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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP

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

DATE: June 3, 2022

RE: Nexford Industrial Holdings Inc. — Side-A DIC Policy Analysis; Harrington Specialty Insurance Co. Policy No. HSI-DIC-2021-00342

MATTER NO.: 1005-00003

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I. Executive Summary

This memorandum provides a detailed analysis of the Harrington Specialty Insurance Co. Side-A Directors & Officers Difference-in-Conditions ("DIC") policy currently in force for the July 1, 2021 through July 1, 2022 policy year, Policy No. HSI-DIC-2021-00342 (the "Harrington Policy" or "Side-A DIC Policy"). The analysis has been prepared at the direction of Responsible Partner Douglas Fairchild to support the advisory engagement for Nexford Industrial Holdings Inc. ("Nexford" or the "Company") in connection with the upcoming July 1, 2022 renewal of the Company's directors and officers ("D&O") liability insurance program.

The Side-A DIC Policy currently provides a $15,000,000 dedicated limit of liability for non-indemnifiable loss sustained by individual directors and officers of Nexford and its subsidiaries. The limit is non-aggregating with the underlying D&O tower and is not subject to any self-insured retention ("SIR"). The current annual premium is $224,000, which is fully earned at inception.

The Side-A DIC Policy sits alongside Nexford's four-layer underlying D&O tower, which provides an aggregate of $40,000,000 in combined limits across the following carriers: Vandermeer National Insurance Company (primary), Commonwealth Indemnity Group (first excess), Graystone Mutual Assurance Co. (second excess), and Pinnacle Re Insurance Ltd. (third excess). Including the Side-A DIC Policy, Nexford's total D&O program provides $55,000,000 in aggregate limits at a combined annual premium of $1,363,450.

Based on our analysis of the policy terms, coordination with the underlying D&O tower, and assessment of the Company's current and anticipated risk profile, we recommend that Nexford increase the Side-A DIC limit from $15,000,000 to $20,000,000 at the upcoming July 1, 2022 renewal. This recommendation is driven by several converging factors:

(a) PE Sponsor Control Dynamics. Veltrano Capital Partners Fund IV, LP holds 68.5% of the Company's equity and appoints five of the nine board directors. This concentrated ownership structure creates heightened exposure for insured-versus-insured claims, conflicted transaction allegations, and breach of fiduciary duty claims — categories of risk for which the Side-A DIC may be the only available source of coverage given the Insured vs. Insured exclusion in the underlying tower.

(b) Potential IPO in the 2023–2024 Timeframe. The Company's General Counsel, Priya Sundaram, has identified a potential initial public offering as a near-term strategic possibility. If Nexford proceeds to a public offering, the exposure profile for directors and officers will increase substantially, including securities class action risk, SEC enforcement exposure, and shareholder derivative litigation. While the entire D&O tower will require restructuring in connection with any IPO, ensuring a robust Side-A DIC foundation now is a prudent preparatory measure.

(c) Dedicated, Non-Eroding Nature of Side-A Coverage. The Side-A DIC Policy represents the last line of personal asset protection for individual directors and officers. Unlike the underlying D&O tower, which is subject to erosion by entity-level and Side-B claims, the Side-A DIC limit is exclusively dedicated to non-indemnifiable loss of individual Insured Persons. In a worst-case scenario — including Company insolvency — the Side-A DIC is the only policy that will pay directly to the individual director or officer without risk of the proceeds being swept into a bankruptcy estate.

This memorandum addresses six key areas of analysis: (i) trigger provisions, (ii) bankruptcy and insolvency response, (iii) difference-in-conditions coverage grants, (iv) personal coverage extensions, (v) limit adequacy, and (vi) coordination with the underlying D&O tower. Our analysis identifies the policy's significant strengths, notes areas requiring attention at renewal, and catalogs the DIC differentials between the Harrington Policy and the Vandermeer National primary D&O policy.

Preliminary premium indications from the Company's insurance broker, Ashford Breckinridge LLP, suggest that the proposed increase to a $20,000,000 limit can be achieved at an estimated annual premium of approximately $285,000 to $295,000, representing an incremental cost of approximately $61,000 to $71,000 per year. This incremental cost is modest relative to the total D&O tower premium of $1,363,450, the Company's combined insurance spend of $4,006,350, and the Company's $1.42 billion in annual revenue.

II. Background

A. Nexford Corporate Structure and Board Composition

Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The Company was acquired on June 15, 2018 in a leveraged buyout valued at approximately $2.1 billion by Veltrano Capital Partners Fund IV, LP ("Veltrano Fund IV" or the "Sponsor"), a Delaware limited partnership with offices in Charlotte, North Carolina and New York, New York. Fund IV is a 2017-vintage fund with $4.8 billion in committed capital. Nexford is Fund IV's largest portfolio company by enterprise value.

The Company's current capitalization reflects the post-LBO ownership structure as follows:

• Veltrano Capital Partners Fund IV, LP: 68.5% equity ownership

• Management Rollover Equity: 19.3% (held by certain continuing members of senior management who participated in the rollover at the time of the LBO)

• Co-Investor Equity: 12.2% (held by co-investors who participated alongside Fund IV in the acquisition)

Nexford's estimated current enterprise value is approximately $2.6 billion, reflecting appreciation from the original $2.1 billion acquisition price. For fiscal year 2021, the Company reported consolidated revenue of $1.42 billion and EBITDA of $218 million. The Company's total funded debt stands at approximately $1.05 billion, consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. The resulting leverage ratio is approximately 4.8x EBITDA.

Nexford operates through three wholly-owned operating subsidiaries:

The Company is governed by a nine-member board of directors, composed of four independent directors and five directors appointed by the Sponsor pursuant to the stockholders' agreement. The board is chaired by Gerald "Gerry" Whitcomb, a Veltrano-appointed director. In addition to the nine voting members, Celeste Brogan, Partner, Portfolio Operations at Veltrano Capital Partners, serves as a non-voting board observer.

The Company's senior officers include:

• Sandra Elliston, Chief Executive Officer

• Marcus Delacroix, Chief Financial Officer

• Priya Sundaram, General Counsel and Corporate Secretary

• Trevor Haines, Vice President, Risk Management

The combination of a PE sponsor holding a supermajority equity position, a sponsor-controlled board (five of nine seats plus the board chairman position), and a leveraged capital structure creates a governance dynamic that is directly relevant to the Side-A DIC analysis, as discussed in greater detail throughout this memorandum.

B. Current D&O Tower Structure (2021–2022)

Nexford's current D&O liability insurance program consists of four layers of traditional D&O coverage (providing Insuring Agreements A, B, and, to a limited extent, C) plus the dedicated Side-A DIC Policy that is the subject of this memorandum. The following table summarizes the layer-by-layer structure of the program for the 2021–2022 policy year:

The resulting combined rate-on-line for the entire D&O program is approximately 2.48% ($1,363,450 ÷ $55,000,000).

With respect to D&O loss history, Nexford has a favorable record. Over the past five years, there has been one reported D&O claim — a shareholder demand letter received in 2020 relating to certain governance matters, which was resolved without any payment. There have been zero paid D&O losses during this period. While the Company's clean loss history is a positive factor for premium negotiations, it should not be conflated with an absence of risk exposure. As a privately held company, Nexford does not currently face securities-litigation exposure of the type associated with public companies. However, employment practices claims, regulatory investigations, creditor claims (particularly given the leveraged capital structure), and fiduciary duty disputes arising from the PE sponsor relationship remain meaningful exposure areas.

C. Scope of This Memorandum

This analysis was prepared pursuant to the Calderwood & Harkness LLP engagement letter dated April 22, 2022, under the standing outside counsel agreement between Calderwood & Harkness LLP and Nexford Industrial Holdings Inc. dated January 15, 2020. The scope of this memorandum is limited to the Side-A DIC Policy and its coordination with the underlying D&O tower. Related memoranda addressing other aspects of the D&O program are identified by cross-reference throughout this analysis.

In preparing this memorandum, we reviewed the following policy documents and related materials:

• Harrington Specialty Insurance Co. Side-A DIC Policy, Policy No. HSI-DIC-2021-00342, including all endorsements, declarations, and schedules;

• Vandermeer National Insurance Company primary D&O Policy, Policy No. VNI-DO-2021-88473, including all endorsements and declarations;

• Commonwealth Indemnity Group first excess D&O Policy, Policy No. CIG-XS-2021-7742;

• Graystone Mutual Assurance Co. second excess D&O Policy, Policy No. GMA-XS-2021-3316;

• Pinnacle Re Insurance Ltd. third excess D&O Policy, Policy No. PRI-XS-2021-0091;

• Nexford Industrial Holdings Inc. form Director and Officer Indemnification Agreement (current version dated September 2019);

• Nexford Industrial Holdings Inc. Amended and Restated Certificate of Incorporation (filed June 15, 2018);

• Nexford Industrial Holdings Inc. Amended and Restated Bylaws (adopted June 15, 2018, as amended through March 2021);

• Nexford Industrial Holdings Inc. Stockholders' Agreement (dated June 15, 2018); and

• Selected board resolutions related to indemnification and insurance authorization.

We also coordinated with the Company's insurance broker, Ashford Breckinridge LLP, specifically Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, regarding placement history, carrier communications, and preliminary renewal indications. Additionally, we reviewed the actuarial analysis prepared by Kessler Quinn Advisory Group — specifically Arthur Kessler, Managing Director, and Diana Cho, Vice President, Actuarial Services — regarding D&O loss modeling for companies with profiles comparable to Nexford.

This memorandum is one of several related work product deliverables under the engagement. Cross-references are made throughout to the following companion memoranda:

• Preliminary Coverage Gap Memorandum (dated May 27, 2022) — identifying 14 specific gaps in the underlying D&O tower;

• Claims Reporting Compliance Checklist (dated June 1, 2022) — prepared for Trevor Haines and Donna Kowalski;

• Indemnification Agreement Review Memorandum (dated June 4, 2022);

• D&O Limits Adequacy Memorandum (dated June 6, 2022); and

• Regulatory Investigation Coverage Memorandum (dated June 14, 2022) — addressing OSHA, CPSC, and state attorney general investigation exposure.

III. Policy Overview — Harrington Specialty Side-A DIC (HSI-DIC-2021-00342)

A. Named Insureds and Insured Persons

The Harrington Side-A DIC Policy identifies Nexford Industrial Holdings Inc. as the Named Insured. The policy defines "Insured Persons" to include all past, present, and future directors and officers of Nexford Industrial Holdings Inc. and each of its subsidiaries, as those terms are defined in the policy. Based on the subsidiary schedule attached to the declarations, the covered subsidiaries include:

• Nexford Conveyor Systems, LLC (Delaware LLC; Joliet, Illinois);

• Triton Fastener Corp. (Illinois corporation; Rockford, Illinois); and

• Marlowe Asset Management Precision Machining, Inc. (Ohio corporation; Akron, Ohio).

Consistent with the fundamental nature of a Side-A policy, the Harrington Policy covers only individual Insured Persons. There is no entity coverage under the Side-A DIC. Nexford, as the Named Insured, does not receive direct coverage for losses it sustains as an entity; rather, the Named Insured designation serves to identify the corporate family whose individual directors and officers are the beneficiaries of the policy. This is a critical distinction from the underlying D&O tower, which provides entity coverage (Side-C) and indemnifiable loss coverage (Side-B) in addition to non-indemnifiable loss coverage (Side-A). The Harrington Policy is a personal protection policy, designed solely to protect the personal assets of individual directors and officers.

Coverage extends to all nine current members of the Nexford board of directors, including the four independent directors and the five Sponsor-appointed directors. It also covers all officers of the Company and its subsidiaries, including Sandra Elliston (CEO), Marcus Delacroix (CFO), Priya Sundaram (General Counsel and Corporate Secretary), Trevor Haines (VP Risk Management), and all other officers meeting the policy's definition of that term.

