MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
May 27, 2022
To: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
From: Naomi Petersen, Lead Associate, M&A Department Yuki Nakamura, Working Associate, Litigation (General) Department
Re: Nexford Industrial Holdings Inc. — Preliminary Coverage Gap Analysis, Product-Liability Insurance Tower (Policy Period: July 1, 2021 – July 1, 2022)
Matter No.: 1005-00003
Billing Partner: Angela Fontaine (Code: AFO-7724)
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP at the direction of Nexford Industrial Holdings Inc. and its counsel. This memorandum and its contents are not intended for distribution beyond the persons identified herein and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Nexford Industrial Holdings Inc. Any inadvertent disclosure does not constitute a waiver of the attorney-client privilege or work-product protection.
I. Executive Summary and Purpose
This memorandum identifies eleven (11) coverage gaps, deficiencies, or areas of concern in Nexford Industrial Holdings Inc.'s ("Nexford" or "NIH") current product-liability ("PL") insurance tower for the policy period July 1, 2021 through July 1, 2022. The purpose of this preliminary analysis is to inform the upcoming renewal cycle and to provide actionable guidance for the negotiation of improved policy terms for the renewal period commencing July 1, 2022.
This analysis was conducted at the direction of Nexford General Counsel Priya Sundaram and in coordination with Vice President, Risk Management Trevor Haines and Director of Insurance and Claims Donna Kowalski. The engagement arises in the broader context of Nexford's ongoing relationship with Veltrano Capital Partners Fund IV, LP ("Veltrano"), the majority equity sponsor, and the firm's role in advising on risk allocation and insurance adequacy in connection with the portfolio company's operations and anticipated strategic transactions.
Our findings are based upon a detailed review of policies, endorsements, binders, loss runs, and broker submissions provided by Ashford Breckinridge LLP, Nexford's broker of record. The primary contacts at Ashford Breckinridge for this engagement are Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive. We have also incorporated actuarial inputs from Kessler Quinn Advisory Group, including analysis prepared by Arthur Kessler, Managing Director, and Diana Cho, Vice President, Actuarial Services. Kessler Quinn was retained by Veltrano Capital Partners Fund IV, LP in connection with its ongoing portfolio risk management oversight.
Each of the eleven identified gaps has been categorized by severity using a three-tier framework:
• Critical: Gaps presenting a substantial risk of uninsured or underinsured loss in a reasonably foreseeable scenario; requiring immediate attention and prioritization during the 2022–2023 renewal negotiation process.
• Significant: Gaps that could materially affect coverage in plausible claim scenarios; warranting focused attention during renewal negotiations and, where possible, resolution prior to policy binding.
• Moderate: Gaps that present a recognized but more limited risk; recommended for monitoring and remediation if market conditions and carrier negotiations permit.
This memorandum is preliminary in nature. A comprehensive tower review report, providing detailed policy wording analysis, follow-form assessments across all four layers, proposed endorsement language, and expanded actuarial and benchmarking data, will follow. The target delivery date for the comprehensive report is June 17, 2022. Until the comprehensive report is delivered and reviewed, the findings and recommendations set forth herein should be treated as directional and subject to revision.
II. Overview of Current Product-Liability Tower
A. Tower Structure
Nexford's PL tower for the current policy period (July 1, 2021 – July 1, 2022) consists of a primary general liability/product liability policy and three excess layers, structured as follows:
The following additional parameters apply to the current tower:
• Self-Insured Retention (SIR): $500,000 per occurrence on the Midland Casualty primary policy (MCS-GL-2021-55671). The SIR applies to both indemnity payments and defense costs. Satisfaction of the SIR is a condition precedent to the insurer's obligation to defend and indemnify.
• Product Recall Sub-Limit: $2,500,000 per occurrence / $5,000,000 aggregate, included within the Midland Casualty primary policy limits. The recall sub-limit covers first-party recall costs including, but not limited to, notification expenses, transportation and disposal of recalled products, and replacement costs. Third-party recall liability is subject to the general per-occurrence and aggregate limits.
• Completed Operations Coverage: Extends ten (10) years post-delivery of the insured's product. This time limitation applies uniformly across all product lines and named insured subsidiaries.
• Rate-on-Line: 3.52%, calculated as total annual premium ($2,642,900) divided by total aggregate limits ($75,000,000). This rate-on-line is broadly consistent with market rates for heavy industrial manufacturers as of the July 2021 placement, though market conditions have tightened in the intervening period.
The tower is structured on a follow-form basis, with the Great Basin umbrella, Cornerstone second excess, and Allegheny Pacific third excess each following the terms, conditions, definitions, and exclusions of the immediately underlying policy unless their own policy terms are more restrictive. This follow-form structure is significant because, as discussed in Section III below, certain exclusions and limitations in the excess layers are in fact more restrictive than the corresponding provisions in the Midland Casualty primary, creating vertical inconsistencies in the tower.
B. Named Insureds
The following entities are named insureds under the Midland Casualty primary policy and, by extension under follow-form provisions, under each of the three excess layers:
1. Nexford Industrial Holdings Inc. — A Delaware corporation and the parent holding company of the Nexford group. Nexford's headquarters are located at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. Nexford does not directly manufacture products but holds 100% of the equity interests in each of the three operating subsidiaries described below and provides centralized management, legal, compliance, and administrative services to the group.
2. Nexford Conveyor Systems, LLC ("NCS") — A Delaware limited liability company and wholly-owned subsidiary of Nexford. NCS's principal manufacturing facility is located at 4500 Industrial Parkway, Joliet, Illinois 60436. NCS designs, manufactures, and sells industrial conveyor systems and related equipment for use in mining, aggregate processing, warehouse automation, and heavy manufacturing applications. NCS is the largest contributor to consolidated revenue, representing approximately 56% of consolidated revenue ($795.2 million for fiscal year 2021).
