Trevor,
I hope the week is treating you well. I'm writing in connection with Matter 1005-00003 (Nexford D&O and PL Tower Review) to provide some guidance on setting up a defense cost erosion tracking protocol for the two pending product-liability cases that are currently drawing on the Midland Casualty & Surety Company primary GL/PL policy (Policy No. MCS-GL-2021-55671, expiring July 1, 2022; renewal policy MCS-GL-2022-58904, effective July 1, 2022). This follows up on the conversation you and I had a couple of weeks ago about the importance of monitoring aggregate erosion in real time, particularly given the severity of the pending claims.
**Why Erosion Tracking Matters — The Aggregate Structure**
As a quick refresher on why this matters so much, the Midland Casualty primary PL policy carries limits of $5 million per occurrence and $10 million in the aggregate, subject to a $500,000 per-occurrence self-insured retention. Critically, defense costs under the primary layer are included within limits — meaning they erode the aggregate. They are not paid in addition to limits.
The practical consequence is significant. The Great Basin Insurance Company 1st excess/umbrella layer ($25 million excess of $10 million) attaches only once the Midland Casualty $10 million aggregate is fully exhausted. Every dollar of defense costs that Midland Casualty pays under the primary reduces the amount of indemnity coverage available before Nexford needs to look to Great Basin for coverage. If we're not tracking this carefully, you could find yourself in a situation where the primary aggregate is approaching exhaustion without adequate lead time to (a) provide timely notice to Great Basin, or (b) manage the cash-flow implications of any gap between primary exhaustion and the point at which the excess layer begins responding.
**Current Claims Posture and Reserve Status**
Two open product-liability claims are currently drawing on the Midland Casualty primary:
1. **Higgins v. Nexford Conveyor Systems, LLC et al.**, Case No. 2021-L-04382, Circuit Court of Will County, Illinois — filed September 14, 2021. The plaintiff alleges a catastrophic crush injury resulting from an allegedly defective emergency stop mechanism on a Model NCS-7200 conveyor system. Damages sought total $14.5 million. The case is currently in discovery.
2. **Consolidated Builders Supply Co. v. Triton Fastener Corp.**, Case No. 1:21-cv-08914, U.S. District Court for the Northern District of Illinois — filed November 2, 2021. The plaintiff alleges structural failure of Grade 8 hex bolts causing a partial wall collapse at a construction site. Damages sought total $6.8 million. The motion to dismiss was denied on February 11, 2022, and the case is in active litigation.
Combined damages sought across both cases come to $21.3 million — well in excess of the $10 million primary aggregate. The total open product-liability reserves as of April 2022 stand at $8.3 million across both claims, as set by Midland Casualty on the primary layer. On top of that, the Kessler Quinn Advisory Group's actuarial analysis estimates an additional $2.1 million in IBNR (incurred but not reported) exposure. When you factor in the $4.72 million already paid on closed claims over the past five years, total five-year PL incurred losses come to approximately $15.12 million.
The defense costs already incurred on the Higgins and Consolidated Builders matters are being paid by Midland Casualty and are actively eroding the aggregate. I'd recommend confirming the exact defense cost figures with Donna and with Catherine Byrne and Rafael Mendez at Hollander Byrne & Strauss LLP, who are handling the litigation on both matters. Those numbers are the starting point for the tracking protocol outlined below.
**Recommended Tracking Protocol**
Here is what I'd suggest putting in place:
*Quarterly Tracking Spreadsheet.* Set up a spreadsheet that captures, for each open claim:
- Indemnity payments made by Midland Casualty (net of the $500,000 SIR per occurrence) - Defense costs paid by Midland Casualty, allocated by claim - A running cumulative total against the $10 million aggregate - Remaining aggregate capacity - Percentage of aggregate exhausted
This doesn't need to be elaborate — a well-organized Excel workbook will do the job — but it needs to be maintained consistently.
*Quarterly Loss Runs.* Request quarterly loss runs from Ashford Breckinridge LLP (Phillip Garza or Tamara Fisk). As your broker, they can obtain these directly from Midland Casualty. I'd recommend quarterly at a minimum, but if aggregate erosion begins to accelerate, shift to monthly requests.
*Coordination with Litigation Counsel.* Hollander Byrne & Strauss should be providing periodic defense cost reports. For reference, Douglas Fairchild sent a coordination letter to Catherine Byrne on May 25, 2022, which established defense cost reporting protocols and a duty to notify Calderwood & Harkness of material developments that could affect tower erosion. Make sure those reports are flowing and that the numbers are being fed into your tracking spreadsheet.
*Internal Trigger Thresholds.* I'd recommend setting the following internal triggers:
- **50% aggregate erosion ($5 million cumulative):** Schedule an internal review meeting with Donna Kowalski and Priya Sundaram to assess trajectory and discuss strategy. - **75% aggregate erosion ($7.5 million cumulative):** Provide formal notice to Great Basin Insurance Company (1st excess/umbrella) of potential attachment. As a precautionary measure, also notify Cornerstone Reinsurance Corp. (2nd excess) and Allegheny Pacific Underwriters, Inc. (3rd excess) at the same time. - **90% aggregate erosion ($9 million cumulative):** Engage directly with Great Basin on claims handling transition and confirm the drop-down obligations under the excess/umbrella policy terms.
**Renewal Transition Considerations**
With the July 1 renewal date fast approaching, a few points to keep in mind:
The current Midland Casualty policy (MCS-GL-2021-55671) expires on July 1, 2022, and the renewal policy (MCS-GL-2022-58904) incepts on the same date. Both pending claims were reported under the current policy year, and since the Midland primary is written on an occurrence basis, the Higgins and Consolidated Builders claims will continue to erode the 2021-2022 policy year aggregate — not the renewal year aggregate — because the underlying occurrences predate the renewal.
This means you'll need to maintain separate tracking for the 2021-2022 policy year and the 2022-2023 renewal year. Conflating aggregate erosion across policy periods is an easy mistake to make and can lead to significant confusion about how much capacity remains under each year.
For your awareness, the renewal policy maintains the same $5 million per occurrence / $10 million aggregate structure, with the same $500,000 SIR. The one notable change is that the recall sub-limit has been increased to $5 million per occurrence / $10 million aggregate (up from $2.5 million / $5 million), but that is a separate sub-limit and does not affect defense cost erosion tracking for the two pending claims.
**Action Items**
To get the tracking protocol up and running, here's what I'd suggest as next steps:
1. Confirm with Donna the current cumulative defense costs that Midland Casualty has paid on each of the two open claims. This gives us our baseline. 2. Request an updated loss run from Ashford Breckinridge before the July 1 renewal date so we have a clean snapshot as of the policy transition. 3. If it would be helpful, I'm happy to put together a tracking spreadsheet template that you and Donna can use going forward — just let me know. 4. Naomi Petersen (cc'd) is well-versed in the excess layer attachment mechanics and follow-form provisions across the tower, so please feel free to reach out to her directly with any questions on those points.
I'm available by phone if you'd like to talk through any of this in more detail. Don't hesitate to reach out.
Best regards,
**Yuki Nakamura** Calderwood & Harkness LLP 155 North Wacker Drive, Suite 4200 Chicago, IL 60606 Direct: (312) 555-0184 Email: ynakamura@calderwoodharkness.com
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