An important point requiring attention at renewal concerns the Sponsor-appointed directors who serve in a dual capacity — specifically, those individuals who are both board members of Nexford and employees or partners of Veltrano Capital Partners. The Harrington Policy should be reviewed to determine whether claims arising from these individuals' Veltrano roles (as opposed to their Nexford board roles) are excluded from coverage or are subject to a carve-back. If the policy contains a limitation on coverage for claims arising out of services rendered for an entity other than the Named Insured or its subsidiaries, Sponsor-appointed directors could face a coverage gap for claims that straddle their Veltrano and Nexford responsibilities. We recommend that this issue be addressed with Harrington through the broker at renewal, and that appropriate clarifying endorsement language be requested if any ambiguity exists.

B. Policy Period and Limits

The Harrington Side-A DIC Policy has a policy period of July 1, 2021 to July 1, 2022. The limit of liability is $15,000,000 per policy period. This limit is dedicated — meaning it does not share an aggregate with any of the underlying D&O tower layers — and is available exclusively for non-indemnifiable loss of individual Insured Persons.

The policy is not subject to any self-insured retention. When the policy is triggered — whether by non-indemnification of an Insured Person or on a DIC basis — Harrington is obligated to pay from the first dollar of covered loss, without any deductible or retention. This stands in contrast to the underlying Vandermeer primary policy, which imposes a $1,000,000 SIR on entity coverage.

The Harrington Policy is a claims-made and reported policy. A claim must be first made against the Insured Person during the policy period and must be reported to Harrington during the policy period or within any applicable extended reporting period. The policy includes extended reporting period provisions, the terms of which are discussed in Section IV.C below.

C. Premium. The annual premium for the Harrington Side-A DIC Policy is $224,000. Consistent with market practice for Side-A DIC placements, the premium is fully earned at inception. This means that no portion of the premium is refundable upon cancellation or non-renewal of the policy, and the full premium obligation accrued on the July 1, 2021 inception date. The fully-earned premium structure reflects the unique nature of Side-A DIC coverage, which cannot be replaced mid-term without exposing Insured Persons to potential gaps in personal protection.

The current rate-on-line for the Side-A DIC Policy is 1.49% ($224,000 ÷ $15,000,000), which is within the range we have observed for Side-A DIC placements of this type for privately held, PE-backed industrial companies.

IV. Trigger Provisions Analysis

A. Primary Trigger — Non-Indemnification

The Harrington Side-A DIC Policy is fundamentally a non-indemnification policy. It responds when Nexford — the entity that would ordinarily indemnify its directors and officers pursuant to the Company's bylaws, certificate of incorporation, and individual indemnification agreements — is unable or unwilling to indemnify the Insured Person for a loss that would otherwise be covered under the policy.

The Harrington Policy identifies three specific trigger scenarios under which the non-indemnification response is activated:

1. Financial Inability. The policy responds when Nexford is financially unable to indemnify an Insured Person. This trigger encompasses situations in which the Company lacks sufficient liquid assets to satisfy its indemnification obligations, is in a state of insolvency (whether legal or equitable), or has filed for or been placed into bankruptcy proceedings under Title 11 of the United States Code. The financial inability trigger does not require a formal bankruptcy filing; it can be activated if the Company simply lacks the financial resources to make the indemnification payment, regardless of whether formal insolvency proceedings have been commenced.

In the context of Nexford's current financial position, this trigger warrants careful consideration. While the Company's fiscal year 2021 financial performance is strong — $1.42 billion in revenue and $218 million in EBITDA — the Company also carries $1.05 billion in funded debt from the 2018 LBO. The resulting leverage ratio of approximately 4.8x EBITDA, while within acceptable ranges for leveraged buyout structures, is not insignificant. In a downside economic scenario — such as a severe contraction in industrial demand, supply chain disruption, or a credit market dislocation — the Company's ability to service its debt and simultaneously satisfy indemnification obligations to directors and officers could be strained. The financial inability trigger in the Side-A DIC Policy is designed to address precisely this contingency.

2. Legal Prohibition. The policy responds when Nexford is legally prohibited from indemnifying an Insured Person under applicable law. Under Section 145 of the Delaware General Corporation Law ("DGCL"), a corporation's power to indemnify its directors and officers is subject to certain limitations. Most notably, Section 145(a) permits indemnification of directors and officers who acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation. Where a director or officer is found to have breached the duty of loyalty, engaged in intentional misconduct, or obtained an improper personal benefit, the corporation may be legally prohibited from providing indemnification. Similarly, public policy considerations may prevent indemnification in certain circumstances — for example, with respect to disgorgement obligations under securities laws or penalties under environmental statutes.

The legal prohibition trigger is of particular significance in the Nexford context because of the Sponsor dynamics. If a claim were brought alleging that a Sponsor-appointed director breached the duty of loyalty by acting in the interest of Veltrano Capital Partners rather than in the best interest of Nexford, a court could find that indemnification of such conduct is not permitted under the DGCL. In that scenario, the Side-A DIC Policy would be the only source of coverage for the individual director's personal defense costs and, potentially, any judgment or settlement.

3. Refusal to Indemnify. The policy responds when Nexford refuses to indemnify an Insured Person for any reason, including a board decision not to advance defense costs or not to indemnify following the conclusion of a proceeding. This trigger is intentionally broad and does not require the Company to articulate a legal basis for its refusal. If the board — or any authorized body within the Company — simply declines to approve indemnification or advancement, the Side-A DIC is triggered.

The refusal trigger is particularly important in the PE-sponsor context. Because Veltrano-appointed directors hold five of nine board seats, a majority of the board could theoretically refuse to approve indemnification of a director or officer whose interests conflict with those of the Sponsor. For example, if management and the Sponsor are in dispute regarding a transaction, the Sponsor-controlled board could refuse to advance defense costs to a management director who has brought a claim challenging the transaction. In that scenario, the Side-A DIC's refusal trigger would be the affected director's primary means of obtaining coverage for defense costs and other covered losses.

B. DIC Trigger — Difference in Conditions

In addition to the non-indemnification trigger, the Harrington Policy responds on a "difference-in-conditions" basis. The DIC trigger activates when the underlying D&O tower denies, rescinds, or limits coverage for a claim that would otherwise be covered under the broader terms of the Side-A DIC Policy. This is the feature that distinguishes a "Side-A DIC" policy from a simple "Side-A only" policy: the DIC function provides gap-filling coverage wherever the underlying tower's terms are narrower or more restrictive than the Harrington Policy's terms.

The DIC trigger is activated under the following principal circumstances:

• Underlying carrier denial based on an exclusion not present in the Harrington Policy. If Vandermeer National (or any of the excess carriers) denies coverage for a claim based on an exclusion contained in the underlying policy that does not appear in the Harrington Policy — or that appears in a narrower form in the Harrington Policy — the Harrington Policy drops down and responds as if no underlying coverage existed for that claim. This is the core DIC mechanism, and the specific exclusion differentials are catalogued in Section VI below.

• Underlying carrier insolvency or failure to pay. If any underlying carrier — Vandermeer, Commonwealth, Graystone, or Pinnacle Re — becomes insolvent, is placed in rehabilitation or liquidation by a state insurance department, or otherwise fails to pay a covered claim, the Harrington Policy drops down to fill the gap left by the failed carrier. This trigger is discussed in greater detail in Section V.C below.

• Exhaustion of the underlying tower by non-Side-A claims. If the $40,000,000 underlying D&O tower is exhausted by claims that are not individual, non-indemnifiable claims — such as entity-level claims (Side-C), indemnifiable loss claims (Side-B), or claims by co-insured parties — the Harrington Policy's $15,000,000 limit remains fully available for the individual Insured Person. This is the "last line of defense" function of the Side-A DIC: even if the underlying tower has been entirely consumed, the dedicated Side-A limit is intact and available.

The gap-filling function of the DIC trigger is the most analytically significant feature of the Harrington Policy. By intentionally drafting the Side-A DIC terms to be broader than the underlying tower's terms, Harrington creates an affirmative coverage program that captures claims falling into the gaps between the underlying tower's exclusions and the Harrington Policy's broader grants. The specific DIC differentials we have identified between the Harrington Policy and the Vandermeer primary policy are discussed in detail in Section VI.

C. Claims-Made Trigger Mechanics

The Harrington Side-A DIC Policy operates on a claims-made and reported basis. Under this trigger structure, three conditions must be satisfied for coverage to attach:

(1) A "Claim" (as defined in the policy) must be first made against an Insured Person during the policy period (July 1, 2021 to July 1, 2022);

(2) The Claim must be reported to Harrington during the policy period or within any applicable extended reporting period; and

(3) The Claim must arise from a "Wrongful Act" (as defined in the policy) that occurred on or after the applicable retroactive date.

Definition of "Claim." The Harrington Policy defines "Claim" broadly to include: (a) any written demand for monetary or non-monetary relief; (b) any civil proceeding, including a lawsuit, counterclaim, cross-claim, or third-party complaint; (c) any criminal proceeding; (d) any arbitration or alternative dispute resolution proceeding; (e) any administrative or regulatory proceeding; and (f) any formal investigation by a governmental authority, including the issuance of a subpoena, target letter, or Wells notice. This breadth of definition is an important feature of the Harrington Policy and stands in contrast to the Vandermeer primary policy's definition of "Claim," which we have identified as potentially narrower. Specifically, in our Preliminary Coverage Gap Memorandum dated May 27, 2022, we identified Item 7 of 14 D&O gaps as concerning the narrower "Claim" definition in the Vandermeer primary, which may not encompass certain categories of informal governmental inquiries or pre-formal investigation communications. The DIC function of the Harrington Policy should fill this gap, such that a matter meeting Harrington's broader "Claim" definition but not Vandermeer's narrower definition would be covered under the Side-A DIC on a DIC basis.

Retroactive Date / Interrelation Date. The Harrington Policy provides coverage for claims arising from wrongful acts committed on or after June 15, 2018 — the date of the Veltrano LBO closing. This retroactive date is consistent with the retroactive date used in the underlying D&O tower. The selection of the LBO closing date as the retroactive date reflects the fact that the current D&O program was placed in connection with the LBO, and that the current universe of Insured Persons and the current corporate structure originated on that date.

Extended Reporting Period. The Harrington Policy provides for an extended reporting period (sometimes referred to as a "tail" or "Discovery period") following the expiration of the policy period. The specific terms of the extended reporting period — including duration, triggering events, and any additional premium — should be reviewed in detail at renewal. Given the potential for an IPO in the 2023–2024 timeframe, the availability and terms of the extended reporting period take on additional significance, as the Company may wish to consider purchasing an extended reporting period under the current policy structure before transitioning to a public-company D&O program.

V. Bankruptcy and Insolvency Response Provisions

A. Company Insolvency / Bankruptcy Trigger

The Harrington Side-A DIC Policy contains detailed provisions addressing the impact of Nexford entering bankruptcy, receivership, or insolvency proceedings on the availability of coverage for individual Insured Persons. These provisions are among the most important features of any Side-A DIC policy, and the Harrington Policy's treatment of this issue is robust.

The policy expressly provides that Harrington's obligations to pay covered losses to individual Insured Persons are not stayed, discharged, reduced, or otherwise affected by any bankruptcy filing by Nexford, any subsidiary, or any other entity. This means that even if the Company commences a voluntary petition under Chapter 11 of the Bankruptcy Code, or is the subject of an involuntary petition under Chapter 7, the Side-A DIC Policy remains fully operative and available to individual directors and officers.

This provision directly addresses one of the most significant risks in D&O insurance: the risk that the bankruptcy estate will assert that D&O insurance proceeds constitute property of the estate under Section 541 of the Bankruptcy Code and therefore are subject to the automatic stay under Section 362. In the traditional D&O context (i.e., policies that include entity coverage), courts have sometimes found that D&O insurance proceeds are property of the estate because the entity has a direct interest in the policy proceeds — for example, to fund indemnification obligations or to satisfy direct entity-coverage claims. This risk is most acute in the underlying D&O tower, where Side-B and Side-C coverage may create an estate interest in the policy limits.

The Side-A DIC Policy is specifically designed to eliminate this risk. Because the Harrington Policy covers only non-indemnifiable loss of individual Insured Persons, and because the Company has no direct interest in the policy proceeds (which are payable exclusively to the individual, not to the entity), the Side-A DIC limit should not be deemed property of the estate. The Harrington Policy's express bankruptcy-override provision reinforces this structural protection.