3. Triton Fastener Corp. ("Triton") — An Illinois corporation and wholly-owned subsidiary of Nexford. Triton's principal facility is located at 1010 Whitman Avenue, Rockford, Illinois 61101. Triton manufactures high-strength industrial fasteners, including hex bolts, structural screws, anchor bolts, and specialty fastening systems used in construction, infrastructure, and heavy equipment applications. Triton accounts for approximately 28% of consolidated revenue ($397.6 million for fiscal year 2021).
4. Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management" or "VPM") — An Ohio corporation and wholly-owned subsidiary of Nexford. Marlowe Asset Management's principal facility is located at 775 Summit Industrial Boulevard, Akron, Ohio 44311. Marlowe Asset Management provides precision CNC machining, metal finishing, and specialty component fabrication services both for external customers and as a captive supplier to NCS and Triton. Marlowe Asset Management accounts for approximately 16% of consolidated revenue ($227.2 million for fiscal year 2021).
Consolidated fiscal year 2021 revenue across all four entities was approximately $1.42 billion, as reflected in the audited financial statements prepared by Pemberton & Associates CPAs, LLP. The three operating subsidiaries collectively ship approximately 42,000 stock keeping units (SKUs) annually across their respective product lines, encompassing a broad range of industrial goods with varying risk profiles and end-use applications.
It should be noted that the named insured schedule does not currently include any joint ventures, foreign subsidiaries, or affiliated entities outside the four entities listed above. To the extent that Nexford establishes new subsidiaries or acquires additional entities during the policy period, the automatic acquisition provision in the Midland Casualty primary (Section V.B of the policy form) provides coverage for newly acquired or formed entities for a period of ninety (90) days, after which written notice to the insurer and endorsement are required. This provision has not been tested to date.
C. Pending Claims and Loss History Context
An understanding of Nexford's current claims environment and five-year loss history is essential context for the coverage gap analysis that follows. The pending claims and historical loss data directly inform several of the identified gaps, particularly with respect to aggregate erosion risk (Gap No. 6) and product recall sub-limit adequacy (Gap No. 1).
Pending Litigation. Two product-liability lawsuits are currently pending against Nexford subsidiaries:
1. *Higgins v. Nexford Conveyor Systems, LLC et al.*, Case No. 2021-L-04382, Circuit Court of Will County, Illinois. This action was filed on September 14, 2021, by plaintiff Marcus Higgins, an employee of Western Mineral Processing, Inc. The complaint alleges that the plaintiff sustained catastrophic crush injuries to his right hand and forearm as a result of a defective emergency stop mechanism on a Model NCS-7200 industrial conveyor system manufactured by NCS. The plaintiff alleges strict product liability, negligence in design and manufacture, and failure to warn. Damages sought total approximately $14.5 million, including past and future medical expenses, lost earning capacity, and pain and suffering. The case is currently in the discovery phase. Expert depositions are scheduled for July and August 2022. No trial date has been set.
2. *Consolidated Builders Supply Co. v. Triton Fastener Corp.*, Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois. This action was filed on November 2, 2021, by plaintiff Consolidated Builders Supply Co. The complaint alleges that Grade 8 hex bolts manufactured by Triton experienced premature structural failure when used in a load-bearing structural connection at a commercial construction project in Naperville, Illinois, causing a partial wall collapse. The plaintiff alleges strict product liability, breach of implied warranty of merchantability, and negligence. Damages sought total approximately $6.8 million, including property damage, remediation costs, and business interruption. Triton's motion to dismiss was denied on February 11, 2022, and the case is proceeding to discovery.
Both pending cases are being defended by Hollander Byrne & Strauss LLP, with Catherine Byrne, Partner, serving as lead counsel and Rafael Mendez, Senior Associate, as second chair. Defense costs in both matters are being charged against the Midland Casualty primary policy limits, as discussed further below.
Open Reserves. Total open product-liability reserves across both pending claims are $8.3 million, established within the Midland Casualty primary layer. These reserves have been set by Midland Casualty in consultation with defense counsel and Nexford's internal claims management team led by Donna Kowalski. The reserve breakdown is as follows (as of the most recent reserve review, March 31, 2022): the Higgins matter carries the larger share of reserves given the severity of the injuries alleged and the magnitude of the damages sought; the Consolidated Builders matter is reserved at a lower level reflecting the property-damage-only nature of the claim and the pending discovery on causation. Specific reserve allocations by claim are maintained in a separate privileged reserve analysis memorandum and are not further detailed here.
Five-Year Loss History. The following summarizes Nexford's five-year product-liability loss history across all three operating subsidiaries:
• Reported claims (five-year period): 12
• Closed claims: 9 (total paid losses: $4.72 million)
• Open claims: 3 (total open reserves: $8.3 million, inclusive of the two pending lawsuits described above and one additional open claim at the notice-only stage)
• IBNR estimate: $2.1 million, as calculated by Kessler Quinn Advisory Group based on actuarial triangulation and frequency/severity modeling applied to Nexford's historical loss data and industry benchmarks for heavy industrial manufacturers
• Total five-year incurred losses: $15.12 million ($4.72 million paid + $8.3 million reserved + $2.1 million IBNR)
Prior Product Recalls. Two product recall or corrective action events have occurred within the five-year loss history period:
1. Triton Fastener Voluntary Recall (March 12, 2020): Triton initiated a voluntary recall of certain lots of Grade 5 carriage bolts after internal quality control testing identified a potential heat-treatment deficiency that could result in reduced tensile strength below specification. The recall affected approximately 48,000 units distributed to 17 customers. Total recall cost was approximately $1.1 million, including notification expenses, product retrieval, replacement, testing, and related administrative costs. The recall was reported to the Consumer Product Safety Commission ("CPSC") and resolved without CPSC enforcement action.
2. Nexford Conveyor Systems Advisory Notice (August 7, 2020): NCS issued a product advisory notice to approximately 230 customers regarding a recommended inspection and replacement of a specific bearing assembly component in Model NCS-6500 conveyor systems manufactured between January 2018 and June 2019. While not characterized as a formal recall, the advisory notice was treated as a recall event for insurance purposes. Total cost was approximately $340,000, consisting primarily of field service inspection costs and replacement component manufacturing and distribution.
