PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law 155 North Wacker Drive, Suite 4200 Chicago, Illinois 60606
Telephone: (312) 555-8400 Facsimile: (312) 555-8401 www.calderwoodharkness.com
MEMORANDUM
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:
Douglas Fairchild, Responsible Partner — Calderwood & Harkness LLP
Naomi Petersen, Lead Associate — Calderwood & Harkness LLP
Yuki Nakamura, Working Associate — Calderwood & Harkness LLP
DATE: July 22, 2022
RE: Post-Bind Policy Wording Review — Directors & Officers Liability Insurance Tower (July 1, 2022 – July 1, 2023 Policy Year)
MATTER NO.: 1005-00003
CC: Angela Fontaine, Billing Partner, Calderwood & Harkness LLP
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I. Executive Summary
This Memorandum sets forth the results of our post-bind policy wording review of the final issued Directors & Officers ("D&O") liability insurance policy forms for the Nexford Industrial Holdings Inc. ("Nexford" or the "Company") renewal tower for the policy period July 1, 2022 through July 1, 2023 (the "Renewal Tower"). The purpose of this review is to compare the final issued policy forms received from the Company's insurance broker, Ashford Breckinridge LLP, against the negotiated terms reflected in the binders issued on or about June 28, 2022, and against the specific policy wording improvements memorialized in the Renewal Negotiation Points Memorandum dated June 13, 2022 (the "Negotiation Points Memorandum").
The scope of this review encompasses all five layers of the D&O tower, as follows:
Primary Layer: Vandermeer National Insurance Company, renewal policy number VNI-DO-2022-91205, providing $10,000,000 each Loss / $10,000,000 aggregate, with a $1,000,000 self-insured retention ("SIR") applicable to entity coverage and no SIR applicable to individual director and officer (Side-A) coverage. The renewal premium for the primary layer is $377,200.
1st Excess Layer: Commonwealth Indemnity Group, providing $10,000,000 in excess of the underlying $10,000,000 primary layer, following form to the Vandermeer primary, with a renewal premium of $165,000.
2nd Excess Layer: Northfield Excess Insurance Company, a new carrier on the Renewal Tower replacing Graystone Mutual Assurance Co. on this layer, providing $10,000,000 in excess of $20,000,000 aggregate underlying limits, with a renewal premium of $221,000 (compared to the prior-year premium of $198,750 with Graystone).
3rd Excess Layer: Pinnacle Re Insurance Ltd. (domiciled in Bermuda), providing $10,000,000 in excess of $30,000,000 aggregate underlying limits, with a renewal premium of $146,000.
Side-A DIC Layer: Harrington Specialty Insurance Co., renewal of policy number HSI-DIC-2021-00342, providing $20,000,000 in dedicated Side-A difference-in-conditions ("DIC") coverage with no SIR. The limit has been increased from $15,000,000 in the prior policy year to $20,000,000 at the direction of the Nexford board of directors, consistent with our recommendation in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022. The renewal premium for the Side-A DIC layer is $289,500 (increased from $224,000 in the prior year).
The total D&O tower aggregate limit remains at $55,000,000, unchanged from the prior policy year. Total renewal premium across all five layers is $1,498,200, representing an increase of $134,750, or approximately 9.88%, over the prior-year total premium of $1,363,450. This increase reflects market hardening in the D&O segment, the addition of a new carrier at the second excess level, and the limit increase on the Side-A DIC layer.
Overall Conclusion. The final issued policy forms are substantially consistent with the binder terms and the negotiated wording improvements set forth in the Negotiation Points Memorandum. Of the ten specific D&O policy wording improvements negotiated with carriers through Ashford Breckinridge LLP during the renewal process, nine have been properly incorporated into the issued policy forms. However, one material endorsement discrepancy has been identified in the Vandermeer National Insurance Company primary layer that requires a corrective endorsement.
The discrepancy involves the definition of "Claim" in the issued Vandermeer primary policy (VNI-DO-2022-91205), which is narrower than the definition that was negotiated and reflected in the binder. Specifically, the issued policy limits the regulatory investigation prong of the "Claim" definition to "formal investigation[s] commenced by the filing of a notice of charges, formal investigative order, or similar document," thereby excluding coverage for informal regulatory inquiries, preliminary fact-finding requests, voluntary information requests, and subpoenas issued outside the context of a formally commenced investigation. This narrowing is contrary to the agreed-upon language, which was specifically negotiated to encompass informal inquiries from governmental, regulatory, and self-regulatory bodies.
Because the three excess layers (Commonwealth, Northfield, and Pinnacle Re) each follow form to the Vandermeer primary policy, this narrowing discrepancy in the primary "Claim" definition will carry through to those excess layers unless corrected at the primary level. The Harrington Side-A DIC layer is unaffected because it contains an independent, broader definition of "Claim" that does include informal regulatory inquiries.
