1005-00003 · Calderwood & Harkness LLP · Coverage Analysis

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PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc.

CC: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc. Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc.

FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP Yuki Nakamura, Working Associate, Calderwood & Harkness LLP

DATE: June 14, 2022

RE: Analysis of D&O Tower Coverage for Regulatory Investigations — Nexford Industrial Holdings Inc. (Matter No. 1005-00003)

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I. EXECUTIVE SUMMARY

This memorandum analyzes the directors' and officers' liability insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") with respect to coverage for regulatory investigations by federal and state agencies. The analysis focuses on investigations by the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), and state attorneys general, which represent the most likely sources of regulatory inquiry given Nexford's industrial manufacturing operations, product-safety history, and current litigation exposure.

We have reviewed all five layers of the D&O tower for the current policy period of July 1, 2021 through July 1, 2022, which are structured as follows:

The total tower aggregate limit is $55,000,000 with a total annual premium of $1,363,450, representing a rate-on-line of approximately 2.48%.

Key Finding. Our analysis has identified a significant potential gap in coverage arising from the Vandermeer National primary policy's definition of "Claim." As currently drafted, that definition appears to require the filing or commencement of a formal proceeding before coverage is triggered. This formulation may exclude from the definition of "Claim" — and therefore from coverage — a range of informal regulatory inquiries that typically precede formal proceedings, including OSHA information requests, CPSC preliminary staff inquiries and Section 15(b) mandatory reporting demands, and state attorney general civil investigative demands ("CIDs"). Because these informal investigative actions represent the earliest and often the most critical stages of a regulatory investigation — when the Company's directors and officers must retain counsel, gather and produce documents, prepare for interviews, and develop response strategies — the exclusion of these activities from coverage creates a meaningful gap in D&O protection.

This gap is particularly concerning in Nexford's circumstances. The Company operates through three manufacturing subsidiaries — Nexford Conveyor Systems, LLC ("NCS"), Triton Fastener Corp. ("Triton"), and Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management") — in sectors subject to heightened regulatory scrutiny for workplace safety and product quality. Approximately 42,000 stock-keeping units are shipped annually across these subsidiaries. Two recent product-safety incidents (Triton's voluntary product recall in March 2020 and NCS's advisory notice in August 2020) have already established regulatory contact history with CPSC. Two pending product-liability lawsuits — Higgins v. Nexford Conveyor Systems, LLC et al. (Will County Circuit Court) and Consolidated Builders Supply Co. v. Triton Fastener Corp. (N.D. Ill.) — involve allegations of product defects that could prompt regulatory "piggyback" investigations by OSHA, CPSC, or state attorneys general.

Recommendation. We recommend that the Company, through its broker of record Ashford Breckinridge, negotiate a broadening of the "Claim" definition at the upcoming July 1, 2022 renewal to expressly encompass informal investigations, subpoenas, civil investigative demands, document requests, and regulatory inspections directed at individual directors and officers. This recommendation, along with supporting fallback strategies and related action items, is detailed in Part IX of this memorandum and has been incorporated as a negotiation priority in the Renewal Negotiation Points Memorandum dated June 13, 2022.

II. BACKGROUND AND CONTEXT

A. Nexford's Operational Profile and Regulatory Exposure

Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. For fiscal year 2021, the Company reported consolidated revenue of approximately $1.42 billion and EBITDA of approximately $218 million, as reflected in audited financial statements prepared by Pemberton & Associates CPAs, LLP. Nexford is a portfolio company of Veltrano Capital Partners Fund IV, LP ("Veltrano" or the "Sponsor"), which holds a 68.5% majority equity interest. Management rollover equity accounts for approximately 19.3% of the capital structure, with co-investors holding the remaining 12.2%.

The Company's board of directors consists of nine members: four independent directors and five directors appointed by Veltrano pursuant to the terms of the Stockholders' Agreement dated September 14, 2018, as amended. The Board is chaired by Gerald "Gerry" Whitcomb, a Veltrano Managing Director.

Nexford conducts its manufacturing operations through three wholly owned operating subsidiaries, each of which presents a distinct regulatory exposure profile:

Nexford Conveyor Systems, LLC ("NCS"). NCS is a Delaware limited liability company operating a 440,000-square-foot manufacturing facility in Joliet, Illinois, with approximately 1,200 employees. NCS designs, manufactures, and distributes heavy-duty belt and roller conveyor systems primarily for grain processing, mining, and general industrial applications. NCS represents the largest segment of Nexford's business, accounting for approximately 56% of consolidated revenue, or $795.2 million in FY2021. NCS's products and operations are subject to OSHA machine guarding and lockout/tagout standards (29 C.F.R. §§ 1910.212, 1910.147), as well as CPSC oversight for product safety to the extent NCS products are used in settings accessible to consumers or where CPSC asserts overlapping jurisdiction. NCS's Joliet facility has been the subject of two OSHA programmed inspections within the last five years, both resolved without citation.

Triton Fastener Corp. ("Triton"). Triton is an Illinois corporation operating a 280,000-square-foot manufacturing facility in Rockford, Illinois, with approximately 650 employees. Triton manufactures industrial fasteners, structural bolts, and anchoring systems for the commercial construction industry. Triton accounts for approximately 28% of consolidated revenue, or $397.6 million in FY2021. Triton's products are subject to building code compliance oversight by state and local building authorities, CPSC safety standards applicable to hardware and fastener products, and the consumer protection jurisdiction of state attorneys general in every state where Triton's products are sold. Triton's Grade 8 hex bolt product line was the subject of a voluntary recall in March 2020, as discussed in Part II.B below.

Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"). Marlowe Asset Management is an Ohio corporation operating a 195,000-square-foot precision machining facility in Akron, Ohio, with approximately 380 employees. Marlowe Asset Management manufactures precision-machined components for the automotive and construction equipment industries. Marlowe Asset Management accounts for approximately 16% of consolidated revenue, or $227.2 million in FY2021. Marlowe Asset Management's operations are subject to OSHA workplace safety regulations, and its automotive components may be subject to National Highway Traffic Safety Administration ("NHTSA") oversight if they are deemed safety-critical components within the meaning of the National Traffic and Motor Vehicle Safety Act. Marlowe Asset Management also faces state regulatory oversight in Ohio and other states where its products are incorporated into end-use vehicles or equipment.

Across all three subsidiaries, approximately 42,000 SKUs are shipped annually to customers in all fifty states and internationally. The breadth of the Company's product distribution footprint means that regulatory inquiries could originate from any of the fifty states' attorneys general, any of the twenty-seven states operating their own OSHA-approved workplace safety plans, and multiple federal agencies.

B. Recent Product-Safety Incidents and Pending Litigation

Two recent product-safety incidents and two pending product-liability lawsuits form the factual backdrop that makes regulatory investigation coverage an urgent priority for the Company's D&O tower:

Triton Fastener Voluntary Recall (March 2020). On March 12, 2020, Triton initiated a voluntary recall of approximately 14,500 packages of Grade 8 hex bolts (Part Nos. TFC-HB8-1250 through TFC-HB8-1750) after internal quality assurance testing identified potential hardness inconsistencies in a production run manufactured between October and December 2019. The recall was coordinated with CPSC under its voluntary corrective action procedures. Total direct costs of the recall were approximately $1.1 million, including customer notifications, product retrieval, replacement shipments, and internal investigation expenses. The recall was resolved without the imposition of civil penalties by CPSC, but it established a regulatory contact history between Triton and CPSC staff that could facilitate faster initiation of any future inquiry. Importantly, CPSC staff retained jurisdiction to reopen the matter if additional information surfaces suggesting that the scope of the recall was insufficient or that Triton failed to comply with its mandatory reporting obligations under Section 15(b) of the Consumer Product Safety Act, 15 U.S.C. § 2064(b).

NCS Advisory Notice (August 2020). On August 7, 2020, NCS issued an advisory notice to approximately 230 customers concerning a potential issue with the emergency stop mechanism on its Model NCS-7200 belt conveyor system. The advisory notice recommended a field inspection and, if necessary, replacement of a specific relay component in the emergency stop circuit. Total direct costs were approximately $340,000. The advisory notice was issued on a voluntary basis and was not coordinated with CPSC or OSHA, although NCS's quality engineering team assessed at the time that the issue did not rise to the level of a reportable product defect. The decision not to file a Section 15(b) report with CPSC is itself a judgment that could be scrutinized in any subsequent regulatory investigation, and the adequacy of NCS's internal decision-making process on this point could become a focus of any CPSC inquiry.

_Higgins v. Nexford Conveyor Systems, LLC et al._ (Will County, Illinois). On September 14, 2021, Darren Higgins filed suit against NCS and Nexford Industrial Holdings Inc. in the Circuit Court of Will County, Illinois, Case No. 2021-L-04382, alleging that a defective emergency stop mechanism on a Model NCS-7200 conveyor system at a grain processing facility in Lockport, Illinois, caused a catastrophic crush injury resulting in the amputation of Mr. Higgins's right hand and forearm. The complaint alleges strict product liability, negligent design, negligent failure to warn, and breach of implied warranty, and seeks damages of $14.5 million. The case is in active discovery, with written discovery responses exchanged and depositions of NCS design engineers scheduled for July and August 2022. The allegations in Higgins directly implicate the same emergency stop mechanism that was the subject of the August 2020 advisory notice, creating a clear nexus between the pending litigation and any potential OSHA or CPSC investigation. This type of industrial accident — a catastrophic injury at a customer's facility involving the manufacturer's product — is precisely the scenario that can trigger an OSHA investigation of the manufacturer's design and safety testing protocols, particularly if OSHA determines that the product defect created a recognized hazard to workers at the end-user site.

_Consolidated Builders Supply Co. v. Triton Fastener Corp._ (N.D. Illinois). On November 2, 2021, Consolidated Builders Supply Co. filed suit against Triton in the United States District Court for the Northern District of Illinois, Case No. 1:21-cv-08914, alleging that Grade 8 hex bolts manufactured by Triton (from the same product line as the March 2020 recall, though from a different production run) suffered structural failure in a commercial building project in Naperville, Illinois, causing a partial wall collapse. The complaint alleges strict product liability, negligence, and breach of warranty, and seeks $6.8 million in property damage and business interruption losses. Triton's motion to dismiss was denied by Judge Alicia Moreno on February 11, 2022, and the case is now in the early stages of discovery. Although Consolidated Builders involves property damage rather than personal injury, the allegation that Triton's structural fasteners failed in a commercial construction application could prompt investigation by the Illinois Attorney General's office under the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.), particularly if the AG's office determines that Triton's quality control failures constitute unfair or deceptive practices affecting Illinois consumers and businesses.

Total Exposure. Total open product-liability reserves across both claims are $8.3 million. The five-year total incurred product-liability loss figure is $15.12 million, consisting of $4.72 million in paid losses, $8.3 million in case reserves, and $2.1 million in incurred-but-not-reported ("IBNR") reserves as estimated by Kessler Quinn Advisory Group in its actuarial analysis dated April 15, 2022.

The pendency of these two lawsuits significantly heightens the risk of regulatory "piggyback" investigations. It is well established that regulatory agencies monitor litigation filings, media reports, and mandatory incident reports as sources of information about potential safety hazards. An OSHA area director reviewing the Higgins complaint, for example, could initiate an inspection or investigation of NCS's product design and testing processes. Similarly, CPSC staff could open a new investigation into NCS's compliance with Section 15(b) reporting requirements, questioning whether the August 2020 advisory notice should have been filed as a formal report of a substantial product hazard. State attorneys general in Illinois or other states could issue CIDs seeking information about Triton's quality control procedures following the allegations in Consolidated Builders.

C. D&O Loss History

The Company's five-year D&O loss history is clean. Only one claim has been reported against the D&O tower during the current and preceding policy periods: a shareholder demand letter received in 2020 from a minority co-investor alleging that the Board failed to adequately supervise Triton's quality control processes in connection with the March 2020 recall. The demand letter was resolved without payment following a board investigation conducted under the supervision of the Audit Committee.

