MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc. Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc. Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc.
FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP Yuki Nakamura, Working Associate, Calderwood & Harkness LLP
DATE: May 20, 2022
RE: Interaction of Pending Product-Liability Claims with PL Tower Renewal — July 1, 2022 Policy Period
MATTER NO.: 1005-00003
CC: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of the General Counsel of Nexford Industrial Holdings Inc. It constitutes attorney work product and is protected by the attorney-client privilege. This memorandum is intended solely for the use of the named recipients and should not be disclosed to any third party, including insurance carriers, brokers, or defense counsel, without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege.
I. Executive Summary
The purpose of this memorandum is to analyze the treatment of two pending product-liability lawsuits under Nexford Industrial Holdings Inc.'s ("Nexford" or the "Company") renewal product-liability ("PL") insurance tower for the policy period commencing July 1, 2022 and ending July 1, 2023 (the "Renewal Tower"). This analysis identifies potential coverage continuity risks, known-claims exclusion issues, aggregate erosion concerns, and coordination requirements with the incumbent PL tower for the policy period July 1, 2021 through July 1, 2022 (the "Incumbent Tower"). This memorandum is intended to equip the Nexford risk management and legal teams with the information necessary to make informed decisions during the renewal binding process, which is currently targeted for June 28, 2022.
The two pending claims at issue are:
1. Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, Circuit Court of Will County, Illinois (the "Higgins Action"), in which the plaintiff seeks damages of approximately $14.5 million arising from an alleged catastrophic crush injury caused by a purportedly defective emergency stop mechanism on a Model NCS-7200 conveyor system; and
2. Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois (the "Consolidated Builders Action"), in which the plaintiff seeks damages of approximately $6.8 million arising from an alleged structural failure of Grade 8 hex bolts in a commercial building project, resulting in a partial wall collapse and consequential property damage and business interruption losses.
The combined damages sought across these two matters total $21.3 million. As of April 2022, total open reserves across both claims stand at $8.3 million, carried on the Midland Casualty & Surety Company ("Midland Casualty") primary general liability/product-liability layer, Policy No. MCS-GL-2021-55671.
Our principal conclusions are as follows:
• Both claims were timely reported and are properly covered under the Incumbent Tower, which is written on an occurrence basis. Because the occurrence trigger governs, the Renewal Tower should not be implicated for either the Higgins or Consolidated Builders claims, provided that the underlying occurrences are definitively mapped to the Incumbent Tower's policy period (or an earlier policy period).
• Notwithstanding the occurrence-based trigger structure, Nexford must exercise care with respect to three specific risks at renewal: (a) certain carrier-specific known-claims and prior-litigation exclusions in the excess layers, particularly the Great Basin Insurance Company ("Great Basin") "Specific Matters" exclusion endorsement and any endorsement that Cornerstone Reinsurance Corp. ("Cornerstone") may seek to impose, which could inadvertently exclude coverage for future claims involving the same product types (as opposed to the same specific occurrences); (b) aggregate erosion tracking across policy periods, particularly if Midland Casualty employs a payment-date allocation methodology rather than an occurrence-date allocation methodology, which could result in post-renewal payments on the pending claims eroding the fresh Renewal Tower aggregate; and (c) the provision of proper and timely notice to all renewal carriers, including any new carriers introduced to the tower, to preserve all coverage rights under both the Incumbent and Renewal Towers.
The remainder of this memorandum provides the detailed analysis supporting these conclusions and sets forth specific recommendations and action items for the period leading up to renewal binding.
II. Background
A. The Pending Claims
1. *Higgins v. Nexford Conveyor Systems, LLC et al.* (Case No. 2021-L-04382). The Higgins Action was filed on September 14, 2021, in the Circuit Court of Will County, Illinois. The plaintiff, Robert Higgins, alleges that he sustained a catastrophic crush injury while operating a Model NCS-7200 conveyor system at a grain processing facility. Specifically, the complaint alleges that the emergency stop mechanism on the NCS-7200 conveyor system was defectively designed and/or manufactured, and that this defect caused the emergency stop to fail to engage when activated by the plaintiff, resulting in severe injuries to the plaintiff's left arm and hand.
The total damages sought in the Higgins Action are approximately $14.5 million, encompassing claims for medical expenses (past and future), lost wages, loss of earning capacity, pain and suffering, and loss of normal life.
As of the date of this memorandum, the Higgins Action is active and in the discovery phase. No dispositive motions have been filed. Trial has not yet been scheduled.
The named defendant in the Higgins Action is Nexford Conveyor Systems, LLC, a Delaware limited liability company with its principal place of business and primary manufacturing facility located at 4500 Industrial Parkway, Joliet, Illinois 60436. Nexford Conveyor Systems, LLC is a wholly owned subsidiary of Nexford Industrial Holdings Inc. and is the Company's largest operating unit, accounting for approximately 56% of Nexford's $1.42 billion consolidated revenue, or approximately $795.2 million in fiscal year 2021.
The defense of the Higgins Action is being handled by Hollander Byrne & Strauss LLP ("HBS"), 70 West Madison Street, Suite 3600, Chicago, Illinois 60602. The lead trial counsel is Catherine Byrne, Partner, assisted by Rafael Mendez, Senior Associate. HBS was retained at the direction of Midland Casualty, subject to a reservation of rights letter dated October 8, 2021.
2. *Consolidated Builders Supply Co. v. Triton Fastener Corp.* (Case No. 1:21-cv-08914). The Consolidated Builders Action was filed on November 2, 2021, in the United States District Court for the Northern District of Illinois. The plaintiff, Consolidated Builders Supply Co. ("Ridgeway Enterprises"), alleges that Grade 8 hex bolts manufactured and sold by Triton Fastener Corp. suffered a structural failure when installed in a commercial building project, causing a partial wall collapse at a construction site located in the greater Chicago metropolitan area. Ridgeway Enterprises seeks damages of approximately $6.8 million, comprising property damage to the building under construction, costs of remediation, business interruption losses, and lost profits.
