renewal-negotiation-points-memo.docx

1005-00003 · Calderwood & Harkness LLP · Renewal Support

renewal-negotiation-points-memo.docx DOCUMENT M&A / Corporate

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MEMORANDUM

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

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

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

DATE: June 13, 2022

RE: Prioritized Renewal Negotiation Points — D&O and Product-Liability Insurance Towers (2022–2023 Renewal)

Matter No.: 1005-00003

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I. Purpose and Executive Summary

This memorandum sets forth eighteen (18) prioritized policy wording improvements that Calderwood & Harkness LLP ("C&H") recommends Nexford Industrial Holdings Inc. ("Nexford" or the "Company") negotiate with its incumbent and prospective carriers through Ashford Breckinridge LLP ("Ashford"), the Company's broker of record, in connection with the renewal of the directors' and officers' liability ("D&O") and product-liability ("PL") insurance towers for the policy period July 1, 2022 through July 1, 2023 (the "Renewal").

The negotiation points set forth herein are drawn from the findings and recommendations contained in C&H's Preliminary Coverage Gap Memoranda dated May 27, 2022 — the first of which identified fourteen (14) coverage gaps in the D&O tower and the second of which identified eleven (11) coverage gaps in the PL tower — as well as C&H's ongoing comprehensive tower review analysis, which has encompassed a policy-by-policy wording comparison, carrier quote analysis, and coordination with external actuarial consultants. This memorandum distills those broader findings into a concise set of actionable negotiation points suitable for use by Ashford in direct carrier negotiations.

The memorandum is organized into two principal sections. Part A addresses ten (10) negotiation points relating to the D&O tower. Part B addresses eight (8) negotiation points relating to the PL tower. Each negotiation point is assigned one of three priority designations — Critical, High, or Moderate — and includes: (a) a description of the coverage issue or gap; (b) a summary of the relevant current policy wording; (c) C&H's recommended wording improvement; and (d) a fallback position in the event the relevant carrier declines the primary request. The fallback positions are designed to provide Ashford's placement team with the flexibility to exercise judgment on carrier-specific dynamics while preserving the essential coverage objectives identified by C&H and the Company.

By way of reference context, the following summarizes the current architecture of each tower:

D&O Tower — $55M Aggregate Limits (Five Layers)

The current rate-on-line for the D&O tower is approximately 2.48%.

PL Tower — $75M Aggregate Limits (Four Layers)

The current rate-on-line for the PL tower is approximately 3.52%.

The combined current premium for both towers is $4,006,350, representing approximately 0.282% of the Company's $1.42 billion in consolidated revenue for fiscal year 2021.

Carrier renewal quotes were received between May 18 and June 8, 2022. These negotiation points should be communicated to Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, at Ashford Breckinridge for prompt presentation to the respective carriers, in advance of the targeted June 28, 2022 bind date.

II. Methodology and Priority Framework

A. Priority Tier Definitions

C&H has assigned each of the eighteen negotiation points one of three priority designations, defined as follows:

• Critical — Coverage gaps that could leave individual directors and officers, or the Company itself, materially exposed to uninsured or underinsured loss in realistic claim scenarios. Points designated as Critical are non-negotiable in their primary request form; C&H recommends that the Company be prepared to change carriers on a given layer if the incumbent carrier declines the primary request on a Critical point. Fallback positions are provided for Critical points, but they represent the absolute minimum acceptable outcome, not a desirable compromise.

• High — Significant coverage improvements that would substantially reduce ambiguity, broaden protection, or eliminate non-follow-form gaps between tower layers. Points designated as High warrant a strong push in carrier negotiations, and C&H recommends that Ashford present them with emphasis. However, High-priority points are accompanied by meaningful fallback positions that, if accepted, would provide adequate (though not optimal) coverage.

• Moderate — Enhancements that reflect current market best practices, align policy language with Nexford's specific risk profile, or address potential coverage ambiguities that are less likely to give rise to coverage disputes. Points designated as Moderate are desirable but are not deal-breakers. C&H recommends pursuing them but acknowledges that they may be appropriate trading points in overall premium or retention negotiations.

B. Analytical Inputs

The negotiation points set forth in this memorandum are informed by the following analytical inputs:

1. Policy-by-Policy Wording Comparison. C&H has conducted a detailed, provision-by-provision comparison of the current policy forms across all nine layers of the two towers (five D&O layers and four PL layers), as well as the available renewal and replacement quotes. This comparison identified instances of non-follow-form language, definitional inconsistencies, and exclusion scope variances between layers within the same tower.

2. Nexford Risk Profile Analysis. C&H has analyzed the Company's specific risk profile in constructing and prioritizing these negotiation points. Key risk characteristics include: (a) PE-backed ownership structure, with Veltrano Capital Partners Fund IV holding 68.5% of the Company's equity following the June 15, 2018 leveraged buyout; (b) a nine-member board of directors with five sponsor-appointed directors (including Chairman Gerald Whitcomb) and one board observer (Celeste Brogan, Vice President at Veltrano Capital Partners); (c) $1.05 billion in funded debt (with Broadleaf Capital Markets, LLC serving as administrative agent for the senior secured credit facilities), creating meaningful credit-related D&O exposure; (d) a contemplated initial public offering in the 2023–2024 timeframe, which would substantially alter the Company's D&O risk profile; (e) two pending product-liability lawsuits (discussed further in Part B); and (f) two prior product recalls in 2020.

3. Actuarial Loss Modeling. Kessler Quinn Advisory Group has provided actuarial loss modeling for the PL tower, reflecting a total five-year incurred loss figure of $15.12 million, comprising $4.72 million in paid losses, $8.3 million in open case reserves, and $2.1 million in incurred but not reported ("IBNR") loss estimates. This modeling has informed the priority designations and premium reasonableness assessments for PL-related negotiation points.

4. Carrier Quote Comparison Matrices. C&H prepared carrier quote comparison matrices for both the D&O and PL towers, dated June 10, 2022, which compare the renewal and replacement quotes on a line-by-line basis across key coverage terms, conditions, exclusions, limits, retentions, and pricing. These matrices form the factual basis for many of the observations in this memorandum.

C. Role of Fallback Positions

Each negotiation point includes a fallback position designed to facilitate efficient negotiation and to enable Ashford Breckinridge's placement team to exercise professional judgment regarding carrier-specific dynamics. The fallback positions reflect C&H's assessment of the minimum acceptable outcome on each point, taking into account the overall tower architecture, the availability of DIC or other backstop coverage, and the relative bargaining position of the Company with each carrier. Ashford should not accept terms below the stated fallback position without prior consultation with C&H and the Company's risk management team.

PART A: D&O TOWER — 10 NEGOTIATION POINTS

D&O Point 1: Severability of the Application

Priority: Critical

Issue. The Vandermeer National Insurance Company primary D&O policy (Policy No. VNI-DO-2021-88473) contains a rescission provision that does not include full severability of the application. Under the current policy language, a material misstatement or omission in the application for insurance — whether made by a single individual officer or by the Company itself — could potentially serve as the basis for the carrier to rescind or void coverage for all insured persons under the policy, including innocent directors and officers who had no knowledge of, and no involvement in, the alleged misstatement or omission. This is a fundamental coverage integrity issue that goes to the very foundation of the D&O program's protective purpose.

Current Wording. The rescission clause in the Vandermeer primary applies to the "Application" as submitted on behalf of the Company. The policy does not contain an express carve-out or severability provision shielding innocent insured persons from the consequences of another insured person's misstatement or omission in the application. The application was signed by the Company's Chief Financial Officer, Marcus Delacroix, on behalf of the Company and all proposed insured persons. There is no differentiation in the rescission clause between Side-A (non-indemnifiable loss), Side-B (indemnifiable loss), and Side-C (entity coverage), meaning that rescission based on a misstatement could theoretically void all three insuring agreements simultaneously.

Recommended Improvement. C&H recommends that Nexford negotiate for the insertion of a full severability clause in the Vandermeer primary policy, providing as follows:

(i) No statements, representations, or information contained in the Application, or in any materials submitted in connection therewith, shall be imputed to any individual Insured Person for the purpose of determining the availability of coverage under Insuring Agreement A (Side-A, Non-Indemnifiable Loss) or Insuring Agreement B (Side-B, Indemnifiable Loss). Only statements, representations, or information actually made by, or made with the actual knowledge of, the individual Insured Person seeking coverage shall be relevant to the determination of that individual Insured Person's entitlement to coverage.

(ii) For purposes of Insuring Agreement C (Entity Coverage), the "knowledge" of the Company shall be limited to the actual knowledge of the following individuals: Sandra Elliston, Chief Executive Officer; Marcus Delacroix, Chief Financial Officer; and Priya Sundaram, General Counsel. No knowledge possessed by any other employee, officer, or director of the Company shall be imputed to the Company for purposes of the rescission provision.

This formulation ensures that innocent directors and officers are fully protected from rescission resulting from another individual's misstatement, while appropriately limiting the Company's imputed knowledge for entity coverage purposes to the three most senior officers with operational and legal oversight responsibilities.

Fallback Position. If Vandermeer National Insurance Company declines full severability across both Side-A and Side-B, C&H recommends the following fallback position: seek severability limited to Side-A coverage (non-indemnifiable loss) in the Vandermeer primary and confirm that the Harrington Specialty Insurance Co. Side-A DIC policy (Policy No. HSI-DIC-2021-00342) contains full severability of the application. For Side-B, seek a narrower knowledge definition limiting imputed knowledge to the signing officer of the Application (currently Marcus Delacroix, CFO). This fallback would preserve the most critical protection — personal asset protection for directors and officers in scenarios where the Company cannot or will not indemnify — while accepting a somewhat narrower protection on indemnifiable claims.

Applicable Layers. This negotiation point is directed primarily at the Vandermeer National Insurance Company primary policy. C&H further recommends that Ashford confirm alignment of severability provisions in the Commonwealth Indemnity Group 1st excess, the Northfield Excess Insurance Company 2nd excess (or Graystone Mutual Assurance Co. if Graystone is ultimately retained), and the Pinnacle Re Insurance Ltd. 3rd excess. Any excess layer that follows form to the Vandermeer primary on rescission/severability should be confirmed in writing to do so. Any excess layer that does not follow form should be separately negotiated for consistent severability language.

D&O Point 2: Definition of "Insured Person" — Consistency Across Layers

Priority: Critical

Issue. The definition of "Insured Person" is materially inconsistent across the layers of the D&O tower. This inconsistency creates the potential for gaps in coverage at excess attachment points — specifically, individuals who qualify as "Insured Persons" under the Vandermeer primary may not qualify as such under one or more excess layers, resulting in a loss of coverage precisely at the point where the excess policy should be responding to a large claim.