Recommendation. We recommend that Nexford, through its broker Ashford Breckinridge LLP (attention: Phillip Garza, Senior Vice President, Executive Risk Practice), promptly request a corrective endorsement from Vandermeer National Insurance Company to restore the negotiated definition of "Claim" to include informal regulatory inquiries. Calderwood & Harkness has prepared proposed corrective endorsement language, which is set forth in Appendix B to this Memorandum and discussed in detail in Section IV.A.5 below. The corrective endorsement should be obtained no later than August 31, 2022.
II. Background
A. Engagement Context
Calderwood & Harkness LLP ("C&H") was engaged by Nexford Industrial Holdings Inc. to perform a comprehensive review of the Company's D&O and product-liability insurance tower in connection with the 2022-2023 renewal cycle. Nexford is a Delaware corporation headquartered at 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173. The engagement was authorized pursuant to an engagement letter dated April 22, 2022, executed under the standing outside counsel agreement between C&H and Nexford dated January 15, 2020.
The engagement scope encompassed a full analysis of the existing D&O tower, identification of coverage gaps and areas for improvement, preparation of renewal negotiation guidance for Nexford's broker, and post-bind review of final issued policy forms. In the course of this engagement, C&H delivered the following work product, among other items, prior to the issuance of this Memorandum:
• Preliminary Coverage Gap Memorandum (May 27, 2022) — identifying inconsistencies in the definition of "Insured Person" across layers and other coverage gaps in the expiring tower.
• Side-A DIC Policy Analysis Memorandum (June 3, 2022) — analyzing the adequacy of the $15,000,000 Side-A DIC limit and recommending an increase to $20,000,000, given the Company's board composition, private-equity sponsorship, and potential IPO timeline.
• D&O Limits Adequacy Memorandum (June 6, 2022) — concluding that a $55,000,000 aggregate D&O tower is adequate for Nexford's current private-company status but should be revisited in connection with any planned initial public offering.
• Renewal Negotiation Points Memorandum (June 13, 2022) — setting forth ten specific D&O policy wording improvements to be negotiated with carriers through Ashford Breckinridge LLP for incorporation into the renewal policies.
• Regulatory Investigation Coverage Memorandum (June 14, 2022) — analyzing the importance of informal regulatory inquiry coverage for manufacturing companies subject to ongoing oversight by the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), and state regulatory agencies.
• Comprehensive D&O and Product-Liability Tower Review Report (June 17, 2022) — consolidating the foregoing analyses into a single comprehensive report for Nexford management and the board of directors.
• Renewal Binding Confirmation Review Letter (July 8, 2022) — a preliminary review of binding confirmations received from Ashford Breckinridge LLP, which first flagged the potential discrepancy in the Vandermeer "Claim" definition that is confirmed in this Memorandum.
The D&O renewal was placed through Ashford Breckinridge LLP, acting as Nexford's insurance broker. Tamara Fisk served as the Account Executive responsible for the Nexford D&O placement during the renewal process. The renewal was bound on or about June 28, 2022, and the new policy period commenced on July 1, 2022.
B. Nexford Corporate Structure
Nexford Industrial Holdings Inc. is the parent holding company of a group of industrial manufacturing businesses. The corporate structure is relevant to the D&O tower review because each subsidiary is a named insured under the D&O policies, and the ownership structure — including majority private-equity sponsorship — implicates specific policy provisions, including the insured-versus-insured exclusion and related carve-backs.
Nexford's three operating subsidiaries, all of which are named insureds under the D&O policies, are as follows:
1. Nexford Conveyor Systems, LLC — a Delaware limited liability company with its principal facility located at 4500 Industrial Parkway, Joliet, Illinois 60436. Nexford Conveyor Systems is engaged in the design, engineering, and manufacture of conveyor and material-handling systems for warehouse, distribution, and manufacturing facilities.
2. Triton Fastener Corp. — an Illinois corporation with its principal facility located at 1010 Whitman Avenue, Rockford, Illinois 61101. Triton Fastener is a producer of industrial fasteners, anchoring systems, and related hardware for construction and manufacturing applications.
3. Marlowe Asset Management Precision Machining, Inc. — an Ohio corporation with its principal facility located at 775 Summit Industrial Boulevard, Akron, Ohio 44311. Marlowe Asset Management Precision Machining provides precision CNC machining, fabrication, and assembly services for automotive, aerospace, and defense sector customers.
For the fiscal year ended December 31, 2021, the Nexford group reported consolidated revenue of approximately $1.42 billion and EBITDA of approximately $218 million.
Nexford is majority-owned by Veltrano Capital Partners Fund IV, LP ("Veltrano"), which holds approximately 68.5% of the Company's equity. Management rollover equity constitutes approximately 19.3% of total equity, with co-investors holding the remaining 12.2%. The Veltrano sponsorship has been in place since 2018.
The Company is governed by a nine-member board of directors: four independent directors and five directors appointed by Veltrano Capital Partners. The board is chaired by Gerald ("Gerry") Whitcomb. This board composition is directly relevant to several D&O policy provisions reviewed herein, including the insured-versus-insured exclusion and the breadth of the "Insured Person" definition.