This provision is of particular significance given Nexford's current financial condition. With $1.05 billion in funded debt — the legacy of the 2018 leveraged buyout — the Company carries a leverage ratio of approximately 4.8x EBITDA. While the Company's current performance is adequate to service this debt, a meaningful adverse event — such as a severe economic downturn, a major product-liability loss, or a disruption in the industrial manufacturing sector — could place the Company under financial stress. In such a scenario, the directors and officers would face the dual risk of personal claims (e.g., creditor allegations of breach of fiduciary duty, deepening insolvency claims, fraudulent transfer allegations) and the loss of the Company's ability to indemnify them. The Side-A DIC Policy's bankruptcy-override provisions ensure that coverage remains available precisely when the directors and officers need it most.

B. Direct Payment to Insured Persons

A foundational feature of the Harrington Side-A DIC Policy is that Harrington pays losses directly to the individual Insured Person, not to the Company. This direct-payment mechanism serves several critical purposes:

• It prevents insurance proceeds from being swept into the Company's bankruptcy estate or from being attached by the Company's creditors. Because the proceeds flow to the individual — not through the entity — they are not available to satisfy the Company's obligations to its lenders, trade creditors, or other claimants.

• It ensures that the individual Insured Person receives the benefit of the coverage regardless of the Company's financial condition, corporate decisions, or governance dynamics. The individual director or officer is not dependent on the Company's willingness or ability to process the insurance claim; the individual can submit the claim directly to Harrington and receive payment directly.

• It preserves the Side-A DIC Policy's status as a policy in which the bankruptcy estate has no interest, thereby strengthening the argument against any assertion by a bankruptcy trustee that the policy proceeds are estate property.

The Harrington Policy also contains a "Priority of Payments" clause that establishes a clear hierarchy for the application of policy proceeds. Under this clause, Harrington prioritizes non-indemnifiable loss (i.e., Side-A loss — the very category of loss for which the policy is designed) over any other type of exposure. While the Harrington Policy does not provide entity coverage or Side-B coverage, this priority-of-payments provision is relevant to the extent that any allocation dispute arises between covered and uncovered loss, or between the claims of different Insured Persons. The provision ensures that the policy's limited proceeds are applied first to the most critical category of exposure: personal, non-indemnifiable loss of individual directors and officers.

C. Carrier Insolvency

The Harrington Policy contains a DIC trigger that activates if an underlying carrier in the D&O tower becomes insolvent or is placed in rehabilitation or liquidation proceedings by the carrier's domiciliary state insurance department (or, in the case of Pinnacle Re, by the Bermuda Monetary Authority). If an underlying carrier is unable to fulfill its obligations under the D&O tower — whether due to insolvency, receivership, or regulatory intervention — the Harrington Policy drops down to fill the gap in coverage for the individual Insured Person.

We have reviewed the current financial condition and ratings of the four underlying D&O carriers:

We note that Graystone Mutual Assurance Co., the second excess carrier, carries a B++ (Good) rating from A.M. Best, which, while still within the "secure" category, is lower than the ratings of the other tower participants. Furthermore, we understand that Graystone's rating is under review for a possible downgrade. As discussed in Section XI (Outstanding Considerations), Northfield Excess Insurance Company has been identified as a potential replacement for Graystone on the second excess layer at the upcoming renewal. If Graystone is replaced, the Harrington Policy's DIC provisions should be reviewed to ensure proper coordination with the replacement carrier's terms.

Additionally, we note that Pinnacle Re Insurance Ltd. is domiciled in Bermuda, which is subject to a different regulatory framework than the United States-domiciled carriers. While Bermuda's regulatory regime is generally well-regarded, the mechanisms for rehabilitating or liquidating a Bermuda-domiciled insurer differ from those available under U.S. state insurance guarantee fund laws. In the event of a Pinnacle Re insolvency, the availability and extent of state guarantee fund coverage may be more limited or uncertain than would be the case for a domestically domiciled carrier. The Harrington Policy's carrier-insolvency DIC trigger provides an additional layer of protection against this contingency.

We recommend that Nexford, through its broker Ashford Breckinridge, periodically monitor the A.M. Best ratings and financial condition of all underlying carriers in the D&O tower, with particular attention to Graystone Mutual and Pinnacle Re.

VI. Difference-in-Conditions Coverage Grants

A. Methodology — Coverage Comparison

The DIC function of the Harrington Side-A DIC Policy is the feature that most significantly distinguishes it from a simple Side-A-only policy. To identify and catalogue the specific coverage differentials between the Harrington Policy and the underlying D&O tower, we conducted a side-by-side comparison of the Harrington Policy's terms (including definitions, insuring agreements, exclusions, and conditions) against the corresponding provisions of the Vandermeer National primary D&O policy (Policy No. VNI-DO-2021-88473).

The Vandermeer primary was selected as the primary comparator because it is the lead policy in the underlying tower, and the three excess layers (Commonwealth, Graystone, and Pinnacle Re) are generally follow-form to the Vandermeer terms, subject to any differences noted in their respective policies. Where a specific excess-layer policy contains a term or exclusion that differs from the Vandermeer primary, that difference is noted.

The DIC function operates as follows: wherever the underlying Vandermeer policy contains an exclusion, limitation, condition, or definitional restriction that does not appear in the Harrington Policy — or that appears in a narrower or more favorable form in the Harrington Policy — the Harrington Policy drops down and responds as though the underlying tower had denied coverage for that claim. The Harrington Policy thereby "fills the gap" between the underlying tower's more restrictive terms and the broader coverage available under the Side-A DIC.

B. Key DIC Differentials Identified

Our side-by-side comparison has identified seven principal areas in which the Harrington Side-A DIC Policy provides materially broader coverage than the underlying Vandermeer primary D&O policy. Each differential is discussed below.

1. Insured vs. Insured Exclusion

The Vandermeer primary D&O policy contains an Insured vs. Insured exclusion (sometimes referred to as the "IvI exclusion") that bars coverage for claims brought by one Insured Person against another Insured Person, or by the Named Insured (Nexford) against an Insured Person. This exclusion is standard in D&O policies and is designed to prevent collusive litigation — i.e., to prevent the company or its insiders from manufacturing claims against each other in order to access insurance proceeds.

However, the IvI exclusion can have unintended and adverse consequences in the PE-sponsor context. Because Veltrano Capital Partners Fund IV holds 68.5% of Nexford's equity and appoints five of nine board directors, a number of realistic claim scenarios could trigger the IvI exclusion:

• A derivative action brought by or on behalf of Nexford (as entity) against one or more directors, alleging breach of fiduciary duty — because Nexford is the Named Insured, such a claim would be brought by an "Insured" against an "Insured Person," potentially triggering the exclusion;

• A board dispute between Sponsor-appointed directors and independent or management directors — if one faction of the board brings a claim against the other, both sides are Insured Persons, triggering the exclusion;

• Post-exit claims by remaining shareholders or the Company against former Sponsor-appointed directors following a Veltrano exit — depending on the timing and structure, such claims could be captured by the exclusion; and

• Employment-related claims brought by a director or officer against the Company — if the individual is both an Insured Person and an employee, the exclusion could apply.

The Harrington Side-A DIC Policy either does not contain an Insured vs. Insured exclusion or contains a significantly narrower version with specific carve-backs. Based on our review of the policy language, the Harrington Policy's treatment of IvI claims includes carve-backs for: (a) whistleblower claims and claims brought by an Insured Person in a whistleblower capacity; (b) employment-related claims, including claims for wrongful termination, discrimination, or retaliation; and (c) derivative claims brought in the right of the Company. These carve-backs are critically important in the Nexford context, and the DIC function of the Harrington Policy ensures that claims falling within the Vandermeer IvI exclusion — but outside the scope of the Harrington exclusion or within a Harrington carve-back — are covered under the Side-A DIC.

This differential is, in our judgment, the most significant DIC differential in the current policy structure, given the Sponsor control dynamics and the realistic potential for intra-board disputes.

2. Conduct Exclusions

The Vandermeer primary D&O policy contains conduct exclusions that bar coverage for claims based on or arising out of: (a) dishonesty or fraudulent conduct by the Insured Person; (b) deliberate criminal conduct by the Insured Person; and (c) the Insured Person's gaining of any profit, remuneration, or advantage to which the Insured Person was not legally entitled. These conduct exclusions are standard in D&O policies and serve to prevent insurance coverage for intentional wrongdoing.

The critical question in analyzing conduct exclusions is the trigger standard: when does the exclusion apply? There are two principal approaches used in the D&O market:

• The "in fact" standard, under which the exclusion applies if the relevant conduct occurred "in fact," regardless of whether there has been a judicial determination to that effect. Under this standard, the insurer can assert the conduct exclusion at any time, including during the pendency of litigation, based on its own investigation and determination that the insured engaged in the relevant conduct.

• The "final adjudication" standard, under which the exclusion applies only upon a final, non-appealable adjudication — i.e., a court judgment, jury verdict, or other dispositive judicial determination that is no longer subject to appeal — establishing that the Insured Person engaged in the relevant conduct.

The Harrington Side-A DIC Policy applies the final adjudication standard. The conduct exclusions in the Harrington Policy are triggered only upon a final, non-appealable adjudication establishing that the Insured Person engaged in dishonest, fraudulent, or criminal conduct, or that the Insured Person obtained an improper personal benefit. Until such a final adjudication is entered, the exclusion does not apply, and the Insured Person is entitled to coverage — including, critically, coverage for defense costs during the pendency of the litigation.

We have identified that certain layers of the underlying tower may use the "in fact" standard rather than the final adjudication standard. If so, the DIC function of the Harrington Policy would activate: a claim denied by the underlying carrier under an "in fact" conduct exclusion would be covered under the Harrington Policy's broader terms, which require a final adjudication before the exclusion applies. This differential provides important protection during the often-lengthy period between the assertion of misconduct allegations and the ultimate adjudication of those allegations.

3. Severability

The Harrington Policy provides full severability of both the application and the exclusions. Full severability means that:

• Application severability: The knowledge, statements, or misrepresentations of one Insured Person in the policy application are not imputed to any other Insured Person. If one director made a misrepresentation in the application, that misrepresentation cannot be used by the insurer to rescind coverage for innocent directors.

• Exclusion severability: The conduct or knowledge of one Insured Person that triggers an exclusion is not imputed to any other Insured Person. If Director A engaged in fraud, the fraud exclusion applies to Director A but does not affect the coverage of Director B, Director C, or any other innocent Insured Person.

Full severability is a critical protection in a multi-director, multi-officer environment. Without it, the wrongful conduct of one "bad actor" could destroy coverage for all Insured Persons under the policy.

We have identified the degree of severability in the Vandermeer primary policy as one of the 14 D&O gaps in our Preliminary Coverage Gap Memorandum dated May 27, 2022. If the Vandermeer primary provides only limited severability (e.g., severability of the application but not of the exclusions, or severability only for "innocent" directors but with imputation of knowledge among officers), the DIC function of the Harrington Policy would fill this gap, providing full severability for claims covered under the Side-A DIC.

4. Prior Acts / Pending and Prior Litigation

Both the Harrington Policy and the underlying D&O tower use a retroactive date of June 15, 2018 (the date of the Veltrano LBO closing). Claims arising from wrongful acts committed before this date are not covered under either the Side-A DIC or the underlying tower.

However, the relevant differential concerns the pending and prior litigation exclusion. The underlying tower likely contains an exclusion for claims arising out of, based upon, or attributable to any litigation, proceeding, or dispute that was pending or existing as of a specified date (typically the inception date of the first policy in the program). We have reviewed whether the Vandermeer primary's pending and prior litigation exclusion is broader than the corresponding provision in the Harrington Policy. If the Vandermeer exclusion captures a wider range of prior matters — for example, by using a broader "arising out of or related to" nexus standard rather than a narrower "based upon" standard — the DIC function of the Harrington Policy could be activated for claims that have a tangential relationship to prior matters but that would not be excluded under the Harrington Policy's narrower formulation.

