May 16, 2022. A complete list of documents reviewed is set forth in Section VI below.

We emphasize that this is a preliminary identification of coverage gaps and concerns. A comprehensive tower review report with detailed analysis and policy-language recommendations will follow. The target delivery date for the comprehensive report is June 17, 2022, which is intended to provide adequate lead time for renewal negotiations. Separate, focused memoranda on certain critical topics will be delivered on the schedule set forth in Section V.

All gaps identified herein should be incorporated into the renewal negotiation strategy, and we recommend that the four Critical gaps receive immediate attention in the broker's marketing submission.

II. TOWER OVERVIEW

A. Current D&O Tower Structure (July 1, 2021 – July 1, 2022)

The Company's D&O liability insurance program is structured as a conventional layered tower with a primary policy, three excess follow-form layers, and a standalone Side-A Difference-in-Conditions ("DIC") policy providing dedicated coverage for individual directors and officers. The following table summarizes the incumbent tower:

The aggregate program provides $55,000,000 in total available limits, consisting of $40,000,000 in the traditional ABC tower (primary plus three excess layers) and $15,000,000 in dedicated Side-A DIC coverage.

Rate-on-line. The blended rate-on-line for the full tower is approximately 2.48% ($1,363,450 ÷ $55,000,000). This is within the expected range for a PE-backed, mid-cap industrial company with a clean loss history, though we note that rate-on-line has increased approximately 18% from the 2020–2021 policy year, consistent with the broader hardening of the D&O market over the last several renewal cycles. We anticipate continued upward pressure on pricing at the July 2022 renewal, though the pace of increases has moderated relative to the 2020 and 2021 renewal cycles.

Self-Insured Retention. The Vandermeer primary carries a self-insured retention ("SIR") of $1,000,000 applicable to entity coverage (Side-B indemnification claims and Side-C entity coverage). The SIR does not apply to non-indemnifiable (Side-A) claims. The Harrington Side-A DIC policy has no SIR, consistent with market practice for dedicated Side-A coverage.

Loss History. The Company's five-year D&O loss history is favorable. One claim has been reported during the current and prior policy periods: a shareholder demand letter received in the second quarter of 2020 alleging breach of fiduciary duty by certain directors in connection with an intercompany transaction between Nexford and Nexford Conveyor Systems, LLC. This demand was resolved without payment in the fourth quarter of 2020 and was closed without incurred loss. No other claims have been reported, and the Company has zero paid losses over the five-year period.

B. Named Insureds and Board Composition

The Named Insured under the D&O program is Nexford Industrial Holdings Inc., a Delaware corporation with its principal offices located at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The following subsidiaries are included as Named Insureds under the tower:

• Nexford Conveyor Systems, LLC ("NCS") — a Delaware limited liability company with operations in Joliet, Illinois. NCS is the largest operating subsidiary and accounts for approximately 56% of consolidated revenue ($795.2 million in FY2021).

• Triton Fastener Corp. ("Triton") — an Illinois corporation with operations in Rockford, Illinois. Triton accounts for approximately 28% of consolidated revenue ($397.6 million in FY2021).

• Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management") — an Ohio corporation with operations in Akron, Ohio. Marlowe Asset Management accounts for the remaining approximately 16% of consolidated revenue ($227.2 million in FY2021).

The Company's board of directors consists of nine (9) members with the following composition:

• Five (5) sponsor-appointed directors, appointed by Veltrano Capital Partners Fund IV, LP ("Veltrano" or the "Sponsor"), which holds approximately 68.5% of the Company's equity. The board chairman, Gerald "Gerry" Whitcomb, is a Veltrano-appointed director.

• Four (4) independent directors, not affiliated with the Sponsor or management.

The remaining equity is divided among management rollover participants (approximately 19.3%) and co-investors (approximately 12.2%). Relevant members of the Company's senior management include:

• Sandra Elliston — Chief Executive Officer

• Marcus Delacroix — Chief Financial Officer

• Priya Sundaram — General Counsel

Additionally, Celeste Brogan, Partner, Portfolio Operations at Veltrano Capital Partners, LLC (the Sponsor's management company), serves as a board observer. Ms. Brogan's status as a board observer — rather than a formal director — is relevant to the coverage analysis set forth below, particularly with respect to the definition of "Insured Person" across the tower layers.

C. Relevant Context

Several aspects of the Company's profile and circumstances are relevant to the coverage gap analysis that follows:

Private Company Status. Nexford is currently a privately held company. As such, the Company does not presently face securities-litigation exposure of the type typically associated with publicly traded companies (e.g., Section 10(b) class actions, Section 11 claims). However, the Company remains exposed to a range of D&O claims including employment practices claims, regulatory proceedings (particularly OSHA, CPSC, and state environmental regulators), creditor claims (given the Company's significant leverage), and derivative claims by minority equity holders.

Potential IPO. General Counsel Priya Sundaram has identified a potential initial public offering in the 2023–2024 timeframe as a concern for limits adequacy. An IPO would fundamentally alter the Company's D&O risk profile, introducing securities class action exposure and dramatically increasing the potential severity of claims. The current tower structure and limits should be evaluated with this transition in mind, and we will address pre-IPO D&O planning in our forthcoming D&O Limits Adequacy Memorandum.

Financial Profile. The Company's current enterprise value is estimated at approximately $2.6 billion, reflecting significant growth from the $2.1 billion valuation at the time of the June 2018 leveraged buyout. FY2021 consolidated revenue was $1.42 billion, with EBITDA of approximately $218 million. The Company carries $1.05 billion in total funded debt consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. The Company's leverage ratio (approximately 4.8x EBITDA) is relevant to the analysis of creditor-related D&O claims and the priority-of-payment concerns identified below.

PE Sponsor Control Dynamics. Veltrano's 68.5% equity stake and appointment of five of nine directors creates a control dynamic that has significant implications for D&O coverage. The Sponsor's control heightens the importance of the Side-A DIC policy (as individual directors may have interests that diverge from the Sponsor's interests), the Insured vs. Insured exclusion analysis (as internal disputes between Sponsor-appointed and independent directors are a realistic scenario), and the severability of the application (as Sponsor-appointed directors may have access to different information than independent directors).

III. IDENTIFIED COVERAGE GAPS AND CONCERNS

Gap No. 1: Severability of the Application — Vandermeer Primary

Severity: CRITICAL

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)

Description of Gap. The Vandermeer primary policy contains a severability clause in Section 12(b) of the General Conditions that is ambiguous as to whether the knowledge of one insured person can be imputed to all insured persons for purposes of rescission or voiding of the policy. Upon our review, the application warranty attached to the Vandermeer policy as Endorsement No. 3 is structured as a joint warranty, not a several warranty. This means that a material misstatement or omission by any one of the nine directors, or by any officer who signed or provided information for the application, could potentially serve as grounds for the carrier to void coverage for all insured persons — including those who had no knowledge of the misstatement and bore no responsibility for it.

The practical significance of this gap is substantial. In a joint-warranty structure, the fraudulent or negligent misrepresentation of a single director or officer in the application process can result in a complete forfeiture of coverage for all innocent insured persons. This risk is amplified in the present case by two factors specific to Nexford's governance structure:

First, the PE sponsor dynamic means that the five Sponsor-appointed directors may have access to information — through their relationship with Veltrano Capital Partners and its portfolio operations team — that differs from the information available to the four independent directors. If a Sponsor-appointed director possesses material information relevant to the application that is not disclosed, the independent directors could lose their coverage notwithstanding their own good faith and diligence in the application process.

Second, the Company's General Counsel, Priya Sundaram, has indicated that the D&O application is typically completed by the CFO (Marcus Delacroix) with input from the risk management function, and that individual directors do not separately review or certify the application. This process, while common, increases the risk that information known to an individual director but not to the CFO may be omitted from the application.

Comparison Across Tower. By contrast, the Harrington Side-A DIC policy (HSI-DIC-2021-00342) contains a full severability clause in Section 9 of the policy, which provides that the application shall be construed as a separate application by each insured person, and that no statements, representations, or knowledge of any insured person shall be imputed to any other insured person for any purpose, including rescission, voiding, or denial of coverage. This is the market-standard formulation for Side-A policies and is increasingly standard in primary D&O policies as well.

The disconnect between the Vandermeer primary (joint warranty) and the Harrington Side-A DIC (full severability) creates an internal inconsistency within the tower. An innocent insured person whose coverage is voided under the primary may be able to access the Side-A DIC — but only for non-indemnifiable loss, and only within the DIC's $15 million limit. This is an incomplete backstop.

Recommendation. We recommend that full severability (sometimes referred to as "non-imputation") be negotiated in the Vandermeer primary at the July 2022 renewal. The severability clause should provide that (i) the application is deemed a separate application by each insured person, (ii) no knowledge, statements, or representations of any insured person shall be imputed to any other insured person, and (iii) the policy may only be rescinded or voided as to the specific insured person who made or had knowledge of the material misstatement or omission. This language should be replicated in or incorporated by reference into all excess layers. We will provide draft endorsement language in the comprehensive tower review report.

Gap No. 2: Inconsistent Definition of "Insured Person" Across Layers

Severity: CRITICAL

Affected Layer(s): All Layers

Description of Gap. The definition of "Insured Person" (or its equivalent term) varies materially across the five layers of the D&O tower. These inconsistencies create the risk that certain categories of insured persons will have coverage at the primary level but face gaps or complete absence of coverage in the excess layers. The specific definitional variations are as follows:

Vandermeer Primary (VNI-DO-2021-88473). The Vandermeer policy defines "Insured Person" in Section 2(m) to include all past, present, and future directors, officers, and employees of the "Company" (which is defined in Section 2(d) to include Nexford and its subsidiaries). The definition further extends to include any natural person serving at the Company's specific written request in an "Outside Capacity" as a director, officer, trustee, regent, governor, or equivalent position of an Outside Entity. This is a broad formulation consistent with market practice for primary D&O policies.

Commonwealth 1st Excess (CIG-XS1-2021-55902). The Commonwealth policy purports to follow the Vandermeer definition by reference in Section 1.2 of its "Follow-Form" endorsement. However, the follow-form incorporation adds a qualification not found in the Vandermeer policy: the person must be "duly elected or appointed" to their position. This qualification could potentially exclude de facto officers — individuals who perform the functions of an officer without formal appointment — or persons who have assumed officer-level responsibilities pursuant to an informal arrangement. In a PE-backed company where portfolio operations professionals sometimes assume functional management roles, this qualification is not merely theoretical.

Graystone 2nd Excess (GMA-XS2-2021-17836). The Graystone policy does not follow form to the Vandermeer definition and instead contains its own standalone definition in Section I.F. This definition is materially narrower than the primary, covering only "directors and officers of the Named Insured and its Subsidiaries." Notably, this definition omits employees entirely, meaning that claims against rank-and-file employees or non-officer management personnel that would be covered under the primary would not be covered if the primary limit were exhausted and the claim reached the Graystone layer.

Pinnacle Re 3rd Excess (PRE-XS3-2021-04471). The Pinnacle Re policy uses a different term altogether — "Insured Individual" rather than "Insured Person" — defined in Article I, Section 1.07 to include "directors and officers of the Policyholder." This definition omits employees (consistent with Graystone but narrower than the primary) and also omits Outside Capacity coverage, meaning that a Nexford director serving on the board of a joint venture entity at the Company's request would have no coverage under the Pinnacle Re layer for claims arising from that service.