Combined recall costs for the five-year period total $1.44 million. Both events were charged against the product recall sub-limit within the Midland Casualty primary policy.
D&O Loss History (Comparative Context). For comparative purposes and to inform the coordination-of-coverage analysis in Gap No. 11, Nexford's five-year directors and officers liability loss history reflects a single reported claim: a shareholder demand letter received in 2020 alleging inadequate oversight of quality control processes. The demand letter was resolved without payment, and no lawsuit was filed. Total paid D&O losses for the five-year period are zero.
III. Identified Coverage Gaps
The following eleven coverage gaps, deficiencies, or areas of concern have been identified through our preliminary review of the Nexford PL tower. Each gap is presented with a description of the issue, an assessment of the practical risk, a severity classification, and a preliminary recommendation for remediation. The gaps are numbered sequentially and grouped by severity in the summary table in Section IV below.
Gap No. 1: Product Recall Sub-Limit Inadequacy
Severity: CRITICAL
Description of Gap. The Midland Casualty primary policy (MCS-GL-2021-55671) includes product recall coverage as a sub-limited component of the general policy limits, with a sub-limit of $2,500,000 per occurrence and $5,000,000 in the aggregate for the policy period. This sub-limit applies to first-party recall costs, including but not limited to notification expenses, product transportation and retrieval, inspection and testing, replacement or repair of recalled products, and related administrative and logistical costs. Third-party recall liability (i.e., claims by third parties arising from the recalled product) is subject to the standard per-occurrence and aggregate policy limits and is not separately sub-limited.
Risk Assessment. Nexford's historical recall experience demonstrates that the current sub-limit is already under pressure. The Triton voluntary recall in March 2020 cost approximately $1.1 million, consuming 44% of the per-occurrence sub-limit in a single event that was relatively limited in scope (approximately 48,000 units, 17 affected customers). The NCS advisory notice in August 2020 added another $340,000, bringing cumulative recall-related costs for the prior policy period to $1.44 million.
Looking forward, the risk of a more extensive recall event is meaningful. Nexford's three operating subsidiaries collectively ship approximately 42,000 SKUs annually across a diverse product portfolio that includes safety-critical industrial equipment (conveyor systems with emergency stop mechanisms, high-strength structural fasteners, precision-machined components). A mandatory recall ordered by the CPSC involving multiple fastener lots, or a widespread defect affecting a high-volume NCS conveyor component, could easily generate recall costs exceeding the $2.5 million per-occurrence sub-limit. In a worst-case scenario involving a multi-product recall touching all three subsidiaries, the $5 million aggregate sub-limit could be exhausted in its entirety, leaving any additional recall costs entirely uninsured under the current tower.
Industry benchmarking data, which will be presented in detail in the comprehensive tower review report, indicates that manufacturers of Nexford's scale (consolidated revenue in excess of $1 billion) and product risk profile (heavy industrial products with safety-critical applications) typically carry product recall sub-limits in the range of $5 million to $10 million per occurrence, with aggregate sub-limits of $10 million to $20 million. Nexford's current sub-limits fall well below the lower end of this range.
The excess layers do not independently provide product recall coverage. Great Basin, Cornerstone, and Allegheny Pacific each follow form to the Midland Casualty primary on product recall, meaning that the per-occurrence and aggregate sub-limits in the primary are effectively the ceiling of recall coverage across the entire $75 million tower.
Preliminary Recommendation. This gap should be treated as a priority item in the 2022–2023 renewal negotiation. We recommend that Ashford Breckinridge negotiate an increase in the product recall sub-limit to no less than $5 million per occurrence and $10 million in the aggregate. Depending on carrier appetite and incremental premium cost, consideration should be given to higher limits consistent with industry benchmarks. Ashford Breckinridge should be instructed to solicit indicative pricing for sub-limit increases at the $5M/$10M and $7.5M/$15M levels. In addition, the team should evaluate whether a standalone product recall policy, separate from the GL/PL tower, would provide more comprehensive coverage at a competitive premium. Kessler Quinn should be asked to provide a severity analysis of potential recall scenarios to support the adequacy determination.
Gap No. 2: Completed Operations Tail — 10-Year Limitation
Severity: SIGNIFICANT
Description of Gap. The Midland Casualty primary policy provides completed operations coverage extending ten (10) years following the delivery of the insured product. This temporal limitation applies to all product lines across all named insured subsidiaries without differentiation. After the expiration of the 10-year tail, completed operations coverage ceases, and claims arising from products delivered more than ten years prior to the date of the claim would fall outside the scope of coverage.
The three excess layers — Great Basin umbrella, Cornerstone second excess, and Allegheny Pacific third excess — each follow form to the Midland Casualty primary on the completed operations coverage provision. None of the excess layers independently extends the completed operations tail beyond the 10-year period established in the primary.
Risk Assessment. The 10-year completed operations tail is misaligned with the expected useful life of products manufactured by Nexford's subsidiaries. Conveyor systems manufactured by NCS are capital equipment designed for sustained heavy industrial use, with expected useful lives of 15 to 25 years depending on the application, operating environment, and maintenance regimen. It is common for NCS conveyor systems to remain in active service for 20 or more years. Industrial fasteners manufactured by Triton are installed in permanent or semi-permanent structures — bridges, commercial buildings, heavy equipment, and infrastructure — with service lives that are effectively indefinite. Precision-machined components produced by Marlowe Asset Management are integrated into larger assemblies with similarly long service lives.
The current pending litigation illustrates the risk. In the Higgins matter, the Model NCS-7200 conveyor system at issue was delivered and installed within the 10-year completed operations window, meaning the claim is covered under the current policy terms. However, this outcome is fortuitous rather than structural. A substantially similar claim involving a conveyor system installed 12 or 15 years prior to the incident would fall outside the completed operations tail and would not be covered, despite involving a product with an expected useful life well in excess of 10 years.
The practical consequence of the 10-year limitation is that Nexford faces an expanding window of uninsured exposure for product-liability claims arising from older installations. As NCS's installed base ages — the company has been manufacturing conveyor systems for over 30 years — the proportion of products in service that fall outside the completed operations tail will continue to grow.