As of the date of this memorandum, the Consolidated Builders Action is active. A motion to dismiss filed by Triton Fastener Corp. was denied on February 11, 2022, by the Honorable Judge Patricia K. Sloan. The case is proceeding through fact discovery.
The named defendant in the Consolidated Builders Action is Triton Fastener Corp., an Illinois corporation with its principal place of business and manufacturing facility located at 1010 Whitman Avenue, Rockford, Illinois 61101. Triton Fastener Corp. is a wholly owned subsidiary of Nexford Industrial Holdings Inc. and accounts for approximately 28% of the Company's consolidated revenue, or approximately $397.6 million in fiscal year 2021.
The Consolidated Builders Action is also being defended by Hollander Byrne & Strauss LLP, under the same engagement described above.
3. Aggregate Claims Context. As of April 2022, total open product-liability reserves across both the Higgins and Consolidated Builders matters stand at $8.3 million, carried on the Midland Casualty primary GL/PL layer. These reserves represent the combined estimate of Nexford's exposure on both claims, as evaluated by Midland Casualty in consultation with the Company's risk management team.
Nexford's five-year product-liability loss history (covering the period from fiscal year 2017 through the present) reflects the following:
• Total reported claims: 12
• Claims closed: 9 (total paid losses: $4.72 million)
• Claims open: 3 (total open reserves: $8.3 million, including the two matters addressed in this memorandum and one additional minor claim not at issue here)
• Incurred but not reported ("IBNR") estimate: $2.1 million, as determined by the Kessler Quinn Advisory Group (Diana Cho, Vice President, Actuarial Services), based on their most recent actuarial analysis conducted in March 2022
• Total five-year PL incurred (paid + open reserves + IBNR): $4.72M + $8.3M + $2.1M = $15.12 million
Additional historical context relevant to the pending claims includes:
• Triton Fastener Voluntary Product Recall: Initiated on March 12, 2020, covering certain fastener products manufactured by Triton Fastener Corp. during a specified production period. Total recall costs: $1.1 million, absorbed within the Midland Casualty primary layer's recall sub-limit.
• Nexford Conveyor Advisory Notice: Issued on August 7, 2020, advising certain customers of a potential issue with conveyor components. Total cost of the advisory program: $340,000. The advisory notice was not classified as a formal recall.
Both of these historical events may bear on the pending claims and on the renewal process, as discussed further in Sections IV and VIII below.
B. The PL Tower Structure
1. Incumbent Tower (July 1, 2021 – July 1, 2022). The Incumbent PL Tower is structured as follows:
The total tower aggregate under the Incumbent Tower is $75 million (across all layers), with total annual premium of $2,642,900.
The primary layer's product recall sub-limit of $2.5 million per occurrence and $5 million aggregate is particularly relevant to the pending claims, as discussed in Section VIII below. Additionally, the completed operations coverage extension of 10 years post-delivery under the Midland primary is critical to ensuring coverage for products manufactured and delivered by Nexford subsidiaries prior to the inception of the current policy period.
2. Anticipated Renewal Tower (July 1, 2022 – July 1, 2023). As of the date of this memorandum, renewal quotes are actively being received from incumbent and prospective carriers. The renewal marketing window runs from May 18, 2022 through June 8, 2022. The broker marketing submission was circulated by Ashford Breckinridge LLP ("AB"; contact: Phillip Garza, Senior Vice President, and Tamara Fisk, Account Executive) on May 3, 2022. The submission included full disclosure of both pending claims, the Company's complete five-year loss history, and all open reserve and IBNR information.
Based on preliminary indications received from incumbent carriers, and based on discussions between AB and Nexford's risk management team, the following is anticipated with respect to the Renewal Tower:
• Carrier Continuity: All incumbent carriers on the PL tower — Midland Casualty, Great Basin, Cornerstone, and Allegheny Pacific — are expected to renew for the 2022-2023 policy period. No carrier substitutions are anticipated on the PL tower. This is in contrast to the directors' and officers' ("D&O") liability tower, where Graystone Mutual Assurance Co. may be replaced by Northfield Excess Insurance Company in the D&O excess layer (a matter addressed in separate correspondence).
• Premium: Premium increases are anticipated across the PL tower, consistent with the current hardening market for product-liability coverage in the industrial manufacturing sector. The renewal PL total premium is currently estimated at $2,985,500, representing a 12.96% increase of approximately $342,600 over the prior-year premium of $2,642,900. This figure is subject to confirmation upon binding and final terms.
• Recall Sub-Limit: An increase to the product recall sub-limit from $2.5 million per occurrence / $5 million aggregate to $5 million per occurrence / $10 million aggregate is under active consideration, consistent with Calderwood & Harkness's prior recommendation. A detailed analysis of recall sub-limit adequacy is provided in the separate Product Recall Sub-Limit Adequacy Memorandum dated May 12, 2022 (C&H Matter No. 1005-00003-R).
• Renewal Policy Number: The anticipated Midland Casualty renewal primary policy number is MCS-GL-2022-58904, based on the preliminary binder indication received from Midland's underwriting division.
C. Named Insureds
All three of Nexford's operating subsidiaries are named insureds under the PL tower, together with the parent holding company:
• Nexford Industrial Holdings Inc. (EIN: 83-2174650) — Parent holding company
• Nexford Conveyor Systems, LLC (EIN: 83-2174651) — Defendant in the Higgins Action
• Triton Fastener Corp. (EIN: 36-4892103) — Defendant in the Consolidated Builders Action
• Marlowe Asset Management Precision Machining, Inc. (EIN: 31-1784529) — Not currently involved in any pending PL claim
Each entity's named-insured status is reflected in the Midland Casualty primary policy's Schedule of Named Insureds, and its status carries through to each excess layer by operation of the "follow form" provisions in the Great Basin, Cornerstone, and Allegheny Pacific policies. It is essential that confirmation of named-insured status for all four entities is obtained upon renewal and that the renewal policies reflect the same coverage for each named insured as is provided under the Incumbent Tower. AB should be instructed to verify this as part of the renewal binding process.