Current Wording Discrepancies. The following discrepancies have been identified through C&H's policy-by-policy wording comparison:

• Vandermeer National Insurance Company (Primary): Defines "Insured Person" broadly to include all duly elected or appointed directors and officers, as well as all employees of the Company acting in a managerial or supervisory capacity. This definition encompasses a relatively wide universe of individuals, consistent with best practices for a private PE-backed company.

• Commonwealth Indemnity Group (1st Excess): Uses a materially narrower definition that restricts "Insured Person" to "duly elected or appointed directors and duly appointed officers" of the Named Insured. This definition excludes employees below the vice president level, even if they are acting in a managerial or supervisory capacity. This narrower definition could exclude, for example, plant managers, division heads, and other mid-level managers who may be named as defendants in litigation.

• Graystone Mutual Assurance Co./Northfield Excess Insurance Company (2nd Excess): Definition varies. The Graystone incumbent policy uses a definition similar to Commonwealth's narrower formulation. The Northfield replacement quote uses a definition that is somewhat broader but introduces unique qualifiers that do not appear in the Vandermeer primary.

• Pinnacle Re Insurance Ltd. (3rd Excess): Excludes "shadow directors" and "de facto officers" from the definition of "Insured Person." This exclusion is particularly problematic given the Veltrano Capital Partners sponsor-control structure, under which Veltrano has appointed five of nine board directors and maintains a board observer (Celeste Brogan). Depending on the facts and circumstances, Veltrano personnel who exercise influence over the Company's management and governance could be characterized as shadow directors or de facto officers under applicable corporate law, and the Pinnacle Re exclusion would deny them coverage.

Recommended Improvement. C&H recommends that the definition of "Insured Person" be standardized across all four purchased excess layers (Commonwealth, Northfield, Pinnacle Re, and — if retained — Graystone) to match the Vandermeer primary's broad definition, including directors, officers, and all employees acting in a managerial or supervisory capacity. In addition, C&H recommends that the standardized definition expressly include the following categories of individuals:

(a) De facto officers and shadow directors of the Named Insured or any Subsidiary, defined as any natural person who acts in the capacity of a director or officer of the Named Insured or any Subsidiary, regardless of whether such person has been formally elected or appointed to such position;

(b) Board observers appointed at the request of any shareholder of the Named Insured, including without limitation Celeste Brogan in her capacity as board observer appointed at the request of Veltrano Capital Partners Fund IV; and

(c) Any natural person who, at the specific written request of the Named Insured, serves as a director, officer, trustee, or equivalent of an Outside Entity, but only with respect to such service.

The inclusion of de facto officers and shadow directors is particularly warranted given the Veltrano Capital Partners sponsor-control structure, under which five of nine board seats are held by Veltrano appointees. In a litigation scenario, adverse parties may seek to characterize Veltrano personnel as de facto fiduciaries, and the D&O tower must be positioned to respond to such claims.

Fallback Position. At minimum, C&H recommends that the Company require Commonwealth, Northfield, and Pinnacle Re to adopt a definition of "Insured Person" no narrower than "all duly elected or appointed directors and officers of the Named Insured or any Subsidiary," with an express carve-in for board observers appointed at the request of a shareholder owning more than 50% of the outstanding equity of the Company. While this fallback does not achieve the breadth of the Vandermeer primary's inclusion of managerial employees, it eliminates the most significant gaps — particularly the Pinnacle Re exclusion of shadow directors and the inconsistency regarding board observers.

Applicable Layers. All D&O tower layers. Primary negotiation targets are Commonwealth Indemnity Group (1st Excess), Northfield Excess Insurance Company (2nd Excess), and Pinnacle Re Insurance Ltd. (3rd Excess). The Harrington Side-A DIC should also be reviewed for definitional consistency.

D&O Point 3: "Insured vs. Insured" Exclusion — PE Sponsor Carve-Backs

Priority: Critical

Issue. The Insured versus Insured ("IvI") exclusion is a standard provision in D&O policies that bars coverage for claims brought by one insured against another insured, or by the Company against its own directors and officers. While the exclusion serves a legitimate purpose — preventing collusive claims — it poses a significant and well-documented risk for PE-backed companies such as Nexford.

Specifically, the IvI exclusion in the Vandermeer primary and across the excess layers could bar coverage for claims brought by Veltrano Capital Partners Fund IV or its affiliated entities against Nexford's directors and officers. Given that Veltrano holds 68.5% majority ownership of the Company and has appointed five of nine board directors (including Chairman Gerald Whitcomb), there is a realistic possibility that claims could arise in which Veltrano — as controlling shareholder — takes action against directors or officers, or in which claims are brought derivatively by or on behalf of the Company at Veltrano's direction. Scenarios that could trigger the IvI exclusion include, among others:

(a) A derivative suit brought by minority shareholders (the remaining 31.5% equity holders, including management rollover participants) in which Veltrano-appointed directors are named as defendants;

(b) A direct claim by Veltrano or its affiliates against management for alleged mismanagement, breach of fiduciary duty, or failure to achieve operating targets;

(c) Claims by a bankruptcy trustee, examiner, or creditors' committee in the event of Nexford's insolvency — a scenario that is not purely theoretical given the Company's $1.05 billion in funded debt (with Broadleaf Capital Markets, LLC as administrative agent);

(d) Claims arising in connection with the contemplated 2023–2024 initial public offering, including potential Section 11 or Section 12 claims under the Securities Act of 1933 in which the underwriters or selling shareholders assert contribution or indemnification claims against directors and officers.

Current Wording. The IvI exclusion in the Vandermeer primary bars coverage for any claim "brought by or on behalf of" any Insured Person or the Company against another Insured Person. The exclusion does not contain an express carve-out for claims brought by or at the direction of a shareholder, nor does it include carve-backs for bankruptcy trustee, examiner, or receiver claims. The excess layer policies contain similar IvI exclusions, though the specific language varies. The Harrington Side-A DIC policy has not been separately analyzed for IvI exclusion language in this memorandum but is addressed in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022.

Recommended Improvement. C&H recommends that the Company negotiate the following carve-backs from the IvI exclusion in the Vandermeer primary and across all D&O tower layers:

(i) Shareholder Claims Carve-Back. Claims brought by any shareholder of the Company (including Veltrano Capital Partners Fund IV, Veltrano Capital Partners, LLC, or any of their respective affiliates, funds, parallel vehicles, or portfolio companies) in its capacity as shareholder, whether brought directly, derivatively in the right of the Company, or by a creditors' committee or other representative of shareholders' interests, shall not be subject to the IvI exclusion.

(ii) Bankruptcy and Insolvency Carve-Back. Claims brought by or on behalf of a bankruptcy trustee, receiver, examiner, debtor-in-possession, liquidator, rehabilitator, conservator, or analogous official or entity, whether appointed by a court or acting under applicable law, shall not be subject to the IvI exclusion.

(iii) Employment Practices Carve-Back. Claims constituting Employment Practices Wrongful Acts (as defined in the policy) brought by an Insured Person who is also an employee of the Company, including claims for wrongful termination, harassment, discrimination, or retaliation, shall not be subject to the IvI exclusion.

(iv) Whistleblower Carve-Back. Claims brought by an Insured Person or employee who asserts whistleblower protections under applicable federal or state law, including without limitation the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act, or analogous state whistleblower statutes, shall not be subject to the IvI exclusion.

These carve-backs are widely recognized as essential for PE-backed companies and are increasingly available in the current D&O market. The shareholder claims carve-back is of paramount importance given Veltrano's controlling ownership position and the structural dynamics inherent in a sponsor-controlled board.

Fallback Position. If the carriers decline the full shareholder claims carve-back (which C&H views as unlikely given current market conditions for a well-underwritten PE-backed risk), the Company should seek at minimum: (a) a carve-back for bankruptcy trustee/receiver claims, which is essential given the $1.05 billion debt load; (b) a carve-back for derivative claims brought in the right of the Company by any person or entity other than a director or officer; and (c) confirmation that the Harrington Specialty Side-A DIC policy (Policy No. HSI-DIC-2021-00342) either does not contain an IvI exclusion or, if it does, includes the broadest available carve-backs, ensuring that individual directors and officers have backstop protection even if the traditional tower's IvI exclusion applies.

Applicable Layers. All D&O tower layers, with particular focus on the Vandermeer National Insurance Company primary and the Harrington Specialty Insurance Co. Side-A DIC. Ashford should present the IvI carve-back requests to each carrier in the tower to ensure consistency.

D&O Point 4: Prior Acts Exclusion Scope in Excess Layers

Priority: High

Issue. The Commonwealth Indemnity Group 1st excess policy (Policy No. CIG-XS-2021-7490) contains a prior acts exclusion with a retroactive date of July 1, 2019. This means that claims arising from wrongful acts occurring prior to July 1, 2019 are excluded from coverage under the Commonwealth excess layer, even if such claims are first made during the current or renewal policy period. This retroactive date creates a material gap in coverage because it excludes the period surrounding — and immediately following — the June 15, 2018 Veltrano Capital Partners leveraged buyout closing.

The LBO and its aftermath represent a period of heightened D&O exposure, including potential claims related to: the transaction process and sale procedures; representations and warranties in transaction documents; post-closing integration decisions; changes in corporate governance and board composition; and the assumption of $1.05 billion in funded debt. Claims arising from acts or omissions during this period could realistically be asserted by minority shareholders, creditors, or other parties, and the Commonwealth retroactive date would exclude such claims from the first excess layer.

The Vandermeer primary policy provides full prior acts coverage (no retroactive date), meaning that it would respond to pre-July 1, 2019 claims up to its $10 million per-claim and aggregate limit. However, if such a claim were to exceed $10 million, the Commonwealth excess layer would not attach, creating a $10 million gap between the exhausted primary and the next responding excess layer.

Recommended Improvement. C&H recommends that the Company negotiate for the elimination of the retroactive date in the Commonwealth Indemnity Group 1st excess layer, thereby providing full prior acts coverage from the earliest date of any insured person's service with the Company or any predecessor entity. C&H further recommends that Ashford confirm, in the course of the renewal process, that neither Northfield Excess Insurance Company (2nd Excess) nor Pinnacle Re Insurance Ltd. (3rd Excess) contains a retroactive date or prior acts exclusion, and obtain written confirmation to that effect as a condition of binding.