Preliminary Recommendation. We recommend negotiating an extension of the completed operations tail to fifteen (15) years at a minimum. Ideally, the completed operations coverage should be provided without a temporal limitation (i.e., coverage should apply to completed operations for the life of the product, subject to applicable statutes of repose). If carriers are unwilling to eliminate the time limitation entirely, a manuscript endorsement should be sought that extends the tail for NCS conveyor products specifically, given their longer expected useful life, to a period of not less than 20 years. Ashford Breckinridge should present carriers with data on the expected useful life of Nexford products by product line and subsidiary to support the request. The comprehensive tower review report will include a detailed analysis of completed operations tail provisions across comparable manufacturer programs to provide additional benchmarking support.
Gap No. 3: Pollution Exclusion Breadth — Great Basin Umbrella
Severity: CRITICAL
Description of Gap. The Great Basin Insurance Company first excess/umbrella policy (GBI-UMB-2021-30984; $25 million excess of $10 million) contains a total pollution exclusion that is materially broader in scope than the corresponding exclusion in the Midland Casualty primary policy. This inconsistency between the primary and first excess layers creates a significant vertical gap in the PL tower for claims with any pollution-related component.
Specifically, the Midland Casualty primary includes a pollution exclusion that contains a standard "sudden and accidental" exception. Under this exception, the pollution exclusion does not apply to bodily injury or property damage arising from the sudden and accidental release, discharge, or dispersal of pollutants during the insured's manufacturing operations or from the insured's products after delivery. This carve-back is a widely recognized provision in commercial general liability policies and preserves coverage for a category of claims that is particularly relevant to manufacturers of industrial equipment.
The Great Basin umbrella policy, by contrast, contains an absolute pollution exclusion with no "sudden and accidental" carve-back. The Great Basin exclusion bars coverage for any bodily injury, property damage, or personal and advertising injury "arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of 'pollutants,' regardless of any other contributing cause or event." The exclusion is unqualified and makes no exception for sudden, accidental, or product-related pollution events.
Risk Assessment. The practical effect of this inconsistency is severe. In a claim scenario involving a pollution-related element — and given Nexford's manufacturing operations and product portfolio, such scenarios are readily foreseeable — the Midland Casualty primary would respond up to its per-occurrence limit of $5 million (or up to the $10 million aggregate, depending on the claim), but the Great Basin umbrella would exclude coverage entirely for the same claim. The insured would face a complete gap in coverage between the $10 million primary aggregate and the $35 million attachment point of the Cornerstone second excess.
Furthermore, the Cornerstone second excess (CRC-XS-2021-17620; $25 million excess of $35 million) and the Allegheny Pacific third excess (APU-XS-2021-44215; $15 million excess of $60 million) each follow form to the Great Basin umbrella on the pollution exclusion rather than to the Midland Casualty primary. This means the absolute pollution exclusion — with no "sudden and accidental" carve-back — applies across all three excess layers. In effect, for any claim with a pollution-related component, the Nexford PL tower shrinks from $75 million to $10 million, with $65 million of excess coverage rendered inapplicable.
Examples of foreseeable claim scenarios involving pollution-related elements include: (a) hydraulic fluid releases from NCS conveyor systems causing environmental contamination or bodily injury at a customer's facility; (b) chemical coatings or surface treatments applied to Triton fasteners causing contamination when exposed to heat, moisture, or other environmental conditions; (c) machining lubricants, cutting fluids, or metal treatment chemicals used by Marlowe Asset Management migrating from precision-machined components and causing contamination in end-use applications; and (d) claims involving products used in food processing, pharmaceutical, or water treatment applications where contamination from any chemical residue could be characterized as a pollutant release.
Nexford's manufacturing processes involve extensive use of hydraulic systems, machining fluids, metal treatment chemicals, lubricants, and coatings. The products themselves may contain or be coated with substances that could be characterized as "pollutants" under a broad policy definition. The risk that a product-liability claim could be partially or entirely recharacterized as pollution-related — either by a carrier seeking to invoke the exclusion or by a claimant framing the claim in terms that implicate the exclusion — is significant.
Preliminary Recommendation. This gap is the highest-priority renewal negotiation item identified in this memorandum. Ashford Breckinridge should be directed to require, as a condition of renewal, that Great Basin add a "sudden and accidental" pollution exception to its umbrella policy that is consistent with the corresponding provision in the Midland Casualty primary. The proposed endorsement language should be modeled on the Midland Casualty primary wording to ensure vertical consistency within the tower.
If Great Basin is unwilling to amend its pollution exclusion, Nexford should consider replacing Great Basin with an alternative umbrella carrier that will offer pollution coverage consistent with the primary. Given the current market dynamics in the excess liability space, multiple carrier options should be available. In the event that Great Basin is retained with the absolute pollution exclusion intact, a standalone pollution liability policy should be explored to fill the gap, though this would add complexity and cost to the program.
Regardless of the outcome of negotiations with Great Basin, Ashford Breckinridge should confirm the pollution exclusion language in the Cornerstone and Allegheny Pacific policies and ensure that any amendment to the Great Basin umbrella is flowed through to the upper excess layers on a follow-form basis. The comprehensive tower review report will include a side-by-side comparison of the pollution exclusion language across all four layers.
Gap No. 4: Cross-Suit Exclusion Among Named Insured Subsidiaries
Severity: SIGNIFICANT
Description of Gap. The Midland Casualty primary policy contains an "insured vs. insured" or cross-suit exclusion that bars coverage for claims brought by one named insured against another named insured under the same policy. This exclusion is set forth in the policy's general conditions and applies without exception to any cause of action, demand, or suit initiated by any entity qualifying as a named insured against any other entity qualifying as a named insured, regardless of the underlying factual basis for the claim.