III. Occurrence vs. Claims-Made Trigger Analysis
A. Structure of the PL Tower Trigger
Understanding the coverage trigger applicable to each layer of the PL tower is fundamental to determining which policy period responds to the pending claims and whether the Renewal Tower could be called upon to provide coverage.
The trigger analysis for each layer of the Incumbent Tower is as follows:
• Midland Casualty Primary GL/PL (Policy No. MCS-GL-2021-55671): This policy is written on an occurrence basis. Under the occurrence trigger, the policy in effect at the time of the occurrence that gives rise to the claim responds, regardless of when the claim is first made against the insured or when the insured first reports the claim to the carrier. The "occurrence" is defined in the Midland policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." This means that the policy period during which the bodily injury or property damage took place is the responsive policy period.
• Great Basin 1st Excess/Umbrella (Policy No. GB-XS-2021-00347): The Great Basin policy follows form to the Midland primary in all material respects, including with respect to the coverage trigger. The Great Basin policy is therefore also occurrence-based.
• Cornerstone Reinsurance 2nd Excess (Policy No. CRC-EX-2021-7742): The Cornerstone policy follows form to the Midland primary and is occurrence-based as to the coverage trigger. However, the Cornerstone policy contains a separate "claims-first-made" reporting endorsement (Endorsement No. CRC-RPT-03) that imposes an additional reporting requirement: any claim must be first reported to Cornerstone during the policy period or within a 60-day extended reporting period following expiration of the policy. This endorsement creates a hybrid element that, while not converting the policy to a claims-made form, imposes a reporting condition that could affect coverage if not carefully complied with.
• Allegheny Pacific 3rd Excess (Policy No. APU-EX-2021-1183): The Allegheny Pacific policy follows form to the Midland primary and is occurrence-based. No separate reporting endorsement has been identified in the current policy form.
B. Application to *Higgins*
The Higgins Action involves an alleged catastrophic crush injury caused by the failure of an emergency stop mechanism on a Model NCS-7200 conveyor system. The relevant "occurrence" for trigger purposes is the date on which the bodily injury took place — that is, the date on which the plaintiff, Robert Higgins, was injured.
The complaint in the Higgins Action was filed on September 14, 2021, which falls within the Incumbent Tower's policy period (July 1, 2021 – July 1, 2022). However, the date of filing is not determinative under an occurrence-based policy; what matters is the date of the injury itself. The complaint references the injury as having occurred "on or about" a date that has not been independently verified against the claims file.
Under the occurrence trigger, the 2021-2022 Midland Casualty primary policy responds to the Higgins claim, provided that the date of injury falls within that policy period. The Renewal Tower (commencing July 1, 2022) should not be implicated for this occurrence, as the injury plainly predates the renewal inception. Defense costs and any indemnity payments will erode the Incumbent Tower's limits — first the self-insured retention, then the Midland primary per-occurrence and aggregate limits.
Important caveat: If the date of the actual crush injury predates July 1, 2021 (i.e., occurred during a prior policy period), the applicable prior-year policy would be the responsive policy rather than the Incumbent Tower. It is essential that the precise date of injury be confirmed from the underlying claims file and from defense counsel's records. The complaint's use of the phrase "on or about" introduces ambiguity that must be resolved. We recommend requesting this information from Hollander Byrne & Strauss as a priority item (see Recommendation No. 1 in Section X below).
C. Application to *Consolidated Builders*
The Consolidated Builders Action involves an alleged structural failure of Grade 8 hex bolts manufactured and sold by Triton Fastener Corp., resulting in a partial wall collapse at a commercial construction site. The trigger analysis for this claim is somewhat more complex than for Higgins because it involves property damage rather than bodily injury, and because the relevant "occurrence" may be subject to different characterizations.
Under Illinois law and under the Midland Casualty primary policy's occurrence definition, the relevant occurrence could be characterized as: (a) the date of Triton's delivery of the defective bolts to the construction site or to the plaintiff; (b) the date of installation of the bolts in the building structure; or (c) the date of the actual structural failure and wall collapse. Each of these dates is independently relevant to determining which policy period responds.
The complaint in the Consolidated Builders Action was filed on November 2, 2021, and the wall collapse is alleged to have occurred during the period in which the Incumbent Tower was in effect. However, the delivery and installation of the bolts may have occurred substantially earlier. The Midland Casualty primary policy's completed operations coverage, which extends for 10 years post-delivery, is critical to ensuring coverage for products that were delivered prior to the inception of the current policy period but that cause damage during the policy period.
Under the occurrence trigger, the policy year in which the property damage first manifested responds. If the wall collapse (and the resulting property damage) occurred during the 2021-2022 policy period, the Incumbent Tower should respond. However, if the property damage is alleged to have commenced at an earlier date — for example, through gradual structural deterioration beginning at the time of installation — the occurrence could predate the Incumbent Tower's inception and could implicate an earlier policy period.
The motion to dismiss filed by Triton was denied on February 11, 2022, meaning that the case will proceed to discovery. Discovery will likely shed light on the precise timeline of the bolt delivery, installation, and failure, which will be critical to the trigger analysis.
D. Renewal Tower Implications
Because both the Higgins and Consolidated Builders claims arise from occurrences that predate the inception of the Renewal Tower (July 1, 2022), the Renewal Tower should not be called upon to respond to either claim. This is the expected and intended result under an occurrence-based coverage structure: each policy period stands on its own, and the policy in effect at the time of the occurrence bears the risk.