Fallback Position. If Commonwealth Indemnity Group insists on maintaining a retroactive date, C&H recommends pushing the retroactive date back to at least January 1, 2018, which would provide coverage for acts occurring approximately six months prior to the June 15, 2018 LBO closing. This fallback date captures the most significant pre-LBO exposure period, including the period during which the sale process was being conducted, fiduciary duties to pre-LBO shareholders were in effect, and transaction-related representations were being made. In the event this fallback is accepted, the Company should confirm that the Vandermeer primary and the Harrington Side-A DIC both provide unlimited prior acts coverage, ensuring that drop-down protection exists for pre-January 1, 2018 claims affecting individual directors and officers.

Applicable Layers. Commonwealth Indemnity Group (1st Excess). Confirm status at Northfield Excess Insurance Company (2nd Excess) and Pinnacle Re Insurance Ltd. (3rd Excess).

D&O Point 5: Coordination Between Vandermeer Primary and Harrington Side-A DIC — Trigger Alignment

Priority: High

Issue. The Harrington Specialty Insurance Co. Side-A DIC policy (Policy No. HSI-DIC-2021-00342) is a critical component of Nexford's D&O program. Its purpose is to drop down and provide dedicated, non-rescindable coverage to individual directors and officers in scenarios where the underlying D&O tower — particularly the Vandermeer primary — fails to respond. These scenarios include, among others: insolvency or bankruptcy of the Company precluding indemnification; rescission or voiding of the underlying policy; application of an exclusion in the underlying policy that the DIC does not contain; and insolvency of the underlying carrier.

However, C&H has identified two concerns with the current coordination between the Vandermeer primary and the Harrington Side-A DIC, as analyzed in greater detail in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022.

First, the trigger language in the Harrington policy references a "refusal or failure to pay" by the underlying insurer as the condition precedent for DIC coverage to respond. This formulation may not clearly encompass all scenarios in which coverage under the underlying tower is unavailable. Specifically, it is ambiguous whether "refusal or failure to pay" includes: (a) denial of coverage based on the application of a policy exclusion (which is arguably not a "refusal" but rather a determination of non-coverage); (b) rescission or voiding of the underlying policy (which eliminates the policy ab initio, meaning there is no "refusal to pay" on a policy that no longer exists); and (c) insolvency of the underlying carrier (where the carrier may not have "refused" to pay but is simply unable to pay). While most courts have construed "refusal or failure to pay" broadly, the risk of a coverage dispute is meaningful, particularly in a jurisdiction that construes insurance policy language in favor of the insurer.

Second, the DIC policy's difference-in-conditions coverage grants — which are intended to provide broader coverage than the underlying tower on specific terms — are not consistently broader than the Vandermeer primary on all coverage points. C&H has identified certain provisions where the DIC policy either tracks the Vandermeer primary language identically (providing no incremental DIC protection) or is actually narrower.

Recommended Improvement. C&H recommends the following:

(i) Broaden the DIC trigger clause to include any situation where the underlying insurer "refuses, fails, or is unable to pay, whether in whole or in part, and whether due to insolvency, receivership, liquidation, rehabilitation, rescission, voiding, cancellation, application of any exclusion, condition, limitation, or retention, or for any other reason." This formulation eliminates ambiguity by covering all conceivable scenarios in which the underlying tower fails to respond.

(ii) Confirm, either through policy language or a formal endorsement, that the DIC coverage grants affirmatively cover at least the following scenarios: (a) bankruptcy or insolvency of the Company precluding indemnification of individual directors and officers; (b) exhaustion of the entity coverage self-insured retention ($1M SIR) in circumstances where the Company is unable or unwilling to fund the SIR; (c) regulatory investigation costs, including costs incurred in connection with informal inquiries, subpoenas, or investigative demands by federal or state regulatory bodies; and (d) loss arising from wrongful acts predating the inception of the underlying tower (full prior acts coverage under the DIC, regardless of the retroactive date, if any, in any underlying excess layer).

Fallback Position. If Harrington Specialty Insurance Co. will not broaden the trigger language to the extent described above, C&H recommends seeking a schedule or endorsement listing specific DIC coverage extensions, including at minimum: an express insolvency and bankruptcy carve-in (confirming that DIC coverage is triggered when the Company's insolvency prevents indemnification) and an express rescission carve-in (confirming that DIC coverage is triggered when the underlying policy is rescinded or voided). These two carve-ins address the most significant ambiguities in the current trigger language.

Applicable Layers. Harrington Specialty Insurance Co. Side-A DIC, in coordination with the Vandermeer National Insurance Company primary.

D&O Point 6: Increase Side-A DIC Limit from $15M to $20M

Priority: High

Issue. The current $15 million dedicated Side-A DIC limit may be insufficient to protect individual directors and officers in a severe loss scenario. Several factors inform this assessment:

(a) Board Composition: Nexford has a nine-member board of directors. In a catastrophic claim scenario (e.g., a securities class action following an IPO, or a creditor derivative action following a restructuring), multiple directors could face simultaneous claims, each seeking substantial damages. A $15 million limit shared among nine directors may prove inadequate.

(b) PE Sponsor Control Dynamics: Veltrano Capital Partners' 68.5% controlling ownership position, combined with its appointment of five board members and a board observer, creates a governance structure in which claims against directors may be particularly complex and multifaceted, potentially involving allegations of conflicts of interest, self-dealing, and breach of fiduciary duty in the context of related-party transactions.

(c) Debt Load: The Company carries $1.05 billion in funded debt. In a scenario involving financial distress, creditors or a bankruptcy trustee could assert claims against directors and officers for alleged breaches of fiduciary duty in the zone of insolvency, with damages measured by reference to the full debt load. The Side-A DIC is the last line of defense for individual directors in such a scenario.

(d) Contemplated IPO: The Company is contemplating an initial public offering in 2023–2024. While a post-IPO D&O program would be separately structured, the transition period and the pre-IPO period carry heightened risks, including potential liability under Section 11 and Section 12 of the Securities Act of 1933. A larger DIC limit provides a more robust safety net during this transitional period.

Recommended Improvement. Increase the Harrington Specialty Insurance Co. Side-A DIC limit from $15 million to $20 million, representing a $5 million increase. C&H recommends that the incremental cost of this limit increase be negotiated within the context of the overall D&O tower premium, rather than as a standalone pricing exercise, to optimize the Company's bargaining position.

Fallback Position. If a $20 million DIC limit is not achievable at a premium that the Company deems acceptable, C&H recommends seeking $17.5 million as an intermediate step. In addition, the Company should negotiate an option (at pre-agreed pricing or pricing parameters) to increase the DIC limit to $20 million at the next renewal or upon the occurrence of any public offering event (including an IPO, direct listing, or SPAC combination), ensuring that the enhanced limit is available when the Company's risk profile increases.

Applicable Layers. Harrington Specialty Insurance Co. Side-A DIC.

D&O Point 7: Entity Coverage SIR — Clarification of Applicability

Priority: High

Issue. The Vandermeer National Insurance Company primary D&O policy contains a $1,000,000 self-insured retention ("SIR") applicable to entity coverage (the equivalent of Side-C coverage for a private company). The current policy language is ambiguous in several respects regarding the SIR's application, creating the potential for disputes at the time of a claim.

Specifically, the current SIR clause does not clearly specify: (a) whether the $1 million SIR applies on a per-claim basis or on a per-insured-person basis (a per-insured-person application could result in multiple SIR obligations in a single claim involving multiple individuals); (b) whether defense costs incurred by the Company in connection with an entity claim count toward satisfaction of the SIR (if defense costs do not erode the SIR, the effective SIR is significantly higher, as defense costs for complex D&O claims can be substantial); and (c) whether the SIR applies only to entity/Side-C claims, or whether it also applies to Side-A and Side-B claims (the latter application would be inconsistent with market practice and the intent of the D&O program).

Recommended Improvement. C&H recommends that the Vandermeer primary policy be endorsed to clarify the following three points:

(i) The $1,000,000 SIR applies on a per-claim basis, meaning that the Company is responsible for one SIR per claim, regardless of the number of insured persons involved in the claim.

(ii) Defense costs incurred by the Company in connection with an entity claim count toward — and erode — the SIR. Once the Company has incurred $1,000,000 in defense costs and/or indemnity payments on a given entity claim, the SIR is deemed satisfied and the policy responds.

(iii) The SIR applies exclusively to entity claims under Insuring Agreement C (or its equivalent). The SIR does not apply to Side-A claims (non-indemnifiable loss incurred by individual insured persons) or to Side-B claims (loss for which the Company indemnifies individual insured persons). This distinction is expressly stated in the SIR clause.

Fallback Position. If Vandermeer will not agree that defense costs erode the SIR, C&H recommends accepting a per-claim SIR application without defense cost erosion, provided that the Company obtains express written confirmation that the SIR does not apply to Side-A or Side-B claims. The inapplicability of the SIR to Side-A and Side-B coverage is the most important element of this negotiation point, as it ensures that individual directors and officers have immediate access to coverage (with no retention obligation) for both non-indemnifiable and indemnifiable claims.

Applicable Layers. Vandermeer National Insurance Company primary.

D&O Point 8: Regulatory Investigation Coverage — Definition of "Claim"

Priority: High

Issue. The Vandermeer primary policy's definition of "Claim" may not be sufficiently broad to encompass the full range of regulatory proceedings to which Nexford and its directors and officers may be subject. As analyzed in the Regulatory Investigation Coverage Memorandum being finalized as of June 14, 2022, Nexford's manufacturing operations and product-safety profile create meaningful regulatory exposure across multiple federal and state agencies, including the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), the Environmental Protection Agency ("EPA"), and various state attorneys general offices.

The current definition of "Claim" in the Vandermeer primary includes civil, criminal, and administrative proceedings, but its treatment of regulatory investigations — particularly in their pre-formal or informal stages — is ambiguous. Many regulatory actions begin with informal inquiries, information requests, or investigative subpoenas that do not constitute formal "proceedings" but nonetheless require the expenditure of significant legal fees. If such informal investigatory activity does not constitute a "Claim" under the policy, the Company and its directors and officers would bear the cost of responding to such activity without access to D&O coverage, and by the time the investigation ripens into a formal proceeding (at which point it may constitute a "Claim"), substantial defense costs will already have been incurred outside the coverage framework.