Nexford is currently privately held. However, as has been discussed in our prior memoranda, the Company and its sponsor have indicated that an initial public offering may be pursued in the 2023-2024 timeframe. This potential IPO is relevant to the post-bind review because (a) the current D&O tower structure and limits are calibrated for private-company exposure and will require substantial restructuring for public-company securities litigation risk, and (b) certain policy wording issues — including the "Claim" definition discrepancy identified herein — should be definitively resolved well in advance of any public offering.
C. D&O Claims History
Nexford's five-year D&O loss history reflects a clean claims record. In the five-year period preceding the current renewal, only one claim has been reported under the D&O tower: a shareholder demand letter received in 2020 in connection with a minority co-investor dispute. That claim was resolved without payment, and no reservation of rights was issued by the carrier. No losses have been paid under the D&O tower during the relevant period.
This clean claims history is relevant to the post-bind wording review in two respects. First, it supports the conclusion that the overall renewal terms — including the 9.88% premium increase — reflect market conditions rather than adverse claims experience. Second, and more practically, Nexford's clean record provides leverage in requesting the corrective endorsement from Vandermeer National Insurance Company, as the carrier has no basis to resist restoring the negotiated terms on claims-experience grounds.
III. Methodology
The post-bind policy wording review was conducted in accordance with the following methodology:
Step 1 — Receipt and Cataloging of Final Issued Policy Forms. We received final issued policy forms for all five layers of the D&O tower from Ashford Breckinridge LLP. The policies were transmitted by Tamara Fisk (Account Executive) via encrypted file transfer on the following dates: the Vandermeer primary policy and the Commonwealth first excess policy were received on July 11, 2022; the Northfield second excess policy and Pinnacle Re third excess policy were received on July 14, 2022; and the Harrington Side-A DIC policy was received on July 15, 2022. Upon receipt, each policy was cataloged, assigned an internal tracking number, and logged into the C&H document management system under Matter 1005-00003.
Step 2 — Side-by-Side Comparison Against Binder Term Sheets. Each section of each issued policy form — including declarations pages, insuring agreements, definitions, conditions, exclusions, and endorsements — was compared on a side-by-side basis against the corresponding provisions of the binder term sheets issued by each carrier on or about June 28, 2022. This comparison was performed at the provision level, with particular attention to any variation in language, regardless of apparent materiality.
Step 3 — Cross-Reference to Renewal Negotiation Points. Each issued policy form was cross-referenced against the ten specific D&O policy wording improvements identified in the Negotiation Points Memorandum dated June 13, 2022. These ten points represented the agreed-upon wording enhancements that were negotiated with the carriers through Ashford Breckinridge LLP and were confirmed as accepted by the carriers prior to binding. Each negotiation point was verified against the issued policy language to confirm incorporation.
Step 4 — Endorsement Review. All endorsements attached to each issued policy form were individually reviewed to confirm that (a) each negotiated endorsement was properly attached, (b) the endorsement language matched the agreed-upon terms, and (c) no unexpected or unauthorized endorsements were attached.
Step 5 — Verification of Core Policy Terms. Named insured schedules, limits of liability, retentions and SIRs, premiums, and policy periods were verified against the binder terms for each layer.
Step 6 — Follow-Form and Excess Layer Analysis. The follow-form provisions in the three excess layers (Commonwealth, Northfield, and Pinnacle Re) were analyzed against the primary policy language to determine whether the follow-form grants were complete and unqualified or whether any layer contained independent provisions that modified or restricted the primary coverage. Any independent conditions, exclusions, or definitions in the excess layers were identified and compared to the primary terms.
Step 7 — Cross-Layer Consistency Analysis. Key defined terms — including "Claim," "Insured Person," "Loss," "Wrongful Act," and "Company" — were compared across all five layers to ensure consistency of coverage grants and to identify any definitional gaps that could result in coverage discrepancies at different levels of the tower.
Step 8 — Findings Documentation and Reporting. All findings were documented in this Memorandum, with discrepancies classified as either material (requiring corrective action) or non-material (noted for reference). The single material discrepancy identified — the Vandermeer primary "Claim" definition — is discussed in detail below.
IV. Layer-by-Layer Review
A. Primary Layer — Vandermeer National Insurance Company
1. Policy Identification
The primary layer of the D&O tower is underwritten by Vandermeer National Insurance Company, a Connecticut-domiciled admitted carrier with an A.M. Best rating of A (Excellent), Financial Size Category XIII. The renewal policy is identified as follows:
Carrier: Vandermeer National Insurance Company
Policy Number: VNI-DO-2022-91205 (replacing outgoing policy VNI-DO-2021-88473)
Policy Period: July 1, 2022 to July 1, 2023, 12:01 a.m. local time at the address of the Named Insured
Limits of Liability: $10,000,000 each Loss / $10,000,000 aggregate (all coverage parts combined)
Self-Insured Retention: $1,000,000 applicable to entity coverage (Side-C equivalent); no SIR applicable to individual director and officer coverage under Side-A or Side-B insuring agreements
Premium: $377,200
The Vandermeer primary policy serves as the lead policy for the D&O tower and establishes the baseline policy form to which the three excess layers follow form, subject to specified modifications. Accordingly, any wording discrepancy in the primary policy has the potential to propagate through the excess layers, a consideration that is directly relevant to the "Claim" definition discrepancy discussed in Section IV.A.5 below.