5. Regulatory Investigation Coverage

The Harrington Policy includes a broader definition of covered regulatory proceedings than the Vandermeer primary. Specifically, the Harrington Policy extends coverage to include:

• Formal investigations by governmental or regulatory authorities;

• Informal investigations, inquiries, and examinations;

• Subpoenas (including document subpoenas and deposition subpoenas);

• Target letters and Wells notices; and

• Civil investigative demands ("CIDs").

The Vandermeer primary's definition of covered regulatory proceedings may be narrower, potentially excluding informal investigations or pre-formal inquiry stages. Given Nexford's manufacturing operations across three subsidiaries in three states, with workforces subject to oversight by OSHA (workplace safety), CPSC (consumer product safety), and state attorneys general (consumer protection and environmental enforcement), the breadth of regulatory investigation coverage is a meaningful consideration. We have addressed these regulatory exposure issues in detail in the Regulatory Investigation Coverage Memorandum dated June 14, 2022, which should be read in conjunction with this analysis.

6. Definition of Loss

The Harrington Policy's definition of "Loss" is broader than the corresponding definition in the Vandermeer primary in several important respects:

• Punitive and exemplary damages: The Harrington Policy includes punitive and exemplary damages within the definition of Loss, to the extent such damages are insurable under the law of the applicable jurisdiction. This is a meaningful enhancement, as certain jurisdictions (including, under certain circumstances, Delaware) permit the insurance of punitive damages, while the Vandermeer primary may exclude punitive damages from its definition of Loss entirely.

• Civil fines and penalties: The Harrington Policy includes certain civil fines and penalties within the definition of Loss, subject to specified conditions and limitations (e.g., fines and penalties must not be criminal in nature and must be insurable under applicable law). The Vandermeer primary may take a narrower approach, excluding all fines and penalties without distinction.

• Pre-claim inquiry costs: The Harrington Policy includes costs incurred by an Insured Person in responding to inquiries or investigations that have not yet ripened into a formal "Claim" under the policy. This is a significant coverage enhancement, as substantial costs can be incurred during the pre-claim phase — particularly in the regulatory context — before a formal proceeding is commenced.

Each of these definitional differences creates a potential DIC trigger: a loss element that falls outside the Vandermeer primary's definition of "Loss" but within the Harrington Policy's broader definition would be covered under the Side-A DIC on a DIC basis.

7. Allocation

The Harrington Policy's allocation provisions for mixed claims — i.e., claims involving both covered and uncovered matters, or both covered and uncovered parties — are more favorable to Insured Persons than the allocation clause in the underlying Vandermeer primary.

In a mixed claim, the question arises of how to allocate the total loss between the covered portion (attributable to the Insured Person's covered wrongful acts) and the uncovered portion (attributable to entity conduct, uninsured parties, or excluded matters). The Vandermeer primary may contain an allocation provision that requires a negotiated or adjudicated allocation of loss, which can result in a significant portion of the total loss being allocated away from coverage. The Harrington Policy's allocation provision, by contrast, may provide for a more favorable allocation methodology — such as a presumptive allocation in favor of the Insured Person, or a "largest settlement" approach that allocates coverage based on the Insured Person's reasonable settlement exposure.

To the extent the Harrington Policy's allocation terms are more favorable than those in the underlying tower, a claim that is partially covered under the underlying tower but allocated unfavorably could receive enhanced coverage under the Side-A DIC's broader allocation provisions.

C. Summary Table of DIC Differentials

The following table summarizes the key DIC differentials identified in our side-by-side comparison:

VII. Personal Coverage Extensions

A. Scope of Personal Coverage

The Harrington Side-A DIC Policy provides coverage for individual directors and officers in their personal capacity for wrongful acts committed in their insured capacity — that is, in their capacity as directors, officers, or equivalent functional roles of Nexford and its subsidiaries. The coverage is designed to protect the personal assets of the Insured Person, including personal savings, investments, real property, retirement accounts, and other assets that could be exposed to judgment or attachment in connection with claims arising from their service to the Company.

Beyond coverage for the Insured Persons themselves, the Harrington Policy extends coverage to the following related parties:

Spousal and Domestic Partner Coverage. The Harrington Policy extends coverage to the spouses and domestic partners of Insured Persons, but solely for claims arising from the Insured Person's wrongful acts — not for independent claims against the spouse or domestic partner. This extension is designed to address the risk that a plaintiff pursuing a claim against a director or officer will also seek to attach marital or community property, name the spouse as a co-defendant in a fraudulent transfer action, or assert claims related to joint tax returns. In community property jurisdictions and in cases involving large personal judgments, the spousal extension can be a critical protection.

Estate, Heir, and Legal Representative Coverage. The Harrington Policy extends coverage to the estates, heirs, and legal representatives of deceased or incompetent Insured Persons. If a director or officer dies or becomes incapacitated during the policy period or after the policy period but while a covered claim is pending, coverage continues for the estate or heirs to the same extent it would have been available to the Insured Person. This extension ensures that the death or incapacity of a director or officer does not create a gap in the protection of the individual's personal estate.

B. Outside Directorship Liability

The Harrington Policy should be reviewed to determine whether it provides coverage for Nexford directors and officers who serve on outside boards at the Company's request. This is a common coverage feature in Side-A DIC policies and is typically triggered when a Nexford director or officer, at the Company's request or with the Company's consent, serves as a director, officer, trustee, or equivalent of an outside entity — such as a joint venture, an industry association, a charitable organization, or another portfolio company.

This coverage extension is particularly relevant for Sponsor-appointed directors who may simultaneously serve on the boards of other Veltrano Fund IV portfolio companies. If a Sponsor-appointed director who serves on both the Nexford board and the board of another Fund IV portfolio company faces a claim arising from service on the other portfolio company's board, the availability of coverage under the Nexford Side-A DIC Policy depends on whether the outside directorship extension applies. We recommend confirming the scope of this extension with Harrington at renewal and, if necessary, requesting endorsement language that clarifies coverage for service on other Veltrano portfolio company boards.

Additionally, the outside directorship extension typically operates on an excess basis — meaning it applies only after the exhaustion or inapplicability of any D&O coverage maintained by the outside entity. This coordination mechanism should be reviewed to ensure it functions appropriately in the PE-sponsor context, where the outside entity's D&O program may be placed by the same broker and may involve overlapping carriers.

C. Employment Practices Liability Extension

The Harrington Policy should be reviewed for coverage of employment practices liability ("EPL") claims brought against individual directors and officers. EPL claims include allegations of wrongful termination, discrimination (based on race, sex, age, disability, national origin, or other protected characteristics), sexual harassment, retaliation (including whistleblower retaliation), and hostile work environment. While EPL claims are often brought against the corporate entity, they frequently name individual officers — particularly human resources executives, division heads, and C-suite officers — as co-defendants.

The EPL exposure is meaningful for Nexford given the Company's three-subsidiary structure with significant manufacturing workforces in Joliet, Illinois (Nexford Conveyor Systems), Rockford, Illinois (Triton Fastener Corp.), and Akron, Ohio (Marlowe Asset Management Precision Machining). Manufacturing operations tend to generate higher volumes of employment-related claims due to factors including shift work, physical working conditions, union dynamics, and the demographic diversity of the workforce. Individual directors and officers named in EPL claims — particularly claims alleging systemic discrimination or failure to address known harassment — face personal liability exposure for which the Side-A DIC may provide essential protection, especially if the Company's indemnification is unavailable or if the underlying D&O tower's EPL coverage is limited by the Insured vs. Insured exclusion.

D. Pre-Claim Inquiry and Extradition Costs

Pre-Claim Inquiry Costs. As noted in Section VI.B.6 above, the Harrington Policy's definition of "Loss" may include pre-claim inquiry costs — that is, costs incurred by an individual director or officer in responding to informal regulatory inquiries, governmental requests for information, or preliminary investigation activity that has not yet ripened into a formal "Claim" as defined in the policy. This coverage is particularly valuable in the regulatory context, where a director or officer may need to retain personal counsel, engage forensic accountants, or produce documents in response to an informal OSHA inquiry or a CPSC information request, before any formal proceeding has been commenced. The pre-claim inquiry cost coverage fills a temporal gap that exists in many traditional D&O policies, which provide coverage only after a formal "Claim" has been made.

Extradition and Crisis Management Costs. Some Side-A DIC policies include provisions for extradition expenses — covering the costs incurred by an Insured Person in connection with extradition proceedings arising from criminal charges related to the Insured Person's service to the Company — and crisis management costs, including the costs of public relations advisors, crisis communications consultants, and related professionals retained in connection with a covered claim. We have reviewed the Harrington Policy for the presence and terms of any such provisions. While these coverages are less commonly triggered in the context of a privately held industrial company, they represent additional elements of the personal protection framework that the Side-A DIC is designed to provide. If these provisions are present in the Harrington Policy, they should be evaluated for adequacy at renewal. If they are absent, consideration should be given to requesting their inclusion by endorsement, particularly if the Company proceeds toward an IPO, which would elevate the Company's public profile and the associated risk of governmental enforcement actions with potential criminal dimensions.

VIII. Coordination with Underlying D&O Tower

A. Drop-Down Mechanics

The Harrington Side-A DIC Policy is designed to drop down and respond as primary coverage in circumstances where the underlying D&O tower fails to provide coverage for a non-indemnifiable loss sustained by an individual Insured Person. The principal drop-down scenarios are:

(1) Exhaustion of the underlying tower by non-Side-A claims. If entity-level claims (Side-C), indemnifiable loss claims (Side-B), or claims by co-insured parties consume the $40,000,000 aggregate limit of the underlying four-layer tower, the Side-A DIC's $15,000,000 limit remains fully available for non-indemnifiable loss of individual Insured Persons. Because the Side-A DIC limit is dedicated and non-aggregating, it cannot be eroded by claims that do not constitute non-indemnifiable individual loss.

(2) Denial of coverage by an underlying carrier. If Vandermeer National or any of the excess carriers denies coverage for a claim that would be covered under the broader terms of the Harrington Policy, the Side-A DIC drops down and responds on a DIC basis, as discussed in Section VI above.

(3) Underlying carrier insolvency. If any underlying carrier becomes insolvent or is unable to pay its obligations, the Side-A DIC drops down to fill the resulting gap, as discussed in Section V.C above.

The dedicated, non-eroding nature of the Side-A DIC limit is a foundational structural feature. The $15,000,000 Side-A DIC limit does not erode the underlying tower limits, and the underlying tower limits do not erode the Side-A DIC limit. The two coverage structures operate independently of each other, ensuring that the Side-A DIC limit is always fully available for its intended purpose — personal asset protection for individual directors and officers — regardless of what occurs in the underlying tower.

B. "Other Insurance" Provisions

The Harrington Policy contains an "other insurance" clause that defines the policy's priority relative to other insurance that may be available to the Insured Person. The standard structure for a Side-A DIC policy is as follows:

• For non-indemnifiable loss, the Side-A DIC sits as primary. Because the non-indemnification trigger has been activated (meaning the Company is unable, unwilling, or legally prohibited from indemnifying), the Side-A DIC responds from the first dollar, without waiting for the underlying tower to respond. The underlying tower's Side-A coverage may also respond, but the Side-A DIC operates independently and drops down to fill any gaps.

• The underlying D&O tower remains primary for Side-B (indemnifiable) loss and Side-C (entity) loss. The Side-A DIC does not respond to these categories of loss, which are within the exclusive province of the underlying tower.

The interplay between the Side-A DIC and the underlying tower's "other insurance" provisions should be reviewed at each renewal to ensure that no conflicts or inconsistencies have been introduced. In particular, the renewal of the underlying tower — and the potential replacement of Graystone Mutual Assurance Co. with Northfield Excess Insurance Company on the second excess layer — could introduce new "other insurance" language that affects the coordination mechanics. Calderwood & Harkness should review the renewal policy forms for all layers to confirm seamless integration.