Recommended Improvement. C&H recommends broadening the definition of "Claim" in the Vandermeer primary policy to expressly include the following:

(a) Any formal or informal investigation, examination, or inquiry by any federal, state, local, or foreign regulatory body, governmental agency, or self-regulatory organization, including any civil investigative demand, information request, or request for testimony or documents;

(b) Any subpoena (whether judicial, administrative, or grand jury) issued to any Insured Person or to the Company in connection with an investigation or inquiry concerning the acts or omissions of any Insured Person in their capacity as such;

(c) Any pre-charge, pre-formal investigation, or preliminary inquiry stage of a regulatory proceeding, including target letters, Wells notices, or equivalent notifications issued by a regulatory body.

This broadened definition would ensure that D&O coverage is available from the earliest stage of regulatory engagement, when the Company and its directors and officers most need the protection.

Fallback Position. If the carriers resist broadening the definition of "Claim" to include informal inquiries and pre-formal investigation stages, C&H recommends accepting the inclusion of formal investigations and subpoenas only (categories (a) and (b) above, limited to formal proceedings), but negotiating the addition of a standalone "Investigation Costs" coverage grant with a dedicated sub-limit of $1,000,000 for pre-formal investigation defense costs. This sub-limit would operate independently of the "Claim" definition and would cover legal fees and expenses incurred in responding to informal regulatory inquiries, information requests, and pre-formal investigation activity, up to the stated sub-limit.

Applicable Layers. Vandermeer National Insurance Company primary. C&H further recommends that Ashford confirm alignment on the "Claim" definition in all excess layers, as a claim that constitutes a "Claim" under the primary but not under an excess layer would create a coverage gap at the excess attachment point.

D&O Point 9: Allocation Provisions — Clarification and Presumptive Allocation

Priority: Moderate

Issue. The Vandermeer primary policy contains an allocation clause that governs the allocation of defense costs and settlement amounts in mixed claims — i.e., claims involving both covered and non-covered matters, or both insured and non-insured persons or entities. The current allocation clause does not contain a presumptive allocation formula or methodology. Instead, it provides that, in the event of a mixed claim, the insured and the insurer shall "negotiate in good faith to determine a fair and proper allocation" of covered and non-covered amounts.

While good-faith negotiation is a reasonable aspiration, the absence of a presumptive allocation formula leaves the allocation to be determined at the time of claim — precisely the moment when the interests of the insured and the insurer are most divergent. This creates significant uncertainty regarding the amount of coverage actually available to the insured and has, in industry practice, frequently led to coverage disputes and litigation over allocation percentages. For a PE-backed company like Nexford, where mixed claims (involving both insured directors and officers and non-insured entities such as Veltrano or its affiliates) are a realistic scenario, the absence of a presumptive allocation framework is a notable deficiency.

Recommended Improvement. C&H recommends the insertion of a "presumptive allocation" provision in the Vandermeer primary, providing as follows:

(i) Defense Costs: In any mixed claim involving at least one Insured Person, 100% of defense costs shall be presumptively allocated to — and covered on behalf of — the Insured Person(s), and shall be advanced by the Insurer as incurred. This presumption may be rebutted only if the Insurer demonstrates, by clear and convincing evidence, that a lesser percentage of defense costs is attributable to the covered claims of the Insured Person(s), in which case the allocation shall be adjusted accordingly.

(ii) Settlements: For settlement amounts in mixed claims, a "larger settlement" approach shall apply, under which the full amount of any settlement shall be allocated to covered loss and covered by the policy, unless the Insurer demonstrates, by clear and convincing evidence, that the settlement amount exceeds the portion of the settlement attributable to the covered claims of the Insured Person(s), in which case only the excess portion shall be allocated to non-covered loss.

The 100% presumptive allocation for defense costs, rebuttable only by clear and convincing evidence, is consistent with current best practices in D&O policy language and reflects the practical reality that, in most mixed claims, the insured persons' defense costs are substantially intertwined with the defense of non-covered matters and cannot be meaningfully separated.

Fallback Position. If Vandermeer will not agree to a 100% presumptive allocation for defense costs, C&H recommends negotiating a minimum 80% presumptive allocation to covered loss, with the remaining 20% subject to good-faith negotiation between the insured and the insurer. Even an 80% presumptive allocation represents a significant improvement over the current language, as it establishes a quantitative floor and reduces the scope of potential disputes.

Applicable Layers. Vandermeer National Insurance Company primary. Excess layers to follow form on allocation.

D&O Point 10: Priority of Payments Clause

Priority: Moderate

Issue. The current D&O tower lacks a clear priority of payments clause establishing the order of priority among different categories of insured persons and entities for the receipt of insurance proceeds. This absence creates a significant risk in a bankruptcy or insolvency scenario.

Specifically, if Nexford were to become insolvent or file for bankruptcy protection — a scenario that, while not anticipated, cannot be dismissed given the Company's $1.05 billion funded debt, Veltrano Capital Partners' 68.5% controlling equity position, and the inherent risks of a leveraged capital structure — the insurance proceeds available under the D&O tower could become the subject of competing claims by the Company (or its bankruptcy estate) and individual directors and officers. Without a priority of payments clause, there is no contractual mechanism to ensure that individual directors and officers — the very individuals whom the D&O program is designed to protect — receive the benefit of the insurance proceeds ahead of the corporate entity. In a bankruptcy scenario, the bankruptcy estate could assert a claim to the insurance proceeds as property of the estate, potentially subordinating the interests of individual directors and officers who face personal liability.

Recommended Improvement. C&H recommends the insertion of a priority of payments provision in the Vandermeer primary policy, providing for the following order of priority:

(i) First Priority — Side-A Claims: The insurer shall first pay loss for which no indemnification has been provided to individual insured persons by the Company (i.e., non-indemnifiable loss under Insuring Agreement A / Side-A). This ensures that directors and officers who face personal liability in scenarios where the Company cannot or will not indemnify them — the most acute exposure — have first claim on the insurance proceeds.

(ii) Second Priority — Side-B Claims: The insurer shall then pay loss for which the Company has provided indemnification to individual insured persons (i.e., indemnifiable loss under Insuring Agreement B / Side-B). This reimburses the Company for indemnification payments it has made to individual directors and officers.

(iii) Third Priority — Side-C Claims: The insurer shall then pay loss incurred directly by the Company entity (i.e., entity coverage under Insuring Agreement C / Side-C). Entity claims receive the lowest priority, consistent with the fundamental purpose of D&O insurance as personal protection for individual fiduciaries.

This priority structure is consistent with widely recognized best practices for D&O policy drafting and protects individual directors and officers in the scenarios where protection is most needed — namely, insolvency and bankruptcy, where the Company's ability to indemnify is compromised and the corporate entity may be competing with individuals for limited insurance proceeds.

Fallback Position. If Vandermeer National Insurance Company will not include a priority of payments clause in the primary policy, C&H recommends ensuring that the Harrington Specialty Insurance Co. Side-A DIC provides robust drop-down coverage in bankruptcy and insolvency scenarios (cross-referencing the trigger alignment improvements recommended in D&O Point 5 above). The Side-A DIC serves as an alternative protective mechanism for individual directors and officers, as its dedicated Side-A coverage is not available to the Company entity and therefore is not at risk of being claimed by a bankruptcy estate.

Applicable Layers. Vandermeer National Insurance Company primary. All excess layers should be required to follow form on the priority of payments provision. Harrington Specialty Insurance Co. Side-A DIC serves as a backup protective mechanism.

PART B: PRODUCT-LIABILITY TOWER — 8 NEGOTIATION POINTS

PL Point 1: Increase Product Recall Sub-Limit from $2.5M/$5M to $5M/$10M

Priority: Critical

Issue. The Midland Casualty & Surety Company primary GL/PL policy (Policy No. MCS-GL-2021-55671) contains a product recall sub-limit of $2.5 million per occurrence and $5 million in the aggregate. C&H has concluded, consistent with the analysis set forth in the Product Recall Sub-Limit Adequacy Memorandum dated June 7, 2022, that this sub-limit is materially inadequate given Nexford's product portfolio, manufacturing scale, distribution footprint, and historical recall experience.

The Company's historical recall experience provides a concrete benchmark. In 2020, Nexford's subsidiaries experienced two product recalls:

(a) Triton Fastener Corp. Voluntary Recall (March 12, 2020): Triton initiated a voluntary recall of certain lots of Grade 8 hex bolts due to a hardness testing anomaly identified during quality assurance review. The total cost of the recall, including notification, logistics, replacement product, and associated professional fees, was approximately $1.1 million.

(b) Nexford Conveyor Systems Advisory Notice (August 7, 2020): NCS issued an advisory notice regarding a potential issue with the tensioning mechanism on certain Model NCS-7200 conveyor systems. While technically classified as an advisory notice rather than a formal recall, the Company incurred approximately $340,000 in associated costs, including field inspections, customer communications, and corrective measures.

The combined cost of these two events was approximately $1.44 million. These were relatively contained events — the Triton recall involved specific lots of a single product line, and the NCS advisory notice affected a limited number of units. A larger-scale recall — for example, a systemic manufacturing defect affecting the full production run of Triton Grade 8 hex bolts (a high-volume product line with broad distribution across the industrial fastener market) or a safety-critical failure in the NCS Model NCS-7200 conveyor system (used in heavy industrial applications where malfunction poses bodily injury risk) — could realistically generate recall costs exceeding the current $2.5 million per-occurrence sub-limit. In such a scenario, a single recall event could exhaust more than half of the current per-occurrence sub-limit, and two events in a single policy period could exhaust the $5 million aggregate.

Nexford ships approximately 42,000 SKUs annually across its three operating subsidiaries — Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc. — creating a broad surface area for potential recall exposure.

Recommended Improvement. Increase the product recall sub-limit in the Midland Casualty primary GL/PL policy to $5 million per occurrence and $10 million in the aggregate, representing a doubling of the current sub-limit. This increase would provide more adequate capacity to absorb a significant recall event while leaving headroom within the aggregate for a potential second event in the same policy period.

Fallback Position. If Midland Casualty & Surety Company is unwilling to provide a $5 million per occurrence / $10 million aggregate product recall sub-limit at a premium that the Company deems reasonable, C&H recommends the following alternative approaches: (a) seek a middle-ground sub-limit of $3.5 million per occurrence / $7.5 million in the aggregate; or (b) explore the placement of a standalone product recall/contamination policy with a separate carrier, to be quoted through Ashford Breckinridge, which would provide dedicated recall capacity outside the GL/PL tower and potentially offer broader covered expenses (including brand rehabilitation costs, which may not be covered under the Midland Casualty policy's recall endorsement).

Applicable Layers. Midland Casualty & Surety Company primary GL/PL.