2. Named Insured Schedule
We reviewed the Named Insured Schedule set forth in the declarations page and attached schedule of the issued Vandermeer primary policy. Our review confirmed the following:
• Named Insured: Nexford Industrial Holdings Inc., 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173.
• Subsidiaries / Additional Named Insureds: Nexford Conveyor Systems, LLC; Triton Fastener Corp.; Marlowe Asset Management Precision Machining, Inc. — all three subsidiaries are listed as additional named insureds.
• Employer Identification Numbers (EINs): Nexford Industrial Holdings Inc. (83-2174650); Nexford Conveyor Systems, LLC (83-2174651); Triton Fastener Corp. (36-4892103); Marlowe Asset Management Precision Machining, Inc. (31-1784529). All EINs have been verified against Nexford's corporate records.
• Principal Address: The address listed for the Named Insured on the declarations page is 2200 Corporate Center Drive, Suite 800, Schaumburg, Illinois 60173, which is correct and current.
Finding: The Named Insured Schedule in the issued Vandermeer primary policy is consistent with the binder terms. No discrepancy has been identified.
3. Insuring Agreements
The Vandermeer primary policy contains three insuring agreements, which we reviewed in detail:
Insuring Agreement A (Side-A — Non-Indemnifiable Loss): This insuring agreement provides coverage for Loss arising from Claims made against Insured Persons for Wrongful Acts when the Company has not indemnified, and is not permitted or required to indemnify, the Insured Person. This is the traditional "Side-A" grant providing direct coverage to individual directors and officers for non-indemnifiable losses.
Insuring Agreement B (Side-B — Company Reimbursement): This insuring agreement provides coverage for Loss that the Company is required or permitted to pay as indemnification to Insured Persons for Claims made against them for Wrongful Acts. Under this grant, the Company advances or pays defense costs and settlements on behalf of the individual and is reimbursed by the insurer.
Insuring Agreement C (Entity Coverage): This insuring agreement provides coverage for Loss arising from Claims made directly against the Company for Wrongful Acts, subject to the $1,000,000 SIR. This is the entity-level coverage grant, which is common in private-company D&O forms but is more limited in scope than the individual-level Side-A and Side-B grants.
We compared each insuring agreement against the corresponding provisions set forth in the binder term sheet and confirmed that the coverage grants, operative language, and scope of each insuring agreement match the negotiated terms.
Finding: The insuring agreements in the issued Vandermeer primary policy are consistent with the negotiated terms reflected in the binder. No discrepancy has been identified.
4. Definition of "Insured Person"
The definition of "Insured Person" was identified in our Preliminary Coverage Gap Memorandum dated May 27, 2022 as a key area requiring attention during the renewal negotiation. Under the expiring Vandermeer primary policy (VNI-DO-2021-88473), the definition of "Insured Person" was limited to duly elected or appointed directors and duly appointed officers of the Company, which excluded several categories of individuals who serve in director-like or officer-like capacities for Nexford and its subsidiaries.
Pursuant to the Negotiation Points Memorandum dated June 13, 2022 (Negotiation Point No. 2), C&H recommended that Nexford negotiate a broadened definition of "Insured Person" to include:
(a) any duly elected or appointed director or duly appointed officer of the Company or any Subsidiary;
(b) any person who serves in a de facto capacity as a director or officer of the Company or any Subsidiary, whether or not formally appointed;
(c) any member of any advisory board, advisory committee, or similar body of the Company or any Subsidiary;
(d) any employee of the Company or any Subsidiary who serves in an outside capacity as a director, officer, trustee, regent, governor, or equivalent position of another entity at the specific written request of the Company; and
(e) any person who was, now is, or shall become a person described in (a) through (d) above.
This broadened definition was accepted by Vandermeer during the renewal negotiation and reflected in the binder.
We reviewed the definition of "Insured Person" in the issued Vandermeer primary policy (VNI-DO-2022-91205) and confirmed that it incorporates the broadened language described above, including all five categories enumerated in the Negotiation Points Memorandum.
Finding: The definition of "Insured Person" in the issued Vandermeer primary policy conforms to the negotiated broadened language and is consistent with the binder terms. No discrepancy has been identified.
5. Definition of "Claim" — DISCREPANCY IDENTIFIED
The definition of "Claim" is a critical provision in any D&O policy because it determines the scope of events that will trigger coverage. During the renewal negotiation, the definition of "Claim" was identified as one of the ten priority negotiation points (Negotiation Point No. 3 in the Negotiation Points Memorandum dated June 13, 2022). Specifically, C&H recommended that Nexford negotiate a definition of "Claim" that would encompass not only traditional litigation and formal governmental proceedings, but also informal regulatory inquiries, preliminary fact-finding requests, voluntary information requests, and subpoenas issued by governmental, regulatory, and self-regulatory bodies.