However, there is one scenario in which the Renewal Tower could potentially be implicated: if either claim involves continuing or progressive damage that straddles the boundary between the Incumbent and Renewal policy periods. This concern is particularly relevant to the Consolidated Builders Action. If the structural deterioration caused by the allegedly defective hex bolts is characterized as a continuous process — rather than a discrete event (the wall collapse) — the damage could be alleged to have continued after July 1, 2022, potentially triggering the Renewal Tower as a co-responsive policy. Under Illinois law, the "continuous trigger" theory has been applied in certain environmental and product-liability cases, and its potential application to the Consolidated Builders facts cannot be ruled out at this stage.
For the Higgins Action, the risk of a straddling occurrence is minimal, as the plaintiff's bodily injury is a discrete event that occurred on a specific date.
Recommendation: We recommend that Nexford request from Hollander Byrne & Strauss a precise determination of the alleged dates of occurrence and/or manifestation for each claim, supported by documentary evidence from the claims file and discovery record. This information is necessary to map each claim definitively to the correct policy period(s) and to assess the risk of cross-period trigger arguments. This is identified as Recommendation No. 1 in Section X below.
IV. Known-Claims and Prior-Litigation Exclusions
A. Relevance to Renewal
Even though the PL tower is written on an occurrence basis — meaning that the Renewal Tower generally should not respond to occurrences that predate the renewal inception — most commercial liability policies contain some form of known-claims exclusion or prior/pending litigation exclusion designed to limit the insurer's exposure to risks that are already known to the insured at the time the policy incepts. These exclusions are more commonly associated with claims-made policies, but they can appear in occurrence-based policies as well, particularly in excess layers where the underwriter is seeking to limit its exposure to "inherited" claims.
The practical concern for Nexford at renewal is twofold:
1. If any renewal carrier includes a specific exclusion for the Higgins or Consolidated Builders matters, or for claims arising from the same or similar products or circumstances, Nexford's coverage for new claims involving NCS-7200 conveyor systems or Triton Grade 8 hex bolts could be inadvertently excluded — even if those new claims arise from entirely separate occurrences.
2. Conversely, if the known-claims exclusion is drafted too broadly, it could create a gap in coverage if either pending claim is ultimately determined to straddle policy periods (as discussed in Section III.D above).
Each layer of the Renewal Tower must be analyzed individually.
B. Midland Casualty Primary (Renewal Policy MCS-GL-2022-58904)
As the incumbent primary carrier, Midland Casualty has full and contemporaneous knowledge of both pending claims. Midland has been managing the defense of both matters through its appointment of Hollander Byrne & Strauss as defense counsel and has been receiving regular claims reports and reserve updates from Donna Kowalski's team.
The renewal application and marketing submission prepared by Ashford Breckinridge and circulated on May 3, 2022, fully disclosed both pending claims, all open reserves ($8.3 million), and the Company's complete five-year loss history. There should be no allegation of late notice or inadequate disclosure with respect to Midland.
Midland Casualty's standard renewal form for occurrence-based GL/PL policies does not contain a blanket known-claims exclusion, because the occurrence-based structure inherently allocates claims to the policy period in which the occurrence takes place. However, Midland may include a specific endorsement in the renewal policy that excludes coverage for any claim or loss arising out of the same occurrences as the Higgins or Consolidated Builders matters. Such an endorsement would be designed to ensure that the renewal policy is not implicated for the pending claims, which are properly allocated to the Incumbent Tower.
If Midland includes such an endorsement, the practical impact would be limited — the endorsement would only matter if there is a question about whether an occurrence straddles both policy periods (as discussed in Section III.D above). However, the wording of any such endorsement must be carefully reviewed to ensure that it is limited to the specific occurrences at issue in the two pending claims and does not inadvertently extend to other claims involving NCS-7200 conveyors or Triton Grade 8 hex bolts arising from separate and distinct occurrences.
We will review the final renewal policy wording once issued and will flag any concerns regarding the scope of any specific-occurrence exclusion endorsement.
C. Great Basin 1st Excess/Umbrella
The Great Basin 1st excess/umbrella policy follows form to the Midland primary and historically has not imposed independent known-claims exclusions. However, the Great Basin policy contains a "Specific Matters" exclusion endorsement (Endorsement No. GB-SM-2021-A) that was negotiated during the 2021 renewal cycle. This endorsement was added at Great Basin's request and was intended to address specific known risks at the time of the 2021-2022 inception.
The following issues require investigation with respect to the Great Basin "Specific Matters" endorsement:
1. Carryover to Renewal: It must be confirmed whether this endorsement carries over to the Renewal Tower. If Great Basin intends to renew the endorsement, the listed matters must be reviewed to determine whether Higgins and Consolidated Builders are included.
2. Scope of Exclusion: If the Higgins and Consolidated Builders matters are listed in the endorsement, the exclusionary language must be carefully reviewed to confirm that it applies only to claims arising from those specific occurrences and does not extend to other claims involving NCS-7200 conveyor systems or Triton Grade 8 hex bolts generally. There is a critical distinction between a specific-occurrence exclusion (which excludes only claims arising from the particular accidents at issue) and a product-line exclusion (which excludes all claims involving a particular product type). The latter would be far more harmful to Nexford's coverage position, as it would effectively leave the Company uninsured at the excess level for any future claims involving two of its major product lines.
3. Negotiation Priority: If the endorsement is overly broad, this must be addressed as a priority item in the renewal negotiation. See Recommendation No. 8 in Section X below.
D. Cornerstone Reinsurance 2nd Excess
The Cornerstone 2nd excess layer presents the most complex known-claims issue, due to the interplay between the "claims-first-made" reporting endorsement discussed in Section III.A above and any prior/pending litigation exclusion that Cornerstone may seek to impose at renewal.