PL Point 2: Cross-Suit Exclusion — Intercompany Liability Clarification

Priority: Critical

Issue. The Midland Casualty primary GL/PL policy contains an exclusion for "bodily injury" or "property damage" arising out of the products or operations of an "insured" that is asserted against another "insured." Because Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc. are all Named Insureds under the Midland Casualty policy, this cross-suit exclusion could bar coverage for liability claims between the Company's subsidiaries.

This issue is not theoretical. The Company's supply chain involves significant intercompany integration: Triton Fastener Corp. manufactures fasteners that are incorporated into conveyor systems assembled and sold by Nexford Conveyor Systems, LLC. If a Triton fastener defect causes a conveyor system failure resulting in bodily injury or property damage to a third party, the injured party will likely assert claims against both Triton (as the component manufacturer) and NCS (as the system assembler and seller). In the course of defending such a claim, NCS may assert a cross-claim, contribution claim, or indemnification claim against Triton — or vice versa — seeking to shift responsibility for the loss to the entity whose product was defective. Under the current cross-suit exclusion, such an intercompany claim could be excluded from coverage, leaving the cross-claiming subsidiary without insurance for its contribution or indemnification exposure.

The Cross-Liability and Intercompany Coverage Memorandum dated June 10, 2022 analyzed this issue in detail, including a review of applicable case law interpreting cross-suit exclusions in multi-entity named insured programs.

Recommended Improvement. C&H recommends the addition of a "cross-liability" or "separation of insureds" endorsement to the Midland Casualty primary GL/PL policy. This endorsement would provide that the insurance applies separately to each Named Insured as if a separate policy had been issued to each, except that the aggregate limits of liability stated in the policy shall not be increased by reason of the separation. This is a standard endorsement form (ISO CG 00 01 or equivalent) that is widely available in the commercial general liability market.

The separation of insureds endorsement effectively neutralizes the cross-suit exclusion for intercompany claims by treating each Named Insured as if it were insured under a separate policy. Under this treatment, a cross-claim by NCS against Triton (or vice versa) would be treated as a claim by one insured against an unrelated third party, and the exclusion would not apply.

Fallback Position. If Midland Casualty & Surety Company declines to issue a full separation of insureds endorsement (which would be unusual, as this is a standard endorsement), C&H recommends negotiating a carve-back from the cross-suit exclusion providing coverage for: (i) cross-claims, contribution claims, or indemnification claims between Named Insureds that arise in the context of a claim asserted by an unrelated third party (i.e., where the intercompany claim is triggered by an underlying third-party liability claim); and (ii) subrogation or contribution claims between Named Insureds arising from products liability, including claims arising from component parts manufactured by one Named Insured and incorporated into products assembled or sold by another Named Insured. This fallback preserves coverage for the most important intercompany claim scenarios while potentially addressing any underwriting concern about affirmative intercompany litigation.

Applicable Layers. Midland Casualty & Surety Company primary GL/PL. C&H further recommends that Ashford confirm the Great Basin Insurance Company 1st excess/umbrella follows form on cross-liability, either through its own separation of insureds provision or through express follow-form language incorporating the Midland Casualty endorsement.

PL Point 3: "Other Insurance" Clause Conflicts Between Primary and Excess

Priority: High

Issue. The Midland Casualty primary GL/PL policy and the Great Basin Insurance Company 1st excess/umbrella policy each contain "other insurance" clauses that, as currently drafted, create a potential circular conflict that could delay claims payment or give rise to coverage disputes.

Specifically, the Midland Casualty primary policy designates its coverage as "excess" over any other valid and collectible insurance available to the Named Insured for a covered loss. The Great Basin 1st excess/umbrella policy contains a similar clause designating itself as excess over any other applicable insurance. When both policies designate themselves as "excess" over the same other insurance (or over each other), the resulting circular priority creates an impasse in which each insurer may argue that the other should pay first. This issue was identified and flagged in the Preliminary Coverage Gap Memorandum — PL Tower dated May 27, 2022.

While courts have developed various rules for resolving circular "other insurance" conflicts (including pro-rata allocation, equal shares, and excess-of-excess analysis), these judicial resolutions are unpredictable, jurisdiction-specific, and — most importantly — require the expenditure of time and legal fees that the Company should not have to incur. The purpose of the insurance program is to provide prompt, predictable coverage, and conflicting "other insurance" clauses undermine that objective.

Recommended Improvement. C&H recommends the following two-part approach:

(i) Amend the Midland Casualty primary policy's "other insurance" clause to designate the Midland Casualty coverage as "primary and non-contributory" with respect to any other insurance available to Nexford and its Named Insureds for products liability and completed operations claims. This designation establishes the Midland Casualty policy as the first-responding policy, eliminating the circular conflict.

(ii) Confirm, through endorsement or written confirmation from the Great Basin underwriter, that the Great Basin 1st excess/umbrella policy expressly sits excess of the Midland Casualty primary on a follow-form basis and does not contain any "other insurance" clause that conflicts with or purports to override the Midland Casualty primary's first-position status.

Fallback Position. If "primary and non-contributory" language is not obtainable from Midland Casualty (for example, because Midland Casualty has concerns about its exposure in scenarios involving other primary insurance procured by additional insureds), C&H recommends inserting a coordination clause in both the Midland Casualty and Great Basin policies specifying the order of priority among applicable policies. The coordination clause should reference the vertical exhaustion principle — i.e., the Midland Casualty primary responds first up to its per-occurrence and aggregate limits; the Great Basin umbrella then responds only after the Midland Casualty primary is exhausted — and should expressly state that no other insurance available to any Named Insured shall alter this sequence of priority.

Applicable Layers. Midland Casualty & Surety Company primary GL/PL; Great Basin Insurance Company 1st excess/umbrella.