C. Erosion Scenarios

To illustrate the practical significance of the Side-A DIC's dedicated limit structure, we present the following scenario analysis:

Scenario: A major creditor of Nexford — or a group of creditors acting in concert — brings

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP Yuki Nakamura, Working Associate, Calderwood & Harkness LLP
DATE: June 3, 2022
RE: Nexford Industrial Holdings Inc. — Side-A DIC Policy Analysis; Harrington Specialty Insurance Co. Policy No. HSI-DIC-2021-00342
MATTER NO.: 1005-00003
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I. Executive Summary
This memorandum provides a detailed analysis of the Harrington Specialty Insurance Co. Side-A Directors & Officers Difference-in-Conditions ("DIC") policy currently in force for the July 1, 2021 through July 1, 2022 policy year, Policy No. HSI-DIC-2021-00342 (the "Harrington Policy" or "Side-A DIC Policy"). The analysis has been prepared at the direction of Responsible Partner Douglas Fairchild to support the advisory engagement for Nexford Industrial Holdings Inc. ("Nexford" or the "Company") in connection with the upcoming July 1, 2022 renewal of the Company's directors and officers ("D&O") liability insurance program.
The Side-A DIC Policy currently provides a $15,000,000 dedicated limit of liability for non-indemnifiable loss sustained by individual directors and officers of Nexford and its subsidiaries. The limit is non-aggregating with the underlying D&O tower and is not subject to any self-insured retention ("SIR"). The current annual premium is $224,000, which is fully earned at inception.
The Side-A DIC Policy sits alongside Nexford's four-layer underlying D&O tower, which provides an aggregate of $40,000,000 in combined limits across the following carriers: Vandermeer National Insurance Company (primary), Commonwealth Indemnity Group (first excess), Graystone Mutual Assurance Co. (second excess), and Pinnacle Re Insurance Ltd. (third excess). Including the Side-A DIC Policy, Nexford's total D&O program provides $55,000,000 in aggregate limits at a combined annual premium of $1,363,450.
Based on our analysis of the policy terms, coordination with the underlying D&O tower, and assessment of the Company's current and anticipated risk profile, we recommend that Nexford increase the Side-A DIC limit from $15,000,000 to $20,000,000 at the upcoming July 1, 2022 renewal. This recommendation is driven by several converging factors:
(a) PE Sponsor Control Dynamics. Veltrano Capital Partners Fund IV, LP holds 68.5% of the Company's equity and appoints five of the nine board directors. This concentrated ownership structure creates heightened exposure for insured-versus-insured claims, conflicted transaction allegations, and breach of fiduciary duty claims — categories of risk for which the Side-A DIC may be the only available source of coverage given the Insured vs. Insured exclusion in the underlying tower.
(b) Potential IPO in the 2023–2024 Timeframe. The Company's General Counsel, Priya Sundaram, has identified a potential initial public offering as a near-term strategic possibility. If Nexford proceeds to a public offering, the exposure profile for directors and officers will increase substantially, including securities class action risk, SEC enforcement exposure, and shareholder derivative litigation. While the entire D&O tower will require restructuring in connection with any IPO, ensuring a robust Side-A DIC foundation now is a prudent preparatory measure.
(c) Dedicated, Non-Eroding Nature of Side-A Coverage. The Side-A DIC Policy represents the last line of personal asset protection for individual directors and officers. Unlike the underlying D&O tower, which is subject to erosion by entity-level and Side-B claims, the Side-A DIC limit is exclusively dedicated to non-indemnifiable loss of individual Insured Persons. In a worst-case scenario — including Company insolvency — the Side-A DIC is the only policy that will pay directly to the individual director or officer without risk of the proceeds being swept into a bankruptcy estate.
This memorandum addresses six key areas of analysis: (i) trigger provisions, (ii) bankruptcy and insolvency response, (iii) difference-in-conditions coverage grants, (iv) personal coverage extensions, (v) limit adequacy, and (vi) coordination with the underlying D&O tower. Our analysis identifies the policy's significant strengths, notes areas requiring attention at renewal, and catalogs the DIC differentials between the Harrington Policy and the Vandermeer National primary D&O policy.
Preliminary premium indications from the Company's insurance broker, Ashford Breckinridge LLP, suggest that the proposed increase to a $20,000,000 limit can be achieved at an estimated annual premium of approximately $285,000 to $295,000, representing an incremental cost of approximately $61,000 to $71,000 per year. This incremental cost is modest relative to the total D&O tower premium of $1,363,450, the Company's combined insurance spend of $4,006,350, and the Company's $1.42 billion in annual revenue.
II. Background
A. Nexford Corporate Structure and Board Composition
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The Company was acquired on June 15, 2018 in a leveraged buyout valued at approximately $2.1 billion by Veltrano Capital Partners Fund IV, LP ("Veltrano Fund IV" or the "Sponsor"), a Delaware limited partnership with offices in Charlotte, North Carolina and New York, New York. Fund IV is a 2017-vintage fund with $4.8 billion in committed capital. Nexford is Fund IV's largest portfolio company by enterprise value.
The Company's current capitalization reflects the post-LBO ownership structure as follows:
• Veltrano Capital Partners Fund IV, LP: 68.5% equity ownership
• Management Rollover Equity: 19.3% (held by certain continuing members of senior management who participated in the rollover at the time of the LBO)
• Co-Investor Equity: 12.2% (held by co-investors who participated alongside Fund IV in the acquisition)
Nexford's estimated current enterprise value is approximately $2.6 billion, reflecting appreciation from the original $2.1 billion acquisition price. For fiscal year 2021, the Company reported consolidated revenue of $1.42 billion and EBITDA of $218 million. The Company's total funded debt stands at approximately $1.05 billion, consisting of a Term Loan B facility and a Revolving Credit Facility, with Broadleaf Capital Markets, LLC serving as administrative agent. The resulting leverage ratio is approximately 4.8x EBITDA.
Nexford operates through three wholly-owned operating subsidiaries:
The Company is governed by a nine-member board of directors, composed of four independent directors and five directors appointed by the Sponsor pursuant to the stockholders' agreement. The board is chaired by Gerald "Gerry" Whitcomb, a Veltrano-appointed director. In addition to the nine voting members, Celeste Brogan, Partner, Portfolio Operations at Veltrano Capital Partners, serves as a non-voting board observer.
The Company's senior officers include:
• Sandra Elliston, Chief Executive Officer
• Marcus Delacroix, Chief Financial Officer
• Priya Sundaram, General Counsel and Corporate Secretary
• Trevor Haines, Vice President, Risk Management
The combination of a PE sponsor holding a supermajority equity position, a sponsor-controlled board (five of nine seats plus the board chairman position), and a leveraged capital structure creates a governance dynamic that is directly relevant to the Side-A DIC analysis, as discussed in greater detail throughout this memorandum.
B. Current D&O Tower Structure (2021–2022)
Nexford's current D&O liability insurance program consists of four layers of traditional D&O coverage (providing Insuring Agreements A, B, and, to a limited extent, C) plus the dedicated Side-A DIC Policy that is the subject of this memorandum. The following table summarizes the layer-by-layer structure of the program for the 2021–2022 policy year:
The resulting combined rate-on-line for the entire D&O program is approximately 2.48% ($1,363,450 ÷ $55,000,000).
With respect to D&O loss history, Nexford has a favorable record. Over the past five years, there has been one reported D&O claim — a shareholder demand letter received in 2020 relating to certain governance matters, which was resolved without any payment. There have been zero paid D&O losses during this period. While the Company's clean loss history is a positive factor for premium negotiations, it should not be conflated with an absence of risk exposure. As a privately held company, Nexford does not currently face securities-litigation exposure of the type associated with public companies. However, employment practices claims, regulatory investigations, creditor claims (particularly given the leveraged capital structure), and fiduciary duty disputes arising from the PE sponsor relationship remain meaningful exposure areas.
C. Scope of This Memorandum
This analysis was prepared pursuant to the Calderwood & Harkness LLP engagement letter dated April 22, 2022, under the standing outside counsel agreement between Calderwood & Harkness LLP and Nexford Industrial Holdings Inc. dated January 15, 2020. The scope of this memorandum is limited to the Side-A DIC Policy and its coordination with the underlying D&O tower. Related memoranda addressing other aspects of the D&O program are identified by cross-reference throughout this analysis.
In preparing this memorandum, we reviewed the following policy documents and related materials:
• Harrington Specialty Insurance Co. Side-A DIC Policy, Policy No. HSI-DIC-2021-00342, including all endorsements, declarations, and schedules;
• Vandermeer National Insurance Company primary D&O Policy, Policy No. VNI-DO-2021-88473, including all endorsements and declarations;
• Commonwealth Indemnity Group first excess D&O Policy, Policy No. CIG-XS-2021-7742;
• Graystone Mutual Assurance Co. second excess D&O Policy, Policy No. GMA-XS-2021-3316;
• Pinnacle Re Insurance Ltd. third excess D&O Policy, Policy No. PRI-XS-2021-0091;
• Nexford Industrial Holdings Inc. form Director and Officer Indemnification Agreement (current version dated September 2019);
• Nexford Industrial Holdings Inc. Amended and Restated Certificate of Incorporation (filed June 15, 2018);
• Nexford Industrial Holdings Inc. Amended and Restated Bylaws (adopted June 15, 2018, as amended through March 2021);
• Nexford Industrial Holdings Inc. Stockholders' Agreement (dated June 15, 2018); and
• Selected board resolutions related to indemnification and insurance authorization.
We also coordinated with the Company's insurance broker, Ashford Breckinridge LLP, specifically Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, regarding placement history, carrier communications, and preliminary renewal indications. Additionally, we reviewed the actuarial analysis prepared by Kessler Quinn Advisory Group — specifically Arthur Kessler, Managing Director, and Diana Cho, Vice President, Actuarial Services — regarding D&O loss modeling for companies with profiles comparable to Nexford.
This memorandum is one of several related work product deliverables under the engagement. Cross-references are made throughout to the following companion memoranda:
• Preliminary Coverage Gap Memorandum (dated May 27, 2022) — identifying 14 specific gaps in the underlying D&O tower;
• Claims Reporting Compliance Checklist (dated June 1, 2022) — prepared for Trevor Haines and Donna Kowalski;
• Indemnification Agreement Review Memorandum (dated June 4, 2022);
• D&O Limits Adequacy Memorandum (dated June 6, 2022); and
• Regulatory Investigation Coverage Memorandum (dated June 14, 2022) — addressing OSHA, CPSC, and state attorney general investigation exposure.
III. Policy Overview — Harrington Specialty Side-A DIC (HSI-DIC-2021-00342)
A. Named Insureds and Insured Persons
The Harrington Side-A DIC Policy identifies Nexford Industrial Holdings Inc. as the Named Insured. The policy defines "Insured Persons" to include all past, present, and future directors and officers of Nexford Industrial Holdings Inc. and each of its subsidiaries, as those terms are defined in the policy. Based on the subsidiary schedule attached to the declarations, the covered subsidiaries include:
• Nexford Conveyor Systems, LLC (Delaware LLC; Joliet, Illinois);
• Triton Fastener Corp. (Illinois corporation; Rockford, Illinois); and
• Marlowe Asset Management Precision Machining, Inc. (Ohio corporation; Akron, Ohio).
Consistent with the fundamental nature of a Side-A policy, the Harrington Policy covers only individual Insured Persons. There is no entity coverage under the Side-A DIC. Nexford, as the Named Insured, does not receive direct coverage for losses it sustains as an entity; rather, the Named Insured designation serves to identify the corporate family whose individual directors and officers are the beneficiaries of the policy. This is a critical distinction from the underlying D&O tower, which provides entity coverage (Side-C) and indemnifiable loss coverage (Side-B) in addition to non-indemnifiable loss coverage (Side-A). The Harrington Policy is a personal protection policy, designed solely to protect the personal assets of individual directors and officers.
Coverage extends to all nine current members of the Nexford board of directors, including the four independent directors and the five Sponsor-appointed directors. It also covers all officers of the Company and its subsidiaries, including Sandra Elliston (CEO), Marcus Delacroix (CFO), Priya Sundaram (General Counsel and Corporate Secretary), Trevor Haines (VP Risk Management), and all other officers meeting the policy's definition of that term.
An important point requiring attention at renewal concerns the Sponsor-appointed directors who serve in a dual capacity — specifically, those individuals who are both board members of Nexford and employees or partners of Veltrano Capital Partners. The Harrington Policy should be reviewed to determine whether claims arising from these individuals' Veltrano roles (as opposed to their Nexford board roles) are excluded from coverage or are subject to a carve-back. If the policy contains a limitation on coverage for claims arising out of services rendered for an entity other than the Named Insured or its subsidiaries, Sponsor-appointed directors could face a coverage gap for claims that straddle their Veltrano and Nexford responsibilities. We recommend that this issue be addressed with Harrington through the broker at renewal, and that appropriate clarifying endorsement language be requested if any ambiguity exists.
B. Policy Period and Limits
The Harrington Side-A DIC Policy has a policy period of July 1, 2021 to July 1, 2022. The limit of liability is $15,000,000 per policy period. This limit is dedicated — meaning it does not share an aggregate with any of the underlying D&O tower layers — and is available exclusively for non-indemnifiable loss of individual Insured Persons.