Both the Higgins and Consolidated Builders matters were reported to Cornerstone during the 2021-2022 policy period, and coverage should attach to the Incumbent Tower's Cornerstone layer. However, the renewal analysis requires attention to the following:
1. Prior or Pending Litigation Exclusion: It must be confirmed with Ashford Breckinridge whether Cornerstone's renewal policy will include a "prior or pending litigation" exclusion that bars coverage for any claims arising from the same products or product lines as the pending matters. Given Cornerstone's hybrid reporting requirement, there is a heightened risk that Cornerstone's underwriters will seek to impose such an exclusion at renewal.
2. Product Type vs. Specific Occurrence: Particular attention must be paid to whether Cornerstone distinguishes between (i) claims arising from the same occurrence as the pending matters and (ii) claims arising from the same product type. The latter formulation is significantly more problematic for Nexford, given that the Company's subsidiaries ship approximately 42,000 stock-keeping units ("SKUs") annually across their product lines. A product-type exclusion could effectively render the Cornerstone layer unavailable for a substantial portion of Nexford's PL exposure.
3. Negotiation Strategy: If Cornerstone proposes a product-type exclusion, Nexford should push back firmly and insist on specific-occurrence exclusion language. If Cornerstone is unwilling to narrow the exclusion, Nexford should evaluate whether to seek an alternative carrier for the 2nd excess layer — although this would introduce retroactive date concerns (discussed in Section V below) and could result in a more expensive placement.
E. Allegheny Pacific 3rd Excess
The Allegheny Pacific 3rd excess policy follows form to the Midland primary and does not contain any independent known-claims exclusions in the current policy form. Based on our review, Allegheny Pacific has not historically imposed such exclusions. However, renewal terms should be reviewed upon issuance to confirm continuity of this position. Any departure from the incumbent approach should be flagged immediately for negotiation.
F. Recommendations. Based on the foregoing analysis, we make the following recommendations regarding known-claims and prior-litigation exclusions in the Renewal Tower:
1. Narrow Drafting: Negotiate to ensure that any known-claims or prior/pending litigation exclusion in the Renewal Tower is narrowly drafted to exclude only the two specific pending claims, identified by case name, case number, and parties, and does not extend to other claims involving the same product types or product lines.
2. Specific-Occurrence Language: Insist on "specific occurrence" exclusion language in any such endorsement, rather than "arising out of the same or similar facts, circumstances, or products" language, which could create a de facto product-line exclusion with far-reaching coverage implications.
3. Priority Inclusion: These items should be included as a priority item in the Renewal Negotiation Points Memorandum being prepared by Ashford Breckinridge and reviewed by Calderwood & Harkness prior to binding.
V. Prior Acts / Retroactive Date Considerations
A. Occurrence-Based Policies and Retroactive Dates
Occurrence-based product-liability policies do not typically employ retroactive dates, which are a hallmark of claims-made policy forms. Under a claims-made policy, the retroactive date establishes the earliest point in time from which an occurrence can give rise to a covered claim; any occurrence predating the retroactive date is excluded from coverage, even if the claim is first made during the policy period. Because occurrence-based policies respond based on when the occurrence took place, rather than when the claim was first made, a retroactive date is generally unnecessary and would be inconsistent with the fundamental coverage structure.
However, certain excess layers — particularly those written by reinsurance-oriented carriers — may impose a "prior acts" limitation that effectively functions as a retroactive date by excluding coverage for occurrences that took place before a specified date, typically the date of the carrier's first participation in the insured's tower. Such a limitation serves a similar risk-management function to a retroactive date in a claims-made policy: it protects the excess carrier from being called upon to respond to claims arising from occurrences that predated its involvement with the insured.
In the current Incumbent Tower:
• Midland Casualty Primary: No prior acts exclusion identified.
• Great Basin 1st Excess/Umbrella: No prior acts exclusion identified.
• Cornerstone Reinsurance 2nd Excess: Contains a "prior acts" endorsement (Endorsement No. CRC-PA-01) with a retroactive date of July 1, 2019, which corresponds to the date of Cornerstone's first participation in the Nexford PL tower. Under this endorsement, any occurrence that took place before July 1, 2019 is excluded from Cornerstone's coverage, regardless of the trigger analysis under the underlying policies.
• Allegheny Pacific 3rd Excess: No prior acts exclusion identified.
The impact of Cornerstone's prior acts endorsement on each pending claim is analyzed below.
Application to *Higgins*: The alleged crush injury in the Higgins Action is believed to have occurred during or after 2021, well within the period following Cornerstone's July 1, 2019 retroactive date. Accordingly, the Cornerstone retroactive date should not present an issue for the Higgins claim.
Application to *Consolidated Builders*: The analysis is less straightforward. The Consolidated Builders Action involves an alleged failure of Grade 8 hex bolts, and the relevant occurrence could be characterized in multiple ways (as discussed in Section III.C above). If the "occurrence" is deemed to be the date of the wall collapse, which is believed to have taken place during or after 2021, there is no retroactive date issue. However, if the occurrence is deemed to be the date of delivery or installation of the bolts — which may have occurred before July 1, 2019 — then Cornerstone's prior acts endorsement could exclude coverage for this claim at the 2nd excess layer.
This issue requires factual investigation into Triton Fastener Corp.'s delivery records for the specific bolts at issue in the Consolidated Builders Action. If the bolts were delivered before July 1, 2019, and if a court or carrier were to adopt a delivery-date or installation-date occurrence theory, Cornerstone could disclaim coverage. This would leave a $25 million gap in the tower between $35 million and $60 million.
B. Renewal Impact
The renewal analysis raises two specific concerns with respect to retroactive dates:
1. Cornerstone Retroactive Date Stability: It is essential to confirm that the Cornerstone retroactive date does not move forward upon renewal — that is, it remains at July 1, 2019 and is not reset to July 1, 2022. A forward movement of the retroactive date would exclude from the Cornerstone layer any occurrence that took place before July 1, 2022, effectively eliminating Cornerstone's coverage for all pre-renewal occurrences. This would be unacceptable and would represent a fundamental change in coverage. AB should be instructed to confirm the stability of the Cornerstone retroactive date as part of the renewal negotiation.