The importance of this coverage for Nexford's business was analyzed in detail in the Regulatory Investigation Coverage Memorandum dated June 14, 2022. As set forth in that Memorandum, Nexford's three operating subsidiaries — all engaged in industrial manufacturing — are subject to ongoing regulatory oversight by, among other agencies, OSHA (workplace safety), CPSC (product safety), the Environmental Protection Agency (environmental compliance), and various state-level occupational safety and environmental agencies. Regulatory engagement with these agencies frequently begins with informal inquiries, requests for voluntary information submission, or preliminary fact-finding requests that do not rise to the level of a formally commenced investigation. If the "Claim" definition excludes such informal inquiries, directors and officers who respond to regulatory contact — and potentially incur significant defense and advisory costs in doing so — may find themselves without D&O coverage for those costs until the regulatory matter escalates to a formal proceeding.
Negotiated Term. The following definition of "Claim" was negotiated with Vandermeer, accepted by the carrier, and reflected in the binder term sheet issued on or about June 28, 2022:
"Claim" means:
(a) any written demand for monetary damages or other monetary relief, or for non-monetary or injunctive relief;
(b) any civil, criminal, administrative, or regulatory proceeding commenced by the filing or service of a complaint, indictment, information, or similar pleading;
(c) any formal or informal investigation, examination, or inquiry by any governmental, regulatory, or self-regulatory body or organization, including but not limited to any informal inquiry, request for information, subpoena, civil investigative demand, or similar request, whether or not denominated as a formal proceeding or investigation;
(d) any extradition proceeding; or
(e) any written request to an Insured Person to toll or waive any statute of limitations.
Issued Policy Language. The definition of "Claim" as set forth in the issued Vandermeer primary policy (VNI-DO-2022-91205) includes subsections (a), (b), (d), and (e) as described above, in language substantially identical to the binder terms. However, subsection (c) — the regulatory investigation prong — has been materially narrowed in the issued policy. The issued policy states:
"(c) any formal investigation commenced by the filing of a notice of charges, formal investigative order, or similar document by a governmental, regulatory, or self-regulatory body or organization;"
Analysis of the Discrepancy. The issued policy language differs from the negotiated language in two critical respects:
First, the issued policy limits the regulatory investigation prong to "formal investigation[s]," omitting the word "informal" and the broader category of "examination[s]" and "inquir[ies]" that were included in the negotiated language. Under the issued policy, coverage is triggered only when a governmental, regulatory, or self-regulatory body commences a formally designated investigation, not when the agency initiates preliminary or informal contact with the Company or its directors and officers.
Second, the issued policy requires that the formal investigation be "commenced by the filing of a notice of charges, formal investigative order, or similar document," thereby imposing a procedural threshold that excludes coverage for the vast majority of initial regulatory contact — which typically takes the form of informal letters, telephone inquiries, requests for voluntary document production, or preliminary fact-finding visits that do not involve the issuance of any formal charging or investigative document.
Effect of the Discrepancy. As a practical matter, the issued policy language excludes coverage for the following categories of regulatory events, all of which would have been covered under the negotiated definition:
• Informal inquiries and requests for information from OSHA in connection with workplace safety complaints or investigations;
• Preliminary fact-finding requests from the CPSC regarding product safety concerns, recalls, or consumer complaints;
• Informal investigative contact from state attorneys general, including requests for information issued prior to the commencement of a formal investigation;
• Voluntary information requests from the EPA or state environmental agencies in connection with environmental compliance matters;
• Subpoenas duces tecum and subpoenas ad testificandum issued in the pre-formal-investigation stage of a regulatory inquiry; and
• Civil investigative demands issued by federal or state agencies prior to the filing of a formal complaint or notice of charges.
The exclusion of these categories of regulatory events from the definition of "Claim" means that directors and officers who incur defense costs, legal advisory fees, and related expenses in responding to informal regulatory contact will not be covered under the Vandermeer primary policy (or the follow-form excess layers) unless and until the regulatory matter escalates to a formally commenced investigation — at which point significant costs may already have been incurred without coverage.
Materiality. We classify this discrepancy as material for the following reasons:
(i) The negotiated definition was specifically crafted to address Nexford's regulatory exposure profile as an industrial manufacturing enterprise, as analyzed in the Regulatory Investigation Coverage Memorandum dated June 14, 2022;
(ii) The informal regulatory inquiry coverage was a priority negotiation item that was accepted by Vandermeer during the renewal process and confirmed in the binder — its omission from the issued policy represents a departure from the agreed-upon terms, not a coverage feature that was negotiated and denied;
(iii) The discrepancy affects not only the primary layer but also the three follow-form excess layers (Commonwealth, Northfield, and Pinnacle Re), thereby reducing coverage across $40,000,000 of the tower;
(iv) Nexford's manufacturing operations are subject to frequent and ongoing regulatory contact from OSHA and CPSC, among other agencies, and the Company's directors and officers are at meaningful risk of incurring defense and advisory costs in connection with informal regulatory inquiries; and
(v) The discrepancy was first identified and flagged in our Renewal Binding Confirmation Review Letter dated July 8, 2022, and our review of the full issued policy form has confirmed that the narrowing is not offset or cured by any other policy provision or endorsement.