Zero paid losses have been incurred against the D&O tower to date. This clean claims history is a favorable factor in renewal negotiations and underscores the importance of proactively addressing the regulatory investigation coverage gap before a triggering event occurs. Once a claim is reported, the Company's leverage to negotiate improved policy terms is significantly diminished.

D. PE Sponsor Dynamics

The private equity ownership structure of Nexford creates additional dimensions of regulatory investigation exposure for the Company's directors and officers that warrant consideration in the D&O coverage analysis.

Veltrano Capital Partners Fund IV's 68.5% majority ownership and appointment of five of nine board members means that critical operational decisions — including decisions about capital expenditures for product safety, quality control staffing and investment, product recall timing and scope, and regulatory compliance programs — are substantially influenced by the Sponsor's representatives. In a regulatory investigation, federal and state regulators may scrutinize whether cost-reduction initiatives driven by the PE sponsor's return objectives contributed to product-safety failures. OSHA, CPSC, and state AGs have historically shown heightened interest in situations where corporate governance structures may have created incentives to prioritize short-term financial performance over safety and compliance.

The five Veltrano-appointed directors face personal regulatory exposure if investigators conclude that sponsor-driven cost pressures influenced safety-related decisions. The four independent directors face a different but equally significant risk: they may be questioned about whether they adequately exercised independent oversight over sponsor-influenced management decisions, particularly with respect to product safety, recall decisions, and regulatory compliance.

Additionally, Nexford has been evaluating a potential initial public offering in the 2023-2024 timeframe. An IPO would materially alter the Company's D&O exposure profile by adding SEC and FINRA regulatory oversight, Securities Act and Exchange Act liability, shareholder class action exposure, and the full panoply of public-company regulatory investigation risks. The pre-IPO planning process itself could generate regulatory inquiries if historical product-safety issues are disclosed in SEC filings and attract attention from the enforcement divisions of the SEC, CPSC, or state securities regulators. The current D&O tower review, including this memorandum's analysis of regulatory investigation coverage, should be understood as laying the groundwork for the more comprehensive restructuring of the D&O program that will be required in connection with any IPO.

The Side-A DIC policy issued by Harrington Specialty Insurance Co. (Policy No. HSI-DIC-2021-00342) is of critical importance in this context. The Side-A DIC is designed to provide a dedicated layer of personal protection for individual directors and officers when the underlying D&O tower is exhausted or unavailable. For the nine-member board — and particularly for the four independent directors, who may not have the personal financial resources to self-fund defense costs during protracted regulatory investigations — the Side-A DIC represents the last line of insurance protection.

III. RELEVANT REGULATORY AGENCIES AND INVESTIGATION TYPES

This Part identifies the federal and state regulatory agencies most likely to initiate investigations affecting Nexford's directors and officers, describes the types of investigations each agency conducts, and analyzes the stages of investigation that are relevant to the D&O "Claim" definition analysis.

A. Occupational Safety and Health Administration (OSHA)

OSHA, an agency within the U.S. Department of Labor, has jurisdiction over workplace safety at all three Nexford manufacturing facilities. OSHA administers and enforces the Occupational Safety and Health Act of 1970, 29 U.S.C. §§ 651-678, and the regulations promulgated thereunder, including machine guarding standards (29 C.F.R. § 1910.212), lockout/tagout procedures (29 C.F.R. § 1910.147), and general duty clause obligations (29 U.S.C. § 654(a)(1)).

Types of Investigations. OSHA conducts several types of workplace investigations, each of which follows a somewhat different procedural pathway:

• Programmed Inspections. These are routine inspections initiated by OSHA based on objective scheduling criteria, such as industry hazard data or establishment injury/illness rates. NCS's Joliet facility has been the subject of two programmed inspections within the last five years, both resolved without citation.

• Complaint-Based Inspections. OSHA investigates complaints filed by employees or their representatives alleging unsafe working conditions. These may begin with an informal telephone or letter inquiry to the employer before escalating to a full on-site inspection.

• Referral Inspections. OSHA may initiate an investigation based on referrals from other government agencies, media reports, or information obtained in the course of other inspections. The pending Higgins litigation, if it generates media coverage or if OSHA's area office becomes aware of the underlying facts through other channels, could serve as a referral trigger.

• Fatality and Catastrophe Investigations. OSHA requires employers to report all work-related fatalities within eight hours and all in-patient hospitalizations, amputations, and losses of an eye within twenty-four hours. 29 C.F.R. § 1904.39. The crush injury alleged in Higgins — which resulted in a traumatic amputation — would likely have triggered mandatory reporting by the grain processing facility (as the employer), and could prompt OSHA to investigate not only the employer but also NCS as the manufacturer of the allegedly defective equipment.

Investigation Stages. A typical OSHA investigation progresses through the following stages, each of which has distinct implications for D&O coverage:

1. Informal Inquiry / Information Request. OSHA's area director may send a letter or make a telephone inquiry requesting information about a company's products, safety testing protocols, or quality control procedures. This is the earliest and least formal stage of interaction.

2. Formal Inspection. An OSHA compliance safety and health officer ("CSHO") conducts an on-site inspection, which may include a review of records, interviews of employees and management, and physical inspection of equipment or facilities.

3. Citation and Notification of Penalty. If the CSHO identifies violations, OSHA issues citations and proposes penalties. Citations may be classified as "other-than-serious," "serious," "willful," or "repeat."

4. Contest / Settlement. The employer or cited party may contest citations before the Occupational Safety and Health Review Commission ("OSHRC"), an independent adjudicatory body.

Key D&O Coverage Question. The critical question for D&O coverage purposes is: At what stage does an OSHA action constitute a "Claim" under the D&O policies? Under the current Vandermeer primary policy definition, coverage likely does not attach until at least Stage 3 (issuance of a citation, which could be characterized as an "administrative proceeding commenced by filing"), and potentially not until Stage 4 (a contested proceeding before OSHRC). Stages 1 and 2 — where the Company and its directors and officers must retain counsel, respond to information requests, and prepare for and participate in inspections — likely fall outside the current definition.

Personal Exposure of Directors and Officers. OSHA penalties for willful violations can reach $156,259 per violation under 2022 adjusted penalty levels. More significantly, OSHA can refer cases to the U.S. Department of Justice for criminal prosecution of corporate officers under Section 17(e) of the OSH Act, 29 U.S.C. § 666(e), which provides for fines and imprisonment of up to six months for willful violations that result in death. While criminal prosecution of corporate officers under Section 17(e) is relatively rare, the statute has been used and its availability provides leverage to OSHA in investigations. The possibility of criminal referral underscores the importance of D&O coverage for defense costs at the earliest stages of an OSHA investigation.

Additionally, OSHA may investigate NCS not only in its capacity as an employer at the Joliet facility but also as a manufacturer whose products allegedly caused workplace injury at a customer's site. The Higgins facts — a conveyor system with an allegedly defective emergency stop mechanism at a grain processing facility — present precisely this scenario. If OSHA determines that NCS's product design created a recognized hazard at the end-user facility, NCS's directors and officers could face scrutiny regarding their oversight of product design, safety testing, and the decision-making process surrounding the August 2020 advisory notice.

B. Consumer Product Safety Commission (CPSC)

The CPSC is an independent federal agency with jurisdiction over the safety of consumer products under the Consumer Product Safety Act ("CPSA"), 15 U.S.C. §§ 2051-2089, and related statutes. The CPSC's jurisdiction is directly relevant to Nexford's products to the extent they qualify as "consumer products" under the CPSA, which defines the term broadly to include any article produced or distributed for sale to, or for the personal use, consumption, or enjoyment of, a consumer. 15 U.S.C. § 2052(a)(5).

While Nexford's products are primarily industrial and commercial in nature, the boundary between commercial and consumer products is not always clear-cut. Conveyor components sold to industrial end-users may in some cases be incorporated into systems accessible to consumers (e.g., conveyor systems in retail distribution centers or agricultural facilities open to the public). Industrial fasteners sold for commercial construction may be used in residential applications. The CPSC has historically asserted jurisdiction over products that straddle the commercial-consumer boundary, and Nexford cannot assume that its products will be deemed outside CPSC's jurisdictional reach in all circumstances.

Types of Actions. CPSC's investigative and enforcement actions relevant to Nexford include:

• Section 15(b) Reporting. Under 15 U.S.C. § 2064(b), manufacturers, importers, distributors, and retailers must immediately notify the CPSC when they obtain information reasonably supporting the conclusion that a product fails to comply with an applicable consumer product safety rule, contains a defect that could create a substantial product hazard, or creates an unreasonable risk of serious injury or death. Triton's March 2020 voluntary recall was coordinated with CPSC under these provisions. A Section 15(b) reporting demand from CPSC staff — even if framed as a request for "additional information" — imposes substantial compliance obligations and typically requires immediate engagement of regulatory counsel.

• Preliminary Determination of Substantial Product Hazard. If CPSC staff determines that a product presents a substantial product hazard, the Commission may issue a preliminary determination under 15 U.S.C. § 2064(c)-(d), which triggers a formal adjudicative process.

• Recall Negotiations. The vast majority of product recalls are conducted on a "voluntary" basis through negotiated corrective action plans with CPSC staff. These negotiations can be extended and resource-intensive.

• Civil Penalty Proceedings. The CPSC may seek civil penalties for violations of reporting requirements, safety standards, or Commission orders. Civil penalties can reach $120,000 per violation and $17.15 million for a related series of violations (2022 figures, adjusted for inflation under 16 C.F.R. § 1119.4).

Investigation Stages. A typical CPSC investigation progresses through the following stages:

1. Information Request / Subpoena. CPSC staff may issue an informal letter requesting information or, if necessary, a subpoena compelling production of documents or testimony.

2. Staff Investigation. CPSC compliance staff investigates the reported hazard, which may include testing of the product, review of incident reports, and interviews of company personnel.

3. Preliminary Determination. If staff concludes that a substantial product hazard exists, the matter may be elevated to a preliminary determination, which initiates formal proceedings.

4. Consent Order / Litigation. The matter is resolved through a negotiated consent order (often including a corrective action plan and, in some cases, civil penalties) or through administrative litigation before the Commission.

D&O Coverage Issue. CPSC information requests, Section 15(b) demands, and subpoenas issued at Stages 1 and 2 typically precede any formal "proceeding." Under the current Vandermeer primary policy definition of "Claim," these pre-proceeding actions likely do not trigger coverage, even though they impose substantial compliance burdens and can generate significant legal costs. Triton's prior recall history and NCS's advisory notice have already established contact points with CPSC staff, making future CPSC inquiries more likely and potentially more targeted.

C. State Attorneys General

State attorneys general have broad investigative and enforcement authority over consumer protection, product safety, and unfair or deceptive trade practices under their respective state consumer protection statutes. Given Nexford's multi-state product distribution, the Company and its directors and officers are potentially subject to investigation by the attorney general of any state in which Nexford's products are sold or used.

Investigation Types. State AG investigations relevant to Nexford include:

• Civil Investigative Demands (CIDs). CIDs are the primary pre-litigation investigative tool available to state attorneys general. A CID is a formal demand, issued under statutory authority, compelling the production of documents, answers to interrogatories, or oral testimony. CIDs are issued before any complaint or proceeding is filed — they are investigative instruments, not litigation documents.

• Subpoenas. In some states, the AG may issue administrative subpoenas for documents or testimony in connection with an investigation.

• Informal Inquiries. AG offices may initiate contact through informal letters or telephone inquiries, particularly when they are assessing whether to open a formal investigation.

• Multistate Investigations. State AGs frequently coordinate investigations across multiple states, often through the National Association of Attorneys General. A product-safety issue affecting products sold in multiple states could generate a coordinated multistate investigation that imposes far greater compliance burdens than a single-state inquiry.