The Great Basin umbrella policy follows form to the Midland Casualty primary on this exclusion. The Cornerstone second excess and Allegheny Pacific third excess policies each contain their own cross-suit exclusion language, which differs in certain respects from the Midland Casualty and Great Basin wording. A detailed comparative analysis of the cross-suit exclusion language across all four layers will be included in the comprehensive tower review report.
Risk Assessment. The cross-suit exclusion presents a meaningful and foreseeable risk given the integrated nature of Nexford's manufacturing operations and supply chain. The three operating subsidiaries — NCS, Triton, and Marlowe Asset Management — do not operate independently of one another. Triton fasteners are routinely used as components in NCS conveyor assemblies. Marlowe Asset Management provides precision-machined components to both NCS and Triton as a captive supplier. This intercompany supply chain creates scenarios in which a product failure could involve components from multiple subsidiaries, giving rise to indemnity and contribution claims among the named insureds.
For example, if an NCS conveyor system failure is ultimately traced to a defective Triton fastener incorporated into the conveyor assembly, NCS might bring a cross-claim or third-party complaint against Triton for indemnity or contribution. Under the current policy terms, that cross-claim would be excluded from coverage, meaning Triton would have no insurance protection for its obligation to indemnify NCS, and NCS would have no coverage for the costs of pursuing the cross-claim.
Similarly, if a Marlowe Asset Management precision-machined component is integrated into a Triton fastening assembly or an NCS conveyor system and the component is later found to be defective, cross-claims among the subsidiaries could be excluded. The practical result is that intercompany risk allocation — which any reasonable corporate group would pursue to identify and assign responsibility for product failures — is undermined by the insurance program's own exclusion.
The risk is not hypothetical. The Consolidated Builders Supply Co. v. Triton Fastener Corp. litigation involves allegations of structural failure of Triton Grade 8 hex bolts. If discovery reveals that the bolts incorporated a Marlowe Asset Management-machined component, or if Triton seeks to allocate fault to NCS or Marlowe Asset Management, the cross-suit exclusion could preclude coverage for the resulting intercompany claims.
Preliminary Recommendation. We recommend that Ashford Breckinridge negotiate a cross-liability severability endorsement or a "separation of insureds" clause in the Midland Casualty primary policy. Under such an endorsement, each named insured would be treated as a separate insured for purposes of the cross-suit exclusion, and claims between named insureds would be covered to the same extent as claims by third parties. In the alternative, if a full cross-liability endorsement is not obtainable, a carve-back should be negotiated for cross-claims that arise in the context of third-party-initiated litigation — that is, where a claim by an outside party gives rise to indemnity or contribution claims among the named insureds.
The excess layers should be required to follow form to the amended primary on this issue. The comprehensive tower review report will include proposed endorsement language and a comparative analysis of cross-suit provisions across the tower.
Gap No. 5: "Other Insurance" Clause Conflicts — Midland Primary vs. Great Basin Excess
Severity: SIGNIFICANT
Description of Gap. The Midland Casualty primary policy (MCS-GL-2021-55671) contains an "other insurance" clause providing that, where other valid and collectible insurance is available to the insured for a loss that is also covered under the Midland Casualty policy, the Midland Casualty policy will be excess over such other insurance. This provision is a standard feature of commercial general liability policies but, in certain scenarios, creates unintended conflicts with the "other insurance" clauses in the excess layers of the tower.
The Great Basin umbrella policy similarly contains an "other insurance" clause providing that the Great Basin policy is excess over "all underlying insurance" and "any other insurance" available to the insured. The clause does not distinguish between scheduled underlying insurance (i.e., the Midland Casualty primary) and other sources of insurance that may be available to the insured in a given claim scenario (e.g., additional insured coverage under a customer's or vendor's policy).
Risk Assessment. In many claim scenarios, the "other insurance" clauses in the Midland and Great Basin policies operate without conflict: Midland responds as the primary insurer, and Great Basin responds excess of Midland upon exhaustion of the scheduled underlying limits. However, conflicts arise when a Nexford subsidiary has additional insured status under a third party's insurance policy, or when a third party has additional insured status under the Nexford policy and also carries its own coverage.
Nexford's standard customer contracts frequently require Nexford to name customers as additional insureds on its GL/PL policy. Those same customers may carry their own GL/PL coverage that names Nexford as an additional insured under the customer's policy. In a claim involving a Nexford product at a customer's facility, the customer might seek coverage under Nexford's policy as an additional insured, and Nexford might simultaneously be entitled to coverage as an additional insured under the customer's policy.
In this scenario, both Midland Casualty and the customer's insurer could invoke their respective "other insurance" clauses, each claiming to be excess over the other. The result is a circular priority dispute that can delay claims payment and expose Nexford to the costs of litigating coverage priority among insurers. The Great Basin umbrella's "other insurance" clause compounds the issue by potentially deferring not only to the Midland primary but also to any other coverage available to the insured, creating additional uncertainty about when the umbrella's obligation to pay is triggered.
The issue is not theoretical. Nexford's customer base includes large industrial and construction companies that maintain substantial insurance programs. The likelihood of overlapping coverage in a product-liability claim involving a Nexford product installed at a customer's facility is high, particularly for NCS conveyor systems and Triton structural fasteners used in major construction and infrastructure projects.
Preliminary Recommendation. We recommend that Ashford Breckinridge negotiate a clarifying endorsement in the Midland Casualty primary specifying that the policy is primary and non-contributory when Nexford (or any of its named insured subsidiaries) is the named insured seeking coverage, as distinct from scenarios where a third party is seeking coverage as an additional insured under the Nexford policy. The Great Basin umbrella "other insurance" clause should be amended to provide that the umbrella defers only to the scheduled underlying insurance (Midland Casualty primary) and not to third-party policies under which Nexford may have additional insured status.
The goal is to establish a clear priority of coverage: Nexford's own PL tower responds first for claims against Nexford, and "other insurance" considerations apply only to claims by additional insureds seeking coverage under Nexford's policies. The language across all four layers should be harmonized to eliminate circular priority disputes.