Cross-Reference. This issue was initially flagged in the Renewal Binding Confirmation Review Letter dated July 8, 2022, based on our preliminary review of the binding confirmation documents. The review of the full issued policy form conducted for this Memorandum confirms the discrepancy and provides the detailed analysis set forth above.
Recommendation. We recommend that Nexford promptly request a corrective endorsement from Vandermeer National Insurance Company, through Ashford Breckinridge LLP, to restore subsection (c) of the "Claim" definition to the negotiated language that was agreed upon and reflected in the binder. We have prepared proposed corrective endorsement language, which is set forth in full in Appendix B to this Memorandum. The proposed endorsement would delete the current subsection (c) of the "Claim" definition and replace it with the negotiated language, as follows:
"(c) any formal or informal investigation, examination, or inquiry by any governmental, regulatory, or self-regulatory body or organization, including but not limited to any informal inquiry, request for information, subpoena, civil investigative demand, or similar request, whether or not denominated as a formal proceeding or investigation;"
The corrective endorsement request should be transmitted to Ashford Breckinridge LLP, attention Phillip Garza, Senior Vice President, Executive Risk Practice, for submission to Vandermeer. We recommend a target deadline of August 31, 2022 for issuance of the corrective endorsement.
6. Severability of the Application
Severability of the application was Negotiation Point No. 1 in the Negotiation Points Memorandum dated June 13, 2022. Full severability ensures that misrepresentations or omissions in the insurance application by one insured person are not imputed to other, "innocent" insured persons for purposes of rescission or voiding of coverage. Under the negotiated severability provision, only the knowledge of the individual who signed the application (the "signing officer") may be considered by the insurer in connection with any rescission or voiding of coverage as to that individual; knowledge of the signing officer is not imputed to any other Insured Person.
We reviewed the severability provision in the issued Vandermeer primary policy (VNI-DO-2022-91205) and confirmed that it includes the negotiated full severability language. The provision expressly states that the application shall be construed as a separate application by each Insured Person, and that no statements made or knowledge possessed by any one Insured Person shall be imputed to any other Insured Person for purposes of determining the availability of coverage.
Finding: The severability provision in the issued Vandermeer primary policy includes the negotiated full severability language and is consistent with the binder terms. No discrepancy has been identified.
7. Insured vs. Insured Exclusion
The insured-versus-insured exclusion is a standard provision in D&O policies that bars coverage for Claims brought by one insured against another insured. This exclusion is particularly significant in Nexford's case because Veltrano Capital Partners holds 68.5% of the Company's equity and has appointed five of the nine members of the board of directors. Without appropriate carve-backs, the insured-versus-insured exclusion could potentially bar coverage for certain types of derivative actions, employment disputes, or bankruptcy-related claims that involve insured persons on both sides of the dispute.
Pursuant to Negotiation Point No. 4 in the Negotiation Points Memorandum dated June 13, 2022, C&H recommended that Nexford negotiate the following three carve-backs to the insured-versus-insured exclusion:
(i) Derivative Demand Carve-Back: Claims brought derivatively on behalf of the Company, whether in the right of the Company or as a demand upon the board, shall not be subject to the insured-versus-insured exclusion, provided that the Claim is brought and maintained without the active solicitation, assistance, participation, or intervention of any Insured Person.
(ii) Employment Practices Carve-Back: Claims brought by an Insured Person against the Company or another Insured Person arising out of an employment-related dispute (including wrongful termination, discrimination, harassment, or retaliation) shall not be subject to the insured-versus-insured exclusion.
(iii) Bankruptcy Trustee / Examiner Carve-Back: Claims brought by or on behalf of a bankruptcy trustee, debtor-in-possession, examiner, receiver, liquidator, rehabilitator, or creditors' committee shall not be subject to the insured-versus-insured exclusion.
We reviewed the insured-versus-insured exclusion and its carve-backs in the issued Vandermeer primary policy (VNI-DO-2022-91205) and confirmed that all three negotiated carve-backs have been incorporated into the issued policy in language that is materially identical to the agreed-upon terms.
Finding: The insured-versus-insured exclusion in the issued Vandermeer primary policy includes all three negotiated carve-backs and is consistent with the binder terms. No discrepancy has been identified.
8. Prior Acts / Prior and Pending Litigation Exclusion
The prior acts and prior and pending litigation exclusion is a standard D&O policy provision that bars coverage for Claims arising out of, based upon, or attributable to facts, circumstances, or Wrongful Acts that occurred before the retroactive date stated in the policy, or that are the subject of litigation or proceedings pending or existing on or before a specified date. We reviewed the prior acts exclusion and the retroactive date provisions in the issued Vandermeer primary policy and compared them to the binder terms.