PL Point 4: Completed Operations Tail — 10-Year Extension Confirmat

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum is a confidential attorney-client communication and/or attorney work product prepared by Calderwood & Harkness LLP for Nexford Industrial Holdings Inc. It is not intended for disclosure to third parties and is protected from disclosure by the attorney-client privilege, the work product doctrine, and/or other applicable privileges. Any unauthorized review, use, disclosure, or distribution is prohibited.
MEMORANDUM
TO: Priya Sundaram, General Counsel & Corporate Secretary, Nexford Industrial Holdings Inc.
CC: Trevor Haines, Vice President, Risk Management, Nexford Industrial Holdings Inc.; Donna Kowalski, Director of Insurance and Claims, Nexford Industrial Holdings Inc.; Douglas Fairchild, Partner, Calderwood & Harkness LLP; Angela Fontaine, Partner, Calderwood & Harkness LLP
FROM: Naomi Petersen, Lead Associate, Calderwood & Harkness LLP; Yuki Nakamura, Associate, Calderwood & Harkness LLP
DATE: June 13, 2022
RE: Prioritized Renewal Negotiation Points — D&O and Product-Liability Insurance Towers (2022–2023 Renewal)
Matter No.: 1005-00003
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I. Purpose and Executive Summary
This memorandum sets forth eighteen (18) prioritized policy wording improvements that Calderwood & Harkness LLP ("C&H") recommends Nexford Industrial Holdings Inc. ("Nexford" or the "Company") negotiate with its incumbent and prospective carriers through Ashford Breckinridge LLP ("Ashford"), the Company's broker of record, in connection with the renewal of the directors' and officers' liability ("D&O") and product-liability ("PL") insurance towers for the policy period July 1, 2022 through July 1, 2023 (the "Renewal").
The negotiation points set forth herein are drawn from the findings and recommendations contained in C&H's Preliminary Coverage Gap Memoranda dated May 27, 2022 — the first of which identified fourteen (14) coverage gaps in the D&O tower and the second of which identified eleven (11) coverage gaps in the PL tower — as well as C&H's ongoing comprehensive tower review analysis, which has encompassed a policy-by-policy wording comparison, carrier quote analysis, and coordination with external actuarial consultants. This memorandum distills those broader findings into a concise set of actionable negotiation points suitable for use by Ashford in direct carrier negotiations.
The memorandum is organized into two principal sections. Part A addresses ten (10) negotiation points relating to the D&O tower. Part B addresses eight (8) negotiation points relating to the PL tower. Each negotiation point is assigned one of three priority designations — Critical, High, or Moderate — and includes: (a) a description of the coverage issue or gap; (b) a summary of the relevant current policy wording; (c) C&H's recommended wording improvement; and (d) a fallback position in the event the relevant carrier declines the primary request. The fallback positions are designed to provide Ashford's placement team with the flexibility to exercise judgment on carrier-specific dynamics while preserving the essential coverage objectives identified by C&H and the Company.
By way of reference context, the following summarizes the current architecture of each tower:
D&O Tower — $55M Aggregate Limits (Five Layers)
The current rate-on-line for the D&O tower is approximately 2.48%.
PL Tower — $75M Aggregate Limits (Four Layers)
The current rate-on-line for the PL tower is approximately 3.52%.
The combined current premium for both towers is $4,006,350, representing approximately 0.282% of the Company's $1.42 billion in consolidated revenue for fiscal year 2021.
Carrier renewal quotes were received between May 18 and June 8, 2022. These negotiation points should be communicated to Phillip Garza, Senior Vice President, Executive Risk Practice, and Tamara Fisk, Account Executive, at Ashford Breckinridge for prompt presentation to the respective carriers, in advance of the targeted June 28, 2022 bind date.
II. Methodology and Priority Framework
A. Priority Tier Definitions
C&H has assigned each of the eighteen negotiation points one of three priority designations, defined as follows:
• Critical — Coverage gaps that could leave individual directors and officers, or the Company itself, materially exposed to uninsured or underinsured loss in realistic claim scenarios. Points designated as Critical are non-negotiable in their primary request form; C&H recommends that the Company be prepared to change carriers on a given layer if the incumbent carrier declines the primary request on a Critical point. Fallback positions are provided for Critical points, but they represent the absolute minimum acceptable outcome, not a desirable compromise.
• High — Significant coverage improvements that would substantially reduce ambiguity, broaden protection, or eliminate non-follow-form gaps between tower layers. Points designated as High warrant a strong push in carrier negotiations, and C&H recommends that Ashford present them with emphasis. However, High-priority points are accompanied by meaningful fallback positions that, if accepted, would provide adequate (though not optimal) coverage.
• Moderate — Enhancements that reflect current market best practices, align policy language with Nexford's specific risk profile, or address potential coverage ambiguities that are less likely to give rise to coverage disputes. Points designated as Moderate are desirable but are not deal-breakers. C&H recommends pursuing them but acknowledges that they may be appropriate trading points in overall premium or retention negotiations.
B. Analytical Inputs
The negotiation points set forth in this memorandum are informed by the following analytical inputs:
1. Policy-by-Policy Wording Comparison. C&H has conducted a detailed, provision-by-provision comparison of the current policy forms across all nine layers of the two towers (five D&O layers and four PL layers), as well as the available renewal and replacement quotes. This comparison identified instances of non-follow-form language, definitional inconsistencies, and exclusion scope variances between layers within the same tower.
2. Nexford Risk Profile Analysis. C&H has analyzed the Company's specific risk profile in constructing and prioritizing these negotiation points. Key risk characteristics include: (a) PE-backed ownership structure, with Veltrano Capital Partners Fund IV holding 68.5% of the Company's equity following the June 15, 2018 leveraged buyout; (b) a nine-member board of directors with five sponsor-appointed directors (including Chairman Gerald Whitcomb) and one board observer (Celeste Brogan, Vice President at Veltrano Capital Partners); (c) $1.05 billion in funded debt (with Broadleaf Capital Markets, LLC serving as administrative agent for the senior secured credit facilities), creating meaningful credit-related D&O exposure; (d) a contemplated initial public offering in the 2023–2024 timeframe, which would substantially alter the Company's D&O risk profile; (e) two pending product-liability lawsuits (discussed further in Part B); and (f) two prior product recalls in 2020.
3. Actuarial Loss Modeling. Kessler Quinn Advisory Group has provided actuarial loss modeling for the PL tower, reflecting a total five-year incurred loss figure of $15.12 million, comprising $4.72 million in paid losses, $8.3 million in open case reserves, and $2.1 million in incurred but not reported ("IBNR") loss estimates. This modeling has informed the priority designations and premium reasonableness assessments for PL-related negotiation points.
4. Carrier Quote Comparison Matrices. C&H prepared carrier quote comparison matrices for both the D&O and PL towers, dated June 10, 2022, which compare the renewal and replacement quotes on a line-by-line basis across key coverage terms, conditions, exclusions, limits, retentions, and pricing. These matrices form the factual basis for many of the observations in this memorandum.
C. Role of Fallback Positions
Each negotiation point includes a fallback position designed to facilitate efficient negotiation and to enable Ashford Breckinridge's placement team to exercise professional judgment regarding carrier-specific dynamics. The fallback positions reflect C&H's assessment of the minimum acceptable outcome on each point, taking into account the overall tower architecture, the availability of DIC or other backstop coverage, and the relative bargaining position of the Company with each carrier. Ashford should not accept terms below the stated fallback position without prior consultation with C&H and the Company's risk management team.
PART A: D&O TOWER — 10 NEGOTIATION POINTS
D&O Point 1: Severability of the Application
Priority: Critical
Issue. The Vandermeer National Insurance Company primary D&O policy (Policy No. VNI-DO-2021-88473) contains a rescission provision that does not include full severability of the application. Under the current policy language, a material misstatement or omission in the application for insurance — whether made by a single individual officer or by the Company itself — could potentially serve as the basis for the carrier to rescind or void coverage for all insured persons under the policy, including innocent directors and officers who had no knowledge of, and no involvement in, the alleged misstatement or omission. This is a fundamental coverage integrity issue that goes to the very foundation of the D&O program's protective purpose.
Current Wording. The rescission clause in the Vandermeer primary applies to the "Application" as submitted on behalf of the Company. The policy does not contain an express carve-out or severability provision shielding innocent insured persons from the consequences of another insured person's misstatement or omission in the application. The application was signed by the Company's Chief Financial Officer, Marcus Delacroix, on behalf of the Company and all proposed insured persons. There is no differentiation in the rescission clause between Side-A (non-indemnifiable loss), Side-B (indemnifiable loss), and Side-C (entity coverage), meaning that rescission based on a misstatement could theoretically void all three insuring agreements simultaneously.
Recommended Improvement. C&H recommends that Nexford negotiate for the insertion of a full severability clause in the Vandermeer primary policy, providing as follows:
(i) No statements, representations, or information contained in the Application, or in any materials submitted in connection therewith, shall be imputed to any individual Insured Person for the purpose of determining the availability of coverage under Insuring Agreement A (Side-A, Non-Indemnifiable Loss) or Insuring Agreement B (Side-B, Indemnifiable Loss). Only statements, representations, or information actually made by, or made with the actual knowledge of, the individual Insured Person seeking coverage shall be relevant to the determination of that individual Insured Person's entitlement to coverage.
(ii) For purposes of Insuring Agreement C (Entity Coverage), the "knowledge" of the Company shall be limited to the actual knowledge of the following individuals: Sandra Elliston, Chief Executive Officer; Marcus Delacroix, Chief Financial Officer; and Priya Sundaram, General Counsel. No knowledge possessed by any other employee, officer, or director of the Company shall be imputed to the Company for purposes of the rescission provision.
This formulation ensures that innocent directors and officers are fully protected from rescission resulting from another individual's misstatement, while appropriately limiting the Company's imputed knowledge for entity coverage purposes to the three most senior officers with operational and legal oversight responsibilities.
Fallback Position. If Vandermeer National Insurance Company declines full severability across both Side-A and Side-B, C&H recommends the following fallback position: seek severability limited to Side-A coverage (non-indemnifiable loss) in the Vandermeer primary and confirm that the Harrington Specialty Insurance Co. Side-A DIC policy (Policy No. HSI-DIC-2021-00342) contains full severability of the application. For Side-B, seek a narrower knowledge definition limiting imputed knowledge to the signing officer of the Application (currently Marcus Delacroix, CFO). This fallback would preserve the most critical protection — personal asset protection for directors and officers in scenarios where the Company cannot or will not indemnify — while accepting a somewhat narrower protection on indemnifiable claims.
Applicable Layers. This negotiation point is directed primarily at the Vandermeer National Insurance Company primary policy. C&H further recommends that Ashford confirm alignment of severability provisions in the Commonwealth Indemnity Group 1st excess, the Northfield Excess Insurance Company 2nd excess (or Graystone Mutual Assurance Co. if Graystone is ultimately retained), and the Pinnacle Re Insurance Ltd. 3rd excess. Any excess layer that follows form to the Vandermeer primary on rescission/severability should be confirmed in writing to do so. Any excess layer that does not follow form should be separately negotiated for consistent severability language.
D&O Point 2: Definition of "Insured Person" — Consistency Across Layers
Priority: Critical
Issue. The definition of "Insured Person" is materially inconsistent across the layers of the D&O tower. This inconsistency creates the potential for gaps in coverage at excess attachment points — specifically, individuals who qualify as "Insured Persons" under the Vandermeer primary may not qualify as such under one or more excess layers, resulting in a loss of coverage precisely at the point where the excess policy should be responding to a large claim.
Current Wording Discrepancies. The following discrepancies have been identified through C&H's policy-by-policy wording comparison:
• Vandermeer National Insurance Company (Primary): Defines "Insured Person" broadly to include all duly elected or appointed directors and officers, as well as all employees of the Company acting in a managerial or supervisory capacity. This definition encompasses a relatively wide universe of individuals, consistent with best practices for a private PE-backed company.
• Commonwealth Indemnity Group (1st Excess): Uses a materially narrower definition that restricts "Insured Person" to "duly elected or appointed directors and duly appointed officers" of the Named Insured. This definition excludes employees below the vice president level, even if they are acting in a managerial or supervisory capacity. This narrower definition could exclude, for example, plant managers, division heads, and other mid-level managers who may be named as defendants in litigation.