Harrington Side-A DIC (HSI-DIC-2021-00342). The Harrington policy defines "Insured Person" broadly in Section 2.8 to include any natural person who was, is, or becomes a director or officer of the Company or any subsidiary. The definition further extends to employees, but only to the extent they are named as co-defendants with a director or officer in the same claim. This formulation is narrower than the Vandermeer primary (which covers employees independently) but broader than Graystone and Pinnacle Re.

Specific Concern: Celeste Brogan. The status of Celeste Brogan, Veltrano's board observer, under each layer's definition of "Insured Person" is unclear. Ms. Brogan attends board meetings and has access to confidential Company information, but she is not a director, officer, or employee of Nexford. She is a Partner and employee of Veltrano Capital Partners, LLC. If Ms. Brogan were named as a defendant in a claim arising from her board observer role — which is plausible, as plaintiffs' counsel in derivative and creditor actions routinely cast a wide net — her coverage status under the tower would be uncertain at best.

Impact of Inconsistency. The following table illustrates the coverage status of various categories of persons across the tower layers:

This inconsistency means that the effective breadth of the "Insured Person" definition narrows as a claim moves up the tower — precisely the opposite of what the insured would expect in a layered program.

Recommendation. We recommend that the definitions of "Insured Person" (or equivalent term) be harmonized across all layers at the July 2022 renewal. The preferred approach is to require all excess layers to follow form to the Vandermeer primary definition without qualification, or alternatively, to adopt standalone definitions that are at least as broad as the primary definition. Additionally, consideration should be given to expressly including board observers within the definition — this is not yet standard market language, but given the prevalence of PE board observers, some carriers have begun to offer this coverage by endorsement. We will address the board observer coverage question in greater detail in the comprehensive tower review report.

Gap No. 3: Prior Acts Exclusion Scope — Commonwealth 1st Excess

Severity: MODERATE

Affected Layer(s): Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902)

Description of Gap. The Commonwealth Indemnity Group 1st excess policy contains a prior acts exclusion (Section IV.B.7) with a retroactive date of July 1, 2019. This exclusion bars coverage for claims arising from wrongful acts that occurred prior to that date, regardless of when the claim is first made.

This retroactive date creates a meaningful coverage gap for claims arising from wrongful acts that occurred between the June 15, 2018 LBO closing and June 30, 2019 — a period of approximately twelve and a half months. During this period, significant corporate activity occurred: the LBO itself closed, new management was installed, the board was reconstituted, and the Company underwent a substantial operational restructuring. Claims arising from any of these activities — including allegations that LBO-related disclosures were inadequate, that the transaction was structured to the detriment of minority stakeholders, or that pre-closing liabilities were not properly assumed — would fall squarely within the gap.

The gap is made more concerning by the asymmetric treatment of prior acts across the tower:

• The Vandermeer primary has a full prior acts grant (unlimited retroactive date), meaning it covers claims arising from wrongful acts occurring at any time prior to the policy period.

• The Commonwealth 1st excess has the restricted retroactive date of July 1, 2019, as described above.

• The Graystone 2nd excess and Pinnacle Re 3rd excess both have unlimited retroactive dates, consistent with the primary.

This creates what can be described as a "Swiss cheese" effect: the primary will respond to a pre-July 2019 claim, but if the claim is sufficiently large to exhaust the primary's $10 million limit, the 1st excess ($10M xs $10M) would not respond due to the retroactive date exclusion. The claim would then need to reach the 2nd excess layer ($10M xs $20M) — which does have an unlimited retroactive date — but the $10 million gap created by the Commonwealth exclusion would be the insured's responsibility to fund. In practice, a claim in the $10–20 million range based on pre-July 2019 conduct would have effectively no excess coverage.

Recommendation. We recommend negotiating the removal of the retroactive date in the Commonwealth 1st excess layer at the July 2022 renewal, so that the layer provides a full prior acts grant consistent with the primary and the higher excess layers. If complete removal is not achievable, the retroactive date should at minimum be pushed back to June 15, 2018 (the LBO closing date), which would eliminate the most significant exposure arising from the LBO transaction itself. We note that Ashford Breckinridge has indicated that the July 1, 2019 retroactive date was imposed by Commonwealth at the 2019 renewal as a condition of maintaining the layer, and that removal or modification may require a premium adjustment. We will address the cost-benefit analysis of this negotiation point in the comprehensive tower review report.

Gap No. 4: Coordination Between Vandermeer Primary and Harrington Side-A DIC — Drop-Down Triggers

Severity: CRITICAL

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Harrington Specialty Insurance Co., Side-A DIC (HSI-DIC-2021-00342)

Description of Gap. The Harrington Side-A DIC policy is designed to function as a critical safety net for individual directors and officers. It is intended to "drop down" and provide coverage in circumstances where the underlying traditional ABC tower fails to respond to a non-indemnifiable loss suffered by an individual insured person. The Side-A DIC is, in many respects, the most important layer of the tower from the perspective of individual directors — particularly the four independent directors who lack the financial resources of the Sponsor.

However, our review has identified several scenarios in which the specific "DIC triggers" set forth in Section 4 of the Harrington policy are not fully aligned with all circumstances in which the Vandermeer primary might deny, reduce, or delay coverage. The identified misalignment scenarios are as follows:

(a) Conduct Exclusion Overlap. If the Vandermeer primary denies coverage based on a conduct exclusion — such as the fraud exclusion (Section IV.A.1), the personal profit exclusion (Section IV.A.2), or the criminal acts exclusion (Section IV.A.3) — the Side-A DIC contains substantively identical conduct exclusions in its own exclusionary provisions (Section 5.1 through 5.3). This means that in a scenario where an individual director is accused of fraud or self-dealing, and the Vandermeer primary invokes its conduct exclusion, the Side-A DIC would likely invoke its own parallel exclusion — eliminating the "safety net" that the DIC is intended to provide.

We note that both the Vandermeer and Harrington conduct exclusions contain adjudication requirements (i.e., the exclusion applies only upon a final, non-appealable adjudication establishing the excluded conduct). However, the adjudication standards are not identical: the Vandermeer policy requires "a final adjudication in the underlying action," while the Harrington policy requires "a final and non-appealable judgment or other final adjudication." The difference is subtle but could be outcome-determinative in certain procedural postures.

(b) Insolvency Trigger. If the Vandermeer primary carrier becomes insolvent or otherwise unable to pay claims, the Side-A DIC is designed to drop down and fill the gap. However, the insolvency trigger in Section 4.1(c) of the Harrington policy requires a formal order of liquidation or rehabilitation issued by the Connecticut Insurance Department (Vandermeer's domiciliary regulator). Informal financial distress — including delayed claims payments, credit rating downgrades, or publicly known financial difficulties short of a formal regulatory action — would not trigger the drop-down provision.

This is a meaningful limitation. Carrier insolvency rarely occurs overnight; there is typically an extended period of financial deterioration during which claims payments slow or stop but no formal regulatory order has been entered. During this intermediate period, individual directors and officers would be without coverage under both the primary (which is not paying claims) and the DIC (which has not been triggered).

(c) Defense Cost Advancement. If the Vandermeer primary refuses to advance defense costs pending adjudication of a conduct exclusion, the Side-A DIC's advancement provision in Section 6.2 requires the insured person to first exhaust "all reasonable efforts" to obtain advancement from two sources: (i) the Company (Nexford) under its indemnification obligations, and (ii) the primary carrier under the Vandermeer policy. Only after such efforts have been exhausted — and the DIC carrier has confirmed in writing that it is satisfied that reasonable efforts have been made — will the DIC begin advancing defense costs.

This "all reasonable efforts" exhaustion requirement creates a procedural delay that could be significant. In a fast-moving litigation or regulatory proceeding, defense costs can accumulate rapidly, and the insured person may face weeks or months of delay while attempting to satisfy the exhaustion requirement. The standard is also inherently subjective — what constitutes "all reasonable efforts" is not defined and is subject to the DIC carrier's discretion.

Additionally, we note that the interaction between entity and individual claims is not clearly addressed in the drop-down mechanics. The $1,000,000 SIR on entity coverage in the Vandermeer primary does not apply to Side-A individual coverage, which is appropriate. However, in a "mixed claim" involving both entity and individual defendants, the interplay between the entity SIR and the DIC drop-down triggers is ambiguous. This concern overlaps with Gap No. 5, discussed below.

Recommendation. We recommend a thorough review of the Side-A DIC triggers with Harrington Specialty and negotiation of broader drop-down provisions at renewal. Specifically, we recommend: (i) narrowing the DIC's conduct exclusions to be more favorable to the insured than the primary's conduct exclusions, so that the DIC provides genuine additional protection; (ii) broadening the insolvency trigger to include financial impairment, regulatory action, or failure to pay claims within a specified period (e.g., 60 days), rather than requiring a formal liquidation or rehabilitation order; and (iii) removing or substantially limiting the "all reasonable efforts" exhaustion requirement for defense cost advancement, replacing it with a fixed timeframe (e.g., 30 days from written demand) after which the DIC will begin advancing costs regardless of whether the Company or primary carrier has responded. A detailed analysis of these recommendations will be provided in the Side-A DIC Policy Analysis Memorandum targeted for delivery on June 3, 2022.

Gap No. 5: Entity Coverage SIR — Application to Mixed Claims

Severity: MODERATE

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)

Description of Gap. As noted in the Tower Overview, the Vandermeer primary applies a $1,000,000 self-insured retention to entity coverage, encompassing both Side-B (indemnification) claims and Side-C (entity) claims. No SIR applies to non-indemnifiable (Side-A) claims. This bifurcated SIR structure is typical of modern D&O policies.

The gap arises in the context of a "mixed claim" — a claim that involves both individual and entity liability. Mixed claims are common in practice. For example, a creditor or regulatory body might name both the Company and individual directors and officers as defendants, alleging both corporate wrongdoing and individual breach of fiduciary duty. In such a scenario, the claim involves both entity coverage (subject to the $1,000,000 SIR) and individual coverage (not subject to any SIR).

The Vandermeer policy does not clearly specify the mechanics of SIR satisfaction in a mixed-claim scenario. Specifically, the policy is silent on the following questions:

• Must the $1,000,000 entity SIR be fully satisfied before any coverage under the policy attaches — including individual (Side-A) coverage — or does individual coverage respond immediately while the entity portion awaits SIR satisfaction?

• If individual defense costs are advanced while the entity SIR has not yet been satisfied, do those advanced defense costs count toward satisfaction of the entity SIR, or are they tracked separately?

• If the Company is financially unable to satisfy the entity SIR (e.g., due to liquidity constraints arising from the same event giving rise to the claim), does the carrier have an obligation to advance individual defense costs notwithstanding the entity SIR shortfall?

This ambiguity could result in delayed coverage response for individual directors and officers who are named alongside the Company in a claim. In a worst-case scenario, the carrier could take the position that no coverage attaches until the entity SIR is satisfied, effectively holding individual coverage hostage to the entity's financial capacity.

Recommendation. We recommend negotiating a clarifying endorsement to the Vandermeer primary specifying that individual coverage (both Side-A and the individual component of Side-B claims) responds immediately upon the making of a claim, without reference to and without waiting for satisfaction of the entity SIR. This is increasingly market-standard language and should not be a difficult negotiation point. We will provide draft endorsement language in the comprehensive tower review report.

Gap No. 6: "Insured vs. Insured" Exclusion — Breadth and Carve-Backs

Severity: CRITICAL

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902)

Description of Gap. The Vandermeer primary contains an "Insured vs. Insured" ("IvI") exclusion in Section IV.B.3, which bars coverage for claims brought by one insured person against another insured person, or brought by the Company against an insured person, or brought by any entity or person controlled by or affiliated with an insured person against another insured person. The IvI exclusion is a standard feature of D&O policies, designed to prevent collusive or manufactured claims between related parties.