2. New Carrier Introduction: If any new carrier is introduced to the PL tower at renewal (which is not anticipated but cannot be ruled out), the retroactive date negotiation is critical. Any new carrier must be required to accept a retroactive date no later than the inception of the prior carrier's first participation in the tower, or earlier. Failure to negotiate an appropriate retroactive date for a new carrier could create a coverage gap for occurrences that took place before the new carrier's inception.
This concern is less acute on the PL side (where all incumbent carriers are expected to renew) than on the D&O side, where Northfield Excess Insurance Company is expected to replace Graystone Mutual Assurance Co. in the D&O excess layer. The D&O retroactive date issue is being addressed in separate correspondence.
VI. Aggregate Erosion and Cross-Period Allocation
A. Aggregate Erosion on the Incumbent 2021-2022 Tower
The Midland Casualty primary GL/PL policy provides a $10 million per-policy-period aggregate limit. Understanding the current state of aggregate erosion is essential to assessing the available limits under the Incumbent Tower and the potential for excess layer involvement.
As of April 2022, the following figures are relevant:
• Open reserves on *Higgins* and *Consolidated Builders*: $8.3 million
• Paid losses on other claims during the 2021-2022 period: This figure must be verified against current loss runs obtained from Midland Casualty. The Company's five-year total paid losses of $4.72 million are spread across multiple policy years, and the portion attributable to the 2021-2022 period must be isolated.
• Defense costs: The Midland Casualty primary policy provides that defense costs are within limits (i.e., defense costs erode the per-occurrence and aggregate limits) rather than in addition to limits. This is a significant feature of the policy, as it means that every dollar spent on defense — including attorney fees, expert witness costs, deposition expenses, and other litigation costs — reduces the available limits under the primary layer.
Given the $8.3 million in open reserves plus defense costs already incurred or anticipated, there is a substantial risk that the Midland primary aggregate of $10 million will be significantly eroded, or potentially exhausted, by the end of the Incumbent Tower's policy period (July 1, 2022). If the primary aggregate is exhausted, the Great Basin 1st excess/umbrella layer would be triggered at its $10 million attachment point, and Great Basin would become responsible for defense and indemnity obligations above that attachment point.
Aggregate erosion tracking is a critical ongoing obligation and should be coordinated among Donna Kowalski (Director of Insurance and Claims), Trevor Haines (Vice President, Risk Management), and Hollander Byrne & Strauss (defense counsel). Each stakeholder must have real-time visibility into the cumulative paid and incurred amounts under the Midland primary layer to ensure that proper notice is provided to Great Basin if and when the attachment point is approached.
Cross-Reference: Separate guidance on defense cost erosion tracking is currently being provided by Yuki Nakamura to Trevor Haines under the same matter number. That guidance addresses the specific protocols for recording and reporting defense costs against the Midland primary aggregate and for providing timely notification to excess carriers.
B. Renewal Aggregate — Fresh Limits
Upon renewal on July 1, 2022, the Midland Casualty renewal policy (MCS-GL-2022-58904) will provide a fresh $10 million aggregate for the 2022-2023 policy period (assuming that the renewal policy maintains the same aggregate structure as the Incumbent Tower). This fresh aggregate is intended to be available for new claims arising from new occurrences during the renewal period.
In principle, the renewal aggregate should not be eroded by the Higgins or Consolidated Builders claims, because those claims are properly allocated to the Incumbent Tower's policy period. However, this principle depends on the aggregate erosion methodology employed by Midland Casualty.
There are two principal methodologies for allocating losses against policy-period aggregates:
1. Occurrence-Date Allocation: Under this methodology, all losses (including defense costs and indemnity payments) arising from an occurrence are allocated to the aggregate of the policy period in which the occurrence took place, regardless of when the payments are actually made. This is the methodology most consistent with the occurrence-based trigger structure and provides the clearest separation between policy periods.
2. Payment-Date Allocation: Under this methodology, losses are allocated to the aggregate of the policy period during which the payment is actually made, regardless of when the underlying occurrence took place. This methodology is simpler to administer from an accounting perspective but creates the risk that late-developing costs from prior-period occurrences will erode the current-period aggregate, reducing the available limits for new claims.
If Midland employs a payment-date allocation methodology, defense costs and indemnity payments on the Higgins and Consolidated Builders claims that are incurred after July 1, 2022 would erode the renewal aggregate, potentially reducing the limits available for new claims during the 2022-2023 period. Given that both pending claims are in active litigation with no near-term resolution expected, significant defense costs and potential settlements or judgments could be incurred during the renewal period.
Recommendation: It is essential to confirm with Midland Casualty which aggregate erosion methodology applies under the Midland primary policy, both for the Incumbent Tower and the Renewal Tower. If payment-date allocation applies, Nexford should assess the risk of renewal aggregate erosion and consider whether to negotiate for occurrence-date allocation in the renewal policy wording. This is identified as Recommendation No. 4 in Section X below.
C. Cross-Period Defense Cost Allocation
If either pending claim is determined to straddle policy periods — for example, if the Consolidated Builders claim involves continuing structural deterioration that extends into the renewal period (as discussed in Section III.D above) — defense costs may need to be allocated between the Incumbent and Renewal Towers. Such allocation can be contentious and may be the subject of disputes between the insured and carriers, as well as between carriers participating in different policy periods.