The policy is not subject to any self-insured retention. When the policy is triggered — whether by non-indemnification of an Insured Person or on a DIC basis — Harrington is obligated to pay from the first dollar of covered loss, without any deductible or retention. This stands in contrast to the underlying Vandermeer primary policy, which imposes a $1,000,000 SIR on entity coverage.
The Harrington Policy is a claims-made and reported policy. A claim must be first made against the Insured Person during the policy period and must be reported to Harrington during the policy period or within any applicable extended reporting period. The policy includes extended reporting period provisions, the terms of which are discussed in Section IV.C below.
C. Premium. The annual premium for the Harrington Side-A DIC Policy is $224,000. Consistent with market practice for Side-A DIC placements, the premium is fully earned at inception. This means that no portion of the premium is refundable upon cancellation or non-renewal of the policy, and the full premium obligation accrued on the July 1, 2021 inception date. The fully-earned premium structure reflects the unique nature of Side-A DIC coverage, which cannot be replaced mid-term without exposing Insured Persons to potential gaps in personal protection.
The current rate-on-line for the Side-A DIC Policy is 1.49% ($224,000 ÷ $15,000,000), which is within the range we have observed for Side-A DIC placements of this type for privately held, PE-backed industrial companies.
IV. Trigger Provisions Analysis
A. Primary Trigger — Non-Indemnification
The Harrington Side-A DIC Policy is fundamentally a non-indemnification policy. It responds when Nexford — the entity that would ordinarily indemnify its directors and officers pursuant to the Company's bylaws, certificate of incorporation, and individual indemnification agreements — is unable or unwilling to indemnify the Insured Person for a loss that would otherwise be covered under the policy.
The Harrington Policy identifies three specific trigger scenarios under which the non-indemnification response is activated:
1. Financial Inability. The policy responds when Nexford is financially unable to indemnify an Insured Person. This trigger encompasses situations in which the Company lacks sufficient liquid assets to satisfy its indemnification obligations, is in a state of insolvency (whether legal or equitable), or has filed for or been placed into bankruptcy proceedings under Title 11 of the United States Code. The financial inability trigger does not require a formal bankruptcy filing; it can be activated if the Company simply lacks the financial resources to make the indemnification payment, regardless of whether formal insolvency proceedings have been commenced.
In the context of Nexford's current financial position, this trigger warrants careful consideration. While the Company's fiscal year 2021 financial performance is strong — $1.42 billion in revenue and $218 million in EBITDA — the Company also carries $1.05 billion in funded debt from the 2018 LBO. The resulting leverage ratio of approximately 4.8x EBITDA, while within acceptable ranges for leveraged buyout structures, is not insignificant. In a downside economic scenario — such as a severe contraction in industrial demand, supply chain disruption, or a credit market dislocation — the Company's ability to service its debt and simultaneously satisfy indemnification obligations to directors and officers could be strained. The financial inability trigger in the Side-A DIC Policy is designed to address precisely this contingency.
2. Legal Prohibition. The policy responds when Nexford is legally prohibited from indemnifying an Insured Person under applicable law. Under Section 145 of the Delaware General Corporation Law ("DGCL"), a corporation's power to indemnify its directors and officers is subject to certain limitations. Most notably, Section 145(a) permits indemnification of directors and officers who acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation. Where a director or officer is found to have breached the duty of loyalty, engaged in intentional misconduct, or obtained an improper personal benefit, the corporation may be legally prohibited from providing indemnification. Similarly, public policy considerations may prevent indemnification in certain circumstances — for example, with respect to disgorgement obligations under securities laws or penalties under environmental statutes.
The legal prohibition trigger is of particular significance in the Nexford context because of the Sponsor dynamics. If a claim were brought alleging that a Sponsor-appointed director breached the duty of loyalty by acting in the interest of Veltrano Capital Partners rather than in the best interest of Nexford, a court could find that indemnification of such conduct is not permitted under the DGCL. In that scenario, the Side-A DIC Policy would be the only source of coverage for the individual director's personal defense costs and, potentially, any judgment or settlement.
3. Refusal to Indemnify. The policy responds when Nexford refuses to indemnify an Insured Person for any reason, including a board decision not to advance defense costs or not to indemnify following the conclusion of a proceeding. This trigger is intentionally broad and does not require the Company to articulate a legal basis for its refusal. If the board — or any authorized body within the Company — simply declines to approve indemnification or advancement, the Side-A DIC is triggered.
The refusal trigger is particularly important in the PE-sponsor context. Because Veltrano-appointed directors hold five of nine board seats, a majority of the board could theoretically refuse to approve indemnification of a director or officer whose interests conflict with those of the Sponsor. For example, if management and the Sponsor are in dispute regarding a transaction, the Sponsor-controlled board could refuse to advance defense costs to a management director who has brought a claim challenging the transaction. In that scenario, the Side-A DIC's refusal trigger would be the affected director's primary means of obtaining coverage for defense costs and other covered losses.
B. DIC Trigger — Difference in Conditions
In addition to the non-indemnification trigger, the Harrington Policy responds on a "difference-in-conditions" basis. The DIC trigger activates when the underlying D&O tower denies, rescinds, or limits coverage for a claim that would otherwise be covered under the broader terms of the Side-A DIC Policy. This is the feature that distinguishes a "Side-A DIC" policy from a simple "Side-A only" policy: the DIC function provides gap-filling coverage wherever the underlying tower's terms are narrower or more restrictive than the Harrington Policy's terms.
The DIC trigger is activated under the following principal circumstances:
• Underlying carrier denial based on an exclusion not present in the Harrington Policy. If Vandermeer National (or any of the excess carriers) denies coverage for a claim based on an exclusion contained in the underlying policy that does not appear in the Harrington Policy — or that appears in a narrower form in the Harrington Policy — the Harrington Policy drops down and responds as if no underlying coverage existed for that claim. This is the core DIC mechanism, and the specific exclusion differentials are catalogued in Section VI below.
• Underlying carrier insolvency or failure to pay. If any underlying carrier — Vandermeer, Commonwealth, Graystone, or Pinnacle Re — becomes insolvent, is placed in rehabilitation or liquidation by a state insurance department, or otherwise fails to pay a covered claim, the Harrington Policy drops down to fill the gap left by the failed carrier. This trigger is discussed in greater detail in Section V.C below.
• Exhaustion of the underlying tower by non-Side-A claims. If the $40,000,000 underlying D&O tower is exhausted by claims that are not individual, non-indemnifiable claims — such as entity-level claims (Side-C), indemnifiable loss claims (Side-B), or claims by co-insured parties — the Harrington Policy's $15,000,000 limit remains fully available for the individual Insured Person. This is the "last line of defense" function of the Side-A DIC: even if the underlying tower has been entirely consumed, the dedicated Side-A limit is intact and available.
The gap-filling function of the DIC trigger is the most analytically significant feature of the Harrington Policy. By intentionally drafting the Side-A DIC terms to be broader than the underlying tower's terms, Harrington creates an affirmative coverage program that captures claims falling into the gaps between the underlying tower's exclusions and the Harrington Policy's broader grants. The specific DIC differentials we have identified between the Harrington Policy and the Vandermeer primary policy are discussed in detail in Section VI.
C. Claims-Made Trigger Mechanics
The Harrington Side-A DIC Policy operates on a claims-made and reported basis. Under this trigger structure, three conditions must be satisfied for coverage to attach:
(1) A "Claim" (as defined in the policy) must be first made against an Insured Person during the policy period (July 1, 2021 to July 1, 2022);
(2) The Claim must be reported to Harrington during the policy period or within any applicable extended reporting period; and
(3) The Claim must arise from a "Wrongful Act" (as defined in the policy) that occurred on or after the applicable retroactive date.
Definition of "Claim." The Harrington Policy defines "Claim" broadly to include: (a) any written demand for monetary or non-monetary relief; (b) any civil proceeding, including a lawsuit, counterclaim, cross-claim, or third-party complaint; (c) any criminal proceeding; (d) any arbitration or alternative dispute resolution proceeding; (e) any administrative or regulatory proceeding; and (f) any formal investigation by a governmental authority, including the issuance of a subpoena, target letter, or Wells notice. This breadth of definition is an important feature of the Harrington Policy and stands in contrast to the Vandermeer primary policy's definition of "Claim," which we have identified as potentially narrower. Specifically, in our Preliminary Coverage Gap Memorandum dated May 27, 2022, we identified Item 7 of 14 D&O gaps as concerning the narrower "Claim" definition in the Vandermeer primary, which may not encompass certain categories of informal governmental inquiries or pre-formal investigation communications. The DIC function of the Harrington Policy should fill this gap, such that a matter meeting Harrington's broader "Claim" definition but not Vandermeer's narrower definition would be covered under the Side-A DIC on a DIC basis.
Retroactive Date / Interrelation Date. The Harrington Policy provides coverage for claims arising from wrongful acts committed on or after June 15, 2018 — the date of the Veltrano LBO closing. This retroactive date is consistent with the retroactive date used in the underlying D&O tower. The selection of the LBO closing date as the retroactive date reflects the fact that the current D&O program was placed in connection with the LBO, and that the current universe of Insured Persons and the current corporate structure originated on that date.
Extended Reporting Period. The Harrington Policy provides for an extended reporting period (sometimes referred to as a "tail" or "Discovery period") following the expiration of the policy period. The specific terms of the extended reporting period — including duration, triggering events, and any additional premium — should be reviewed in detail at renewal. Given the potential for an IPO in the 2023–2024 timeframe, the availability and terms of the extended reporting period take on additional significance, as the Company may wish to consider purchasing an extended reporting period under the current policy structure before transitioning to a public-company D&O program.
V. Bankruptcy and Insolvency Response Provisions
A. Company Insolvency / Bankruptcy Trigger
The Harrington Side-A DIC Policy contains detailed provisions addressing the impact of Nexford entering bankruptcy, receivership, or insolvency proceedings on the availability of coverage for individual Insured Persons. These provisions are among the most important features of any Side-A DIC policy, and the Harrington Policy's treatment of this issue is robust.
The policy expressly provides that Harrington's obligations to pay covered losses to individual Insured Persons are not stayed, discharged, reduced, or otherwise affected by any bankruptcy filing by Nexford, any subsidiary, or any other entity. This means that even if the Company commences a voluntary petition under Chapter 11 of the Bankruptcy Code, or is the subject of an involuntary petition under Chapter 7, the Side-A DIC Policy remains fully operative and available to individual directors and officers.
This provision directly addresses one of the most significant risks in D&O insurance: the risk that the bankruptcy estate will assert that D&O insurance proceeds constitute property of the estate under Section 541 of the Bankruptcy Code and therefore are subject to the automatic stay under Section 362. In the traditional D&O context (i.e., policies that include entity coverage), courts have sometimes found that D&O insurance proceeds are property of the estate because the entity has a direct interest in the policy proceeds — for example, to fund indemnification obligations or to satisfy direct entity-coverage claims. This risk is most acute in the underlying D&O tower, where Side-B and Side-C coverage may create an estate interest in the policy limits.
The Side-A DIC Policy is specifically designed to eliminate this risk. Because the Harrington Policy covers only non-indemnifiable loss of individual Insured Persons, and because the Company has no direct interest in the policy proceeds (which are payable exclusively to the individual, not to the entity), the Side-A DIC limit should not be deemed property of the estate. The Harrington Policy's express bankruptcy-override provision reinforces this structural protection.
This provision is of particular significance given Nexford's current financial condition. With $1.05 billion in funded debt — the legacy of the 2018 leveraged buyout — the Company carries a leverage ratio of approximately 4.8x EBITDA. While the Company's current performance is adequate to service this debt, a meaningful adverse event — such as a severe economic downturn, a major product-liability loss, or a disruption in the industrial manufacturing sector — could place the Company under financial stress. In such a scenario, the directors and officers would face the dual risk of personal claims (e.g., creditor allegations of breach of fiduciary duty, deepening insolvency claims, fraudulent transfer allegations) and the loss of the Company's ability to indemnify them. The Side-A DIC Policy's bankruptcy-override provisions ensure that coverage remains available precisely when the directors and officers need it most.