However, the scope of the IvI exclusion and the breadth of its carve-backs are of heightened significance in the context of a PE-backed company such as Nexford. Veltrano Capital Partners Fund IV holds 68.5% of the Company's equity and appoints five of nine directors. This control dynamic means that a wide range of plausible, non-collusive claims could be caught by the IvI exclusion:

• A derivative action brought by management rollover participants (19.3% equity) or co-investors (12.2% equity) against the Sponsor-appointed directors could be treated as a claim by the Company (or its shareholders) against insured persons, triggering the IvI exclusion.

• An internal dispute between Sponsor-appointed directors and independent directors regarding a conflicted transaction, distribution, or governance matter could give rise to a claim by one group of insured persons against another, squarely within the exclusion.

• A removal proceeding or fiduciary duty claim brought by the board against a director or officer could similarly trigger the exclusion.

The current carve-backs to the IvI exclusion in the Vandermeer policy are limited to two scenarios:

(a) Employment practices claims. The IvI exclusion does not apply to claims by insured employees against insured directors or officers alleging wrongful employment practices (e.g., discrimination, harassment, wrongful termination). This is a standard carve-back.

(b) Former insured persons. The IvI exclusion does not apply to claims brought by an insured person who has not served in any insured capacity for at least 24 months prior to the date the claim is first made. This carve-back is designed to allow former directors or officers who have fully separated from the Company to bring claims, but the 24-month look-back is restrictive (some policies use 12 months or no look-back at all).

Notably absent from the Vandermeer carve-backs are the following, each of which is market-standard for PE-backed companies:

(c) Shareholder derivative claims. There is no carve-back for shareholder derivative claims. While Nexford is currently private, derivative claims by minority equity holders are a realistic scenario. The management rollover group (19.3% equity) and the co-investors (12.2% equity) collectively hold approximately 31.5% of the Company's equity. If these minority holders were to bring a derivative claim against the Sponsor-appointed directors — alleging, for example, that a related-party transaction or distribution was unfairly beneficial to Veltrano at the expense of the Company — the IvI exclusion could bar coverage for the very claim that D&O insurance is designed to address. The absence of a derivative claim carve-back is a significant gap.

(d) Bankruptcy and insolvency claims. There is no carve-back for claims brought in a bankruptcy or insolvency context. If Nexford were to file for bankruptcy (which is a relevant consideration given $1.05 billion in funded debt), a bankruptcy trustee or examiner appointed by the court could be deemed to "stand in the shoes" of the Company and thus be treated as an insured person for purposes of the IvI exclusion. Claims by the trustee or examiner against individual directors and officers — the paradigmatic bankruptcy D&O claim — could be excluded. This gap is particularly concerning given Nexford's leverage and the potential for creditor actions.

(e) Whistleblower and qui tam actions. There is no carve-back for whistleblower or qui tam actions. If an insured employee files a qui tam action under the False Claims Act, or brings a whistleblower retaliation claim under Sarbanes-Oxley Section 806 or Dodd-Frank Section 922, the IvI exclusion could bar coverage because the claimant is an insured person bringing a claim against other insured persons. This gap may become more significant if the Company pursues government contracts or if the anticipated IPO brings the Company within the scope of SOX and Dodd-Frank whistleblower protections.

Compounding Issue — Commonwealth 1st Excess. The Commonwealth 1st excess follows the Vandermeer IvI exclusion by reference but adds an additional limitation to the employment practices carve-back. Specifically, the Commonwealth policy narrows the carve-back to apply only to employment claims alleging discrimination (under Title VII, the ADA, the ADEA, or analogous state statutes). Other employment claims — including wrongful termination, retaliation, breach of employment contract, and wage-and-hour claims — are not carved back from the IvI exclusion in the Commonwealth layer. This means that the employment practices carve-back becomes narrower as the claim moves from the primary to the 1st excess, creating a vertical inconsistency within the tower.

Recommendation. We recommend negotiating expanded carve-backs to the IvI exclusion across all layers at the July 2022 renewal. At a minimum, the following carve-backs should be added: (i) shareholder derivative claims (whether brought directly, derivatively, or through a demand process); (ii) claims brought by or at the direction of a bankruptcy trustee, examiner, receiver, liquidator, or similar official; and (iii) whistleblower and qui tam actions. Additionally, the Commonwealth employment practices carve-back should be broadened to match the scope of the Vandermeer primary, and both should be expanded to encompass all employment-related claims (not limited to discrimination). The IvI exclusion language should be harmonized across all tower layers. We will provide recommended policy language in the comprehensive tower review report.

Gap No. 7: Definition of "Claim" — Inconsistency Regarding Regulatory Investigations

Severity: MODERATE

Affected Layer(s): All Layers

Description of Gap. The definition of "Claim" is a foundational element of any claims-made D&O policy, as it determines the scope of events that trigger coverage. Our review has identified significant inconsistency in the treatment of regulatory investigations across the tower layers:

Vandermeer Primary. The Vandermeer policy defines "Claim" in Section 2(c) to include civil, criminal, and administrative or regulatory proceedings commenced by the filing of a complaint, return of an indictment, or issuance of a formal charge or similar pleading. For purposes of regulatory investigations, the definition requires a "formal investigative order, subpoena, or similar compulsory process" for the investigation to constitute a "Claim." Informal regulatory inquiries, voluntary information requests, inspection reports, or preliminary correspondence from regulatory agencies would not satisfy this threshold.

Commonwealth 1st Excess. The Commonwealth policy follows the Vandermeer definition of "Claim" by reference without modification.

Graystone 2nd Excess. The Graystone policy contains its own standalone definition of "Claim" in Section I.A. Notably, this definition uses a broader formulation for regulatory investigations, including "any investigation" by a governmental, regulatory, or self-regulatory body, without limiting coverage to formal proceedings or compulsory process. This creates the unusual and counterintuitive scenario in which the 2nd excess layer has a broader definition of "Claim" than the primary layer — meaning that an informal regulatory inquiry that does not constitute a "Claim" under the primary might nonetheless constitute a "Claim" under the Graystone excess if, hypothetically, the primary were already exhausted by other claims.

Pinnacle Re 3rd Excess. The Pinnacle Re policy moves in the opposite direction, adopting the narrowest formulation in the tower. Under Article I, Section 1.03, a regulatory investigation constitutes a "Claim" only upon receipt of a "written target letter or formal order of investigation." This is narrower than even the Vandermeer definition, as it arguably excludes subpoenas and other compulsory process that does not specifically identify the insured as a "target."

Harrington Side-A DIC. The Harrington policy defines "Claim" in Section 2.2 to include "any formal or informal investigation" by a regulatory or governmental body. This is the broadest definition in the tower and is consistent with best-in-class Side-A DIC coverage.

Practical Significance. This gap is particularly relevant given Nexford's operations in the manufacturing and industrial sectors. The Company's products — heavy-duty conveyor systems, industrial fasteners, and precision-machined components for the automotive and construction industries — carry significant worker-safety and product-safety regulatory exposure. Common regulatory touchpoints include the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), the Environmental Protection Agency ("EPA"), and various state attorneys general. These agencies frequently initiate contact through informal inquiries, voluntary information requests, or civil investigative demands ("CIDs") that may not constitute "formal investigative orders" under the Vandermeer definition. Directors and officers may incur significant defense costs in responding to these preliminary inquiries, and the narrow definition of "Claim" in the primary layer may leave those costs uncovered.

Recommendation. We recommend harmonizing the "Claim" definitions across all layers at renewal, with the goal of including both formal and informal regulatory investigations in the primary and all excess layers. The Harrington Side-A DIC formulation ("formal or informal investigation") provides an appropriate benchmark. At minimum, the Vandermeer primary should be amended to include CIDs, voluntary information requests accompanied by a statement of potential enforcement interest, and other pre-formal investigatory actions. This topic will be addressed in greater detail in the Regulatory Investigation Coverage Memorandum targeted for delivery on June 14, 2022.

Gap No. 8: Allocation Provisions — Lack of Presumptive Allocation

Severity: MODERATE

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); All Excess Layers

Description of Gap. When a claim involves both covered and uncovered matters, parties, or demands, the D&O policy must allocate between covered and uncovered loss. The allocation process determines the portion of defense costs and any settlement or judgment that the insurer is obligated to pay. Allocation disputes are among the most frequent sources of coverage litigation in the D&O context.

The Vandermeer primary contains an allocation provision in Section 8 of the General Conditions requiring "fair and proper" allocation based on the relative legal exposure of the covered and uncovered elements of the claim. While this language is not unusual, the Vandermeer provision does not include a "presumptive allocation" clause in favor of maximum coverage. A presumptive allocation clause typically provides that, pending final allocation, the insurer will presume that 100% of defense costs are covered and will advance accordingly, with a true-up to occur after final resolution of the underlying claim.

Without a presumptive allocation clause, the carrier has the ability to apply its own allocation analysis at the outset of a claim and to advance only the percentage of defense costs that it determines to be allocable to covered loss. In practice, this can result in protracted disputes between the insured and the carrier regarding the appropriate allocation percentage, with the insured bearing the uncovered portion of defense costs in the interim. This effectively shifts the financial burden to the insured during the most critical phase of the litigation, when defense costs are being incurred and the insured needs certainty of coverage.

The Commonwealth and Graystone excess layers are silent on allocation, and their follow-form provisions purport to default to the primary's terms. However, the mechanism by which this default operates is not explicit — it is unclear whether the excess carriers are bound by the primary carrier's allocation determination, or whether each excess carrier can make its own independent allocation analysis.

The Harrington Side-A DIC contains a 100% allocation presumption in favor of the insured person in Section 7.1, providing that the carrier will presume 100% of defense costs are allocable to covered individual loss and will advance accordingly. This is consistent with market best practices for Side-A coverage, but it provides protection only in the DIC layer and only for non-indemnifiable loss.

Recommendation. We recommend negotiating a presumptive allocation clause in the Vandermeer primary at renewal. The clause should provide that the insurer shall advance 100% of defense costs pending final allocation, subject to a right of repayment if it is ultimately determined that a lesser percentage is allocable to covered loss. Excess layers should be required to follow form to the primary's allocation provision, with an explicit statement that each excess carrier is bound by the allocation determination made in the primary layer. We will provide recommended policy language in the comprehensive tower review report.

Gap No. 9: Priority of Payment / Order of Payments Clause

Severity: MODERATE

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); All Excess Layers

Description of Gap. In a D&O tower that includes both entity coverage (Side-C or its equivalent for private companies) and individual coverage (Side-A and Side-B), the order in which the policy pays claims is of critical importance — particularly in scenarios where limits are being eroded by multiple claims or by a single large claim involving both entity and individual liability.

The Vandermeer primary lacks an explicit "priority of payments" clause giving individual insured persons' claims priority over entity claims in the event of limit erosion. Similarly, none of the excess layers contain a priority of payments provision.

This absence is significant because it means that, in theory, a large entity claim could consume the primary limit (and potentially the excess limits) before individual directors and officers receive any payment on their personal claims. Consider the following scenario:

A creditor of Nexford — or the administrative agent, Broadleaf Capital Markets, LLC, acting on behalf of the lending syndicate — files suit against both the Company and individual directors and officers, alleging breach of fiduciary duty and fraudulent conveyance in connection with the Company's capital structure or a distribution to equity holders. The entity's defense costs and potential settlement consume the Vandermeer primary's $10 million limit. The individual directors and officers, who face personal liability, must then look to the excess layers — but those layers may also be eroded by the entity's share of the claim. Without a priority of payments clause, there is no mechanism to ensure that the individuals' claims are satisfied before the entity's claims.