To support any allocation arguments that may arise, we recommend that Nexford maintain detailed contemporaneous records of all defense costs attributable to each policy period. These records should include:
• Monthly billing statements from Hollander Byrne & Strauss, organized by claim and by the time period in which the work was performed;
• A running log of cumulative defense costs by claim and by policy period;
• Documentation of any carrier-directed allocation instructions or guidelines received from Midland Casualty or any excess carrier; and
• Copies of all invoices submitted to and approved by Midland Casualty for reimbursement under the primary layer.
These records will be invaluable in the event of any allocation dispute with carriers and should be maintained by Donna Kowalski's team in coordination with Trevor Haines.
VII. Notice Obligations at Renewal
A. Notice to Renewing Carriers
Even though the incumbent carriers on the PL tower have full knowledge of both pending claims — having received timely notice during the Incumbent Tower's policy period and having been actively involved in the management and defense of the claims — formal notice should be provided to each carrier upon renewal inception to ensure that no gap in coverage arises from a failure to comply with the notice requirements of the renewal policies.
The rationale for providing duplicate notice at renewal is as follows:
1. The renewal policies are separate and independent contracts from the incumbent policies, even where the carrier, the insured, and the coverage terms are the same. Each renewal policy has its own notice requirements, and compliance with the notice provisions of the Incumbent Tower policy does not automatically satisfy the notice provisions of the Renewal Tower policy.
2. Certain carriers — particularly Cornerstone, with its "claims-first-made" reporting endorsement — may require that claims be reported during the renewal policy period (or within the extended reporting period) in order for coverage to attach to the renewal layer. While this should not be implicated for the pending claims (which are properly allocated to the Incumbent Tower), providing notice at renewal eliminates any argument that the insured failed to comply with the renewal policy's notice provisions.
3. Notice at renewal creates a documented record of the insured's compliance with all policy conditions, which can be critical in the event of a coverage dispute.
Specific concern: Great Basin and Cornerstone may have different notice addresses or requirements for the renewal period, particularly if there have been personnel changes in their claims departments or if they have adopted new claims-reporting platforms. Ashford Breckinridge should confirm the current designated claims contacts and notice addresses for each carrier prior to the provision of renewal notice.
B. Notice Contents
The notice provided to each renewal carrier should contain the following information, at a minimum:
1. Identification of each claim:
• Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, Circuit Court of Will County, Illinois
• Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914, United States District Court for the Northern District of Illinois
2. Current status of each claim:
• Higgins: Active; in discovery. No dispositive motions pending. Trial not yet scheduled.
• Consolidated Builders: Active; motion to dismiss denied February 11, 2022. Case proceeding through fact discovery.
3. Current reserves: Total open reserves of $8.3 million across both claims, carried on the Midland Casualty primary layer.
4. Reference to incumbent policy numbers: MCS-GL-2021-55671 (Midland primary); GB-XS-2021-00347 (Great Basin); CRC-EX-2021-7742 (Cornerstone); APU-EX-2021-1183 (Allegheny Pacific).
5. Attachment of prior notice letters: Copies of all prior notice letters provided to each carrier during the Incumbent Tower's policy period should be attached to the renewal notice for completeness.
The notice letters should be prepared by Calderwood & Harkness in coordination with Donna Kowalski's team and should be reviewed by Douglas Fairchild prior to dispatch.
C. Timing. Notice should be provided as soon as practicable after the binding of the Renewal Tower, which is currently targeted for June 28, 2022. Ideally, the notice letters should be dispatched within five business days of binding — that is, by no later than July 6, 2022 (accounting for the Independence Day holiday on July 4).
A separate Claims Reporting Compliance Checklist will be provided to Donna Kowalski and Trevor Haines by Calderwood & Harkness, currently scheduled for delivery on June 1, 2022. The Checklist will provide a step-by-step protocol for ensuring compliance with the notice requirements of each layer of the Renewal Tower.
VIII. Interaction with Product Recall Sub-Limit
The product recall sub-limit under the Midland Casualty primary policy (currently $2.5 million per occurrence / $5 million aggregate) is a distinct coverage feature that provides reimbursement for the costs of recalling defective products from the market. This sub-limit is relevant to the pending claims to the extent that either claim triggers or may trigger a recall obligation, whether voluntary or mandatory.
Application to *Higgins*: The Higgins Action involves the Model NCS-7200 conveyor emergency stop mechanism. If discovery in the Higgins Action reveals a pattern defect in the emergency stop mechanism — as opposed to an isolated manufacturing defect or misuse — a voluntary or mandatory product recall could be triggered. In particular, the U.S. Consumer Product Safety Commission ("CPSC") could issue a recall order if it determines that the NCS-7200 conveyor system presents an unreasonable risk of injury to consumers or workers.
It is noteworthy that Nexford Conveyor Systems already issued an advisory notice on August 7, 2020, at a cost of $340,000, which may have addressed similar products or components. We recommend confirming whether the NCS-7200 conveyor system — or the specific emergency stop mechanism at issue in the Higgins Action — was included within the scope of the August 2020 advisory notice. If it was, the advisory notice may reduce the likelihood of a separate recall. If it was not, the risk of a new recall is heightened, and the recall sub-limit exposure should be closely monitored.
Application to *Consolidated Builders*: The Consolidated Builders Action involves Triton Grade 8 hex bolts. Triton Fastener Corp. conducted a voluntary product recall in March 2020, at a cost of $1.1 million. We recommend confirming whether the specific bolts at issue in the Consolidated Builders Action were included in the March 2020 recall or represent a different product, lot number, or production run. If the subject bolts were included in the prior recall, the adequacy of the recall measures and Triton's compliance with its recall obligations may become issues in the litigation. If the subject bolts were not included, a separate recall could be warranted.