Relevant States. The states with the most direct jurisdictional interest in Nexford's operations and products include:

• Illinois: Headquarters of Nexford and location of NCS (Joliet) and Triton (Rockford) manufacturing facilities. The Illinois AG has enforcement authority under the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.), which broadly prohibits unfair or deceptive acts or practices in the conduct of trade or commerce.

• Ohio: Location of Marlowe Asset Management's Akron manufacturing facility. The Ohio AG has enforcement authority under the Ohio Consumer Sales Practices Act (O.R.C. §§ 1345.01-1345.13).

• All other states where products are sold: Given that Nexford's products are distributed nationally, the AG of any state could assert jurisdiction over a product-safety investigation.

D&O Coverage Issue. State AG CIDs are quintessential pre-litigation investigative tools. They are issued under statutory authority, carry the force of law, and impose immediate compliance obligations — but they do not constitute the "filing of a complaint" or the "commencement of a proceeding." Under the current Vandermeer primary policy definition of "Claim," which appears to require a formal proceeding, a state AG CID likely does not trigger D&O coverage. This is a critical gap because responding to a multistate CID campaign can generate legal costs in the range of $500,000 to $3 million or more, depending on the scope and complexity of the demands.

D. Other Potential Regulatory Bodies

While this memorandum focuses on OSHA, CPSC, and state AGs as the most likely sources of regulatory investigation given Nexford's operations and recent claims history, we note for completeness that other regulatory bodies could potentially become involved:

• National Highway Traffic Safety Administration (NHTSA). If Marlowe Asset Management's precision-machined automotive components are deemed safety-critical — for example, steering components, brake system parts, or structural frame elements — NHTSA could assert jurisdiction under the National Traffic and Motor Vehicle Safety Act, 49 U.S.C. §§ 30101-30170. NHTSA investigations follow a similar progression from preliminary inquiry to formal investigation to recall demand.

• Environmental Protection Agency (EPA). If Nexford's manufacturing processes at any of its three facilities implicate environmental regulations — such as the Clean Air Act, the Resource Conservation and Recovery Act, or the Toxic Substances Control Act — the EPA or state environmental agencies could initiate investigations that create D&O exposure.

• State OSHA-Plan States. Twenty-seven states operate their own OSHA-approved workplace safety programs, which may have broader jurisdiction or more aggressive enforcement postures than federal OSHA. Ohio operates a state OSHA plan through the Ohio Bureau of Workers' Compensation, Division of Safety and Hygiene, which could initiate investigations at Marlowe Asset Management's Akron facility.

The analysis of "Claim" definitions and coverage gaps presented in this memorandum applies with equal force to investigations by these additional agencies. However, the detailed analysis in Parts IV through VI focuses on OSHA, CPSC, and state AGs as the primary regulatory risk vectors for Nexford's current exposure profile.

IV. ANALYSIS OF "CLAIM" DEFINITIONS ACROSS THE D&O TOWER

The central coverage issue identified in this memorandum turns on the definition of "Claim" in each layer of the D&O tower. D&O policies are "claims-made" policies: coverage is triggered by the making of a "Claim" during the policy period. If a regulatory investigation does not meet the policy's definition of "Claim," no coverage is available — regardless of the magnitude of defense costs incurred or the severity of the regulatory exposure facing individual directors and officers. This Part analyzes the "Claim" definition in each of the five layers of the D&O tower.

A. Vandermeer National Insurance Company — Primary Layer (Policy No. VNI-DO-2021-88473)

The Vandermeer National primary policy defines "Claim" in Section II.F as follows:

"Claim means: (i) a written demand for monetary or non-monetary relief made against any Insured Person; (ii) a civil, criminal, administrative, or regulatory proceeding commenced by the filing of a complaint, notice of charges, formal investigative order, or similar document, against any Insured Person, including any appeal therefrom; or (iii) a criminal proceeding commenced by the return of an indictment or the filing of an information or similar document against any Insured Person."

This definition contains three distinct prongs, each triggered by a specific type of event:

Prong (i): Written Demand. This prong covers written demands for monetary or non-monetary relief. A demand letter from a private party, a shareholder demand, or a regulatory demand for specific remedial action (such as a product recall) would likely fall within this prong. However, an OSHA information request, a CPSC preliminary inquiry letter, or a state AG CID is not typically framed as a "demand for relief" — rather, these documents demand information in the course of an investigation. The distinction between a demand for relief and a demand for information is critical and represents the first gap in the definition.

Prong (ii): Proceeding Commenced by Filing. This prong covers proceedings "commenced by the filing of a complaint, notice of charges, formal investigative order, or similar document." The operative language is "commenced by the filing." While the prong includes "formal investigative order" — which could encompass some CPSC formal proceedings or SEC formal orders of investigation — it requires that a "proceeding" be "commenced by filing." Informal OSHA information requests, CPSC preliminary staff inquiries, and state AG CIDs are generally not considered to "commence" a "proceeding" in the sense contemplated by this language. A CID, for example, is an investigative tool that precedes and may or may not lead to the commencement of a proceeding. An OSHA inspection is an administrative action, but it is not typically characterized as a "proceeding commenced by filing."

The phrase "or similar document" at the end of Prong (ii) provides some elasticity, but courts have generally interpreted "similar document" in the context of the enumerated examples — i.e., documents that, like complaints, notices of charges, and formal investigative orders, represent the formal commencement of an adversarial proceeding. See, e.g., ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 2013 MT 152, ¶ 22 (applying ejusdem generis canon to interpret "similar document" in claims-made policy); Minuteman Int'l, Inc. v. Aldermere Assurance, No. 03 C 6067, 2004 WL 603482, at *4 (N.D. Ill. Mar. 22, 2004) (holding that informal agency inquiry did not constitute "proceeding" within meaning of D&O policy).

Prong (iii): Criminal Proceeding. This prong covers criminal proceedings commenced by indictment or information. This is relevant to potential OSHA criminal referrals under OSH Act § 17(e), but only after a grand jury returns an indictment or a prosecutor files an information — the investigation preceding indictment would not be covered.

Gap Identified. Under this definition, the following categories of regulatory action appear to fall outside the definition of "Claim":

• OSHA informal information requests prior to formal inspection

• OSHA complaint-based inquiries and referral inquiries at the preliminary stage

• CPSC Section 15(b) mandatory reporting demands and preliminary staff inquiries

• CPSC administrative subpoenas issued in the course of staff investigations

• State AG civil investigative demands (CIDs)

• State AG informal inquiry letters or telephone contacts

• Informal "voluntary" interviews or document requests by any regulatory body

• Grand jury subpoenas or target letters issued before the return of an indictment

This exclusion of pre-proceeding regulatory actions creates what we term a "precursor gap." The precursor gap is significant because the earliest stages of a regulatory investigation — when the Company's directors and officers must retain experienced regulatory counsel, gather and review potentially millions of pages of documents, prepare employees for interviews, develop response strategies, and make critical decisions about cooperation and disclosure — are often the most expensive and consequential stages. Defense costs incurred during the precursor phase can be substantial: for a complex OSHA or CPSC investigation, pre-formal-proceeding response costs can range from $250,000 to $2 million or more, depending on the scope and complexity of the inquiry and the number of directors and officers who require separate representation.

Comparison with Market-Leading D&O Policy Forms. The Vandermeer definition is narrower than current market-standard D&O policy forms used by many leading carriers for industrial companies with $1 billion or more in revenue. Many current D&O policies define "Claim" to include one or more of the following formulations:

• "a formal or informal investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, investigative order, or subpoena"

• "the receipt by an Insured Person of a subpoena, civil investigative demand, target letter, or similar document in connection with a governmental investigation"

• "a regulatory investigation of an Insured Person" (the broadest formulation, requiring no specific triggering document)

Some carriers offer these broader formulations as part of the base policy form; others offer them through regulatory investigation coverage endorsements, sometimes subject to a sub-limit. The availability of broader "Claim" definitions in the market supports the recommendation that Nexford negotiate such language at the July 1, 2022 renewal.

Self-Insured Retention. The Vandermeer primary policy imposes a $1,000,000 self-insured retention on entity coverage (Coverage B) and on entity securities coverage (Coverage C, if applicable). Side-A coverage (Coverage A) for individual directors and officers is not subject to an SIR. However, the SIR issue is secondary to the definitional issue: if a regulatory investigation does not constitute a "Claim," the SIR is never reached because there is no covered loss to which the SIR could apply.

B. Commonwealth Indemnity Group — 1st Excess ($10M xs $10M)

The Commonwealth Indemnity Group first excess policy (Policy No. CIG-XS-2021-11205) is structured as a follow-form excess policy that "follows the terms, conditions, definitions, and exclusions of the Underlying Insurance" as defined in the Commonwealth policy, subject to certain specified exceptions.

Follow-Form Analysis. Section I of the Commonwealth excess policy states that the policy "shall follow the form" of the Vandermeer primary policy, "except as otherwise provided herein." We have reviewed the Commonwealth policy for any provisions that modify or override the Vandermeer definition of "Claim." The Commonwealth policy does not contain its own independent definition of "Claim" and does not include any endorsement or amendment that would broaden or narrow the Vandermeer definition.

Accordingly, the Commonwealth excess layer incorporates the Vandermeer definition of "Claim" by reference, including all of the limitations and gaps identified in Part IV.A above. Informal regulatory inquiries that do not constitute a "Claim" under the Vandermeer primary will also not constitute a "Claim" under the Commonwealth excess.

Attachment Point. As a practical matter, the Commonwealth excess layer attaches only after exhaustion of the $10 million Vandermeer primary limit by payment of covered losses. If the Vandermeer primary does not cover regulatory investigation costs because the investigation does not meet the definition of "Claim," the primary limit will not be eroded by those costs, and the Commonwealth excess layer will never be reached — regardless of the Commonwealth policy's own terms. This means that even if Commonwealth's follow-form language were somehow interpreted to encompass a broader definition of "Claim" (which we do not believe is the case), the attachment point condition would independently prevent coverage from being triggered.

Consistency Concern. The strict follow-form approach of the Commonwealth excess policy ensures consistency of coverage across the first two layers of the tower. However, this consistency is a double-edged sword: it means that the precursor gap identified in the Vandermeer definition of "Claim" flows through to the first excess layer without correction. Any broadening of the "Claim" definition negotiated at the primary level should be carried through to the Commonwealth excess by operation of its follow-form provision, but this should be confirmed with the carrier at renewal.

C. Graystone Mutual Assurance Co. — 2nd Excess ($10M xs $20M)

The Graystone Mutual Assurance Co. second excess policy (Policy No. GMA-XS-2021-77490) is also structured as a follow-form excess policy, incorporating the terms and conditions of the Vandermeer primary. Our analysis of the Graystone policy is consistent with the analysis of the Commonwealth excess in Part IV.B: Graystone does not independently define "Claim" and follows the Vandermeer definition by reference, subject to the same precursor gap.

Renewal Consideration. We understand from the Renewal Negotiation Points Memorandum dated June 13, 2022, that Graystone is being replaced at the July 1, 2022 renewal by Northfield Excess Insurance Company. The replacement of the second excess carrier presents a valuable opportunity: Nexford and Ashford Breckinridge should ensure that the Northfield replacement policy's "Claim" definition is consistent with any broadened definition negotiated at the Vandermeer primary level, and, if possible, that the Northfield policy includes its own broad definition of "Claim" as an independent safeguard against follow-form interpretation disputes.

Notwithstanding the upcoming replacement, the Graystone policy remains in effect for the 2021-2022 policy period and provides coverage for claims first made during that period. If a regulatory investigation is initiated before July 1, 2022, the Graystone policy's "Claim" definition — with the precursor gap — would apply to that investigation.

D. Pinnacle Re Insurance Ltd. — 3rd Excess ($10M xs $30M)

The Pinnacle Re Insurance Ltd. third excess policy (Policy No. PRI-XS-2021-BM-4419) presents additional complexity because Pinnacle Re is a Bermuda-domiciled carrier. The Pinnacle Re policy is written on a manuscript excess form rather than a standard follow-form endorsement.