The Side-A DIC provides a backstop for individual directors and officers in this scenario, but its $15 million limit may be insufficient if the full underlying tower is unavailable. Moreover, the DIC only covers non-indemnifiable loss — if the Company is willing and able to indemnify (making the claim a Side-B claim rather than a Side-A claim), the DIC does not respond.

This concern is heightened in the pre-IPO context. If Nexford proceeds with an IPO in the 2023–2024 timeframe as contemplated, the entity will face potential securities class action exposure. Entity securities claims under Section 11 of the Securities Act of 1933 can generate enormous defense costs and settlement values, potentially dwarfing the individual claims of directors and officers. Without a priority of payments clause, the directors and officers who approved the IPO registration statement could find their personal coverage consumed by the entity's exposure.

Recommendation. We recommend negotiating a priority of payments clause in the Vandermeer primary and all excess layers, providing that Side-A (non-indemnifiable individual) claims have first priority, Side-B (indemnification) claims have second priority, and Side-C (entity) claims have last priority. This clause should be coordinated with the recommendation (to be addressed in a separate memorandum) to increase the Side-A DIC limit. The priority-of-payment issue will be analyzed in the context of the Company's overall limit sufficiency in the D&O Limits Adequacy Memorandum targeted for delivery on June 6, 2022.

Gap No. 10: Outside Entity Coverage — Limitations

Severity: LOW

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)

Description of Gap. The Vandermeer primary provides coverage under Section 3.4 for insured persons serving at the Company's specific written request as directors, officers, trustees, or equivalent positions of "Outside Entities" (defined to include any entity that is not a Named Insured or subsidiary). This coverage extends to claims arising from such Outside Capacity service.

However, the Outside Entity coverage is subject to limitations that could create disputes. Specifically, coverage is available only where (i) the Outside Entity does not maintain its own D&O insurance covering the insured person, or (ii) the Outside Entity's D&O insurance has been exhausted by payment of claims. The policy does not clearly specify the interaction between the Nexford tower and the Outside Entity's own coverage in situations where both programs are potentially responsive to a claim. Key ambiguities include:

• Whether the Nexford tower is excess to the Outside Entity's D&O insurance (requiring exhaustion of the Outside Entity's coverage before the Nexford tower responds), or whether the two programs respond concurrently on a contribution basis.

• Whether the insured person is required to tender the claim first to the Outside Entity's insurer and pursue recovery there before making a claim under the Nexford tower.

• How the "other insurance" clauses in the respective policies interact — particularly where both the Nexford tower and the Outside Entity's policy contain "excess other insurance" clauses, creating a potential circular priority dispute.

The three Nexford subsidiaries (NCS, Triton, and Marlowe Asset Management) are Named Insureds under the tower and do not present this issue. However, any future subsidiaries, joint ventures, or outside board service by Nexford executives or directors at the Sponsor's request could trigger this gap. We note that it is common in the PE context for senior executives or directors to serve on the boards of other Sponsor portfolio companies, and such service arrangements could implicate the Outside Entity coverage limitations.

Recommendation. We recommend clarifying the "other insurance" priority for Outside Entity coverage at renewal. The preferred approach is to specify that the Nexford tower is excess to any valid and collectible insurance maintained by the Outside Entity, with the Nexford tower responding only after the Outside Entity's coverage has been exhausted or is otherwise unavailable. This would provide certainty to both the insured and the carrier. We will address this issue further in the comprehensive tower review report.

Gap No. 11: Pollution Exclusion in D&O Context

Severity: LOW

Affected Layer(s): All Layers

Description of Gap. The Vandermeer primary and all excess layers contain a pollution exclusion (Vandermeer Section IV.B.5; Commonwealth Exclusion 7; Graystone Section IV.E; Pinnacle Re Article V, Section 5.05). Pollution exclusions are standard features of D&O policies and are generally uncontroversial in the securities-litigation context, where the underlying claims typically involve financial misrepresentation rather than environmental contamination.

However, the Vandermeer pollution exclusion is drafted broadly, applying to "any Claim arising out of, based upon, or attributable to, directly or indirectly, the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, escape, or disposal of Pollutants." The breadth of this language could encompass claims that are fundamentally management liability claims rather than pollution claims — for example:

• A claim against directors and officers alleging that they failed to disclose known environmental liabilities in connection with a transaction, financing, or regulatory filing.

• A claim alleging that directors breached their fiduciary duties by failing to maintain adequate environmental compliance programs, resulting in regulatory penalties and financial losses.

• A securities-type claim (relevant in the pre-IPO context) alleging that management misrepresented the Company's environmental liabilities or compliance posture in an offering document.

These claims, while "arising out of" or "attributable to" pollutants in a literal sense, are at their core allegations of management misconduct — precisely the type of claim that D&O insurance is designed to cover. The broad pollution exclusion could be interpreted to bar coverage for such claims, particularly by an excess carrier seeking to avoid payment.

Nexford's manufacturing operations — conveyor systems fabrication, industrial fastener production, and precision machining for automotive and construction applications — generate industrial waste, machining fluids, metal particulates, and other materials subject to environmental regulation. The Company's facilities are subject to RCRA, CERCLA, Clean Air Act, Clean Water Act, and state environmental regulatory regimes. Environmental claims related to these operations are a realistic scenario.

Recommendation. We recommend negotiating a narrower pollution exclusion at renewal, with a carve-back preserving coverage for securities-type claims, management liability claims, and fiduciary duty claims that are related to environmental matters but do not seek remediation or cleanup costs. This issue should be flagged for priority attention in the pre-IPO planning process. We will address this recommendation further in the comprehensive tower review report.

Gap No. 12: Change of Control / Acquisition Provision — Automatic Run-Off

Severity: MODERATE

Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902); Graystone Mutual Assurance Co., 2nd Excess (GMA-XS2-2021-17836); Pinnacle Re Insurance Ltd., 3rd Excess (PRE-XS3-2021-04471)

Description of Gap. The Vandermeer primary provides in Section 10.2 for the automatic conversion of the policy to a run-off (tail) policy upon a "change of control" of the Company. Upon a qualifying change of control, the policy ceases to provide coverage for prospective claims and instead provides an extended reporting period during which claims arising from pre-change-of-control wrongful acts may be reported.

Our review has identified the following concerns with the change-of-control provisions:

Definition of "Change of Control." The Vandermeer policy defines "change of control" in Section 2(e) to include any transaction or series of transactions in which a person or entity acquires more than 50% of the voting securities of the Company. This definition is facially straightforward but is ambiguous as applied to Nexford's current ownership structure, in which Veltrano Capital Partners Fund IV already holds 68.5% of the Company's equity.

The ambiguity arises in the exit scenario. If Veltrano sells its stake — whether through a secondary sale to a financial buyer, a sale to a strategic acquirer, or an IPO with a sell-down — does a change in the identity of the controlling shareholder constitute a "change of control" under the policy? The definition speaks to a person or entity acquiring more than 50% — suggesting that the trigger is an acquisition of control, not a transfer of control. If the acquirer in a secondary sale obtains more than 50%, the trigger would likely be satisfied. But in an IPO scenario, where Veltrano may sell down its stake over time and no single acquirer obtains 50%, the trigger may not be satisfied even though control has effectively changed.

This ambiguity is of significant practical importance because the change-of-control provision governs whether the current policy automatically converts to a tail — a critical protection for directors and officers who served during the pre-change-of-control period.

Tail Premium. The automatic tail period under the Vandermeer policy is 72 months (six years) from the date of the change of control. The six-year tail period is adequate and consistent with market norms. However, the premium for the tail period is set at 200% of the annualized premium for the primary layer ($487,500 × 2 = $975,000). This is above market: the prevailing market range for D&O tail premiums is 150–175% of the annualized premium. At the current premium level, this represents an overpayment of $122,000 to $243,750 relative to market.

Inconsistency Across Excess Layers. The excess layers have varying change-of-control definitions and provisions:

• Commonwealth 1st Excess: The Commonwealth policy defines change of control using a 50% threshold, consistent with the Vandermeer primary. The tail period and premium are keyed to the primary.

• Graystone 2nd Excess: The Graystone policy uses a 35% threshold for its change-of-control trigger. This means that a partial sale by Veltrano — even one that leaves Veltrano with a significant minority stake — could trigger the change-of-control provision in the Graystone layer while leaving the Vandermeer primary and Commonwealth 1st excess unaffected. A Veltrano sell-down from 68.5% to, say, 40% would trigger the Graystone change of control (because a new person or entity would acquire 35% or more) but not the Vandermeer or Commonwealth change of control (because no person would acquire more than 50%). This inconsistency could result in the 2nd excess converting to a tail while the primary and 1st excess remain active — a highly undesirable outcome.

• Pinnacle Re 3rd Excess: The Pinnacle Re policy does not contain a change-of-control provision at all. It is unclear what happens to the 3rd excess layer upon a qualifying change of control at the primary level. The Pinnacle Re policy does not automatically convert to a tail, and there is no mechanism for the insured to purchase tail coverage under this layer. In a change-of-control scenario, the 3rd excess layer could simply terminate without providing run-off protection.

Recommendation. We recommend the following actions at renewal: (i) harmonize the change-of-control definitions across all layers to use a consistent threshold, preferably 50%; (ii) clarify that a change in the identity of the controlling shareholder (including a Sponsor exit) constitutes a change of control, regardless of the specific transaction structure; (iii) negotiate the tail premium down to 150% of the annualized premium, consistent with market; (iv) ensure that the Pinnacle Re 3rd excess includes a change-of-control provision with an automatic tail, consistent with the rest of the tower; and (v) negotiate a provision permitting the Company to elect the tail rather than having it trigger automatically, to preserve flexibility in the IPO scenario where a controlled sell-down over multiple quarters may not constitute a single "change of control" event.