Gap No. 6: Aggregate Erosion Risk — Primary Layer
Severity: SIGNIFICANT
Description of Gap. The Midland Casualty primary policy carries an aggregate limit of $10 million for the policy period. As of the date of this memorandum, total open reserves charged against the primary aggregate are $8.3 million, representing reserves established for the Higgins v. NCS and Consolidated Builders v. Triton claims. In addition, defense costs in both pending matters are being charged against the policy limits, as the Midland Casualty primary is a duty-to-defend policy in which defense costs are treated as within the policy limits (i.e., defense costs erode both per-occurrence and aggregate limits). The $500,000 SIR per occurrence has been satisfied in both matters.
Risk Assessment. The combination of $8.3 million in open reserves and ongoing defense cost erosion places the $10 million primary aggregate at substantial risk of exhaustion within the current policy period or early in the renewal period. Defense costs in the Higgins case are expected to be significant given the complexity of the product-defect analysis, the need for engineering and metallurgical expert witnesses, and the anticipated depositions scheduled for July and August 2022. Defense costs in the Consolidated Builders case are also accruing as the matter proceeds through discovery following the denial of the motion to dismiss in February 2022.
If both claims resolve at or near their reserved amounts, and if defense costs are added to the reserves, the $10 million aggregate could be fully or nearly exhausted. The Kessler Quinn IBNR estimate of $2.1 million further compounds the erosion risk, as incurred-but-not-reported claims from the current or prior policy periods may generate additional charges against the aggregate if reported during the current period.
Upon exhaustion of the primary aggregate, the Great Basin umbrella attachment point of $10 million would be reached. However, the Great Basin umbrella contains a standard provision requiring complete exhaustion of the scheduled underlying aggregate as a condition of attachment. Partial erosion of the primary aggregate does not trigger a drop-down or early attachment of the umbrella layer. This means that if the primary aggregate is exhausted mid-term and a new occurrence arises, the insured would bear the full cost of the new occurrence — including the $500,000 SIR and all indemnity and defense costs up to the exhausted aggregate — before the umbrella layer attaches. In practical terms, this creates a coverage gap: the insured has no effective primary coverage for new occurrences, and the umbrella does not respond until the primary aggregate, which has already been consumed by prior claims, is "exhausted" in a manner that satisfies the umbrella's attachment conditions.
Preliminary Recommendation. This gap requires both near-term monitoring and renewal-cycle action. In the near term, defense cost erosion should be monitored carefully in coordination with Hollander Byrne & Strauss LLP. Catherine Byrne and Rafael Mendez should be directed to provide monthly defense cost reports for both pending matters, with reporting to Donna Kowalski and copying to this firm. Ashford Breckinridge should be informed of the erosion risk and should assess whether a mid-term aggregate reinstatement can be negotiated with Midland Casualty.
For the renewal effective July 1, 2022, we recommend that the primary per-occurrence and aggregate limits be evaluated for adequacy in light of the current loss environment and the Kessler Quinn actuarial analysis. Consideration should be given to increasing the primary aggregate to $15 million or $20 million, or to negotiating an aggregate reinstatement provision that automatically reinstates the aggregate upon exhaustion (subject to an additional premium). The limits adequacy analysis will be addressed in a separate memorandum incorporating Kessler Quinn's catastrophic loss scenario modeling.
Gap No. 7: Defense Cost Treatment — Erosion vs. Supplementary
Severity: MODERATE
Description of Gap. All four layers of the Nexford PL tower treat defense costs as within the policy limits. Specifically:
• Midland Casualty primary (MCS-GL-2021-55671): Defense costs within the $5 million per-occurrence and $10 million aggregate limits.
• Great Basin umbrella (GBI-UMB-2021-30984): Defense costs within the $25 million per-occurrence and aggregate limits.
• Cornerstone second excess (CRC-XS-2021-17620): Defense costs within the $25 million per-occurrence and aggregate limits.
• Allegheny Pacific third excess (APU-XS-2021-44215): Defense costs within the $15 million per-occurrence and aggregate limits.
No layer in the PL tower provides defense costs on a supplementary or outside-the-limits basis.
Risk Assessment. While defense-within-limits is the standard treatment in commercial general liability and product-liability policies, it contributes materially to the aggregate erosion concern described in Gap No. 6. For a company with Nexford's exposure profile — heavy industrial products with safety-critical applications, approximately 42,000 SKUs shipped annually, and two active lawsuits involving complex product-defect allegations — defense costs can represent a substantial proportion of total incurred losses. The Higgins matter, involving allegations of a defective emergency stop mechanism on an industrial conveyor system, requires engineering analysis, metallurgical testing, human factors evaluation, and the retention of multiple expert witnesses. Defense costs in such matters commonly reach seven figures.
Combined with the $500,000 SIR per occurrence, the defense-within-limits structure means that defense costs begin eroding policy limits from the first dollar above the SIR. Over the life of a complex product-liability case, defense costs alone can consume a meaningful share of available coverage, reducing the funds available for settlement or judgment payments.
Preliminary Recommendation. Nexford should explore whether any carrier in the tower, particularly Midland Casualty on the primary layer, is willing to offer a defense-outside-limits ("DOL") or supplementary defense cost endorsement at renewal. DOL endorsements are uncommon in GL/PL policies but are not unheard of, particularly for large-premium accounts. Ashford Breckinridge should be directed to inquire about DOL availability and pricing. If DOL is not available, the defense cost erosion factor should be incorporated into the limits adequacy analysis to ensure that the selected per-occurrence and aggregate limits reflect the anticipated defense cost burden in addition to projected indemnity exposure. This issue will be addressed in the separate limits adequacy memorandum referenced in Section V.
Gap No. 8: Additional Insured Endorsement — Downstream Coverage Obligations
Severity: MODERATE
Description of Gap. Nexford's standard customer contracts require Nexford to name its customers as additional insureds on its GL/PL policy. This obligation is a common contractual requirement in the industrial manufacturing sector and is intended to provide downstream coverage to customers for liability arising from Nexford products.