• Graystone Mutual Assurance Co./Northfield Excess Insurance Company (2nd Excess): Definition varies. The Graystone incumbent policy uses a definition similar to Commonwealth's narrower formulation. The Northfield replacement quote uses a definition that is somewhat broader but introduces unique qualifiers that do not appear in the Vandermeer primary.
• Pinnacle Re Insurance Ltd. (3rd Excess): Excludes "shadow directors" and "de facto officers" from the definition of "Insured Person." This exclusion is particularly problematic given the Veltrano Capital Partners sponsor-control structure, under which Veltrano has appointed five of nine board directors and maintains a board observer (Celeste Brogan). Depending on the facts and circumstances, Veltrano personnel who exercise influence over the Company's management and governance could be characterized as shadow directors or de facto officers under applicable corporate law, and the Pinnacle Re exclusion would deny them coverage.
Recommended Improvement. C&H recommends that the definition of "Insured Person" be standardized across all four purchased excess layers (Commonwealth, Northfield, Pinnacle Re, and — if retained — Graystone) to match the Vandermeer primary's broad definition, including directors, officers, and all employees acting in a managerial or supervisory capacity. In addition, C&H recommends that the standardized definition expressly include the following categories of individuals:
(a) De facto officers and shadow directors of the Named Insured or any Subsidiary, defined as any natural person who acts in the capacity of a director or officer of the Named Insured or any Subsidiary, regardless of whether such person has been formally elected or appointed to such position;
(b) Board observers appointed at the request of any shareholder of the Named Insured, including without limitation Celeste Brogan in her capacity as board observer appointed at the request of Veltrano Capital Partners Fund IV; and
(c) Any natural person who, at the specific written request of the Named Insured, serves as a director, officer, trustee, or equivalent of an Outside Entity, but only with respect to such service.
The inclusion of de facto officers and shadow directors is particularly warranted given the Veltrano Capital Partners sponsor-control structure, under which five of nine board seats are held by Veltrano appointees. In a litigation scenario, adverse parties may seek to characterize Veltrano personnel as de facto fiduciaries, and the D&O tower must be positioned to respond to such claims.
Fallback Position. At minimum, C&H recommends that the Company require Commonwealth, Northfield, and Pinnacle Re to adopt a definition of "Insured Person" no narrower than "all duly elected or appointed directors and officers of the Named Insured or any Subsidiary," with an express carve-in for board observers appointed at the request of a shareholder owning more than 50% of the outstanding equity of the Company. While this fallback does not achieve the breadth of the Vandermeer primary's inclusion of managerial employees, it eliminates the most significant gaps — particularly the Pinnacle Re exclusion of shadow directors and the inconsistency regarding board observers.
Applicable Layers. All D&O tower layers. Primary negotiation targets are Commonwealth Indemnity Group (1st Excess), Northfield Excess Insurance Company (2nd Excess), and Pinnacle Re Insurance Ltd. (3rd Excess). The Harrington Side-A DIC should also be reviewed for definitional consistency.
D&O Point 3: "Insured vs. Insured" Exclusion — PE Sponsor Carve-Backs
Priority: Critical
Issue. The Insured versus Insured ("IvI") exclusion is a standard provision in D&O policies that bars coverage for claims brought by one insured against another insured, or by the Company against its own directors and officers. While the exclusion serves a legitimate purpose — preventing collusive claims — it poses a significant and well-documented risk for PE-backed companies such as Nexford.
Specifically, the IvI exclusion in the Vandermeer primary and across the excess layers could bar coverage for claims brought by Veltrano Capital Partners Fund IV or its affiliated entities against Nexford's directors and officers. Given that Veltrano holds 68.5% majority ownership of the Company and has appointed five of nine board directors (including Chairman Gerald Whitcomb), there is a realistic possibility that claims could arise in which Veltrano — as controlling shareholder — takes action against directors or officers, or in which claims are brought derivatively by or on behalf of the Company at Veltrano's direction. Scenarios that could trigger the IvI exclusion include, among others:
(a) A derivative suit brought by minority shareholders (the remaining 31.5% equity holders, including management rollover participants) in which Veltrano-appointed directors are named as defendants;
(b) A direct claim by Veltrano or its affiliates against management for alleged mismanagement, breach of fiduciary duty, or failure to achieve operating targets;
(c) Claims by a bankruptcy trustee, examiner, or creditors' committee in the event of Nexford's insolvency — a scenario that is not purely theoretical given the Company's $1.05 billion in funded debt (with Broadleaf Capital Markets, LLC as administrative agent);
(d) Claims arising in connection with the contemplated 2023–2024 initial public offering, including potential Section 11 or Section 12 claims under the Securities Act of 1933 in which the underwriters or selling shareholders assert contribution or indemnification claims against directors and officers.
Current Wording. The IvI exclusion in the Vandermeer primary bars coverage for any claim "brought by or on behalf of" any Insured Person or the Company against another Insured Person. The exclusion does not contain an express carve-out for claims brought by or at the direction of a shareholder, nor does it include carve-backs for bankruptcy trustee, examiner, or receiver claims. The excess layer policies contain similar IvI exclusions, though the specific language varies. The Harrington Side-A DIC policy has not been separately analyzed for IvI exclusion language in this memorandum but is addressed in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022.
Recommended Improvement. C&H recommends that the Company negotiate the following carve-backs from the IvI exclusion in the Vandermeer primary and across all D&O tower layers:
(i) Shareholder Claims Carve-Back. Claims brought by any shareholder of the Company (including Veltrano Capital Partners Fund IV, Veltrano Capital Partners, LLC, or any of their respective affiliates, funds, parallel vehicles, or portfolio companies) in its capacity as shareholder, whether brought directly, derivatively in the right of the Company, or by a creditors' committee or other representative of shareholders' interests, shall not be subject to the IvI exclusion.
(ii) Bankruptcy and Insolvency Carve-Back. Claims brought by or on behalf of a bankruptcy trustee, receiver, examiner, debtor-in-possession, liquidator, rehabilitator, conservator, or analogous official or entity, whether appointed by a court or acting under applicable law, shall not be subject to the IvI exclusion.
(iii) Employment Practices Carve-Back. Claims constituting Employment Practices Wrongful Acts (as defined in the policy) brought by an Insured Person who is also an employee of the Company, including claims for wrongful termination, harassment, discrimination, or retaliation, shall not be subject to the IvI exclusion.
(iv) Whistleblower Carve-Back. Claims brought by an Insured Person or employee who asserts whistleblower protections under applicable federal or state law, including without limitation the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act, or analogous state whistleblower statutes, shall not be subject to the IvI exclusion.
These carve-backs are widely recognized as essential for PE-backed companies and are increasingly available in the current D&O market. The shareholder claims carve-back is of paramount importance given Veltrano's controlling ownership position and the structural dynamics inherent in a sponsor-controlled board.
Fallback Position. If the carriers decline the full shareholder claims carve-back (which C&H views as unlikely given current market conditions for a well-underwritten PE-backed risk), the Company should seek at minimum: (a) a carve-back for bankruptcy trustee/receiver claims, which is essential given the $1.05 billion debt load; (b) a carve-back for derivative claims brought in the right of the Company by any person or entity other than a director or officer; and (c) confirmation that the Harrington Specialty Side-A DIC policy (Policy No. HSI-DIC-2021-00342) either does not contain an IvI exclusion or, if it does, includes the broadest available carve-backs, ensuring that individual directors and officers have backstop protection even if the traditional tower's IvI exclusion applies.
Applicable Layers. All D&O tower layers, with particular focus on the Vandermeer National Insurance Company primary and the Harrington Specialty Insurance Co. Side-A DIC. Ashford should present the IvI carve-back requests to each carrier in the tower to ensure consistency.
D&O Point 4: Prior Acts Exclusion Scope in Excess Layers
Priority: High
Issue. The Commonwealth Indemnity Group 1st excess policy (Policy No. CIG-XS-2021-7490) contains a prior acts exclusion with a retroactive date of July 1, 2019. This means that claims arising from wrongful acts occurring prior to July 1, 2019 are excluded from coverage under the Commonwealth excess layer, even if such claims are first made during the current or renewal policy period. This retroactive date creates a material gap in coverage because it excludes the period surrounding — and immediately following — the June 15, 2018 Veltrano Capital Partners leveraged buyout closing.
The LBO and its aftermath represent a period of heightened D&O exposure, including potential claims related to: the transaction process and sale procedures; representations and warranties in transaction documents; post-closing integration decisions; changes in corporate governance and board composition; and the assumption of $1.05 billion in funded debt. Claims arising from acts or omissions during this period could realistically be asserted by minority shareholders, creditors, or other parties, and the Commonwealth retroactive date would exclude such claims from the first excess layer.
The Vandermeer primary policy provides full prior acts coverage (no retroactive date), meaning that it would respond to pre-July 1, 2019 claims up to its $10 million per-claim and aggregate limit. However, if such a claim were to exceed $10 million, the Commonwealth excess layer would not attach, creating a $10 million gap between the exhausted primary and the next responding excess layer.
Recommended Improvement. C&H recommends that the Company negotiate for the elimination of the retroactive date in the Commonwealth Indemnity Group 1st excess layer, thereby providing full prior acts coverage from the earliest date of any insured person's service with the Company or any predecessor entity. C&H further recommends that Ashford confirm, in the course of the renewal process, that neither Northfield Excess Insurance Company (2nd Excess) nor Pinnacle Re Insurance Ltd. (3rd Excess) contains a retroactive date or prior acts exclusion, and obtain written confirmation to that effect as a condition of binding.
Fallback Position. If Commonwealth Indemnity Group insists on maintaining a retroactive date, C&H recommends pushing the retroactive date back to at least January 1, 2018, which would provide coverage for acts occurring approximately six months prior to the June 15, 2018 LBO closing. This fallback date captures the most significant pre-LBO exposure period, including the period during which the sale process was being conducted, fiduciary duties to pre-LBO shareholders were in effect, and transaction-related representations were being made. In the event this fallback is accepted, the Company should confirm that the Vandermeer primary and the Harrington Side-A DIC both provide unlimited prior acts coverage, ensuring that drop-down protection exists for pre-January 1, 2018 claims affecting individual directors and officers.
Applicable Layers. Commonwealth Indemnity Group (1st Excess). Confirm status at Northfield Excess Insurance Company (2nd Excess) and Pinnacle Re Insurance Ltd. (3rd Excess).
D&O Point 5: Coordination Between Vandermeer Primary and Harrington Side-A DIC — Trigger Alignment
Priority: High
Issue. The Harrington Specialty Insurance Co. Side-A DIC policy (Policy No. HSI-DIC-2021-00342) is a critical component of Nexford's D&O program. Its purpose is to drop down and provide dedicated, non-rescindable coverage to individual directors and officers in scenarios where the underlying D&O tower — particularly the Vandermeer primary — fails to respond. These scenarios include, among others: insolvency or bankruptcy of the Company precluding indemnification; rescission or voiding of the underlying policy; application of an exclusion in the underlying policy that the DIC does not contain; and insolvency of the underlying carrier.
However, C&H has identified two concerns with the current coordination between the Vandermeer primary and the Harrington Side-A DIC, as analyzed in greater detail in the Side-A DIC Policy Analysis Memorandum dated June 3, 2022.
First, the trigger language in the Harrington policy references a "refusal or failure to pay" by the underlying insurer as the condition precedent for DIC coverage to respond. This formulation may not clearly encompass all scenarios in which coverage under the underlying tower is unavailable. Specifically, it is ambiguous whether "refusal or failure to pay" includes: (a) denial of coverage based on the application of a policy exclusion (which is arguably not a "refusal" but rather a determination of non-coverage); (b) rescission or voiding of the underlying policy (which eliminates the policy ab initio, meaning there is no "refusal to pay" on a policy that no longer exists); and (c) insolvency of the underlying carrier (where the carrier may not have "refused" to pay but is simply unable to pay). While most courts have construed "refusal or failure to pay" broadly, the risk of a coverage dispute is meaningful, particularly in a jurisdiction that construes insurance policy language in favor of the insurer.