Gap No. 13: Defense Cost Advancement Timing

Severity: LOW

Affected Layer(s): Vandermeer National Insurance Company, Prim

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege, the work product doctrine, and any other applicable privileges. It is intended solely for the use of the addressee and those persons identified on the distribution list. Any dissemination, distribution, or copying of this memorandum by any person other than those identified herein is strictly prohibited. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.
MEMORANDUM
TO: Douglas Fairchild, Responsible Partner
FROM: Naomi Petersen, Lead Associate, M&A Department Yuki Nakamura, Working Associate, Litigation (General) Department
DATE: May 27, 2022
RE: Preliminary Coverage Gap Memorandum — Directors & Officers Liability Insurance Tower, Nexford Industrial Holdings Inc. (2021–2022 Policy Year)
MATTER NO.: 1005-00003
CLIENT: Nexford Industrial Holdings Inc.
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I. EXECUTIVE SUMMARY
The purpose of this memorandum is to identify and catalog coverage gaps, ambiguities, and concerns in the current Directors & Officers ("D&O") liability insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford" or "NIH" or the "Company") in advance of the July 1, 2022 renewal. This preliminary review is designed to inform renewal negotiation strategy and to flag areas requiring immediate attention by the broker, Ashford Breckinridge LLP, and the Company's risk management team.
In the course of our review, we have identified fourteen (14) distinct coverage gaps or concerns across the Company's five-layer D&O tower program. Each gap has been assessed and rated by severity according to the following scale:
• Critical: The gap presents a material risk that coverage will be unavailable or substantially impaired in a plausible loss scenario. Immediate remediation is recommended prior to or concurrent with renewal.
• Moderate: The gap presents a meaningful risk of coverage dispute, delay, or limitation in certain loss scenarios. Remediation at renewal is strongly recommended.
• Low: The gap presents a limited or theoretical risk under current circumstances but could become material given changes in the Company's profile, operations, or transaction activity. Remediation at renewal is advisable.
Of the fourteen identified gaps, four (4) are rated Critical (Gap Nos. 1, 2, 4, and 6), six (6) are rated Moderate (Gap Nos. 3, 5, 7, 8, 9, and 12), and four (4) are rated Low (Gap Nos. 10, 11, 13, and 14).
This memorandum is based on our review of all policies, binders, endorsements, and related documents collected pursuant to our April 28, 2022 document request to Donna Kowalski, Vice President of Risk Management at Nexford, and Trevor Haines, Deputy General Counsel at Nexford. We have also had the benefit of discussions with Ashford Breckinridge LLP, specifically Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, on May 9 and May 16, 2022. A complete list of documents reviewed is set forth in Section VI below.
We emphasize that this is a preliminary identification of coverage gaps and concerns. A comprehensive tower review report with detailed analysis and policy-language recommendations will follow. The target delivery date for the comprehensive report is June 17, 2022, which is intended to provide adequate lead time for renewal negotiations. Separate, focused memoranda on certain critical topics will be delivered on the schedule set forth in Section V.
All gaps identified herein should be incorporated into the renewal negotiation strategy, and we recommend that the four Critical gaps receive immediate attention in the broker's marketing submission.
II. TOWER OVERVIEW
A. Current D&O Tower Structure (July 1, 2021 – July 1, 2022)
The Company's D&O liability insurance program is structured as a conventional layered tower with a primary policy, three excess follow-form layers, and a standalone Side-A Difference-in-Conditions ("DIC") policy providing dedicated coverage for individual directors and officers. The following table summarizes the incumbent tower:
The aggregate program provides $55,000,000 in total available limits, consisting of $40,000,000 in the traditional ABC tower (primary plus three excess layers) and $15,000,000 in dedicated Side-A DIC coverage.
Rate-on-line. The blended rate-on-line for the full tower is approximately 2.48% ($1,363,450 ÷ $55,000,000). This is within the expected range for a PE-backed, mid-cap industrial company with a clean loss history, though we note that rate-on-line has increased approximately 18% from the 2020–2021 policy year, consistent with the broader hardening of the D&O market over the last several renewal cycles. We anticipate continued upward pressure on pricing at the July 2022 renewal, though the pace of increases has moderated relative to the 2020 and 2021 renewal cycles.
Self-Insured Retention. The Vandermeer primary carries a self-insured retention ("SIR") of $1,000,000 applicable to entity coverage (Side-B indemnification claims and Side-C entity coverage). The SIR does not apply to non-indemnifiable (Side-A) claims. The Harrington Side-A DIC policy has no SIR, consistent with market practice for dedicated Side-A coverage.
Loss History. The Company's five-year D&O loss history is favorable. One claim has been reported during the current and prior policy periods: a shareholder demand letter received in the second quarter of 2020 alleging breach of fiduciary duty by certain directors in connection with an intercompany transaction between Nexford and Nexford Conveyor Systems, LLC. This demand was resolved without payment in the fourth quarter of 2020 and was closed without incurred loss. No other claims have been reported, and the Company has zero paid losses over the five-year period.
B. Named Insureds and Board Composition
The Named Insured under the D&O program is Nexford Industrial Holdings Inc., a Delaware corporation with its principal offices located at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The following subsidiaries are included as Named Insureds under the tower:
• Nexford Conveyor Systems, LLC ("NCS") — a Delaware limited liability company with operations in Joliet, Illinois. NCS is the largest operating subsidiary and accounts for approximately 56% of consolidated revenue ($795.2 million in FY2021).
• Triton Fastener Corp. ("Triton") — an Illinois corporation with operations in Rockford, Illinois. Triton accounts for approximately 28% of consolidated revenue ($397.6 million in FY2021).
• Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management") — an Ohio corporation with operations in Akron, Ohio. Marlowe Asset Management accounts for the remaining approximately 16% of consolidated revenue ($227.2 million in FY2021).
The Company's board of directors consists of nine (9) members with the following composition:
• Five (5) sponsor-appointed directors, appointed by Veltrano Capital Partners Fund IV, LP ("Veltrano" or the "Sponsor"), which holds approximately 68.5% of the Company's equity. The board chairman, Gerald "Gerry" Whitcomb, is a Veltrano-appointed director.
• Four (4) independent directors, not affiliated with the Sponsor or management.
The remaining equity is divided among management rollover participants (approximately 19.3%) and co-investors (approximately 12.2%). Relevant members of the Company's senior management include:
• Sandra Elliston — Chief Executive Officer
• Marcus Delacroix — Chief Financial Officer
• Priya Sundaram — General Counsel
Additionally, Celeste Brogan, Partner, Portfolio Operations at Veltrano Capital Partners, LLC (the Sponsor's management company), serves as a board observer. Ms. Brogan's status as a board observer — rather than a formal director — is relevant to the coverage analysis set forth below, particularly with respect to the definition of "Insured Person" across the tower layers.
C. Relevant Context
Several aspects of the Company's profile and circumstances are relevant to the coverage gap analysis that follows:
Private Company Status. Nexford is currently a privately held company. As such, the Company does not presently face securities-litigation exposure of the type typically associated with publicly traded companies (e.g., Section 10(b) class actions, Section 11 claims). However, the Company remains exposed to a range of D&O claims including employment practices claims, regulatory proceedings (particularly OSHA, CPSC, and state environmental regulators), creditor claims (given the Company's significant leverage), and derivative claims by minority equity holders.
Potential IPO. General Counsel Priya Sundaram has identified a potential initial public offering in the 2023–2024 timeframe as a concern for limits adequacy. An IPO would fundamentally alter the Company's D&O risk profile, introducing securities class action exposure and dramatically increasing the potential severity of claims. The current tower structure and limits should be evaluated with this transition in mind, and we will address pre-IPO D&O planning in our forthcoming D&O Limits Adequacy Memorandum.
Financial Profile. The Company's current enterprise value is estimated at approximately $2.6 billion, reflecting significant growth from the $2.1 billion valuation at the time of the June 2018 leveraged buyout. FY2021 consolidated revenue was $1.42 billion, with EBITDA of approximately $218 million. The Company carries $1.05 billion in total funded debt consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. The Company's leverage ratio (approximately 4.8x EBITDA) is relevant to the analysis of creditor-related D&O claims and the priority-of-payment concerns identified below.
PE Sponsor Control Dynamics. Veltrano's 68.5% equity stake and appointment of five of nine directors creates a control dynamic that has significant implications for D&O coverage. The Sponsor's control heightens the importance of the Side-A DIC policy (as individual directors may have interests that diverge from the Sponsor's interests), the Insured vs. Insured exclusion analysis (as internal disputes between Sponsor-appointed and independent directors are a realistic scenario), and the severability of the application (as Sponsor-appointed directors may have access to different information than independent directors).
III. IDENTIFIED COVERAGE GAPS AND CONCERNS
Gap No. 1: Severability of the Application — Vandermeer Primary
Severity: CRITICAL
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)
Description of Gap. The Vandermeer primary policy contains a severability clause in Section 12(b) of the General Conditions that is ambiguous as to whether the knowledge of one insured person can be imputed to all insured persons for purposes of rescission or voiding of the policy. Upon our review, the application warranty attached to the Vandermeer policy as Endorsement No. 3 is structured as a joint warranty, not a several warranty. This means that a material misstatement or omission by any one of the nine directors, or by any officer who signed or provided information for the application, could potentially serve as grounds for the carrier to void coverage for all insured persons — including those who had no knowledge of the misstatement and bore no responsibility for it.
The practical significance of this gap is substantial. In a joint-warranty structure, the fraudulent or negligent misrepresentation of a single director or officer in the application process can result in a complete forfeiture of coverage for all innocent insured persons. This risk is amplified in the present case by two factors specific to Nexford's governance structure:
First, the PE sponsor dynamic means that the five Sponsor-appointed directors may have access to information — through their relationship with Veltrano Capital Partners and its portfolio operations team — that differs from the information available to the four independent directors. If a Sponsor-appointed director possesses material information relevant to the application that is not disclosed, the independent directors could lose their coverage notwithstanding their own good faith and diligence in the application process.
Second, the Company's General Counsel, Priya Sundaram, has indicated that the D&O application is typically completed by the CFO (Marcus Delacroix) with input from the risk management function, and that individual directors do not separately review or certify the application. This process, while common, increases the risk that information known to an individual director but not to the CFO may be omitted from the application.
Comparison Across Tower. By contrast, the Harrington Side-A DIC policy (HSI-DIC-2021-00342) contains a full severability clause in Section 9 of the policy, which provides that the application shall be construed as a separate application by each insured person, and that no statements, representations, or knowledge of any insured person shall be imputed to any other insured person for any purpose, including rescission, voiding, or denial of coverage. This is the market-standard formulation for Side-A policies and is increasingly standard in primary D&O policies as well.
The disconnect between the Vandermeer primary (joint warranty) and the Harrington Side-A DIC (full severability) creates an internal inconsistency within the tower. An innocent insured person whose coverage is voided under the primary may be able to access the Side-A DIC — but only for non-indemnifiable loss, and only within the DIC's $15 million limit. This is an incomplete backstop.
Recommendation. We recommend that full severability (sometimes referred to as "non-imputation") be negotiated in the Vandermeer primary at the July 2022 renewal. The severability clause should provide that (i) the application is deemed a separate application by each insured person, (ii) no knowledge, statements, or representations of any insured person shall be imputed to any other insured person, and (iii) the policy may only be rescinded or voided as to the specific insured person who made or had knowledge of the material misstatement or omission. This language should be replicated in or incorporated by reference into all excess layers. We will provide draft endorsement language in the comprehensive tower review report.
Gap No. 2: Inconsistent Definition of "Insured Person" Across Layers
Severity: CRITICAL
Affected Layer(s): All Layers
Description of Gap. The definition of "Insured Person" (or its equivalent term) varies materially across the five layers of the D&O tower. These inconsistencies create the risk that certain categories of insured persons will have coverage at the primary level but face gaps or complete absence of coverage in the excess layers. The specific definitional variations are as follows:
Vandermeer Primary (VNI-DO-2021-88473). The Vandermeer policy defines "Insured Person" in Section 2(m) to include all past, present, and future directors, officers, and employees of the "Company" (which is defined in Section 2(d) to include Nexford and its subsidiaries). The definition further extends to include any natural person serving at the Company's specific written request in an "Outside Capacity" as a director, officer, trustee, regent, governor, or equivalent position of an Outside Entity. This is a broad formulation consistent with market practice for primary D&O policies.
Commonwealth 1st Excess (CIG-XS1-2021-55902). The Commonwealth policy purports to follow the Vandermeer definition by reference in Section 1.2 of its "Follow-Form" endorsement. However, the follow-form incorporation adds a qualification not found in the Vandermeer policy: the person must be "duly elected or appointed" to their position. This qualification could potentially exclude de facto officers — individuals who perform the functions of an officer without formal appointment — or persons who have assumed officer-level responsibilities pursuant to an informal arrangement. In a PE-backed company where portfolio operations professionals sometimes assume functional management roles, this qualification is not merely theoretical.
Graystone 2nd Excess (GMA-XS2-2021-17836). The Graystone policy does not follow form to the Vandermeer definition and instead contains its own standalone definition in Section I.F. This definition is materially narrower than the primary, covering only "directors and officers of the Named Insured and its Subsidiaries." Notably, this definition omits employees entirely, meaning that claims against rank-and-file employees or non-officer management personnel that would be covered under the primary would not be covered if the primary limit were exhausted and the claim reached the Graystone layer.
Pinnacle Re 3rd Excess (PRE-XS3-2021-04471). The Pinnacle Re policy uses a different term altogether — "Insured Individual" rather than "Insured Person" — defined in Article I, Section 1.07 to include "directors and officers of the Policyholder." This definition omits employees (consistent with Graystone but narrower than the primary) and also omits Outside Capacity coverage, meaning that a Nexford director serving on the board of a joint venture entity at the Company's request would have no coverage under the Pinnacle Re layer for claims arising from that service.
Harrington Side-A DIC (HSI-DIC-2021-00342). The Harrington policy defines "Insured Person" broadly in Section 2.8 to include any natural person who was, is, or becomes a director or officer of the Company or any subsidiary. The definition further extends to employees, but only to the extent they are named as co-defendants with a director or officer in the same claim. This formulation is narrower than the Vandermeer primary (which covers employees independently) but broader than Graystone and Pinnacle Re.
Specific Concern: Celeste Brogan. The status of Celeste Brogan, Veltrano's board observer, under each layer's definition of "Insured Person" is unclear. Ms. Brogan attends board meetings and has access to confidential Company information, but she is not a director, officer, or employee of Nexford. She is a Partner and employee of Veltrano Capital Partners, LLC. If Ms. Brogan were named as a defendant in a claim arising from her board observer role — which is plausible, as plaintiffs' counsel in derivative and creditor actions routinely cast a wide net — her coverage status under the tower would be uncertain at best.
Impact of Inconsistency. The following table illustrates the coverage status of various categories of persons across the tower layers:
This inconsistency means that the effective breadth of the "Insured Person" definition narrows as a claim moves up the tower — precisely the opposite of what the insured would expect in a layered program.
Recommendation. We recommend that the definitions of "Insured Person" (or equivalent term) be harmonized across all layers at the July 2022 renewal. The preferred approach is to require all excess layers to follow form to the Vandermeer primary definition without qualification, or alternatively, to adopt standalone definitions that are at least as broad as the primary definition. Additionally, consideration should be given to expressly including board observers within the definition — this is not yet standard market language, but given the prevalence of PE board observers, some carriers have begun to offer this coverage by endorsement. We will address the board observer coverage question in greater detail in the comprehensive tower review report.
Gap No. 3: Prior Acts Exclusion Scope — Commonwealth 1st Excess
Severity: MODERATE
Affected Layer(s): Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902)
Description of Gap. The Commonwealth Indemnity Group 1st excess policy contains a prior acts exclusion (Section IV.B.7) with a retroactive date of July 1, 2019. This exclusion bars coverage for claims arising from wrongful acts that occurred prior to that date, regardless of when the claim is first made.
This retroactive date creates a meaningful coverage gap for claims arising from wrongful acts that occurred between the June 15, 2018 LBO closing and June 30, 2019 — a period of approximately twelve and a half months. During this period, significant corporate activity occurred: the LBO itself closed, new management was installed, the board was reconstituted, and the Company underwent a substantial operational restructuring. Claims arising from any of these activities — including allegations that LBO-related disclosures were inadequate, that the transaction was structured to the detriment of minority stakeholders, or that pre-closing liabilities were not properly assumed — would fall squarely within the gap.
The gap is made more concerning by the asymmetric treatment of prior acts across the tower:
• The Vandermeer primary has a full prior acts grant (unlimited retroactive date), meaning it covers claims arising from wrongful acts occurring at any time prior to the policy period.
• The Commonwealth 1st excess has the restricted retroactive date of July 1, 2019, as described above.
• The Graystone 2nd excess and Pinnacle Re 3rd excess both have unlimited retroactive dates, consistent with the primary.
This creates what can be described as a "Swiss cheese" effect: the primary will respond to a pre-July 2019 claim, but if the claim is sufficiently large to exhaust the primary's $10 million limit, the 1st excess ($10M xs $10M) would not respond due to the retroactive date exclusion. The claim would then need to reach the 2nd excess layer ($10M xs $20M) — which does have an unlimited retroactive date — but the $10 million gap created by the Commonwealth exclusion would be the insured's responsibility to fund. In practice, a claim in the $10–20 million range based on pre-July 2019 conduct would have effectively no excess coverage.
Recommendation. We recommend negotiating the removal of the retroactive date in the Commonwealth 1st excess layer at the July 2022 renewal, so that the layer provides a full prior acts grant consistent with the primary and the higher excess layers. If complete removal is not achievable, the retroactive date should at minimum be pushed back to June 15, 2018 (the LBO closing date), which would eliminate the most significant exposure arising from the LBO transaction itself. We note that Ashford Breckinridge has indicated that the July 1, 2019 retroactive date was imposed by Commonwealth at the 2019 renewal as a condition of maintaining the layer, and that removal or modification may require a premium adjustment. We will address the cost-benefit analysis of this negotiation point in the comprehensive tower review report.
Gap No. 4: Coordination Between Vandermeer Primary and Harrington Side-A DIC — Drop-Down Triggers
Severity: CRITICAL
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Harrington Specialty Insurance Co., Side-A DIC (HSI-DIC-2021-00342)
Description of Gap. The Harrington Side-A DIC policy is designed to function as a critical safety net for individual directors and officers. It is intended to "drop down" and provide coverage in circumstances where the underlying traditional ABC tower fails to respond to a non-indemnifiable loss suffered by an individual insured person. The Side-A DIC is, in many respects, the most important layer of the tower from the perspective of individual directors — particularly the four independent directors who lack the financial resources of the Sponsor.
However, our review has identified several scenarios in which the specific "DIC triggers" set forth in Section 4 of the Harrington policy are not fully aligned with all circumstances in which the Vandermeer primary might deny, reduce, or delay coverage. The identified misalignment scenarios are as follows:
(a) Conduct Exclusion Overlap. If the Vandermeer primary denies coverage based on a conduct exclusion — such as the fraud exclusion (Section IV.A.1), the personal profit exclusion (Section IV.A.2), or the criminal acts exclusion (Section IV.A.3) — the Side-A DIC contains substantively identical conduct exclusions in its own exclusionary provisions (Section 5.1 through 5.3). This means that in a scenario where an individual director is accused of fraud or self-dealing, and the Vandermeer primary invokes its conduct exclusion, the Side-A DIC would likely invoke its own parallel exclusion — eliminating the "safety net" that the DIC is intended to provide.
We note that both the Vandermeer and Harrington conduct exclusions contain adjudication requirements (i.e., the exclusion applies only upon a final, non-appealable adjudication establishing the excluded conduct). However, the adjudication standards are not identical: the Vandermeer policy requires "a final adjudication in the underlying action," while the Harrington policy requires "a final and non-appealable judgment or other final adjudication." The difference is subtle but could be outcome-determinative in certain procedural postures.
(b) Insolvency Trigger. If the Vandermeer primary carrier becomes insolvent or otherwise unable to pay claims, the Side-A DIC is designed to drop down and fill the gap. However, the insolvency trigger in Section 4.1(c) of the Harrington policy requires a formal order of liquidation or rehabilitation issued by the Connecticut Insurance Department (Vandermeer's domiciliary regulator). Informal financial distress — including delayed claims payments, credit rating downgrades, or publicly known financial difficulties short of a formal regulatory action — would not trigger the drop-down provision.
This is a meaningful limitation. Carrier insolvency rarely occurs overnight; there is typically an extended period of financial deterioration during which claims payments slow or stop but no formal regulatory order has been entered. During this intermediate period, individual directors and officers would be without coverage under both the primary (which is not paying claims) and the DIC (which has not been triggered).
(c) Defense Cost Advancement. If the Vandermeer primary refuses to advance defense costs pending adjudication of a conduct exclusion, the Side-A DIC's advancement provision in Section 6.2 requires the insured person to first exhaust "all reasonable efforts" to obtain advancement from two sources: (i) the Company (Nexford) under its indemnification obligations, and (ii) the primary carrier under the Vandermeer policy. Only after such efforts have been exhausted — and the DIC carrier has confirmed in writing that it is satisfied that reasonable efforts have been made — will the DIC begin advancing defense costs.
This "all reasonable efforts" exhaustion requirement creates a procedural delay that could be significant. In a fast-moving litigation or regulatory proceeding, defense costs can accumulate rapidly, and the insured person may face weeks or months of delay while attempting to satisfy the exhaustion requirement. The standard is also inherently subjective — what constitutes "all reasonable efforts" is not defined and is subject to the DIC carrier's discretion.
Additionally, we note that the interaction between entity and individual claims is not clearly addressed in the drop-down mechanics. The $1,000,000 SIR on entity coverage in the Vandermeer primary does not apply to Side-A individual coverage, which is appropriate. However, in a "mixed claim" involving both entity and individual defendants, the interplay between the entity SIR and the DIC drop-down triggers is ambiguous. This concern overlaps with Gap No. 5, discussed below.
Recommendation. We recommend a thorough review of the Side-A DIC triggers with Harrington Specialty and negotiation of broader drop-down provisions at renewal. Specifically, we recommend: (i) narrowing the DIC's conduct exclusions to be more favorable to the insured than the primary's conduct exclusions, so that the DIC provides genuine additional protection; (ii) broadening the insolvency trigger to include financial impairment, regulatory action, or failure to pay claims within a specified period (e.g., 60 days), rather than requiring a formal liquidation or rehabilitation order; and (iii) removing or substantially limiting the "all reasonable efforts" exhaustion requirement for defense cost advancement, replacing it with a fixed timeframe (e.g., 30 days from written demand) after which the DIC will begin advancing costs regardless of whether the Company or primary carrier has responded. A detailed analysis of these recommendations will be provided in the Side-A DIC Policy Analysis Memorandum targeted for delivery on June 3, 2022.
Gap No. 5: Entity Coverage SIR — Application to Mixed Claims
Severity: MODERATE
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)
Description of Gap. As noted in the Tower Overview, the Vandermeer primary applies a $1,000,000 self-insured retention to entity coverage, encompassing both Side-B (indemnification) claims and Side-C (entity) claims. No SIR applies to non-indemnifiable (Side-A) claims. This bifurcated SIR structure is typical of modern D&O policies.
The gap arises in the context of a "mixed claim" — a claim that involves both individual and entity liability. Mixed claims are common in practice. For example, a creditor or regulatory body might name both the Company and individual directors and officers as defendants, alleging both corporate wrongdoing and individual breach of fiduciary duty. In such a scenario, the claim involves both entity coverage (subject to the $1,000,000 SIR) and individual coverage (not subject to any SIR).
The Vandermeer policy does not clearly specify the mechanics of SIR satisfaction in a mixed-claim scenario. Specifically, the policy is silent on the following questions:
• Must the $1,000,000 entity SIR be fully satisfied before any coverage under the policy attaches — including individual (Side-A) coverage — or does individual coverage respond immediately while the entity portion awaits SIR satisfaction?
• If individual defense costs are advanced while the entity SIR has not yet been satisfied, do those advanced defense costs count toward satisfaction of the entity SIR, or are they tracked separately?
• If the Company is financially unable to satisfy the entity SIR (e.g., due to liquidity constraints arising from the same event giving rise to the claim), does the carrier have an obligation to advance individual defense costs notwithstanding the entity SIR shortfall?
This ambiguity could result in delayed coverage response for individual directors and officers who are named alongside the Company in a claim. In a worst-case scenario, the carrier could take the position that no coverage attaches until the entity SIR is satisfied, effectively holding individual coverage hostage to the entity's financial capacity.
Recommendation. We recommend negotiating a clarifying endorsement to the Vandermeer primary specifying that individual coverage (both Side-A and the individual component of Side-B claims) responds immediately upon the making of a claim, without reference to and without waiting for satisfaction of the entity SIR. This is increasingly market-standard language and should not be a difficult negotiation point. We will provide draft endorsement language in the comprehensive tower review report.
Gap No. 6: "Insured vs. Insured" Exclusion — Breadth and Carve-Backs
Severity: CRITICAL
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902)
Description of Gap. The Vandermeer primary contains an "Insured vs. Insured" ("IvI") exclusion in Section IV.B.3, which bars coverage for claims brought by one insured person against another insured person, or brought by the Company against an insured person, or brought by any entity or person controlled by or affiliated with an insured person against another insured person. The IvI exclusion is a standard feature of D&O policies, designed to prevent collusive or manufactured claims between related parties.
However, the scope of the IvI exclusion and the breadth of its carve-backs are of heightened significance in the context of a PE-backed company such as Nexford. Veltrano Capital Partners Fund IV holds 68.5% of the Company's equity and appoints five of nine directors. This control dynamic means that a wide range of plausible, non-collusive claims could be caught by the IvI exclusion:
• A derivative action brought by management rollover participants (19.3% equity) or co-investors (12.2% equity) against the Sponsor-appointed directors could be treated as a claim by the Company (or its shareholders) against insured persons, triggering the IvI exclusion.
• An internal dispute between Sponsor-appointed directors and independent directors regarding a conflicted transaction, distribution, or governance matter could give rise to a claim by one group of insured persons against another, squarely within the exclusion.
• A removal proceeding or fiduciary duty claim brought by the board against a director or officer could similarly trigger the exclusion.
The current carve-backs to the IvI exclusion in the Vandermeer policy are limited to two scenarios:
(a) Employment practices claims. The IvI exclusion does not apply to claims by insured employees against insured directors or officers alleging wrongful employment practices (e.g., discrimination, harassment, wrongful termination). This is a standard carve-back.
(b) Former insured persons. The IvI exclusion does not apply to claims brought by an insured person who has not served in any insured capacity for at least 24 months prior to the date the claim is first made. This carve-back is designed to allow former directors or officers who have fully separated from the Company to bring claims, but the 24-month look-back is restrictive (some policies use 12 months or no look-back at all).
Notably absent from the Vandermeer carve-backs are the following, each of which is market-standard for PE-backed companies:
(c) Shareholder derivative claims. There is no carve-back for shareholder derivative claims. While Nexford is currently private, derivative claims by minority equity holders are a realistic scenario. The management rollover group (19.3% equity) and the co-investors (12.2% equity) collectively hold approximately 31.5% of the Company's equity. If these minority holders were to bring a derivative claim against the Sponsor-appointed directors — alleging, for example, that a related-party transaction or distribution was unfairly beneficial to Veltrano at the expense of the Company — the IvI exclusion could bar coverage for the very claim that D&O insurance is designed to address. The absence of a derivative claim carve-back is a significant gap.
(d) Bankruptcy and insolvency claims. There is no carve-back for claims brought in a bankruptcy or insolvency context. If Nexford were to file for bankruptcy (which is a relevant consideration given $1.05 billion in funded debt), a bankruptcy trustee or examiner appointed by the court could be deemed to "stand in the shoes" of the Company and thus be treated as an insured person for purposes of the IvI exclusion. Claims by the trustee or examiner against individual directors and officers — the paradigmatic bankruptcy D&O claim — could be excluded. This gap is particularly concerning given Nexford's leverage and the potential for creditor actions.
(e) Whistleblower and qui tam actions. There is no carve-back for whistleblower or qui tam actions. If an insured employee files a qui tam action under the False Claims Act, or brings a whistleblower retaliation claim under Sarbanes-Oxley Section 806 or Dodd-Frank Section 922, the IvI exclusion could bar coverage because the claimant is an insured person bringing a claim against other insured persons. This gap may become more significant if the Company pursues government contracts or if the anticipated IPO brings the Company within the scope of SOX and Dodd-Frank whistleblower protections.
Compounding Issue — Commonwealth 1st Excess. The Commonwealth 1st excess follows the Vandermeer IvI exclusion by reference but adds an additional limitation to the employment practices carve-back. Specifically, the Commonwealth policy narrows the carve-back to apply only to employment claims alleging discrimination (under Title VII, the ADA, the ADEA, or analogous state statutes). Other employment claims — including wrongful termination, retaliation, breach of employment contract, and wage-and-hour claims — are not carved back from the IvI exclusion in the Commonwealth layer. This means that the employment practices carve-back becomes narrower as the claim moves from the primary to the 1st excess, creating a vertical inconsistency within the tower.
Recommendation. We recommend negotiating expanded carve-backs to the IvI exclusion across all layers at the July 2022 renewal. At a minimum, the following carve-backs should be added: (i) shareholder derivative claims (whether brought directly, derivatively, or through a demand process); (ii) claims brought by or at the direction of a bankruptcy trustee, examiner, receiver, liquidator, or similar official; and (iii) whistleblower and qui tam actions. Additionally, the Commonwealth employment practices carve-back should be broadened to match the scope of the Vandermeer primary, and both should be expanded to encompass all employment-related claims (not limited to discrimination). The IvI exclusion language should be harmonized across all tower layers. We will provide recommended policy language in the comprehensive tower review report.
Gap No. 7: Definition of "Claim" — Inconsistency Regarding Regulatory Investigations
Severity: MODERATE
Affected Layer(s): All Layers
Description of Gap. The definition of "Claim" is a foundational element of any claims-made D&O policy, as it determines the scope of events that trigger coverage. Our review has identified significant inconsistency in the treatment of regulatory investigations across the tower layers:
Vandermeer Primary. The Vandermeer policy defines "Claim" in Section 2(c) to include civil, criminal, and administrative or regulatory proceedings commenced by the filing of a complaint, return of an indictment, or issuance of a formal charge or similar pleading. For purposes of regulatory investigations, the definition requires a "formal investigative order, subpoena, or similar compulsory process" for the investigation to constitute a "Claim." Informal regulatory inquiries, voluntary information requests, inspection reports, or preliminary correspondence from regulatory agencies would not satisfy this threshold.
Commonwealth 1st Excess. The Commonwealth policy follows the Vandermeer definition of "Claim" by reference without modification.
Graystone 2nd Excess. The Graystone policy contains its own standalone definition of "Claim" in Section I.A. Notably, this definition uses a broader formulation for regulatory investigations, including "any investigation" by a governmental, regulatory, or self-regulatory body, without limiting coverage to formal proceedings or compulsory process. This creates the unusual and counterintuitive scenario in which the 2nd excess layer has a broader definition of "Claim" than the primary layer — meaning that an informal regulatory inquiry that does not constitute a "Claim" under the primary might nonetheless constitute a "Claim" under the Graystone excess if, hypothetically, the primary were already exhausted by other claims.
Pinnacle Re 3rd Excess. The Pinnacle Re policy moves in the opposite direction, adopting the narrowest formulation in the tower. Under Article I, Section 1.03, a regulatory investigation constitutes a "Claim" only upon receipt of a "written target letter or formal order of investigation." This is narrower than even the Vandermeer definition, as it arguably excludes subpoenas and other compulsory process that does not specifically identify the insured as a "target."
Harrington Side-A DIC. The Harrington policy defines "Claim" in Section 2.2 to include "any formal or informal investigation" by a regulatory or governmental body. This is the broadest definition in the tower and is consistent with best-in-class Side-A DIC coverage.
Practical Significance. This gap is particularly relevant given Nexford's operations in the manufacturing and industrial sectors. The Company's products — heavy-duty conveyor systems, industrial fasteners, and precision-machined components for the automotive and construction industries — carry significant worker-safety and product-safety regulatory exposure. Common regulatory touchpoints include the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), the Environmental Protection Agency ("EPA"), and various state attorneys general. These agencies frequently initiate contact through informal inquiries, voluntary information requests, or civil investigative demands ("CIDs") that may not constitute "formal investigative orders" under the Vandermeer definition. Directors and officers may incur significant defense costs in responding to these preliminary inquiries, and the narrow definition of "Claim" in the primary layer may leave those costs uncovered.
Recommendation. We recommend harmonizing the "Claim" definitions across all layers at renewal, with the goal of including both formal and informal regulatory investigations in the primary and all excess layers. The Harrington Side-A DIC formulation ("formal or informal investigation") provides an appropriate benchmark. At minimum, the Vandermeer primary should be amended to include CIDs, voluntary information requests accompanied by a statement of potential enforcement interest, and other pre-formal investigatory actions. This topic will be addressed in greater detail in the Regulatory Investigation Coverage Memorandum targeted for delivery on June 14, 2022.
Gap No. 8: Allocation Provisions — Lack of Presumptive Allocation
Severity: MODERATE
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); All Excess Layers
Description of Gap. When a claim involves both covered and uncovered matters, parties, or demands, the D&O policy must allocate between covered and uncovered loss. The allocation process determines the portion of defense costs and any settlement or judgment that the insurer is obligated to pay. Allocation disputes are among the most frequent sources of coverage litigation in the D&O context.
The Vandermeer primary contains an allocation provision in Section 8 of the General Conditions requiring "fair and proper" allocation based on the relative legal exposure of the covered and uncovered elements of the claim. While this language is not unusual, the Vandermeer provision does not include a "presumptive allocation" clause in favor of maximum coverage. A presumptive allocation clause typically provides that, pending final allocation, the insurer will presume that 100% of defense costs are covered and will advance accordingly, with a true-up to occur after final resolution of the underlying claim.
Without a presumptive allocation clause, the carrier has the ability to apply its own allocation analysis at the outset of a claim and to advance only the percentage of defense costs that it determines to be allocable to covered loss. In practice, this can result in protracted disputes between the insured and the carrier regarding the appropriate allocation percentage, with the insured bearing the uncovered portion of defense costs in the interim. This effectively shifts the financial burden to the insured during the most critical phase of the litigation, when defense costs are being incurred and the insured needs certainty of coverage.
The Commonwealth and Graystone excess layers are silent on allocation, and their follow-form provisions purport to default to the primary's terms. However, the mechanism by which this default operates is not explicit — it is unclear whether the excess carriers are bound by the primary carrier's allocation determination, or whether each excess carrier can make its own independent allocation analysis.
The Harrington Side-A DIC contains a 100% allocation presumption in favor of the insured person in Section 7.1, providing that the carrier will presume 100% of defense costs are allocable to covered individual loss and will advance accordingly. This is consistent with market best practices for Side-A coverage, but it provides protection only in the DIC layer and only for non-indemnifiable loss.