Follow-Form Analysis. Section 2.1 of the Pinnacle Re policy provides that the policy "shall follow the form and be subject to the same terms, conditions, limitations, and exclusions (except as herein specifically provided)" as the Vandermeer primary. However, the Pinnacle Re policy contains several provisions that deviate from the Vandermeer form, including choice of law and dispute resolution provisions. The definition of "Claim" is not independently defined in the Pinnacle Re policy, and the follow-form language appears to incorporate the Vandermeer definition.

Bermuda-Form Considerations. The Pinnacle Re policy specifies that it shall be governed by the laws of Bermuda, with disputes to be resolved by arbitration in Hamilton, Bermuda. Bermuda law on insurance coverage issues differs from U.S. law in certain respects, and the application of Bermuda law to the interpretation of U.S. D&O policy terms — including the definition of "Claim" in the context of U.S. regulatory investigations — introduces uncertainty. Bermuda courts and arbitrators may interpret the "proceeding commenced by filing" language differently than U.S. courts. While we are not aware of Bermuda case law specifically addressing this issue, the potential for divergent interpretation is a risk factor.

Regulatory Investigation Limitations. Some Bermuda-form excess policies contain specific limitations on coverage for regulatory investigations conducted by non-Bermuda regulatory agencies. We have not identified such a limitation in the Pinnacle Re policy, but the manuscript nature of the policy and the Bermuda choice of law provision warrant continued attention.

Choice of Law and Dispute Resolution. If a coverage dispute were to arise regarding whether a U.S. regulatory investigation constitutes a "Claim" under the Pinnacle Re policy, the dispute would be resolved by Bermuda arbitration under Bermuda law. This introduces both procedural and substantive uncertainty that is absent from the U.S.-domiciled layers of the tower.

E. Harrington Specialty Insurance Co. — Side-A DIC (Policy No. HSI-DIC-2021-00342, $15M Dedicated)

The Harrington Specialty Insurance Co. Side-A Difference in Conditions ("DIC") policy is a dedicated personal-liability policy for individual directors and officers that is designed to respond when the underlying D&O tower fails to cover or is financially exhausted. The Side-A DIC carries a $15 million limit (with a recommendation to increase to $20 million at renewal, per our Side-A DIC Policy Analysis Memorandum dated June 3, 2022) and is not subject to an SIR.

Independent Definition of "Claim." Unlike the follow-form excess policies in the tower, the Harrington Side-A DIC contains its own independent definition of "Claim" in Section 2(d):

"Claim means: (i) any written demand for monetary damages or non-monetary relief; (ii) any civil, criminal, administrative, regulatory, or arbitration proceeding for monetary damages or non-monetary relief, commenced by the service of a complaint, filing of a charge, return of an indictment, or similar document; (iii) any formal civil, criminal, or regulatory investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, formal investigative order, or subpoena; or (iv) any written request by an Insured Person to the Company for indemnification or advancement of Defense Costs in connection with any matter described in clauses (i) through (iii)."

The Harrington definition is meaningfully broader than the Vandermeer primary definition. Prong (iii) of the Harrington definition expressly includes "any formal civil, criminal, or regulatory investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, formal investigative order, or subpoena." This language would cover, inter alia, OSHA formal inspections commenced by issuance of an inspection notice, CPSC investigations commenced by issuance of a subpoena or formal investigative order, and state AG investigations commenced by issuance of a CID (which is functionally equivalent to a subpoena).

However, the Harrington definition is still narrower than the broadest market formulations in two respects. First, it is limited to "formal" investigations — informal inquiries, preliminary information requests, and voluntary interview requests that do not involve a "notice of investigation, formal investigative order, or subpoena" would still fall outside the definition. Second, the definition requires that the investigation be "of an Insured Person" — an investigation of the Company that incidentally creates personal exposure for directors and officers may not qualify unless individual directors or officers are specifically named or targeted.

DIC Trigger Analysis. The critical question is whether the Harrington Side-A DIC will "drop down" to provide coverage for regulatory investigation defense costs if the underlying D&O tower's "Claim" definition excludes such matters. The DIC trigger provisions are set forth in Section 5 of the Harrington policy:

"This Policy shall provide the coverages set forth herein in the event that:

(a) the Underlying Insurance fails or is unable to advance or pay Defense Costs or indemnify Loss due to the financial insolvency or receivership of the issuer of the Underlying Insurance;

(b) the Company fails or refuses to indemnify or advance Defense Costs to an Insured Person for a Claim that is covered by this Policy;

(c) the Underlying Insurance fails to cover or excludes from coverage a Claim that is covered by this Policy, by reason of a term, condition, definition, or exclusion in the Underlying Insurance that is less favorable to the Insured Person than the corresponding provision of this Policy (a 'Difference in Conditions');

(d) the aggregate limit of liability of the Underlying Insurance is exhausted by payment of covered Loss."

Section 5(c) — the "Difference in Conditions" trigger — is directly relevant to the regulatory investigation coverage gap. If the Vandermeer primary definition of "Claim" is narrower than the Harrington definition (which it is, as demonstrated above), and if a regulatory investigation constitutes a "Claim" under the Harrington definition but not under the Vandermeer definition, then the DIC trigger in Section 5(c) should be activated, causing the Side-A DIC to drop down and provide coverage for individual directors' and officers' defense costs.

However, there are potential arguments that carriers could raise to resist this interpretation. Some carriers have argued that the DIC trigger requires a direct conflict between specific policy provisions — i.e., the Underlying Insurance must affirmatively "exclude" the claim, rather than simply fail to include it within its definition of "Claim." Under this reading, a narrower definition of "Claim" in the underlying policy is not a "term, condition, definition, or exclusion" that is "less favorable" than the DIC policy — it is simply a different scope of coverage. We believe this argument is ultimately unpersuasive under Delaware and Illinois law, but it introduces litigation risk.

Recommendation. To eliminate ambiguity, we recommend negotiating with Harrington Specialty at the July 1, 2022 renewal to add a specific DIC trigger for regulatory investigation coverage that expressly provides:

"The Difference in Conditions trigger set forth in Section 5(c) shall apply, without limitation, in the event that the Underlying Insurance defines 'Claim' in a manner that does not include any investigation, inquiry, subpoena, civil investigative demand, or similar regulatory action that would constitute a 'Claim' under this Policy."

This clarifying language would remove any doubt about the Side-A DIC's obligation to drop down for regulatory investigation defense costs.

Board-Level Significance. The Side-A DIC's role as the ultimate backstop for individual directors and officers makes the DIC trigger analysis particularly important for Nexford's nine-member board. The four independent directors — who serve on the board to provide oversight and who may not have the personal financial resources to self-fund defense costs during a protracted regulatory investigation — are the primary beneficiaries of the Side-A DIC. If the DIC does not clearly drop down for regulatory investigation costs, independent directors may face a period during the pre-formal-proceeding phase of an investigation when neither the Company's indemnification obligations nor the D&O insurance program provides coverage for their defense costs. This gap could affect Nexford's ability to recruit and retain qualified independent directors.

V. TYPES OF REGULATORY INVESTIGATION COSTS AND COVERAGE ANALYSIS

This Part analyzes the specific categories of costs that may arise in connection with a regulatory investigation and assesses the D&O tower's coverage for each category.

A. Defense Costs in Formal Proceedings

Once a regulatory investigation crosses the threshold into a formal "proceeding" that satisfies the Vandermeer definition of "Claim" — e.g., an OSHA citation and contest proceeding before OSHRC, a CPSC formal administrative proceeding, or a state AG enforcement action commenced by filing of a complaint — defense costs are generally available under all layers of the D&O tower, subject to applicable SIRs, exclusions, and per-claim and aggregate limits.

The D&O tower provides advancement of defense costs rather than a duty to defend. Under a duty-to-advance structure, the insurer pays defense costs as they are incurred, subject to a right of recoupment if it is ultimately determined that the costs were not covered. This distinction is significant in the regulatory investigation context because it ensures that directors and officers receive funds to pay their attorneys as the investigation proceeds, rather than waiting until the conclusion of the investigation for reimbursement. The Vandermeer primary policy's defense cost advancement provision (Section VII.A) requires the insurer to advance defense costs within thirty days of receipt of invoices that it does not dispute.

However, allocation issues arise when a regulatory investigation targets both the Company (as an entity) and individual directors and officers. Under the Vandermeer primary policy, entity coverage (Coverage B) is subject to a $1 million SIR, while individual coverage (Coverage A) is not. If a regulatory investigation generates defense costs that are attributable to both entity-level and individual-level exposure, the parties must allocate those costs between covered and potentially uncovered components. The Vandermeer policy's allocation provision (Section VII.C) provides for allocation "based on the relative legal exposure of the parties," which is inherently subjective and could generate disputes with the carrier.

B. Pre-Investigation / Informal Inquiry Response Costs

This category represents the primary coverage gap identified in this memorandum. Pre-investigation and informal inquiry response costs include:

• Retaining and consulting with regulatory counsel experienced in OSHA, CPSC, or state AG matters

• Conducting initial internal fact-gathering to assess the scope and seriousness of the regulatory inquiry

• Collecting, reviewing, and producing documents responsive to information requests, subpoenas, or CIDs

• Preparing Company personnel (including directors and officers) for regulatory interviews

• Developing a response strategy, including decisions about cooperation, privilege assertions, and voluntary disclosures

• Engaging technical experts to assess product-safety issues

• Coordinating with the Company's product-liability defense team regarding overlapping factual issues

These costs can be substantial. Based on our experience and market data, the cost of responding to a complex OSHA or CPSC investigation from the initial information request through the pre-formal-proceeding stage typically ranges from $250,000 to $2 million or more, depending on the scope of the inquiry, the volume of documents at issue, the number of witnesses to be prepared, and the complexity of the technical product-safety issues involved. A multistate AG CID campaign can generate even higher costs, particularly if the Company must retain separate counsel in each state and produce state-specific document sets.

Under the current Vandermeer primary policy definition of "Claim," these pre-proceeding costs likely fall outside coverage. The costs are incurred before any "proceeding" is "commenced by filing," and the regulatory inquiry itself does not constitute a "written demand for monetary or non-monetary relief" within the meaning of the policy. This means that individual directors and officers who incur personal legal costs in responding to informal regulatory inquiries — for example, a director who retains personal counsel to prepare for an OSHA interview regarding his or her oversight of product-safety decisions — may have no insurance coverage for those costs under either the D&O tower or the Side-A DIC (depending on whether the DIC's "formal investigation" threshold is met).

This gap is particularly troubling from a corporate governance perspective. The earliest stages of a regulatory investigation are often the most critical for establishing the direction and tone of the Company's response. Decisions made during the pre-proceeding phase — about cooperation, document preservation, privilege assertions, and voluntary disclosures — can materially affect the outcome of the investigation. If directors and officers are deterred from retaining counsel during this phase because of uncertainty about insurance coverage, the quality of the Company's overall response may suffer.

C. Internal Investigation Costs

When a regulatory inquiry prompts the Company to conduct an internal investigation — whether at the direction of the Board, the Audit Committee, or outside counsel — the costs of that investigation raise a separate coverage question.

Internal investigation costs typically include fees and expenses of outside counsel conducting the investigation, fees of forensic accountants or technical consultants, and costs of document collection, review, and analysis. For a complex product-safety internal investigation, these costs can range from $500,000 to $5 million or more.