The retroactive date in the issued policy is consistent with the retroactive date reflected in the binder, and the scope of the prior and pending litigation exclusion is unchanged from the expiring policy and consistent with the agreed-upon terms. The prior and pending litigation date has been appropriately updated to reflect the inception date of the current policy period.
Finding: The prior acts and prior and pending litigation exclusion provisions in the issued Vandermeer primary policy are consistent with the binder terms. No discrepancy has been identified.
9. Allocation Provisions
Allocation provisions govern how defense costs, settlements, and judgments are allocated between covered and non-covered matters in mixed claims — i.e., Claims involving both insured and uninsured parties, or both covered and non-covered allegations. During the renewal negotiation (Negotiation Point No. 6), C&H recommended that Nexford negotiate "presumptive allocation" language favoring the insured in mixed claims, under which the insurer is required to advance and pay the maximum covered portion of any Loss unless the insurer can demonstrate that a different allocation is appropriate.
We reviewed the allocation provision in the issued Vandermeer primary policy (VNI-DO-2022-91205) and confirmed that it includes the negotiated presumptive allocation language. The provision states that in the event of a mixed claim, the Insurer and the Insured shall use their best efforts to agree upon a fair and proper allocation. In the event of a disagreement, the Insurer shall advance the maximum covered portion of defense costs pending resolution of the allocation dispute, and the allocation ultimately determined shall be based upon relative legal exposure and fault of the insured and uninsured parties and the covered and non-covered allegations.
Finding: The allocation provision in the issued Vandermeer primary policy includes the negotiated presumptive allocation language and is consistent with the binder terms. No discrepancy has been identified.
10. Priority of Payment / Order of Payments Provision
The priority of payment provision (sometimes referred to as the "order of payments" provision) establishes the priority among competing claimants to the policy limits. This provision is particularly important in situations where the policy limits may be insufficient to cover all losses, as it determines whether individual directors and officers (natural persons) are paid before the corporate entity.
Pursuant to Negotiation Point No. 7, C&H recommended that Nexford negotiate a "natural-person priority" provision that requires the insurer to pay Loss of individual Insured Persons (directors and officers) before paying any Loss of the Company under the entity coverage insuring agreement. This provision is designed to protect the personal assets of individual directors and officers by ensuring that the Company's entity-level claims do not erode the policy limits to the detriment of individual insureds.
We reviewed the priority of payment provision in the issued Vandermeer primary policy (VNI-DO-2022-91205) and confirmed that it includes the negotiated natural-person priority language. The provision expressly states that the Insurer shall first pay Loss for which coverage is provided under Insuring Agreement A (Side-A — Non-Indemnifiable Loss) and Insuring Agreement B (Side-B — Company Reimbursement), and that Loss payable under Insuring Agreement C (Entity Coverage) shall be paid only after all obligations under Insuring Agreements A and B have been fully satisfied or it has been determined that no further Loss will be payable under those agreements.
Finding: The priority of payment provision in the issued Vandermeer primary policy includes the negotiated natural-person priority language and is consistent with the binder terms. No discrepancy has been identified.
11. Other Endorsements
We reviewed all endorsements attached to the issued Vandermeer primary policy (VNI-DO-2022-91205). The following endorsements were attached:
• Endorsement No. 1: Named Insured Schedule (as reviewed in Section IV.A.2 above)
• Endorsement No. 2: Self-Insured Retention Amendment (reflecting $1,000,000 SIR on entity coverage)
• Endorsement No. 3: Broadened Insured Person Definition (as reviewed in Section IV.A.4 above)
• Endorsement No. 4: Severability of Application (as reviewed in Section IV.A.6 above)
• Endorsement No. 5: Insured vs. Insured Exclusion Carve-Backs (as reviewed in Section IV.A.7 above)
• Endorsement No. 6: Presumptive Allocation (as reviewed in Section IV.A.9 above)
• Endorsement No. 7: Priority of Payment (as reviewed in Section IV.A.10 above)
• Endorsement No. 8: Entity Coverage Scope Amendment (broadening entity coverage to include non-securities claims, as negotiated per Negotiation Point No. 9)
• Endorsement No. 9: Notice Provisions Amendment (extending notice period and permitting notice by electronic means, as negotiated per Negotiation Point No. 10)
• Endorsement No. 10: Illinois Amendatory Endorsement (required by Illinois Department of Insurance)
• Endorsement No. 11: Terrorism Risk Insurance Act Disclosure Endorsement
• Endorsement No. 12: Sanctions Limitation and Exclusion Endorsement
Each endorsement was reviewed against the binder terms and the Negotiation Points Memorandum. All endorsements are consistent with the agreed-upon terms, with the sole exception of the "Claim" definition issue discussed in Section IV.A.5 above, which is not addressed by any separate endorsement and requires the corrective endorsement recommended therein.