Recommendation. We recommend negotiating a presumptive allocation clause in the Vandermeer primary at renewal. The clause should provide that the insurer shall advance 100% of defense costs pending final allocation, subject to a right of repayment if it is ultimately determined that a lesser percentage is allocable to covered loss. Excess layers should be required to follow form to the primary's allocation provision, with an explicit statement that each excess carrier is bound by the allocation determination made in the primary layer. We will provide recommended policy language in the comprehensive tower review report.
Gap No. 9: Priority of Payment / Order of Payments Clause
Severity: MODERATE
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); All Excess Layers
Description of Gap. In a D&O tower that includes both entity coverage (Side-C or its equivalent for private companies) and individual coverage (Side-A and Side-B), the order in which the policy pays claims is of critical importance — particularly in scenarios where limits are being eroded by multiple claims or by a single large claim involving both entity and individual liability.
The Vandermeer primary lacks an explicit "priority of payments" clause giving individual insured persons' claims priority over entity claims in the event of limit erosion. Similarly, none of the excess layers contain a priority of payments provision.
This absence is significant because it means that, in theory, a large entity claim could consume the primary limit (and potentially the excess limits) before individual directors and officers receive any payment on their personal claims. Consider the following scenario:
A creditor of Nexford — or the administrative agent, Broadleaf Capital Markets, LLC, acting on behalf of the lending syndicate — files suit against both the Company and individual directors and officers, alleging breach of fiduciary duty and fraudulent conveyance in connection with the Company's capital structure or a distribution to equity holders. The entity's defense costs and potential settlement consume the Vandermeer primary's $10 million limit. The individual directors and officers, who face personal liability, must then look to the excess layers — but those layers may also be eroded by the entity's share of the claim. Without a priority of payments clause, there is no mechanism to ensure that the individuals' claims are satisfied before the entity's claims.
The Side-A DIC provides a backstop for individual directors and officers in this scenario, but its $15 million limit may be insufficient if the full underlying tower is unavailable. Moreover, the DIC only covers non-indemnifiable loss — if the Company is willing and able to indemnify (making the claim a Side-B claim rather than a Side-A claim), the DIC does not respond.
This concern is heightened in the pre-IPO context. If Nexford proceeds with an IPO in the 2023–2024 timeframe as contemplated, the entity will face potential securities class action exposure. Entity securities claims under Section 11 of the Securities Act of 1933 can generate enormous defense costs and settlement values, potentially dwarfing the individual claims of directors and officers. Without a priority of payments clause, the directors and officers who approved the IPO registration statement could find their personal coverage consumed by the entity's exposure.
Recommendation. We recommend negotiating a priority of payments clause in the Vandermeer primary and all excess layers, providing that Side-A (non-indemnifiable individual) claims have first priority, Side-B (indemnification) claims have second priority, and Side-C (entity) claims have last priority. This clause should be coordinated with the recommendation (to be addressed in a separate memorandum) to increase the Side-A DIC limit. The priority-of-payment issue will be analyzed in the context of the Company's overall limit sufficiency in the D&O Limits Adequacy Memorandum targeted for delivery on June 6, 2022.
Gap No. 10: Outside Entity Coverage — Limitations
Severity: LOW
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473)
Description of Gap. The Vandermeer primary provides coverage under Section 3.4 for insured persons serving at the Company's specific written request as directors, officers, trustees, or equivalent positions of "Outside Entities" (defined to include any entity that is not a Named Insured or subsidiary). This coverage extends to claims arising from such Outside Capacity service.
However, the Outside Entity coverage is subject to limitations that could create disputes. Specifically, coverage is available only where (i) the Outside Entity does not maintain its own D&O insurance covering the insured person, or (ii) the Outside Entity's D&O insurance has been exhausted by payment of claims. The policy does not clearly specify the interaction between the Nexford tower and the Outside Entity's own coverage in situations where both programs are potentially responsive to a claim. Key ambiguities include:
• Whether the Nexford tower is excess to the Outside Entity's D&O insurance (requiring exhaustion of the Outside Entity's coverage before the Nexford tower responds), or whether the two programs respond concurrently on a contribution basis.
• Whether the insured person is required to tender the claim first to the Outside Entity's insurer and pursue recovery there before making a claim under the Nexford tower.
• How the "other insurance" clauses in the respective policies interact — particularly where both the Nexford tower and the Outside Entity's policy contain "excess other insurance" clauses, creating a potential circular priority dispute.
The three Nexford subsidiaries (NCS, Triton, and Marlowe Asset Management) are Named Insureds under the tower and do not present this issue. However, any future subsidiaries, joint ventures, or outside board service by Nexford executives or directors at the Sponsor's request could trigger this gap. We note that it is common in the PE context for senior executives or directors to serve on the boards of other Sponsor portfolio companies, and such service arrangements could implicate the Outside Entity coverage limitations.
Recommendation. We recommend clarifying the "other insurance" priority for Outside Entity coverage at renewal. The preferred approach is to specify that the Nexford tower is excess to any valid and collectible insurance maintained by the Outside Entity, with the Nexford tower responding only after the Outside Entity's coverage has been exhausted or is otherwise unavailable. This would provide certainty to both the insured and the carrier. We will address this issue further in the comprehensive tower review report.
Gap No. 11: Pollution Exclusion in D&O Context
Severity: LOW
Affected Layer(s): All Layers
Description of Gap. The Vandermeer primary and all excess layers contain a pollution exclusion (Vandermeer Section IV.B.5; Commonwealth Exclusion 7; Graystone Section IV.E; Pinnacle Re Article V, Section 5.05). Pollution exclusions are standard features of D&O policies and are generally uncontroversial in the securities-litigation context, where the underlying claims typically involve financial misrepresentation rather than environmental contamination.
However, the Vandermeer pollution exclusion is drafted broadly, applying to "any Claim arising out of, based upon, or attributable to, directly or indirectly, the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, escape, or disposal of Pollutants." The breadth of this language could encompass claims that are fundamentally management liability claims rather than pollution claims — for example:
• A claim against directors and officers alleging that they failed to disclose known environmental liabilities in connection with a transaction, financing, or regulatory filing.
• A claim alleging that directors breached their fiduciary duties by failing to maintain adequate environmental compliance programs, resulting in regulatory penalties and financial losses.
• A securities-type claim (relevant in the pre-IPO context) alleging that management misrepresented the Company's environmental liabilities or compliance posture in an offering document.
These claims, while "arising out of" or "attributable to" pollutants in a literal sense, are at their core allegations of management misconduct — precisely the type of claim that D&O insurance is designed to cover. The broad pollution exclusion could be interpreted to bar coverage for such claims, particularly by an excess carrier seeking to avoid payment.
Nexford's manufacturing operations — conveyor systems fabrication, industrial fastener production, and precision machining for automotive and construction applications — generate industrial waste, machining fluids, metal particulates, and other materials subject to environmental regulation. The Company's facilities are subject to RCRA, CERCLA, Clean Air Act, Clean Water Act, and state environmental regulatory regimes. Environmental claims related to these operations are a realistic scenario.
Recommendation. We recommend negotiating a narrower pollution exclusion at renewal, with a carve-back preserving coverage for securities-type claims, management liability claims, and fiduciary duty claims that are related to environmental matters but do not seek remediation or cleanup costs. This issue should be flagged for priority attention in the pre-IPO planning process. We will address this recommendation further in the comprehensive tower review report.
Gap No. 12: Change of Control / Acquisition Provision — Automatic Run-Off
Severity: MODERATE
Affected Layer(s): Vandermeer National Insurance Company, Primary (VNI-DO-2021-88473); Commonwealth Indemnity Group, 1st Excess (CIG-XS1-2021-55902); Graystone Mutual Assurance Co., 2nd Excess (GMA-XS2-2021-17836); Pinnacle Re Insurance Ltd., 3rd Excess (PRE-XS3-2021-04471)
Description of Gap. The Vandermeer primary provides in Section 10.2 for the automatic conversion of the policy to a run-off (tail) policy upon a "change of control" of the Company. Upon a qualifying change of control, the policy ceases to provide coverage for prospective claims and instead provides an extended reporting period during which claims arising from pre-change-of-control wrongful acts may be reported.
Our review has identified the following concerns with the change-of-control provisions:
Definition of "Change of Control." The Vandermeer policy defines "change of control" in Section 2(e) to include any transaction or series of transactions in which a person or entity acquires more than 50% of the voting securities of the Company. This definition is facially straightforward but is ambiguous as applied to Nexford's current ownership structure, in which Veltrano Capital Partners Fund IV already holds 68.5% of the Company's equity.
The ambiguity arises in the exit scenario. If Veltrano sells its stake — whether through a secondary sale to a financial buyer, a sale to a strategic acquirer, or an IPO with a sell-down — does a change in the identity of the controlling shareholder constitute a "change of control" under the policy? The definition speaks to a person or entity acquiring more than 50% — suggesting that the trigger is an acquisition of control, not a transfer of control. If the acquirer in a secondary sale obtains more than 50%, the trigger would likely be satisfied. But in an IPO scenario, where Veltrano may sell down its stake over time and no single acquirer obtains 50%, the trigger may not be satisfied even though control has effectively changed.
This ambiguity is of significant practical importance because the change-of-control provision governs whether the current policy automatically converts to a tail — a critical protection for directors and officers who served during the pre-change-of-control period.
Tail Premium. The automatic tail period under the Vandermeer policy is 72 months (six years) from the date of the change of control. The six-year tail period is adequate and consistent with market norms. However, the premium for the tail period is set at 200% of the annualized premium for the primary layer ($487,500 × 2 = $975,000). This is above market: the prevailing market range for D&O tail premiums is 150–175% of the annualized premium. At the current premium level, this represents an overpayment of $122,000 to $243,750 relative to market.
Inconsistency Across Excess Layers. The excess layers have varying change-of-control definitions and provisions:
• Commonwealth 1st Excess: The Commonwealth policy defines change of control using a 50% threshold, consistent with the Vandermeer primary. The tail period and premium are keyed to the primary.
• Graystone 2nd Excess: The Graystone policy uses a 35% threshold for its change-of-control trigger. This means that a partial sale by Veltrano — even one that leaves Veltrano with a significant minority stake — could trigger the change-of-control provision in the Graystone layer while leaving the Vandermeer primary and Commonwealth 1st excess unaffected. A Veltrano sell-down from 68.5% to, say, 40% would trigger the Graystone change of control (because a new person or entity would acquire 35% or more) but not the Vandermeer or Commonwealth change of control (because no person would acquire more than 50%). This inconsistency could result in the 2nd excess converting to a tail while the primary and 1st excess remain active — a highly undesirable outcome.
• Pinnacle Re 3rd Excess: The Pinnacle Re policy does not contain a change-of-control provision at all. It is unclear what happens to the 3rd excess layer upon a qualifying change of control at the primary level. The Pinnacle Re policy does not automatically convert to a tail, and there is no mechanism for the insured to purchase tail coverage under this layer. In a change-of-control scenario, the 3rd excess layer could simply terminate without providing run-off protection.
Recommendation. We recommend the following actions at renewal: (i) harmonize the change-of-control definitions across all layers to use a consistent threshold, preferably 50%; (ii) clarify that a change in the identity of the controlling shareholder (including a Sponsor exit) constitutes a change of control, regardless of the specific transaction structure; (iii) negotiate the tail premium down to 150% of the annualized premium, consistent with market; (iv) ensure that the Pinnacle Re 3rd excess includes a change-of-control provision with an automatic tail, consistent with the rest of the tower; and (v) negotiate a provision permitting the Company to elect the tail rather than having it trigger automatically, to preserve flexibility in the IPO scenario where a controlled sell-down over multiple quarters may not constitute a single "change of control" event.
Gap No. 13: Defense Cost Advancement Timing
Severity: LOW
Affected Layer(s): Vandermeer National Insurance Company, Prim

MEMORANDUM

MATTER NO.: 1005-00003

I. EXECUTIVE SUMMARY

II. TOWER OVERVIEW

III. IDENTIFIED COVERAGE GAPS AND CONCERNS

Record

Parties

Dates

Amounts