The Vandermeer primary policy defines "Loss" in Section II.L to mean "damages, judgments, settlements, pre-judgment and post-judgment interest, and Defense Costs." "Defense Costs" is defined in Section II.D as "reasonable and necessary fees, costs, and expenses incurred in the investigation, defense, or appeal of a Claim." The question is whether the costs of an internal investigation conducted by the Company (or on behalf of individual directors and officers) cons

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc.
CC: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc. Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc.
FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP Yuki Nakamura, Working Associate, Calderwood & Harkness LLP
DATE: June 14, 2022
RE: Analysis of D&O Tower Coverage for Regulatory Investigations — Nexford Industrial Holdings Inc. (Matter No. 1005-00003)
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I. EXECUTIVE SUMMARY
This memorandum analyzes the directors' and officers' liability insurance tower maintained by Nexford Industrial Holdings Inc. ("Nexford" or the "Company") with respect to coverage for regulatory investigations by federal and state agencies. The analysis focuses on investigations by the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), and state attorneys general, which represent the most likely sources of regulatory inquiry given Nexford's industrial manufacturing operations, product-safety history, and current litigation exposure.
We have reviewed all five layers of the D&O tower for the current policy period of July 1, 2021 through July 1, 2022, which are structured as follows:
The total tower aggregate limit is $55,000,000 with a total annual premium of $1,363,450, representing a rate-on-line of approximately 2.48%.
Key Finding. Our analysis has identified a significant potential gap in coverage arising from the Vandermeer National primary policy's definition of "Claim." As currently drafted, that definition appears to require the filing or commencement of a formal proceeding before coverage is triggered. This formulation may exclude from the definition of "Claim" — and therefore from coverage — a range of informal regulatory inquiries that typically precede formal proceedings, including OSHA information requests, CPSC preliminary staff inquiries and Section 15(b) mandatory reporting demands, and state attorney general civil investigative demands ("CIDs"). Because these informal investigative actions represent the earliest and often the most critical stages of a regulatory investigation — when the Company's directors and officers must retain counsel, gather and produce documents, prepare for interviews, and develop response strategies — the exclusion of these activities from coverage creates a meaningful gap in D&O protection.
This gap is particularly concerning in Nexford's circumstances. The Company operates through three manufacturing subsidiaries — Nexford Conveyor Systems, LLC ("NCS"), Triton Fastener Corp. ("Triton"), and Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management") — in sectors subject to heightened regulatory scrutiny for workplace safety and product quality. Approximately 42,000 stock-keeping units are shipped annually across these subsidiaries. Two recent product-safety incidents (Triton's voluntary product recall in March 2020 and NCS's advisory notice in August 2020) have already established regulatory contact history with CPSC. Two pending product-liability lawsuits — Higgins v. Nexford Conveyor Systems, LLC et al. (Will County Circuit Court) and Consolidated Builders Supply Co. v. Triton Fastener Corp. (N.D. Ill.) — involve allegations of product defects that could prompt regulatory "piggyback" investigations by OSHA, CPSC, or state attorneys general.
Recommendation. We recommend that the Company, through its broker of record Ashford Breckinridge, negotiate a broadening of the "Claim" definition at the upcoming July 1, 2022 renewal to expressly encompass informal investigations, subpoenas, civil investigative demands, document requests, and regulatory inspections directed at individual directors and officers. This recommendation, along with supporting fallback strategies and related action items, is detailed in Part IX of this memorandum and has been incorporated as a negotiation priority in the Renewal Negotiation Points Memorandum dated June 13, 2022.
II. BACKGROUND AND CONTEXT
A. Nexford's Operational Profile and Regulatory Exposure
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. For fiscal year 2021, the Company reported consolidated revenue of approximately $1.42 billion and EBITDA of approximately $218 million, as reflected in audited financial statements prepared by Pemberton & Associates CPAs, LLP. Nexford is a portfolio company of Veltrano Capital Partners Fund IV, LP ("Veltrano" or the "Sponsor"), which holds a 68.5% majority equity interest. Management rollover equity accounts for approximately 19.3% of the capital structure, with co-investors holding the remaining 12.2%.
The Company's board of directors consists of nine members: four independent directors and five directors appointed by Veltrano pursuant to the terms of the Stockholders' Agreement dated September 14, 2018, as amended. The Board is chaired by Gerald "Gerry" Whitcomb, a Veltrano Managing Director.
Nexford conducts its manufacturing operations through three wholly owned operating subsidiaries, each of which presents a distinct regulatory exposure profile:
Nexford Conveyor Systems, LLC ("NCS"). NCS is a Delaware limited liability company operating a 440,000-square-foot manufacturing facility in Joliet, Illinois, with approximately 1,200 employees. NCS designs, manufactures, and distributes heavy-duty belt and roller conveyor systems primarily for grain processing, mining, and general industrial applications. NCS represents the largest segment of Nexford's business, accounting for approximately 56% of consolidated revenue, or $795.2 million in FY2021. NCS's products and operations are subject to OSHA machine guarding and lockout/tagout standards (29 C.F.R. §§ 1910.212, 1910.147), as well as CPSC oversight for product safety to the extent NCS products are used in settings accessible to consumers or where CPSC asserts overlapping jurisdiction. NCS's Joliet facility has been the subject of two OSHA programmed inspections within the last five years, both resolved without citation.
Triton Fastener Corp. ("Triton"). Triton is an Illinois corporation operating a 280,000-square-foot manufacturing facility in Rockford, Illinois, with approximately 650 employees. Triton manufactures industrial fasteners, structural bolts, and anchoring systems for the commercial construction industry. Triton accounts for approximately 28% of consolidated revenue, or $397.6 million in FY2021. Triton's products are subject to building code compliance oversight by state and local building authorities, CPSC safety standards applicable to hardware and fastener products, and the consumer protection jurisdiction of state attorneys general in every state where Triton's products are sold. Triton's Grade 8 hex bolt product line was the subject of a voluntary recall in March 2020, as discussed in Part II.B below.
Marlowe Asset Management Precision Machining, Inc. ("Marlowe Asset Management"). Marlowe Asset Management is an Ohio corporation operating a 195,000-square-foot precision machining facility in Akron, Ohio, with approximately 380 employees. Marlowe Asset Management manufactures precision-machined components for the automotive and construction equipment industries. Marlowe Asset Management accounts for approximately 16% of consolidated revenue, or $227.2 million in FY2021. Marlowe Asset Management's operations are subject to OSHA workplace safety regulations, and its automotive components may be subject to National Highway Traffic Safety Administration ("NHTSA") oversight if they are deemed safety-critical components within the meaning of the National Traffic and Motor Vehicle Safety Act. Marlowe Asset Management also faces state regulatory oversight in Ohio and other states where its products are incorporated into end-use vehicles or equipment.
Across all three subsidiaries, approximately 42,000 SKUs are shipped annually to customers in all fifty states and internationally. The breadth of the Company's product distribution footprint means that regulatory inquiries could originate from any of the fifty states' attorneys general, any of the twenty-seven states operating their own OSHA-approved workplace safety plans, and multiple federal agencies.
B. Recent Product-Safety Incidents and Pending Litigation
Two recent product-safety incidents and two pending product-liability lawsuits form the factual backdrop that makes regulatory investigation coverage an urgent priority for the Company's D&O tower:
Triton Fastener Voluntary Recall (March 2020). On March 12, 2020, Triton initiated a voluntary recall of approximately 14,500 packages of Grade 8 hex bolts (Part Nos. TFC-HB8-1250 through TFC-HB8-1750) after internal quality assurance testing identified potential hardness inconsistencies in a production run manufactured between October and December 2019. The recall was coordinated with CPSC under its voluntary corrective action procedures. Total direct costs of the recall were approximately $1.1 million, including customer notifications, product retrieval, replacement shipments, and internal investigation expenses. The recall was resolved without the imposition of civil penalties by CPSC, but it established a regulatory contact history between Triton and CPSC staff that could facilitate faster initiation of any future inquiry. Importantly, CPSC staff retained jurisdiction to reopen the matter if additional information surfaces suggesting that the scope of the recall was insufficient or that Triton failed to comply with its mandatory reporting obligations under Section 15(b) of the Consumer Product Safety Act, 15 U.S.C. § 2064(b).
NCS Advisory Notice (August 2020). On August 7, 2020, NCS issued an advisory notice to approximately 230 customers concerning a potential issue with the emergency stop mechanism on its Model NCS-7200 belt conveyor system. The advisory notice recommended a field inspection and, if necessary, replacement of a specific relay component in the emergency stop circuit. Total direct costs were approximately $340,000. The advisory notice was issued on a voluntary basis and was not coordinated with CPSC or OSHA, although NCS's quality engineering team assessed at the time that the issue did not rise to the level of a reportable product defect. The decision not to file a Section 15(b) report with CPSC is itself a judgment that could be scrutinized in any subsequent regulatory investigation, and the adequacy of NCS's internal decision-making process on this point could become a focus of any CPSC inquiry.
_Higgins v. Nexford Conveyor Systems, LLC et al._ (Will County, Illinois). On September 14, 2021, Darren Higgins filed suit against NCS and Nexford Industrial Holdings Inc. in the Circuit Court of Will County, Illinois, Case No. 2021-L-04382, alleging that a defective emergency stop mechanism on a Model NCS-7200 conveyor system at a grain processing facility in Lockport, Illinois, caused a catastrophic crush injury resulting in the amputation of Mr. Higgins's right hand and forearm. The complaint alleges strict product liability, negligent design, negligent failure to warn, and breach of implied warranty, and seeks damages of $14.5 million. The case is in active discovery, with written discovery responses exchanged and depositions of NCS design engineers scheduled for July and August 2022. The allegations in Higgins directly implicate the same emergency stop mechanism that was the subject of the August 2020 advisory notice, creating a clear nexus between the pending litigation and any potential OSHA or CPSC investigation. This type of industrial accident — a catastrophic injury at a customer's facility involving the manufacturer's product — is precisely the scenario that can trigger an OSHA investigation of the manufacturer's design and safety testing protocols, particularly if OSHA determines that the product defect created a recognized hazard to workers at the end-user site.
_Consolidated Builders Supply Co. v. Triton Fastener Corp._ (N.D. Illinois). On November 2, 2021, Consolidated Builders Supply Co. filed suit against Triton in the United States District Court for the Northern District of Illinois, Case No. 1:21-cv-08914, alleging that Grade 8 hex bolts manufactured by Triton (from the same product line as the March 2020 recall, though from a different production run) suffered structural failure in a commercial building project in Naperville, Illinois, causing a partial wall collapse. The complaint alleges strict product liability, negligence, and breach of warranty, and seeks $6.8 million in property damage and business interruption losses. Triton's motion to dismiss was denied by Judge Alicia Moreno on February 11, 2022, and the case is now in the early stages of discovery. Although Consolidated Builders involves property damage rather than personal injury, the allegation that Triton's structural fasteners failed in a commercial construction application could prompt investigation by the Illinois Attorney General's office under the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.), particularly if the AG's office determines that Triton's quality control failures constitute unfair or deceptive practices affecting Illinois consumers and businesses.
Total Exposure. Total open product-liability reserves across both claims are $8.3 million. The five-year total incurred product-liability loss figure is $15.12 million, consisting of $4.72 million in paid losses, $8.3 million in case reserves, and $2.1 million in incurred-but-not-reported ("IBNR") reserves as estimated by Kessler Quinn Advisory Group in its actuarial analysis dated April 15, 2022.
The pendency of these two lawsuits significantly heightens the risk of regulatory "piggyback" investigations. It is well established that regulatory agencies monitor litigation filings, media reports, and mandatory incident reports as sources of information about potential safety hazards. An OSHA area director reviewing the Higgins complaint, for example, could initiate an inspection or investigation of NCS's product design and testing processes. Similarly, CPSC staff could open a new investigation into NCS's compliance with Section 15(b) reporting requirements, questioning whether the August 2020 advisory notice should have been filed as a formal report of a substantial product hazard. State attorneys general in Illinois or other states could issue CIDs seeking information about Triton's quality control procedures following the allegations in Consolidated Builders.
C. D&O Loss History