B. Direct Payment to Insured Persons
A foundational feature of the Harrington Side-A DIC Policy is that Harrington pays losses directly to the individual Insured Person, not to the Company. This direct-payment mechanism serves several critical purposes:
• It prevents insurance proceeds from being swept into the Company's bankruptcy estate or from being attached by the Company's creditors. Because the proceeds flow to the individual — not through the entity — they are not available to satisfy the Company's obligations to its lenders, trade creditors, or other claimants.
• It ensures that the individual Insured Person receives the benefit of the coverage regardless of the Company's financial condition, corporate decisions, or governance dynamics. The individual director or officer is not dependent on the Company's willingness or ability to process the insurance claim; the individual can submit the claim directly to Harrington and receive payment directly.
• It preserves the Side-A DIC Policy's status as a policy in which the bankruptcy estate has no interest, thereby strengthening the argument against any assertion by a bankruptcy trustee that the policy proceeds are estate property.
The Harrington Policy also contains a "Priority of Payments" clause that establishes a clear hierarchy for the application of policy proceeds. Under this clause, Harrington prioritizes non-indemnifiable loss (i.e., Side-A loss — the very category of loss for which the policy is designed) over any other type of exposure. While the Harrington Policy does not provide entity coverage or Side-B coverage, this priority-of-payments provision is relevant to the extent that any allocation dispute arises between covered and uncovered loss, or between the claims of different Insured Persons. The provision ensures that the policy's limited proceeds are applied first to the most critical category of exposure: personal, non-indemnifiable loss of individual directors and officers.
C. Carrier Insolvency
The Harrington Policy contains a DIC trigger that activates if an underlying carrier in the D&O tower becomes insolvent or is placed in rehabilitation or liquidation proceedings by the carrier's domiciliary state insurance department (or, in the case of Pinnacle Re, by the Bermuda Monetary Authority). If an underlying carrier is unable to fulfill its obligations under the D&O tower — whether due to insolvency, receivership, or regulatory intervention — the Harrington Policy drops down to fill the gap in coverage for the individual Insured Person.
We have reviewed the current financial condition and ratings of the four underlying D&O carriers:
We note that Graystone Mutual Assurance Co., the second excess carrier, carries a B++ (Good) rating from A.M. Best, which, while still within the "secure" category, is lower than the ratings of the other tower participants. Furthermore, we understand that Graystone's rating is under review for a possible downgrade. As discussed in Section XI (Outstanding Considerations), Northfield Excess Insurance Company has been identified as a potential replacement for Graystone on the second excess layer at the upcoming renewal. If Graystone is replaced, the Harrington Policy's DIC provisions should be reviewed to ensure proper coordination with the replacement carrier's terms.
Additionally, we note that Pinnacle Re Insurance Ltd. is domiciled in Bermuda, which is subject to a different regulatory framework than the United States-domiciled carriers. While Bermuda's regulatory regime is generally well-regarded, the mechanisms for rehabilitating or liquidating a Bermuda-domiciled insurer differ from those available under U.S. state insurance guarantee fund laws. In the event of a Pinnacle Re insolvency, the availability and extent of state guarantee fund coverage may be more limited or uncertain than would be the case for a domestically domiciled carrier. The Harrington Policy's carrier-insolvency DIC trigger provides an additional layer of protection against this contingency.
We recommend that Nexford, through its broker Ashford Breckinridge, periodically monitor the A.M. Best ratings and financial condition of all underlying carriers in the D&O tower, with particular attention to Graystone Mutual and Pinnacle Re.
VI. Difference-in-Conditions Coverage Grants
A. Methodology — Coverage Comparison
The DIC function of the Harrington Side-A DIC Policy is the feature that most significantly distinguishes it from a simple Side-A-only policy. To identify and catalogue the specific coverage differentials between the Harrington Policy and the underlying D&O tower, we conducted a side-by-side comparison of the Harrington Policy's terms (including definitions, insuring agreements, exclusions, and conditions) against the corresponding provisions of the Vandermeer National primary D&O policy (Policy No. VNI-DO-2021-88473).
The Vandermeer primary was selected as the primary comparator because it is the lead policy in the underlying tower, and the three excess layers (Commonwealth, Graystone, and Pinnacle Re) are generally follow-form to the Vandermeer terms, subject to any differences noted in their respective policies. Where a specific excess-layer policy contains a term or exclusion that differs from the Vandermeer primary, that difference is noted.
The DIC function operates as follows: wherever the underlying Vandermeer policy contains an exclusion, limitation, condition, or definitional restriction that does not appear in the Harrington Policy — or that appears in a narrower or more favorable form in the Harrington Policy — the Harrington Policy drops down and responds as though the underlying tower had denied coverage for that claim. The Harrington Policy thereby "fills the gap" between the underlying tower's more restrictive terms and the broader coverage available under the Side-A DIC.
B. Key DIC Differentials Identified
Our side-by-side comparison has identified seven principal areas in which the Harrington Side-A DIC Policy provides materially broader coverage than the underlying Vandermeer primary D&O policy. Each differential is discussed below.
1. Insured vs. Insured Exclusion
The Vandermeer primary D&O policy contains an Insured vs. Insured exclusion (sometimes referred to as the "IvI exclusion") that bars coverage for claims brought by one Insured Person against another Insured Person, or by the Named Insured (Nexford) against an Insured Person. This exclusion is standard in D&O policies and is designed to prevent collusive litigation — i.e., to prevent the company or its insiders from manufacturing claims against each other in order to access insurance proceeds.
However, the IvI exclusion can have unintended and adverse consequences in the PE-sponsor context. Because Veltrano Capital Partners Fund IV holds 68.5% of Nexford's equity and appoints five of nine board directors, a number of realistic claim scenarios could trigger the IvI exclusion:
• A derivative action brought by or on behalf of Nexford (as entity) against one or more directors, alleging breach of fiduciary duty — because Nexford is the Named Insured, such a claim would be brought by an "Insured" against an "Insured Person," potentially triggering the exclusion;
• A board dispute between Sponsor-appointed directors and independent or management directors — if one faction of the board brings a claim against the other, both sides are Insured Persons, triggering the exclusion;
• Post-exit claims by remaining shareholders or the Company against former Sponsor-appointed directors following a Veltrano exit — depending on the timing and structure, such claims could be captured by the exclusion; and
• Employment-related claims brought by a director or officer against the Company — if the individual is both an Insured Person and an employee, the exclusion could apply.
The Harrington Side-A DIC Policy either does not contain an Insured vs. Insured exclusion or contains a significantly narrower version with specific carve-backs. Based on our review of the policy language, the Harrington Policy's treatment of IvI claims includes carve-backs for: (a) whistleblower claims and claims brought by an Insured Person in a whistleblower capacity; (b) employment-related claims, including claims for wrongful termination, discrimination, or retaliation; and (c) derivative claims brought in the right of the Company. These carve-backs are critically important in the Nexford context, and the DIC function of the Harrington Policy ensures that claims falling within the Vandermeer IvI exclusion — but outside the scope of the Harrington exclusion or within a Harrington carve-back — are covered under the Side-A DIC.
This differential is, in our judgment, the most significant DIC differential in the current policy structure, given the Sponsor control dynamics and the realistic potential for intra-board disputes.
2. Conduct Exclusions
The Vandermeer primary D&O policy contains conduct exclusions that bar coverage for claims based on or arising out of: (a) dishonesty or fraudulent conduct by the Insured Person; (b) deliberate criminal conduct by the Insured Person; and (c) the Insured Person's gaining of any profit, remuneration, or advantage to which the Insured Person was not legally entitled. These conduct exclusions are standard in D&O policies and serve to prevent insurance coverage for intentional wrongdoing.
The critical question in analyzing conduct exclusions is the trigger standard: when does the exclusion apply? There are two principal approaches used in the D&O market:
• The "in fact" standard, under which the exclusion applies if the relevant conduct occurred "in fact," regardless of whether there has been a judicial determination to that effect. Under this standard, the insurer can assert the conduct exclusion at any time, including during the pendency of litigation, based on its own investigation and determination that the insured engaged in the relevant conduct.
• The "final adjudication" standard, under which the exclusion applies only upon a final, non-appealable adjudication — i.e., a court judgment, jury verdict, or other dispositive judicial determination that is no longer subject to appeal — establishing that the Insured Person engaged in the relevant conduct.
The Harrington Side-A DIC Policy applies the final adjudication standard. The conduct exclusions in the Harrington Policy are triggered only upon a final, non-appealable adjudication establishing that the Insured Person engaged in dishonest, fraudulent, or criminal conduct, or that the Insured Person obtained an improper personal benefit. Until such a final adjudication is entered, the exclusion does not apply, and the Insured Person is entitled to coverage — including, critically, coverage for defense costs during the pendency of the litigation.
We have identified that certain layers of the underlying tower may use the "in fact" standard rather than the final adjudication standard. If so, the DIC function of the Harrington Policy would activate: a claim denied by the underlying carrier under an "in fact" conduct exclusion would be covered under the Harrington Policy's broader terms, which require a final adjudication before the exclusion applies. This differential provides important protection during the often-lengthy period between the assertion of misconduct allegations and the ultimate adjudication of those allegations.
3. Severability
The Harrington Policy provides full severability of both the application and the exclusions. Full severability means that:
• Application severability: The knowledge, statements, or misrepresentations of one Insured Person in the policy application are not imputed to any other Insured Person. If one director made a misrepresentation in the application, that misrepresentation cannot be used by the insurer to rescind coverage for innocent directors.
• Exclusion severability: The conduct or knowledge of one Insured Person that triggers an exclusion is not imputed to any other Insured Person. If Director A engaged in fraud, the fraud exclusion applies to Director A but does not affect the coverage of Director B, Director C, or any other innocent Insured Person.
Full severability is a critical protection in a multi-director, multi-officer environment. Without it, the wrongful conduct of one "bad actor" could destroy coverage for all Insured Persons under the policy.
We have identified the degree of severability in the Vandermeer primary policy as one of the 14 D&O gaps in our Preliminary Coverage Gap Memorandum dated May 27, 2022. If the Vandermeer primary provides only limited severability (e.g., severability of the application but not of the exclusions, or severability only for "innocent" directors but with imputation of knowledge among officers), the DIC function of the Harrington Policy would fill this gap, providing full severability for claims covered under the Side-A DIC.
4. Prior Acts / Pending and Prior Litigation
Both the Harrington Policy and the underlying D&O tower use a retroactive date of June 15, 2018 (the date of the Veltrano LBO closing). Claims arising from wrongful acts committed before this date are not covered under either the Side-A DIC or the underlying tower.
However, the relevant differential concerns the pending and prior litigation exclusion. The underlying tower likely contains an exclusion for claims arising out of, based upon, or attributable to any litigation, proceeding, or dispute that was pending or existing as of a specified date (typically the inception date of the first policy in the program). We have reviewed whether the Vandermeer primary's pending and prior litigation exclusion is broader than the corresponding provision in the Harrington Policy. If the Vandermeer exclusion captures a wider range of prior matters — for example, by using a broader "arising out of or related to" nexus standard rather than a narrower "based upon" standard — the DIC function of the Harrington Policy could be activated for claims that have a tangential relationship to prior matters but that would not be excluded under the Harrington Policy's narrower formulation.
5. Regulatory Investigation Coverage
The Harrington Policy includes a broader definition of covered regulatory proceedings than the Vandermeer primary. Specifically, the Harrington Policy extends coverage to include:
• Formal investigations by governmental or regulatory authorities;
• Informal investigations, inquiries, and examinations;
• Subpoenas (including document subpoenas and deposition subpoenas);
• Target letters and Wells notices; and