The Midland Casualty primary includes a blanket additional insured endorsement that provides additional insured status to parties with whom Nexford has entered into a written contract requiring such status. However, the endorsement is limited in scope: it provides additional insured coverage only for liability arising out of Nexford's "ongoing operations" and does not clearly extend to liability arising out of "completed operations." The endorsement tracks the ISO CG 20 10 form (additional insured — ongoing operations only) rather than the broader CG 20 37 form (additional insured — completed operations) or a combined CG 20 10/CG 20 37 endorsement.
The Great Basin umbrella follows form to the Midland Casualty primary on additional insured provisions and does not independently extend additional insured coverage to completed operations.
Risk Assessment. The practical consequence of this limitation is significant in the context of Nexford's business operations and contractual relationships. Many of Nexford's customer contracts require additional insured status for both ongoing operations and completed operations. These contractual requirements are particularly common in construction, infrastructure, and industrial project contracts, where the customer's risk exposure to product-liability claims extends well beyond the period of Nexford's active manufacturing and delivery operations.
If a customer is sued for bodily injury or property damage arising from a Nexford product after the product has been delivered, installed, and placed into service — which is a completed operations scenario — the customer may not qualify as an additional insured under the current blanket endorsement. The customer's claim for additional insured coverage would be denied, and the customer would be required to seek defense and indemnity under its own insurance program or directly from Nexford.
This creates a dual exposure for Nexford. First, the customer may assert a breach-of-contract claim against Nexford for failing to provide the additional insured coverage required by the customer contract. Second, Nexford may be required to indemnify the customer directly under the contractual indemnity provisions of the customer agreement, without the benefit of insurance coverage to fund that indemnity obligation. Both outcomes increase Nexford's uninsured financial exposure.
Preliminary Recommendation. We recommend that Ashford Breckinridge negotiate an expanded blanket additional insured endorsement in the Midland Casualty primary that includes both ongoing operations and completed operations, consistent with the combined ISO CG 20 10/CG 20 37 format or equivalent manuscript wording. The Great Basin umbrella and both excess layers should be required to follow form to the expanded endorsement. Nexford's standard customer contract templates should also be reviewed to ensure that the additional insured obligations are aligned with the coverage actually provided under the policy, and any discrepancies should be flagged for Priya Sundaram's review.
Gap No. 9: Vendor/Contractor Coverage — Component Supplier Exposure
Severity: MODERATE
Description of Gap. Nexford purchases components, raw materials, and subcontracted services from approximately 200 or more vendors and subcontractors across its three operating subsidiaries. These vendors supply a wide range of materials and components that are incorporated into Nexford's finished products, including steel stock, fastener blanks, bearings, electrical components, hydraulic assemblies, rubber and polymer compounds, surface coatings, and machined subcomponents.
The Midland Casualty primary policy does not include a "vendors endorsement" or "component parts" coverage extension. No separate vendor coverage is provided in any layer of the PL tower.
Risk Assessment. In a product-liability claim where the root cause of the product failure is attributable to a defective component or material supplied by a third-party vendor, Nexford's PL tower will respond to the claim against Nexford (as the manufacturer of the finished product), but it will not extend coverage to the vendor. Nexford would then need to pursue recovery against the vendor through contractual indemnity provisions, subrogation, or direct litigation.
The effectiveness of this risk transfer mechanism depends on the enforceability of Nexford's vendor contracts and the adequacy of the vendors' own insurance programs. Based on discussions with Donna Kowalski, Director of Insurance and Claims, enforcement of vendor contractual requirements — including requirements for minimum insurance limits, indemnification obligations, and evidence of insurance (certificates of insurance with additional insured endorsements) — is inconsistent across the three subsidiaries. Some vendors maintain comprehensive insurance programs with adequate limits; others carry minimal coverage or fail to provide timely certificates of insurance. The absence of a vendor endorsement in Nexford's own policy means that Nexford has no fallback coverage mechanism when vendor risk transfer fails.
Preliminary Recommendation. This gap requires a two-pronged approach. First, the comprehensive tower review report should include a detailed assessment of whether a vendor endorsement or component parts coverage extension is appropriate for the Nexford PL program, considering the cost, scope, and practical utility of such an endorsement. Second, and independently of the insurance solution, Nexford's vendor contract compliance program should be reviewed and strengthened. Donna Kowalski should be consulted regarding current compliance monitoring practices, and recommendations should be made for improving certificate of insurance tracking, minimum insurance requirements, and enforcement of contractual indemnity obligations. This issue will be flagged for further analysis in the comprehensive report.
Gap No. 10: Territory and Jurisdictional Limitations
Severity: MODERATE
Description of Gap. The Midland Casualty primary policy contains a territory clause that limits coverage to occurrences and claims arising within "the United States of America, its territories and possessions, Puerto Rico, and Canada." Products shipped to or used in jurisdictions outside this defined territory are not covered under the primary policy.
The Great Basin umbrella contains a broader territory clause providing worldwide coverage, but subject to a "suit-in-the-US" requirement — that is, claims must be brought in a court of competent jurisdiction within the United States or Canada for coverage to apply. Claims litigated in courts outside the United States and Canada are excluded, regardless of where the underlying occurrence took place.
The Cornerstone second excess and Allegheny Pacific third excess follow form to the Great Basin umbrella on territorial provisions.
Risk Assessment. Nexford Conveyor Systems and Triton Fastener products are exported to Mexico and select Central American markets. While current export revenue to these markets represents a modest percentage of consolidated revenue, broker submission data indicates that the export program is growing, with Nexford actively pursuing sales opportunities in Mexico's mining and construction sectors.
Under the current tower structure, a product-liability claim arising from a Nexford product used in Mexico or Central America would be uncovered if: (a) the occurrence giving rise to the claim takes place outside the United States, its territories, Puerto Rico, or Canada, falling outside the Midland primary territory clause; and (b) the resulting lawsuit is filed in a Mexican or Central American court, failing to satisfy the Great Basin umbrella's suit-in-the-US requirement.