The Company's five-year D&O loss history is clean. Only one claim has been reported against the D&O tower during the current and preceding policy periods: a shareholder demand letter received in 2020 from a minority co-investor alleging that the Board failed to adequately supervise Triton's quality control processes in connection with the March 2020 recall. The demand letter was resolved without payment following a board investigation conducted under the supervision of the Audit Committee.
Zero paid losses have been incurred against the D&O tower to date. This clean claims history is a favorable factor in renewal negotiations and underscores the importance of proactively addressing the regulatory investigation coverage gap before a triggering event occurs. Once a claim is reported, the Company's leverage to negotiate improved policy terms is significantly diminished.
D. PE Sponsor Dynamics
The private equity ownership structure of Nexford creates additional dimensions of regulatory investigation exposure for the Company's directors and officers that warrant consideration in the D&O coverage analysis.
Veltrano Capital Partners Fund IV's 68.5% majority ownership and appointment of five of nine board members means that critical operational decisions — including decisions about capital expenditures for product safety, quality control staffing and investment, product recall timing and scope, and regulatory compliance programs — are substantially influenced by the Sponsor's representatives. In a regulatory investigation, federal and state regulators may scrutinize whether cost-reduction initiatives driven by the PE sponsor's return objectives contributed to product-safety failures. OSHA, CPSC, and state AGs have historically shown heightened interest in situations where corporate governance structures may have created incentives to prioritize short-term financial performance over safety and compliance.
The five Veltrano-appointed directors face personal regulatory exposure if investigators conclude that sponsor-driven cost pressures influenced safety-related decisions. The four independent directors face a different but equally significant risk: they may be questioned about whether they adequately exercised independent oversight over sponsor-influenced management decisions, particularly with respect to product safety, recall decisions, and regulatory compliance.
Additionally, Nexford has been evaluating a potential initial public offering in the 2023-2024 timeframe. An IPO would materially alter the Company's D&O exposure profile by adding SEC and FINRA regulatory oversight, Securities Act and Exchange Act liability, shareholder class action exposure, and the full panoply of public-company regulatory investigation risks. The pre-IPO planning process itself could generate regulatory inquiries if historical product-safety issues are disclosed in SEC filings and attract attention from the enforcement divisions of the SEC, CPSC, or state securities regulators. The current D&O tower review, including this memorandum's analysis of regulatory investigation coverage, should be understood as laying the groundwork for the more comprehensive restructuring of the D&O program that will be required in connection with any IPO.
The Side-A DIC policy issued by Harrington Specialty Insurance Co. (Policy No. HSI-DIC-2021-00342) is of critical importance in this context. The Side-A DIC is designed to provide a dedicated layer of personal protection for individual directors and officers when the underlying D&O tower is exhausted or unavailable. For the nine-member board — and particularly for the four independent directors, who may not have the personal financial resources to self-fund defense costs during protracted regulatory investigations — the Side-A DIC represents the last line of insurance protection.
III. RELEVANT REGULATORY AGENCIES AND INVESTIGATION TYPES
This Part identifies the federal and state regulatory agencies most likely to initiate investigations affecting Nexford's directors and officers, describes the types of investigations each agency conducts, and analyzes the stages of investigation that are relevant to the D&O "Claim" definition analysis.
A. Occupational Safety and Health Administration (OSHA)
OSHA, an agency within the U.S. Department of Labor, has jurisdiction over workplace safety at all three Nexford manufacturing facilities. OSHA administers and enforces the Occupational Safety and Health Act of 1970, 29 U.S.C. §§ 651-678, and the regulations promulgated thereunder, including machine guarding standards (29 C.F.R. § 1910.212), lockout/tagout procedures (29 C.F.R. § 1910.147), and general duty clause obligations (29 U.S.C. § 654(a)(1)).
Types of Investigations. OSHA conducts several types of workplace investigations, each of which follows a somewhat different procedural pathway:
• Programmed Inspections. These are routine inspections initiated by OSHA based on objective scheduling criteria, such as industry hazard data or establishment injury/illness rates. NCS's Joliet facility has been the subject of two programmed inspections within the last five years, both resolved without citation.
• Complaint-Based Inspections. OSHA investigates complaints filed by employees or their representatives alleging unsafe working conditions. These may begin with an informal telephone or letter inquiry to the employer before escalating to a full on-site inspection.
• Referral Inspections. OSHA may initiate an investigation based on referrals from other government agencies, media reports, or information obtained in the course of other inspections. The pending Higgins litigation, if it generates media coverage or if OSHA's area office becomes aware of the underlying facts through other channels, could serve as a referral trigger.
• Fatality and Catastrophe Investigations. OSHA requires employers to report all work-related fatalities within eight hours and all in-patient hospitalizations, amputations, and losses of an eye within twenty-four hours. 29 C.F.R. § 1904.39. The crush injury alleged in Higgins — which resulted in a traumatic amputation — would likely have triggered mandatory reporting by the grain processing facility (as the employer), and could prompt OSHA to investigate not only the employer but also NCS as the manufacturer of the allegedly defective equipment.
Investigation Stages. A typical OSHA investigation progresses through the following stages, each of which has distinct implications for D&O coverage:
1. Informal Inquiry / Information Request. OSHA's area director may send a letter or make a telephone inquiry requesting information about a company's products, safety testing protocols, or quality control procedures. This is the earliest and least formal stage of interaction.
2. Formal Inspection. An OSHA compliance safety and health officer ("CSHO") conducts an on-site inspection, which may include a review of records, interviews of employees and management, and physical inspection of equipment or facilities.
3. Citation and Notification of Penalty. If the CSHO identifies violations, OSHA issues citations and proposes penalties. Citations may be classified as "other-than-serious," "serious," "willful," or "repeat."
4. Contest / Settlement. The employer or cited party may contest citations before the Occupational Safety and Health Review Commission ("OSHRC"), an independent adjudicatory body.
Key D&O Coverage Question. The critical question for D&O coverage purposes is: At what stage does an OSHA action constitute a "Claim" under the D&O policies? Under the current Vandermeer primary policy definition, coverage likely does not attach until at least Stage 3 (issuance of a citation, which could be characterized as an "administrative proceeding commenced by filing"), and potentially not until Stage 4 (a contested proceeding before OSHRC). Stages 1 and 2 — where the Company and its directors and officers must retain counsel, respond to information requests, and prepare for and participate in inspections — likely fall outside the current definition.
Personal Exposure of Directors and Officers. OSHA penalties for willful violations can reach $156,259 per violation under 2022 adjusted penalty levels. More significantly, OSHA can refer cases to the U.S. Department of Justice for criminal prosecution of corporate officers under Section 17(e) of the OSH Act, 29 U.S.C. § 666(e), which provides for fines and imprisonment of up to six months for willful violations that result in death. While criminal prosecution of corporate officers under Section 17(e) is relatively rare, the statute has been used and its availability provides leverage to OSHA in investigations. The possibility of criminal referral underscores the importance of D&O coverage for defense costs at the earliest stages of an OSHA investigation.
Additionally, OSHA may investigate NCS not only in its capacity as an employer at the Joliet facility but also as a manufacturer whose products allegedly caused workplace injury at a customer's site. The Higgins facts — a conveyor system with an allegedly defective emergency stop mechanism at a grain processing facility — present precisely this scenario. If OSHA determines that NCS's product design created a recognized hazard at the end-user facility, NCS's directors and officers could face scrutiny regarding their oversight of product design, safety testing, and the decision-making process surrounding the August 2020 advisory notice.
B. Consumer Product Safety Commission (CPSC)
The CPSC is an independent federal agency with jurisdiction over the safety of consumer products under the Consumer Product Safety Act ("CPSA"), 15 U.S.C. §§ 2051-2089, and related statutes. The CPSC's jurisdiction is directly relevant to Nexford's products to the extent they qualify as "consumer products" under the CPSA, which defines the term broadly to include any article produced or distributed for sale to, or for the personal use, consumption, or enjoyment of, a consumer. 15 U.S.C. § 2052(a)(5).
While Nexford's products are primarily industrial and commercial in nature, the boundary between commercial and consumer products is not always clear-cut. Conveyor components sold to industrial end-users may in some cases be incorporated into systems accessible to consumers (e.g., conveyor systems in retail distribution centers or agricultural facilities open to the public). Industrial fasteners sold for commercial construction may be used in residential applications. The CPSC has historically asserted jurisdiction over products that straddle the commercial-consumer boundary, and Nexford cannot assume that its products will be deemed outside CPSC's jurisdictional reach in all circumstances.
Types of Actions. CPSC's investigative and enforcement actions relevant to Nexford include:
• Section 15(b) Reporting. Under 15 U.S.C. § 2064(b), manufacturers, importers, distributors, and retailers must immediately notify the CPSC when they obtain information reasonably supporting the conclusion that a product fails to comply with an applicable consumer product safety rule, contains a defect that could create a substantial product hazard, or creates an unreasonable risk of serious injury or death. Triton's March 2020 voluntary recall was coordinated with CPSC under these provisions. A Section 15(b) reporting demand from CPSC staff — even if framed as a request for "additional information" — imposes substantial compliance obligations and typically requires immediate engagement of regulatory counsel.
• Preliminary Determination of Substantial Product Hazard. If CPSC staff determines that a product presents a substantial product hazard, the Commission may issue a preliminary determination under 15 U.S.C. § 2064(c)-(d), which triggers a formal adjudicative process.
• Recall Negotiations. The vast majority of product recalls are conducted on a "voluntary" basis through negotiated corrective action plans with CPSC staff. These negotiations can be extended and resource-intensive.
• Civil Penalty Proceedings. The CPSC may seek civil penalties for violations of reporting requirements, safety standards, or Commission orders. Civil penalties can reach $120,000 per violation and $17.15 million for a related series of violations (2022 figures, adjusted for inflation under 16 C.F.R. § 1119.4).
Investigation Stages. A typical CPSC investigation progresses through the following stages:
1. Information Request / Subpoena. CPSC staff may issue an informal letter requesting information or, if necessary, a subpoena compelling production of documents or testimony.
2. Staff Investigation. CPSC compliance staff investigates the reported hazard, which may include testing of the product, review of incident reports, and interviews of company personnel.
3. Preliminary Determination. If staff concludes that a substantial product hazard exists, the matter may be elevated to a preliminary determination, which initiates formal proceedings.
4. Consent Order / Litigation. The matter is resolved through a negotiated consent order (often including a corrective action plan and, in some cases, civil penalties) or through administrative litigation before the Commission.
D&O Coverage Issue. CPSC information requests, Section 15(b) demands, and subpoenas issued at Stages 1 and 2 typically precede any formal "proceeding." Under the current Vandermeer primary policy definition of "Claim," these pre-proceeding actions likely do not trigger coverage, even though they impose substantial compliance burdens and can generate significant legal costs. Triton's prior recall history and NCS's advisory notice have already established contact points with CPSC staff, making future CPSC inquiries more likely and potentially more targeted.
C. State Attorneys General
State attorneys general have broad investigative and enforcement authority over consumer protection, product safety, and unfair or deceptive trade practices under their respective state consumer protection statutes. Given Nexford's multi-state product distribution, the Company and its directors and officers are potentially subject to investigation by the attorney general of any state in which Nexford's products are sold or used.
Investigation Types. State AG investigations relevant to Nexford include:
• Civil Investigative Demands (CIDs). CIDs are the primary pre-litigation investigative tool available to state attorneys general. A CID is a formal demand, issued under statutory authority, compelling the production of documents, answers to interrogatories, or oral testimony. CIDs are issued before any complaint or proceeding is filed — they are investigative instruments, not litigation documents.
• Subpoenas. In some states, the AG may issue administrative subpoenas for documents or testimony in connection with an investigation.
• Informal Inquiries. AG offices may initiate contact through informal letters or telephone inquiries, particularly when they are assessing whether to open a formal investigation.