• Civil investigative demands ("CIDs").
The Vandermeer primary's definition of covered regulatory proceedings may be narrower, potentially excluding informal investigations or pre-formal inquiry stages. Given Nexford's manufacturing operations across three subsidiaries in three states, with workforces subject to oversight by OSHA (workplace safety), CPSC (consumer product safety), and state attorneys general (consumer protection and environmental enforcement), the breadth of regulatory investigation coverage is a meaningful consideration. We have addressed these regulatory exposure issues in detail in the Regulatory Investigation Coverage Memorandum dated June 14, 2022, which should be read in conjunction with this analysis.
6. Definition of Loss
The Harrington Policy's definition of "Loss" is broader than the corresponding definition in the Vandermeer primary in several important respects:
• Punitive and exemplary damages: The Harrington Policy includes punitive and exemplary damages within the definition of Loss, to the extent such damages are insurable under the law of the applicable jurisdiction. This is a meaningful enhancement, as certain jurisdictions (including, under certain circumstances, Delaware) permit the insurance of punitive damages, while the Vandermeer primary may exclude punitive damages from its definition of Loss entirely.
• Civil fines and penalties: The Harrington Policy includes certain civil fines and penalties within the definition of Loss, subject to specified conditions and limitations (e.g., fines and penalties must not be criminal in nature and must be insurable under applicable law). The Vandermeer primary may take a narrower approach, excluding all fines and penalties without distinction.
• Pre-claim inquiry costs: The Harrington Policy includes costs incurred by an Insured Person in responding to inquiries or investigations that have not yet ripened into a formal "Claim" under the policy. This is a significant coverage enhancement, as substantial costs can be incurred during the pre-claim phase — particularly in the regulatory context — before a formal proceeding is commenced.
Each of these definitional differences creates a potential DIC trigger: a loss element that falls outside the Vandermeer primary's definition of "Loss" but within the Harrington Policy's broader definition would be covered under the Side-A DIC on a DIC basis.
7. Allocation
The Harrington Policy's allocation provisions for mixed claims — i.e., claims involving both covered and uncovered matters, or both covered and uncovered parties — are more favorable to Insured Persons than the allocation clause in the underlying Vandermeer primary.
In a mixed claim, the question arises of how to allocate the total loss between the covered portion (attributable to the Insured Person's covered wrongful acts) and the uncovered portion (attributable to entity conduct, uninsured parties, or excluded matters). The Vandermeer primary may contain an allocation provision that requires a negotiated or adjudicated allocation of loss, which can result in a significant portion of the total loss being allocated away from coverage. The Harrington Policy's allocation provision, by contrast, may provide for a more favorable allocation methodology — such as a presumptive allocation in favor of the Insured Person, or a "largest settlement" approach that allocates coverage based on the Insured Person's reasonable settlement exposure.
To the extent the Harrington Policy's allocation terms are more favorable than those in the underlying tower, a claim that is partially covered under the underlying tower but allocated unfavorably could receive enhanced coverage under the Side-A DIC's broader allocation provisions.
C. Summary Table of DIC Differentials
The following table summarizes the key DIC differentials identified in our side-by-side comparison:
VII. Personal Coverage Extensions
A. Scope of Personal Coverage
The Harrington Side-A DIC Policy provides coverage for individual directors and officers in their personal capacity for wrongful acts committed in their insured capacity — that is, in their capacity as directors, officers, or equivalent functional roles of Nexford and its subsidiaries. The coverage is designed to protect the personal assets of the Insured Person, including personal savings, investments, real property, retirement accounts, and other assets that could be exposed to judgment or attachment in connection with claims arising from their service to the Company.
Beyond coverage for the Insured Persons themselves, the Harrington Policy extends coverage to the following related parties:
Spousal and Domestic Partner Coverage. The Harrington Policy extends coverage to the spouses and domestic partners of Insured Persons, but solely for claims arising from the Insured Person's wrongful acts — not for independent claims against the spouse or domestic partner. This extension is designed to address the risk that a plaintiff pursuing a claim against a director or officer will also seek to attach marital or community property, name the spouse as a co-defendant in a fraudulent transfer action, or assert claims related to joint tax returns. In community property jurisdictions and in cases involving large personal judgments, the spousal extension can be a critical protection.
Estate, Heir, and Legal Representative Coverage. The Harrington Policy extends coverage to the estates, heirs, and legal representatives of deceased or incompetent Insured Persons. If a director or officer dies or becomes incapacitated during the policy period or after the policy period but while a covered claim is pending, coverage continues for the estate or heirs to the same extent it would have been available to the Insured Person. This extension ensures that the death or incapacity of a director or officer does not create a gap in the protection of the individual's personal estate.
B. Outside Directorship Liability
The Harrington Policy should be reviewed to determine whether it provides coverage for Nexford directors and officers who serve on outside boards at the Company's request. This is a common coverage feature in Side-A DIC policies and is typically triggered when a Nexford director or officer, at the Company's request or with the Company's consent, serves as a director, officer, trustee, or equivalent of an outside entity — such as a joint venture, an industry association, a charitable organization, or another portfolio company.
This coverage extension is particularly relevant for Sponsor-appointed directors who may simultaneously serve on the boards of other Veltrano Fund IV portfolio companies. If a Sponsor-appointed director who serves on both the Nexford board and the board of another Fund IV portfolio company faces a claim arising from service on the other portfolio company's board, the availability of coverage under the Nexford Side-A DIC Policy depends on whether the outside directorship extension applies. We recommend confirming the scope of this extension with Harrington at renewal and, if necessary, requesting endorsement language that clarifies coverage for service on other Veltrano portfolio company boards.
Additionally, the outside directorship extension typically operates on an excess basis — meaning it applies only after the exhaustion or inapplicability of any D&O coverage maintained by the outside entity. This coordination mechanism should be reviewed to ensure it functions appropriately in the PE-sponsor context, where the outside entity's D&O program may be placed by the same broker and may involve overlapping carriers.
C. Employment Practices Liability Extension
The Harrington Policy should be reviewed for coverage of employment practices liability ("EPL") claims brought against individual directors and officers. EPL claims include allegations of wrongful termination, discrimination (based on race, sex, age, disability, national origin, or other protected characteristics), sexual harassment, retaliation (including whistleblower retaliation), and hostile work environment. While EPL claims are often brought against the corporate entity, they frequently name individual officers — particularly human resources executives, division heads, and C-suite officers — as co-defendants.
The EPL exposure is meaningful for Nexford given the Company's three-subsidiary structure with significant manufacturing workforces in Joliet, Illinois (Nexford Conveyor Systems), Rockford, Illinois (Triton Fastener Corp.), and Akron, Ohio (Marlowe Asset Management Precision Machining). Manufacturing operations tend to generate higher volumes of employment-related claims due to factors including shift work, physical working conditions, union dynamics, and the demographic diversity of the workforce. Individual directors and officers named in EPL claims — particularly claims alleging systemic discrimination or failure to address known harassment — face personal liability exposure for which the Side-A DIC may provide essential protection, especially if the Company's indemnification is unavailable or if the underlying D&O tower's EPL coverage is limited by the Insured vs. Insured exclusion.
D. Pre-Claim Inquiry and Extradition Costs
Pre-Claim Inquiry Costs. As noted in Section VI.B.6 above, the Harrington Policy's definition of "Loss" may include pre-claim inquiry costs — that is, costs incurred by an individual director or officer in responding to informal regulatory inquiries, governmental requests for information, or preliminary investigation activity that has not yet ripened into a formal "Claim" as defined in the policy. This coverage is particularly valuable in the regulatory context, where a director or officer may need to retain personal counsel, engage forensic accountants, or produce documents in response to an informal OSHA inquiry or a CPSC information request, before any formal proceeding has been commenced. The pre-claim inquiry cost coverage fills a temporal gap that exists in many traditional D&O policies, which provide coverage only after a formal "Claim" has been made.
Extradition and Crisis Management Costs. Some Side-A DIC policies include provisions for extradition expenses — covering the costs incurred by an Insured Person in connection with extradition proceedings arising from criminal charges related to the Insured Person's service to the Company — and crisis management costs, including the costs of public relations advisors, crisis communications consultants, and related professionals retained in connection with a covered claim. We have reviewed the Harrington Policy for the presence and terms of any such provisions. While these coverages are less commonly triggered in the context of a privately held industrial company, they represent additional elements of the personal protection framework that the Side-A DIC is designed to provide. If these provisions are present in the Harrington Policy, they should be evaluated for adequacy at renewal. If they are absent, consideration should be given to requesting their inclusion by endorsement, particularly if the Company proceeds toward an IPO, which would elevate the Company's public profile and the associated risk of governmental enforcement actions with potential criminal dimensions.
VIII. Coordination with Underlying D&O Tower
A. Drop-Down Mechanics
The Harrington Side-A DIC Policy is designed to drop down and respond as primary coverage in circumstances where the underlying D&O tower fails to provide coverage for a non-indemnifiable loss sustained by an individual Insured Person. The principal drop-down scenarios are:
(1) Exhaustion of the underlying tower by non-Side-A claims. If entity-level claims (Side-C), indemnifiable loss claims (Side-B), or claims by co-insured parties consume the $40,000,000 aggregate limit of the underlying four-layer tower, the Side-A DIC's $15,000,000 limit remains fully available for non-indemnifiable loss of individual Insured Persons. Because the Side-A DIC limit is dedicated and non-aggregating, it cannot be eroded by claims that do not constitute non-indemnifiable individual loss.
(2) Denial of coverage by an underlying carrier. If Vandermeer National or any of the excess carriers denies coverage for a claim that would be covered under the broader terms of the Harrington Policy, the Side-A DIC drops down and responds on a DIC basis, as discussed in Section VI above.
(3) Underlying carrier insolvency. If any underlying carrier becomes insolvent or is unable to pay its obligations, the Side-A DIC drops down to fill the resulting gap, as discussed in Section V.C above.
The dedicated, non-eroding nature of the Side-A DIC limit is a foundational structural feature. The $15,000,000 Side-A DIC limit does not erode the underlying tower limits, and the underlying tower limits do not erode the Side-A DIC limit. The two coverage structures operate independently of each other, ensuring that the Side-A DIC limit is always fully available for its intended purpose — personal asset protection for individual directors and officers — regardless of what occurs in the underlying tower.
B. "Other Insurance" Provisions
The Harrington Policy contains an "other insurance" clause that defines the policy's priority relative to other insurance that may be available to the Insured Person. The standard structure for a Side-A DIC policy is as follows:
• For non-indemnifiable loss, the Side-A DIC sits as primary. Because the non-indemnification trigger has been activated (meaning the Company is unable, unwilling, or legally prohibited from indemnifying), the Side-A DIC responds from the first dollar, without waiting for the underlying tower to respond. The underlying tower's Side-A coverage may also respond, but the Side-A DIC operates independently and drops down to fill any gaps.
• The underlying D&O tower remains primary for Side-B (indemnifiable) loss and Side-C (entity) loss. The Side-A DIC does not respond to these categories of loss, which are within the exclusive province of the underlying tower.
The interplay between the Side-A DIC and the underlying tower's "other insurance" provisions should be reviewed at each renewal to ensure that no conflicts or inconsistencies have been introduced. In particular, the renewal of the underlying tower — and the potential replacement of Graystone Mutual Assurance Co. with Northfield Excess Insurance Company on the second excess layer — could introduce new "other insurance" language that affects the coordination mechanics. Calderwood & Harkness should review the renewal policy forms for all layers to confirm seamless integration.
C. Erosion Scenarios
To illustrate the practical significance of the Side-A DIC's dedicated limit structure, we present the following scenario analysis:
Scenario: A major creditor of Nexford — or a group of creditors acting in concert — brings

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