Finding: All endorsements attached to the issued Vandermeer primary policy, other than the absence of a corrective endorsement for the "Claim" definition, are consistent with the binder terms and the negotiated policy wording improvements. No additional discrepancies have been identified in the endorsements.
B. 1st Excess Layer — Commonwealth Indemnity Group
1. Policy Identification
The first excess layer of the D&O tower is underwritten by Commonwealth Indemnity Group, a Pennsylvania-domiciled admitted carrier with an A.M. Best rating of A (Excellent), Financial Size Category XII. The renewal policy is identified as follows:
Carrier: Commonwealth Indemnity Group
Policy Number: CIG-XS-2022-74810
Policy Period: July 1, 2022 to July 1, 2023, 12:01 a.m. local time at the address of the Named Insured
Limits of Liability: $10,000,000 each Loss / $10,000,000 aggregate, excess of the $10,000,000 underlying Vandermeer primary limits
Attachment Point: $10,000,000
Premium: $165,000
2. Follow-Form Analysis
The Commonwealth first excess policy follows form to the Vandermeer primary policy (VNI-DO-2022-91205), subject to specified differences set forth in the Commonwealth policy. Under the follow-form grant, Commonwealth adopts the terms, conditions, definitions, and exclusions of the underlying Vandermeer primary policy, except to the extent that the Commonwealth policy contains independent provisions that expressly modify or supersede the primary terms.
We reviewed the Commonwealth issued policy to identify any deviations from the follow-form grant. The Preliminary Coverage Gap Memorandum dated May 27, 2022 had identified a concern regarding the scope of the prior acts exclusion in the then-expiring Commonwealth excess policy, which contained a narrower retroactive date than the Vandermeer primary. This discrepancy was raised during the renewal negotiation, and Ashford Breckinridge LLP confirmed that Commonwealth had agreed to conform its retroactive date to the Vandermeer primary for the renewal period.
We confirmed that the issued Commonwealth policy incorporates the negotiated correction and contains a retroactive date consistent with the Vandermeer primary. No other deviations from the follow-form grant were identified, and no independent exclusions, conditions, or limitations were found that would restrict coverage beyond the terms of the primary policy.
Finding: The issued Commonwealth first excess policy is consistent with the binder terms. It follows form to the Vandermeer primary with the previously agreed modifications incorporated. No discrepancy has been identified.
3. Drop-Down Provisions
The Commonwealth policy contains a standard drop-down provision providing that, upon exhaustion of the underlying Vandermeer primary limits by the payment of Loss, the Commonwealth policy will attach and respond to covered Claims as if it were the primary policy. We reviewed the drop-down language and confirmed that there is no gap between the Vandermeer primary limits ($10,000,000) and the Commonwealth attachment point ($10,000,000). The drop-down provision is triggered upon exhaustion by payment of covered Loss, and the Commonwealth policy does not impose any additional conditions on the drop-down beyond exhaustion of the underlying limits.
Finding: The drop-down provisions in the issued Commonwealth policy are consistent with the binder terms. No discrepancy has been identified.
4. Definition Consistency
We reviewed the key defined terms in the Commonwealth policy for consistency with the Vandermeer primary and across the tower.
The definition of "Insured Person" in the Commonwealth policy follows form to the Vandermeer primary. We confirmed that the broadened "Insured Person" definition negotiated for the primary policy (including de facto officers, advisory board members, and outside capacity service) is adopted by Commonwealth through its follow-form provision.
With respect to the definition of "Claim," the Commonwealth policy follows form to the Vandermeer primary definition. This means that the narrowing discrepancy identified in the Vandermeer primary "Claim" definition — specifically, the exclusion of informal regulatory inquiries — will carry through to the Commonwealth first excess layer. Under the Commonwealth follow-form grant, the definition of "Claim" applicable to the first excess layer is the definition as set forth in the issued Vandermeer primary policy, including the narrowed subsection (c) that limits coverage to formal investigations commenced by the filing of a notice of charges, formal investigative order, or similar document.
Recommendation: If the corrective endorsement is obtained at the Vandermeer primary level, the follow-form provision in the Commonwealth policy will incorporate the corrected definition of "Claim" without the need for a separate endorsement to the Commonwealth policy. We recommend confirming with Commonwealth that no independent endorsement is required at the first excess level following issuance of the corrective endorsement on the primary policy. This confirmation should be obtained through Ashford Breckinridge LLP.
C. 2nd Excess Layer — Northfield Excess Insurance Company
1. Policy Identification
The second excess layer of the D&O tower is underwritten by Northfield Excess Insurance Company, a New York-domiciled admitted carrier with an A.M. Best rating of A- (Excellent), Financial Size Category XI. Northfield is a new carrier on the Nexford D&O tower, replacing Graystone Mutual Assurance Co. (domiciled in Ohio) on this layer. The carrier change was driven by Graystone's decision to exit the D&O excess market for private-equity-backed industrial accounts, as communicated by Ashford Breckinridge LLP during the renewal process.