• Multistate Investigations. State AGs frequently coordinate investigations across multiple states, often through the National Association of Attorneys General. A product-safety issue affecting products sold in multiple states could generate a coordinated multistate investigation that imposes far greater compliance burdens than a single-state inquiry.
Relevant States. The states with the most direct jurisdictional interest in Nexford's operations and products include:
• Illinois: Headquarters of Nexford and location of NCS (Joliet) and Triton (Rockford) manufacturing facilities. The Illinois AG has enforcement authority under the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.), which broadly prohibits unfair or deceptive acts or practices in the conduct of trade or commerce.
• Ohio: Location of Marlowe Asset Management's Akron manufacturing facility. The Ohio AG has enforcement authority under the Ohio Consumer Sales Practices Act (O.R.C. §§ 1345.01-1345.13).
• All other states where products are sold: Given that Nexford's products are distributed nationally, the AG of any state could assert jurisdiction over a product-safety investigation.
D&O Coverage Issue. State AG CIDs are quintessential pre-litigation investigative tools. They are issued under statutory authority, carry the force of law, and impose immediate compliance obligations — but they do not constitute the "filing of a complaint" or the "commencement of a proceeding." Under the current Vandermeer primary policy definition of "Claim," which appears to require a formal proceeding, a state AG CID likely does not trigger D&O coverage. This is a critical gap because responding to a multistate CID campaign can generate legal costs in the range of $500,000 to $3 million or more, depending on the scope and complexity of the demands.
D. Other Potential Regulatory Bodies
While this memorandum focuses on OSHA, CPSC, and state AGs as the most likely sources of regulatory investigation given Nexford's operations and recent claims history, we note for completeness that other regulatory bodies could potentially become involved:
• National Highway Traffic Safety Administration (NHTSA). If Marlowe Asset Management's precision-machined automotive components are deemed safety-critical — for example, steering components, brake system parts, or structural frame elements — NHTSA could assert jurisdiction under the National Traffic and Motor Vehicle Safety Act, 49 U.S.C. §§ 30101-30170. NHTSA investigations follow a similar progression from preliminary inquiry to formal investigation to recall demand.
• Environmental Protection Agency (EPA). If Nexford's manufacturing processes at any of its three facilities implicate environmental regulations — such as the Clean Air Act, the Resource Conservation and Recovery Act, or the Toxic Substances Control Act — the EPA or state environmental agencies could initiate investigations that create D&O exposure.
• State OSHA-Plan States. Twenty-seven states operate their own OSHA-approved workplace safety programs, which may have broader jurisdiction or more aggressive enforcement postures than federal OSHA. Ohio operates a state OSHA plan through the Ohio Bureau of Workers' Compensation, Division of Safety and Hygiene, which could initiate investigations at Marlowe Asset Management's Akron facility.
The analysis of "Claim" definitions and coverage gaps presented in this memorandum applies with equal force to investigations by these additional agencies. However, the detailed analysis in Parts IV through VI focuses on OSHA, CPSC, and state AGs as the primary regulatory risk vectors for Nexford's current exposure profile.
IV. ANALYSIS OF "CLAIM" DEFINITIONS ACROSS THE D&O TOWER
The central coverage issue identified in this memorandum turns on the definition of "Claim" in each layer of the D&O tower. D&O policies are "claims-made" policies: coverage is triggered by the making of a "Claim" during the policy period. If a regulatory investigation does not meet the policy's definition of "Claim," no coverage is available — regardless of the magnitude of defense costs incurred or the severity of the regulatory exposure facing individual directors and officers. This Part analyzes the "Claim" definition in each of the five layers of the D&O tower.
A. Vandermeer National Insurance Company — Primary Layer (Policy No. VNI-DO-2021-88473)
The Vandermeer National primary policy defines "Claim" in Section II.F as follows:
"Claim means: (i) a written demand for monetary or non-monetary relief made against any Insured Person; (ii) a civil, criminal, administrative, or regulatory proceeding commenced by the filing of a complaint, notice of charges, formal investigative order, or similar document, against any Insured Person, including any appeal therefrom; or (iii) a criminal proceeding commenced by the return of an indictment or the filing of an information or similar document against any Insured Person."
This definition contains three distinct prongs, each triggered by a specific type of event:
Prong (i): Written Demand. This prong covers written demands for monetary or non-monetary relief. A demand letter from a private party, a shareholder demand, or a regulatory demand for specific remedial action (such as a product recall) would likely fall within this prong. However, an OSHA information request, a CPSC preliminary inquiry letter, or a state AG CID is not typically framed as a "demand for relief" — rather, these documents demand information in the course of an investigation. The distinction between a demand for relief and a demand for information is critical and represents the first gap in the definition.
Prong (ii): Proceeding Commenced by Filing. This prong covers proceedings "commenced by the filing of a complaint, notice of charges, formal investigative order, or similar document." The operative language is "commenced by the filing." While the prong includes "formal investigative order" — which could encompass some CPSC formal proceedings or SEC formal orders of investigation — it requires that a "proceeding" be "commenced by filing." Informal OSHA information requests, CPSC preliminary staff inquiries, and state AG CIDs are generally not considered to "commence" a "proceeding" in the sense contemplated by this language. A CID, for example, is an investigative tool that precedes and may or may not lead to the commencement of a proceeding. An OSHA inspection is an administrative action, but it is not typically characterized as a "proceeding commenced by filing."
The phrase "or similar document" at the end of Prong (ii) provides some elasticity, but courts have generally interpreted "similar document" in the context of the enumerated examples — i.e., documents that, like complaints, notices of charges, and formal investigative orders, represent the formal commencement of an adversarial proceeding. See, e.g., ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 2013 MT 152, ¶ 22 (applying ejusdem generis canon to interpret "similar document" in claims-made policy); Minuteman Int'l, Inc. v. Aldermere Assurance, No. 03 C 6067, 2004 WL 603482, at *4 (N.D. Ill. Mar. 22, 2004) (holding that informal agency inquiry did not constitute "proceeding" within meaning of D&O policy).
Prong (iii): Criminal Proceeding. This prong covers criminal proceedings commenced by indictment or information. This is relevant to potential OSHA criminal referrals under OSH Act § 17(e), but only after a grand jury returns an indictment or a prosecutor files an information — the investigation preceding indictment would not be covered.
Gap Identified. Under this definition, the following categories of regulatory action appear to fall outside the definition of "Claim":
• OSHA informal information requests prior to formal inspection
• OSHA complaint-based inquiries and referral inquiries at the preliminary stage
• CPSC Section 15(b) mandatory reporting demands and preliminary staff inquiries
• CPSC administrative subpoenas issued in the course of staff investigations
• State AG civil investigative demands (CIDs)
• State AG informal inquiry letters or telephone contacts
• Informal "voluntary" interviews or document requests by any regulatory body
• Grand jury subpoenas or target letters issued before the return of an indictment
This exclusion of pre-proceeding regulatory actions creates what we term a "precursor gap." The precursor gap is significant because the earliest stages of a regulatory investigation — when the Company's directors and officers must retain experienced regulatory counsel, gather and review potentially millions of pages of documents, prepare employees for interviews, develop response strategies, and make critical decisions about cooperation and disclosure — are often the most expensive and consequential stages. Defense costs incurred during the precursor phase can be substantial: for a complex OSHA or CPSC investigation, pre-formal-proceeding response costs can range from $250,000 to $2 million or more, depending on the scope and complexity of the inquiry and the number of directors and officers who require separate representation.
Comparison with Market-Leading D&O Policy Forms. The Vandermeer definition is narrower than current market-standard D&O policy forms used by many leading carriers for industrial companies with $1 billion or more in revenue. Many current D&O policies define "Claim" to include one or more of the following formulations:
• "a formal or informal investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, investigative order, or subpoena"
• "the receipt by an Insured Person of a subpoena, civil investigative demand, target letter, or similar document in connection with a governmental investigation"
• "a regulatory investigation of an Insured Person" (the broadest formulation, requiring no specific triggering document)
Some carriers offer these broader formulations as part of the base policy form; others offer them through regulatory investigation coverage endorsements, sometimes subject to a sub-limit. The availability of broader "Claim" definitions in the market supports the recommendation that Nexford negotiate such language at the July 1, 2022 renewal.
Self-Insured Retention. The Vandermeer primary policy imposes a $1,000,000 self-insured retention on entity coverage (Coverage B) and on entity securities coverage (Coverage C, if applicable). Side-A coverage (Coverage A) for individual directors and officers is not subject to an SIR. However, the SIR issue is secondary to the definitional issue: if a regulatory investigation does not constitute a "Claim," the SIR is never reached because there is no covered loss to which the SIR could apply.
B. Commonwealth Indemnity Group — 1st Excess ($10M xs $10M)
The Commonwealth Indemnity Group first excess policy (Policy No. CIG-XS-2021-11205) is structured as a follow-form excess policy that "follows the terms, conditions, definitions, and exclusions of the Underlying Insurance" as defined in the Commonwealth policy, subject to certain specified exceptions.
Follow-Form Analysis. Section I of the Commonwealth excess policy states that the policy "shall follow the form" of the Vandermeer primary policy, "except as otherwise provided herein." We have reviewed the Commonwealth policy for any provisions that modify or override the Vandermeer definition of "Claim." The Commonwealth policy does not contain its own independent definition of "Claim" and does not include any endorsement or amendment that would broaden or narrow the Vandermeer definition.
Accordingly, the Commonwealth excess layer incorporates the Vandermeer definition of "Claim" by reference, including all of the limitations and gaps identified in Part IV.A above. Informal regulatory inquiries that do not constitute a "Claim" under the Vandermeer primary will also not constitute a "Claim" under the Commonwealth excess.
Attachment Point. As a practical matter, the Commonwealth excess layer attaches only after exhaustion of the $10 million Vandermeer primary limit by payment of covered losses. If the Vandermeer primary does not cover regulatory investigation costs because the investigation does not meet the definition of "Claim," the primary limit will not be eroded by those costs, and the Commonwealth excess layer will never be reached — regardless of the Commonwealth policy's own terms. This means that even if Commonwealth's follow-form language were somehow interpreted to encompass a broader definition of "Claim" (which we do not believe is the case), the attachment point condition would independently prevent coverage from being triggered.
Consistency Concern. The strict follow-form approach of the Commonwealth excess policy ensures consistency of coverage across the first two layers of the tower. However, this consistency is a double-edged sword: it means that the precursor gap identified in the Vandermeer definition of "Claim" flows through to the first excess layer without correction. Any broadening of the "Claim" definition negotiated at the primary level should be carried through to the Commonwealth excess by operation of its follow-form provision, but this should be confirmed with the carrier at renewal.
C. Graystone Mutual Assurance Co. — 2nd Excess ($10M xs $20M)
The Graystone Mutual Assurance Co. second excess policy (Policy No. GMA-XS-2021-77490) is also structured as a follow-form excess policy, incorporating the terms and conditions of the Vandermeer primary. Our analysis of the Graystone policy is consistent with the analysis of the Commonwealth excess in Part IV.B: Graystone does not independently define "Claim" and follows the Vandermeer definition by reference, subject to the same precursor gap.
Renewal Consideration. We understand from the Renewal Negotiation Points Memorandum dated June 13, 2022, that Graystone is being replaced at the July 1, 2022 renewal by Northfield Excess Insurance Company. The replacement of the second excess carrier presents a valuable opportunity: Nexford and Ashford Breckinridge should ensure that the Northfield replacement policy's "Claim" definition is consistent with any broadened definition negotiated at the Vandermeer primary level, and, if possible, that the Northfield policy includes its own broad definition of "Claim" as an independent safeguard against follow-form interpretation disputes.
Notwithstanding the upcoming replacement, the Graystone policy remains in effect for the 2021-2022 policy period and provides coverage for claims first made during that period. If a regulatory investigation is initiated before July 1, 2022, the Graystone policy's "Claim" definition — with the precursor gap — would apply to that investigation.
D. Pinnacle Re Insurance Ltd. — 3rd Excess ($10M xs $30M)
The Pinnacle Re Insurance Ltd. third excess policy (Policy No. PRI-XS-2021-BM-4419) presents additional complexity because Pinnacle Re is a Bermuda-domiciled carrier. The Pinnacle Re policy is written on a manuscript excess form rather than a standard follow-form endorsement.