Renewal Sub-Limit Allocation: If a new recall is triggered during the Renewal Tower's policy period relating to the same product types involved in the pending claims, the allocation of recall costs between the Incumbent Tower's recall sub-limit aggregate and the Renewal Tower's recall sub-limit aggregate will depend on whether the recall is deemed a separate occurrence or part of the same continuing course of events. A recall triggered by the same defect that gave rise to the Higgins or Consolidated Builders claims could be characterized as part of the same occurrence, in which case the recall costs should be allocated to the Incumbent Tower's sub-limit. However, if the recall is deemed a new and separate occurrence — for example, because it involves a different product lot or a newly discovered defect — the Renewal Tower's sub-limit would apply.
As noted in Section II.B.2 above, Calderwood & Harkness has separately recommended that the recall sub-limit be increased to $5 million per occurrence / $10 million aggregate at renewal, in light of the current claims environment and the potential for recall activity involving both Nexford Conveyor Systems and Triton Fastener Corp. products. A detailed analysis of this recommendation is provided in the Product Recall Sub-Limit Adequacy Memorandum (C&H Matter No. 1005-00003-R).
IX. Coordination with Defense Counsel
Hollander Byrne & Strauss LLP is handling the defense of both the Higgins and Consolidated Builders matters. Calderwood & Harkness LLP, in its capacity as coverage counsel to Nexford, is separately preparing a coordination letter to HBS, dated May 25, 2022, that will address the following topics:
• Cooperation Obligations: HBS's obligations to cooperate with Midland Casualty & Surety Company as the insurer providing defense and indemnification under the primary GL/PL layer. This includes compliance with Midland's litigation management guidelines, submission of budgets and staffing plans, and adherence to billing protocols.
• Settlement Consent Requirements: A reminder that HBS is not authorized to settle or consent to any resolution of either claim without the written consent of the applicable carrier(s). Under the Midland Casualty primary policy, settlement authority rests with the carrier, subject to the insured's consent rights under applicable law. For claims that may implicate the excess layers, the consent of the applicable excess carrier(s) may also be required.
• Defense Cost Reporting Protocols: Instructions regarding the format, frequency, and content of defense cost reports to be provided to Nexford's risk management and insurance teams. These reports are essential for aggregate erosion tracking (see Section VI above).
• Duty to Notify C&H of Material Developments: HBS is to notify Calderwood & Harkness promptly of any material development in either pending claim that could affect tower erosion, including but not limited to: adverse court rulings, significant changes in liability or damages assessments, discovery of evidence bearing on the existence of a pattern defect, any communication from the CPSC or other regulatory body regarding a potential recall, and any settlement demand or offer.
In addition, defense counsel should be informed of the renewal timeline and any changes to carrier contacts, reporting requirements, or coverage terms that could affect their obligations. If the renewal introduces any new carriers to the PL tower, or if existing carriers modify their claims contacts or reporting platforms, HBS must be promptly notified so that its communications and reports can be directed to the correct recipients.
Specific Instruction to HBS: Hollander Byrne & Strauss should not settle or consent to any resolution of either the Higgins Action or the Consolidated Builders Action without the written consent of the applicable carrier(s), and should copy Calderwood & Harkness on all material correspondence with carriers relating to either matter. This instruction will be formalized in the May 25, 2022 coordination letter.
X. Recommendations and Action Items
Based on the analysis set forth in this memorandum, we recommend the following action items, each of which should be addressed in the period before renewal binding (currently targeted for June 28, 2022) and incorporated into the broader renewal negotiation process:
1. Confirm Occurrence Dates. Request from Hollander Byrne & Strauss LLP precise dates of the alleged occurrences in both the Higgins Action (date of the crush injury to plaintiff Robert Higgins) and the Consolidated Builders Action (date of the wall collapse and, separately, the dates of delivery and installation of the Grade 8 hex bolts by Triton Fastener Corp.). This information is necessary to map each claim definitively to the correct policy period and to assess the risk of cross-period trigger arguments. Responsible party: Naomi Petersen (C&H), in coordination with Donna Kowalski (Nexford). Target completion: June 3, 2022.
2. Negotiate Narrow Known-Claims Exclusions. Ensure that any pending/prior litigation or known-claims exclusion in the Renewal Tower references only the two specific pending cases by name and case number — Higgins v. Nexford Conveyor Systems, LLC et al., Case No. 2021-L-04382, and Consolidated Builders Supply Co. v. Triton Fastener Corp., Case No. 1:21-cv-08914 — and does not extend to product-line exclusions for NCS-7200 conveyor systems or Triton Grade 8 hex bolts generally. Insist on "specific occurrence" exclusion language rather than "arising out of the same or similar facts, circumstances, or products" language. Responsible party: Ashford Breckinridge (Phillip Garza, Tamara Fisk), with review by C&H (Naomi Petersen). Target completion: June 15, 2022.
3. Confirm Cornerstone Retroactive Date. Verify with Cornerstone Reinsurance Corp. (through Ashford Breckinridge) that the retroactive date of July 1, 2019 under the prior acts endorsement (CRC-PA-01) does not move forward at renewal and remains anchored to the date of Cornerstone's first participation in the Nexford PL tower. Separately, investigate Triton Fastener Corp.'s delivery records for the Grade 8 hex bolts at issue in the Consolidated Builders Action to determine whether any delivery dates predate July 1, 2019. Responsible party: Ashford Breckinridge (Tamara Fisk) for carrier confirmation; Donna Kowalski (Nexford) for delivery records investigation. Target completion: June 10, 2022.
4. Determine Aggregate Erosion Methodology. Confirm with Midland Casualty & Surety Company whether aggregate erosion under the primary GL/PL policy (both Incumbent and Renewal) is based on occurrence-date allocation or payment-date allocation. If payment-date allocation applies, assess the risk that post-renewal defense costs and indemnity payments on the Higgins and Consolidated Builders claims could erode the fresh 2022-2023 aggregate, and evaluate whether to negotiate for occurrence-date allocation in the renewal policy wording. Responsible party: Ashford Breckinridge (Phillip Garza), with analysis by C&H (Yuki Nakamura). Target completion: June 8, 2022.