This scenario is realistic. Product-liability claims in Mexico are typically litigated in Mexican courts under Mexican law. A plaintiff injured by a defective conveyor system at a Mexican mining operation, or a construction company alleging failure of Triton fasteners at a Mexican construction project, would likely file suit in Mexico rather than in the United States. In such a case, neither the primary nor the umbrella would respond, and the claim would be entirely uninsured.
Preliminary Recommendation. We recommend that Ashford Breckinridge negotiate a worldwide territory extension in the Midland Casualty primary, or at a minimum, an extension to include Mexico and Central American jurisdictions where Nexford products are currently sold or anticipated to be sold. The Great Basin umbrella's suit-in-the-US requirement should be removed or relaxed to cover claims litigated in any jurisdiction, or at minimum in Mexico and Central America. If the existing carriers are unwilling to extend territorial coverage, Nexford should consider a standalone international product-liability policy to cover export exposures. Given the growth trajectory of the export program, this issue should be addressed proactively rather than retroactively.
Gap No. 11: Coordination of Coverage Between PL and D&O Towers
Severity: MODERATE
Description of Gap. Certain categories of claims against Nexford could implicate both the product-liability tower and the directors and officers liability ("D&O") tower simultaneously. Examples of such overlapping claims include: (a) a catastrophic product-liability event that triggers shareholder derivative claims alleging that directors and officers failed to exercise adequate oversight of product safety and quality control; (b) a regulatory investigation by the CPSC or other governmental authority targeting both the corporate entity (under the PL tower) and individual directors and officers (under the D&O tower); (c) creditor claims against directors and officers in a scenario where a massive product-liability judgment creates financial distress; and (d) securities fraud claims following a product recall or product-liability event that affects the company's share price or credit standing.
The Midland Casualty PL primary (MCS-GL-2021-55671) and the Vandermeer National D&O primary (Policy No. VNI-DO-2021-88473) each contain "other insurance" clauses that could create disputes about priority of coverage in overlapping claim scenarios. Neither tower expressly addresses the coordination between the PL and D&O programs.
The two towers also have different self-insured retention structures: the PL tower carries a $500,000 SIR per occurrence on the primary layer, while the D&O tower carries a $1,000,000 SIR on entity coverage (Side B and Side C). The D&O Side-A DIC policy issued by Harrington Specialty (Policy No. HSI-DIC-2021-00342) has no SIR and covers non-indemnifiable losses to individual directors and officers. These different retention levels could create confusion about which tower responds first, and at what retention level, when a single event triggers claims under both programs.
Risk Assessment. The risk of inter-tower coordination issues is compounded by the composition of Nexford's board of directors. The board comprises nine directors: four independent directors and five directors appointed by Veltrano Capital Partners Fund IV, LP, the majority equity sponsor. The sponsor-appointed directors may have coverage under Veltrano's own D&O insurance program, in addition to the Nexford D&O tower. In a product-liability-related regulatory action or derivative claim targeting individual directors, multiple insurance programs — the Nexford PL tower, the Nexford D&O tower (including the Side-A DIC policy), and the Veltrano D&O program — could all be triggered simultaneously, with unclear priority among them.
While the probability of a single event triggering all of these programs simultaneously is lower than the probability of the gaps described in earlier sections of this memorandum, the potential severity is very high. A major product-liability event resulting in multiple fatalities, a CPSC enforcement action, and shareholder litigation could generate aggregate claims well in excess of the combined limits of both towers.
Preliminary Recommendation. We recommend that Ashford Breckinridge, in coordination with Calderwood & Harkness, develop an inter-tower coordination protocol that establishes clear rules of priority between the PL and D&O towers for overlapping claims. The "other insurance" clauses in both towers should be reviewed and, if necessary, amended to ensure that they do not create circular priority disputes. Consideration should be given to whether an integrated program approach or a specific coordination endorsement — added to both the PL and D&O towers — would provide clarity.
This issue will be addressed in detail in the comprehensive tower review report. The parallel preliminary coverage gap memorandum for the D&O tower, delivered concurrently with this memorandum, addresses the coordination issue from the D&O side.
IV. Summary of Gaps by Severity
The following table summarizes the eleven identified coverage gaps by severity classification. Gaps classified as "Critical" should be treated as immediate priorities for the 2022–2023 renewal negotiation cycle. Gaps classified as "Significant" should be addressed during the renewal negotiation process with the goal of resolution at or before policy binding. Gaps classified as "Moderate" should be monitored and addressed if market conditions and carrier negotiations permit.
Critical (Immediate Renewal Priority)
Significant (Address During Renewal Negotiation)
Moderate (Monitor / Address If Feasible)
V. Next Steps and Recommendations
Based on the preliminary findings set forth in this memorandum, we recommend the following action items, organized by priority and timeline:
Immediate Actions (Week of May 30, 2022):
1. Client Distribution. Circulate this memorandum to Priya Sundaram (General Counsel), Trevor Haines (Vice President, Risk Management), and Donna Kowalski (Director of Insurance and Claims) at Nexford for review and comment. Schedule a conference call for the week of June 6 to discuss findings and prioritize renewal negotiation objectives.
2. Broker Coordination. Coordinate with Ashford Breckinridge (Phillip Garza and Tamara Fisk) to incorporate the gap findings into the renewal marketing strategy and carrier negotiations. The broker submission was circulated on May 3, 2022, and carrier quotes are expected between May 18 and June 8, 2022. Ashford Breckinridge should be directed to include the Critical and Significant gap items as specific negotiation points in all carrier discussions and to report back on carrier receptivity and pricing for requested endorsements and coverage modifications.
3. Defense Cost Monitoring. Coordinate with Hollander Byrne & Strauss LLP (Catherine Byrne and Rafael Mendez) to establish a monthly defense cost reporting protocol for both the Higgins and Consolidated Builders matters. Defense cost reports should be provided to Donna Kowalski, with copies to this firm, on a monthly basis beginning June 15, 2022, to enable real-time tracking of aggregate erosion in the Midland Casualty primary layer.
Near-Term Deliverables (Target: June 17, 2022):
4. Comprehensive PL Tower Review Report. Prepare the comprehensive product-liability tow