Follow-Form Analysis. Section 2.1 of the Pinnacle Re policy provides that the policy "shall follow the form and be subject to the same terms, conditions, limitations, and exclusions (except as herein specifically provided)" as the Vandermeer primary. However, the Pinnacle Re policy contains several provisions that deviate from the Vandermeer form, including choice of law and dispute resolution provisions. The definition of "Claim" is not independently defined in the Pinnacle Re policy, and the follow-form language appears to incorporate the Vandermeer definition.
Bermuda-Form Considerations. The Pinnacle Re policy specifies that it shall be governed by the laws of Bermuda, with disputes to be resolved by arbitration in Hamilton, Bermuda. Bermuda law on insurance coverage issues differs from U.S. law in certain respects, and the application of Bermuda law to the interpretation of U.S. D&O policy terms — including the definition of "Claim" in the context of U.S. regulatory investigations — introduces uncertainty. Bermuda courts and arbitrators may interpret the "proceeding commenced by filing" language differently than U.S. courts. While we are not aware of Bermuda case law specifically addressing this issue, the potential for divergent interpretation is a risk factor.
Regulatory Investigation Limitations. Some Bermuda-form excess policies contain specific limitations on coverage for regulatory investigations conducted by non-Bermuda regulatory agencies. We have not identified such a limitation in the Pinnacle Re policy, but the manuscript nature of the policy and the Bermuda choice of law provision warrant continued attention.
Choice of Law and Dispute Resolution. If a coverage dispute were to arise regarding whether a U.S. regulatory investigation constitutes a "Claim" under the Pinnacle Re policy, the dispute would be resolved by Bermuda arbitration under Bermuda law. This introduces both procedural and substantive uncertainty that is absent from the U.S.-domiciled layers of the tower.
E. Harrington Specialty Insurance Co. — Side-A DIC (Policy No. HSI-DIC-2021-00342, $15M Dedicated)
The Harrington Specialty Insurance Co. Side-A Difference in Conditions ("DIC") policy is a dedicated personal-liability policy for individual directors and officers that is designed to respond when the underlying D&O tower fails to cover or is financially exhausted. The Side-A DIC carries a $15 million limit (with a recommendation to increase to $20 million at renewal, per our Side-A DIC Policy Analysis Memorandum dated June 3, 2022) and is not subject to an SIR.
Independent Definition of "Claim." Unlike the follow-form excess policies in the tower, the Harrington Side-A DIC contains its own independent definition of "Claim" in Section 2(d):
"Claim means: (i) any written demand for monetary damages or non-monetary relief; (ii) any civil, criminal, administrative, regulatory, or arbitration proceeding for monetary damages or non-monetary relief, commenced by the service of a complaint, filing of a charge, return of an indictment, or similar document; (iii) any formal civil, criminal, or regulatory investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, formal investigative order, or subpoena; or (iv) any written request by an Insured Person to the Company for indemnification or advancement of Defense Costs in connection with any matter described in clauses (i) through (iii)."
The Harrington definition is meaningfully broader than the Vandermeer primary definition. Prong (iii) of the Harrington definition expressly includes "any formal civil, criminal, or regulatory investigation of an Insured Person commenced by the filing or issuance of a notice of investigation, formal investigative order, or subpoena." This language would cover, inter alia, OSHA formal inspections commenced by issuance of an inspection notice, CPSC investigations commenced by issuance of a subpoena or formal investigative order, and state AG investigations commenced by issuance of a CID (which is functionally equivalent to a subpoena).
However, the Harrington definition is still narrower than the broadest market formulations in two respects. First, it is limited to "formal" investigations — informal inquiries, preliminary information requests, and voluntary interview requests that do not involve a "notice of investigation, formal investigative order, or subpoena" would still fall outside the definition. Second, the definition requires that the investigation be "of an Insured Person" — an investigation of the Company that incidentally creates personal exposure for directors and officers may not qualify unless individual directors or officers are specifically named or targeted.
DIC Trigger Analysis. The critical question is whether the Harrington Side-A DIC will "drop down" to provide coverage for regulatory investigation defense costs if the underlying D&O tower's "Claim" definition excludes such matters. The DIC trigger provisions are set forth in Section 5 of the Harrington policy:
"This Policy shall provide the coverages set forth herein in the event that:
(a) the Underlying Insurance fails or is unable to advance or pay Defense Costs or indemnify Loss due to the financial insolvency or receivership of the issuer of the Underlying Insurance;
(b) the Company fails or refuses to indemnify or advance Defense Costs to an Insured Person for a Claim that is covered by this Policy;
(c) the Underlying Insurance fails to cover or excludes from coverage a Claim that is covered by this Policy, by reason of a term, condition, definition, or exclusion in the Underlying Insurance that is less favorable to the Insured Person than the corresponding provision of this Policy (a 'Difference in Conditions');
(d) the aggregate limit of liability of the Underlying Insurance is exhausted by payment of covered Loss."
Section 5(c) — the "Difference in Conditions" trigger — is directly relevant to the regulatory investigation coverage gap. If the Vandermeer primary definition of "Claim" is narrower than the Harrington definition (which it is, as demonstrated above), and if a regulatory investigation constitutes a "Claim" under the Harrington definition but not under the Vandermeer definition, then the DIC trigger in Section 5(c) should be activated, causing the Side-A DIC to drop down and provide coverage for individual directors' and officers' defense costs.
However, there are potential arguments that carriers could raise to resist this interpretation. Some carriers have argued that the DIC trigger requires a direct conflict between specific policy provisions — i.e., the Underlying Insurance must affirmatively "exclude" the claim, rather than simply fail to include it within its definition of "Claim." Under this reading, a narrower definition of "Claim" in the underlying policy is not a "term, condition, definition, or exclusion" that is "less favorable" than the DIC policy — it is simply a different scope of coverage. We believe this argument is ultimately unpersuasive under Delaware and Illinois law, but it introduces litigation risk.
Recommendation. To eliminate ambiguity, we recommend negotiating with Harrington Specialty at the July 1, 2022 renewal to add a specific DIC trigger for regulatory investigation coverage that expressly provides:
"The Difference in Conditions trigger set forth in Section 5(c) shall apply, without limitation, in the event that the Underlying Insurance defines 'Claim' in a manner that does not include any investigation, inquiry, subpoena, civil investigative demand, or similar regulatory action that would constitute a 'Claim' under this Policy."
This clarifying language would remove any doubt about the Side-A DIC's obligation to drop down for regulatory investigation defense costs.
Board-Level Significance. The Side-A DIC's role as the ultimate backstop for individual directors and officers makes the DIC trigger analysis particularly important for Nexford's nine-member board. The four independent directors — who serve on the board to provide oversight and who may not have the personal financial resources to self-fund defense costs during a protracted regulatory investigation — are the primary beneficiaries of the Side-A DIC. If the DIC does not clearly drop down for regulatory investigation costs, independent directors may face a period during the pre-formal-proceeding phase of an investigation when neither the Company's indemnification obligations nor the D&O insurance program provides coverage for their defense costs. This gap could affect Nexford's ability to recruit and retain qualified independent directors.
V. TYPES OF REGULATORY INVESTIGATION COSTS AND COVERAGE ANALYSIS
This Part analyzes the specific categories of costs that may arise in connection with a regulatory investigation and assesses the D&O tower's coverage for each category.
A. Defense Costs in Formal Proceedings
Once a regulatory investigation crosses the threshold into a formal "proceeding" that satisfies the Vandermeer definition of "Claim" — e.g., an OSHA citation and contest proceeding before OSHRC, a CPSC formal administrative proceeding, or a state AG enforcement action commenced by filing of a complaint — defense costs are generally available under all layers of the D&O tower, subject to applicable SIRs, exclusions, and per-claim and aggregate limits.
The D&O tower provides advancement of defense costs rather than a duty to defend. Under a duty-to-advance structure, the insurer pays defense costs as they are incurred, subject to a right of recoupment if it is ultimately determined that the costs were not covered. This distinction is significant in the regulatory investigation context because it ensures that directors and officers receive funds to pay their attorneys as the investigation proceeds, rather than waiting until the conclusion of the investigation for reimbursement. The Vandermeer primary policy's defense cost advancement provision (Section VII.A) requires the insurer to advance defense costs within thirty days of receipt of invoices that it does not dispute.
However, allocation issues arise when a regulatory investigation targets both the Company (as an entity) and individual directors and officers. Under the Vandermeer primary policy, entity coverage (Coverage B) is subject to a $1 million SIR, while individual coverage (Coverage A) is not. If a regulatory investigation generates defense costs that are attributable to both entity-level and individual-level exposure, the parties must allocate those costs between covered and potentially uncovered components. The Vandermeer policy's allocation provision (Section VII.C) provides for allocation "based on the relative legal exposure of the parties," which is inherently subjective and could generate disputes with the carrier.
B. Pre-Investigation / Informal Inquiry Response Costs
This category represents the primary coverage gap identified in this memorandum. Pre-investigation and informal inquiry response costs include:
• Retaining and consulting with regulatory counsel experienced in OSHA, CPSC, or state AG matters
• Conducting initial internal fact-gathering to assess the scope and seriousness of the regulatory inquiry
• Collecting, reviewing, and producing documents responsive to information requests, subpoenas, or CIDs
• Preparing Company personnel (including directors and officers) for regulatory interviews
• Developing a response strategy, including decisions about cooperation, privilege assertions, and voluntary disclosures
• Engaging technical experts to assess product-safety issues
• Coordinating with the Company's product-liability defense team regarding overlapping factual issues
These costs can be substantial. Based on our experience and market data, the cost of responding to a complex OSHA or CPSC investigation from the initial information request through the pre-formal-proceeding stage typically ranges from $250,000 to $2 million or more, depending on the scope of the inquiry, the volume of documents at issue, the number of witnesses to be prepared, and the complexity of the technical product-safety issues involved. A multistate AG CID campaign can generate even higher costs, particularly if the Company must retain separate counsel in each state and produce state-specific document sets.
Under the current Vandermeer primary policy definition of "Claim," these pre-proceeding costs likely fall outside coverage. The costs are incurred before any "proceeding" is "commenced by filing," and the regulatory inquiry itself does not constitute a "written demand for monetary or non-monetary relief" within the meaning of the policy. This means that individual directors and officers who incur personal legal costs in responding to informal regulatory inquiries — for example, a director who retains personal counsel to prepare for an OSHA interview regarding his or her oversight of product-safety decisions — may have no insurance coverage for those costs under either the D&O tower or the Side-A DIC (depending on whether the DIC's "formal investigation" threshold is met).
This gap is particularly troubling from a corporate governance perspective. The earliest stages of a regulatory investigation are often the most critical for establishing the direction and tone of the Company's response. Decisions made during the pre-proceeding phase — about cooperation, document preservation, privilege assertions, and voluntary disclosures — can materially affect the outcome of the investigation. If directors and officers are deterred from retaining counsel during this phase because of uncertainty about insurance coverage, the quality of the Company's overall response may suffer.
C. Internal Investigation Costs
When a regulatory inquiry prompts the Company to conduct an internal investigation — whether at the direction of the Board, the Audit Committee, or outside counsel — the costs of that investigation raise a separate coverage question.
Internal investigation costs typically include fees and expenses of outside counsel conducting the investigation, fees of forensic accountants or technical consultants, and costs of document collection, review, and analysis. For a complex product-safety internal investigation, these costs can range from $500,000 to $5 million or more.
The Vandermeer primary policy defines "Loss" in Section II.L to mean "damages, judgments, settlements, pre-judgment and post-judgment interest, and Defense Costs." "Defense Costs" is defined in Section II.D as "reasonable and necessary fees, costs, and expenses incurred in the investigation, defense, or appeal of a Claim." The question is whether the costs of an internal investigation conducted by the Company (or on behalf of individual directors and officers) cons

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

I. EXECUTIVE SUMMARY

II. BACKGROUND AND CONTEXT

III. RELEVANT REGULATORY AGENCIES AND INVESTIGATION TYPES

V. TYPES OF REGULATORY INVESTIGATION COSTS AND COVERAGE ANALYSIS

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