Second, the DIC policy's difference-in-conditions coverage grants — which are intended to provide broader coverage than the underlying tower on specific terms — are not consistently broader than the Vandermeer primary on all coverage points. C&H has identified certain provisions where the DIC policy either tracks the Vandermeer primary language identically (providing no incremental DIC protection) or is actually narrower.
Recommended Improvement. C&H recommends the following:
(i) Broaden the DIC trigger clause to include any situation where the underlying insurer "refuses, fails, or is unable to pay, whether in whole or in part, and whether due to insolvency, receivership, liquidation, rehabilitation, rescission, voiding, cancellation, application of any exclusion, condition, limitation, or retention, or for any other reason." This formulation eliminates ambiguity by covering all conceivable scenarios in which the underlying tower fails to respond.
(ii) Confirm, either through policy language or a formal endorsement, that the DIC coverage grants affirmatively cover at least the following scenarios: (a) bankruptcy or insolvency of the Company precluding indemnification of individual directors and officers; (b) exhaustion of the entity coverage self-insured retention ($1M SIR) in circumstances where the Company is unable or unwilling to fund the SIR; (c) regulatory investigation costs, including costs incurred in connection with informal inquiries, subpoenas, or investigative demands by federal or state regulatory bodies; and (d) loss arising from wrongful acts predating the inception of the underlying tower (full prior acts coverage under the DIC, regardless of the retroactive date, if any, in any underlying excess layer).
Fallback Position. If Harrington Specialty Insurance Co. will not broaden the trigger language to the extent described above, C&H recommends seeking a schedule or endorsement listing specific DIC coverage extensions, including at minimum: an express insolvency and bankruptcy carve-in (confirming that DIC coverage is triggered when the Company's insolvency prevents indemnification) and an express rescission carve-in (confirming that DIC coverage is triggered when the underlying policy is rescinded or voided). These two carve-ins address the most significant ambiguities in the current trigger language.
Applicable Layers. Harrington Specialty Insurance Co. Side-A DIC, in coordination with the Vandermeer National Insurance Company primary.
D&O Point 6: Increase Side-A DIC Limit from $15M to $20M
Priority: High
Issue. The current $15 million dedicated Side-A DIC limit may be insufficient to protect individual directors and officers in a severe loss scenario. Several factors inform this assessment:
(a) Board Composition: Nexford has a nine-member board of directors. In a catastrophic claim scenario (e.g., a securities class action following an IPO, or a creditor derivative action following a restructuring), multiple directors could face simultaneous claims, each seeking substantial damages. A $15 million limit shared among nine directors may prove inadequate.
(b) PE Sponsor Control Dynamics: Veltrano Capital Partners' 68.5% controlling ownership position, combined with its appointment of five board members and a board observer, creates a governance structure in which claims against directors may be particularly complex and multifaceted, potentially involving allegations of conflicts of interest, self-dealing, and breach of fiduciary duty in the context of related-party transactions.
(c) Debt Load: The Company carries $1.05 billion in funded debt. In a scenario involving financial distress, creditors or a bankruptcy trustee could assert claims against directors and officers for alleged breaches of fiduciary duty in the zone of insolvency, with damages measured by reference to the full debt load. The Side-A DIC is the last line of defense for individual directors in such a scenario.
(d) Contemplated IPO: The Company is contemplating an initial public offering in 2023–2024. While a post-IPO D&O program would be separately structured, the transition period and the pre-IPO period carry heightened risks, including potential liability under Section 11 and Section 12 of the Securities Act of 1933. A larger DIC limit provides a more robust safety net during this transitional period.
Recommended Improvement. Increase the Harrington Specialty Insurance Co. Side-A DIC limit from $15 million to $20 million, representing a $5 million increase. C&H recommends that the incremental cost of this limit increase be negotiated within the context of the overall D&O tower premium, rather than as a standalone pricing exercise, to optimize the Company's bargaining position.
Fallback Position. If a $20 million DIC limit is not achievable at a premium that the Company deems acceptable, C&H recommends seeking $17.5 million as an intermediate step. In addition, the Company should negotiate an option (at pre-agreed pricing or pricing parameters) to increase the DIC limit to $20 million at the next renewal or upon the occurrence of any public offering event (including an IPO, direct listing, or SPAC combination), ensuring that the enhanced limit is available when the Company's risk profile increases.
Applicable Layers. Harrington Specialty Insurance Co. Side-A DIC.
D&O Point 7: Entity Coverage SIR — Clarification of Applicability
Priority: High
Issue. The Vandermeer National Insurance Company primary D&O policy contains a $1,000,000 self-insured retention ("SIR") applicable to entity coverage (the equivalent of Side-C coverage for a private company). The current policy language is ambiguous in several respects regarding the SIR's application, creating the potential for disputes at the time of a claim.
Specifically, the current SIR clause does not clearly specify: (a) whether the $1 million SIR applies on a per-claim basis or on a per-insured-person basis (a per-insured-person application could result in multiple SIR obligations in a single claim involving multiple individuals); (b) whether defense costs incurred by the Company in connection with an entity claim count toward satisfaction of the SIR (if defense costs do not erode the SIR, the effective SIR is significantly higher, as defense costs for complex D&O claims can be substantial); and (c) whether the SIR applies only to entity/Side-C claims, or whether it also applies to Side-A and Side-B claims (the latter application would be inconsistent with market practice and the intent of the D&O program).
Recommended Improvement. C&H recommends that the Vandermeer primary policy be endorsed to clarify the following three points:
(i) The $1,000,000 SIR applies on a per-claim basis, meaning that the Company is responsible for one SIR per claim, regardless of the number of insured persons involved in the claim.
(ii) Defense costs incurred by the Company in connection with an entity claim count toward — and erode — the SIR. Once the Company has incurred $1,000,000 in defense costs and/or indemnity payments on a given entity claim, the SIR is deemed satisfied and the policy responds.
(iii) The SIR applies exclusively to entity claims under Insuring Agreement C (or its equivalent). The SIR does not apply to Side-A claims (non-indemnifiable loss incurred by individual insured persons) or to Side-B claims (loss for which the Company indemnifies individual insured persons). This distinction is expressly stated in the SIR clause.
Fallback Position. If Vandermeer will not agree that defense costs erode the SIR, C&H recommends accepting a per-claim SIR application without defense cost erosion, provided that the Company obtains express written confirmation that the SIR does not apply to Side-A or Side-B claims. The inapplicability of the SIR to Side-A and Side-B coverage is the most important element of this negotiation point, as it ensures that individual directors and officers have immediate access to coverage (with no retention obligation) for both non-indemnifiable and indemnifiable claims.
Applicable Layers. Vandermeer National Insurance Company primary.
D&O Point 8: Regulatory Investigation Coverage — Definition of "Claim"
Priority: High
Issue. The Vandermeer primary policy's definition of "Claim" may not be sufficiently broad to encompass the full range of regulatory proceedings to which Nexford and its directors and officers may be subject. As analyzed in the Regulatory Investigation Coverage Memorandum being finalized as of June 14, 2022, Nexford's manufacturing operations and product-safety profile create meaningful regulatory exposure across multiple federal and state agencies, including the Occupational Safety and Health Administration ("OSHA"), the Consumer Product Safety Commission ("CPSC"), the Environmental Protection Agency ("EPA"), and various state attorneys general offices.
The current definition of "Claim" in the Vandermeer primary includes civil, criminal, and administrative proceedings, but its treatment of regulatory investigations — particularly in their pre-formal or informal stages — is ambiguous. Many regulatory actions begin with informal inquiries, information requests, or investigative subpoenas that do not constitute formal "proceedings" but nonetheless require the expenditure of significant legal fees. If such informal investigatory activity does not constitute a "Claim" under the policy, the Company and its directors and officers would bear the cost of responding to such activity without access to D&O coverage, and by the time the investigation ripens into a formal proceeding (at which point it may constitute a "Claim"), substantial defense costs will already have been incurred outside the coverage framework.
Recommended Improvement. C&H recommends broadening the definition of "Claim" in the Vandermeer primary policy to expressly include the following:
(a) Any formal or informal investigation, examination, or inquiry by any federal, state, local, or foreign regulatory body, governmental agency, or self-regulatory organization, including any civil investigative demand, information request, or request for testimony or documents;
(b) Any subpoena (whether judicial, administrative, or grand jury) issued to any Insured Person or to the Company in connection with an investigation or inquiry concerning the acts or omissions of any Insured Person in their capacity as such;
(c) Any pre-charge, pre-formal investigation, or preliminary inquiry stage of a regulatory proceeding, including target letters, Wells notices, or equivalent notifications issued by a regulatory body.
This broadened definition would ensure that D&O coverage is available from the earliest stage of regulatory engagement, when the Company and its directors and officers most need the protection.
Fallback Position. If the carriers resist broadening the definition of "Claim" to include informal inquiries and pre-formal investigation stages, C&H recommends accepting the inclusion of formal investigations and subpoenas only (categories (a) and (b) above, limited to formal proceedings), but negotiating the addition of a standalone "Investigation Costs" coverage grant with a dedicated sub-limit of $1,000,000 for pre-formal investigation defense costs. This sub-limit would operate independently of the "Claim" definition and would cover legal fees and expenses incurred in responding to informal regulatory inquiries, information requests, and pre-formal investigation activity, up to the stated sub-limit.
Applicable Layers. Vandermeer National Insurance Company primary. C&H further recommends that Ashford confirm alignment on the "Claim" definition in all excess layers, as a claim that constitutes a "Claim" under the primary but not under an excess layer would create a coverage gap at the excess attachment point.
D&O Point 9: Allocation Provisions — Clarification and Presumptive Allocation
Priority: Moderate
Issue. The Vandermeer primary policy contains an allocation clause that governs the allocation of defense costs and settlement amounts in mixed claims — i.e., claims involving both covered and non-covered matters, or both insured and non-insured persons or entities. The current allocation clause does not contain a presumptive allocation formula or methodology. Instead, it provides that, in the event of a mixed claim, the insured and the insurer shall "negotiate in good faith to determine a fair and proper allocation" of covered and non-covered amounts.
While good-faith negotiation is a reasonable aspiration, the absence of a presumptive allocation formula leaves the allocation to be determined at the time of claim — precisely the moment when the interests of the insured and the insurer are most divergent. This creates significant uncertainty regarding the amount of coverage actually available to the insured and has, in industry practice, frequently led to coverage disputes and litigation over allocation percentages. For a PE-backed company like Nexford, where mixed claims (involving both insured directors and officers and non-insured entities such as Veltrano or its affiliates) are a realistic scenario, the absence of a presumptive allocation framework is a notable deficiency.
Recommended Improvement. C&H recommends the insertion of a "presumptive allocation" provision in the Vandermeer primary, providing as follows:
(i) Defense Costs: In any mixed claim involving at least one Insured Person, 100% of defense costs shall be presumptively allocated to — and covered on behalf of — the Insured Person(s), and shall be advanced by the Insurer as incurred. This presumption may be rebutted only if the Insurer demonstrates, by clear and convincing evidence, that a lesser percentage of defense costs is attributable to the covered claims of the Insured Person(s), in which case the allocation shall be adjusted accordingly.
(ii) Settlements: For settlement amounts in mixed claims, a "larger settlement" approach shall apply, under which the full amount of any settlement shall be allocated to covered loss and covered by the policy, unless the Insurer demonstrates, by clear and convincing evidence, that the settlement amount exceeds the portion of the settlement attributable to the covered claims of the Insured Person(s), in which case only the excess portion shall be allocated to non-covered loss.
The 100% presumptive allocation for defense costs, rebuttable only by clear and convincing evidence, is consistent with current best practices in D&O policy language and reflects the practical reality that, in most mixed claims, the insured persons' defense costs are substantially intertwined with the defense of non-covered matters and cannot be meaningfully separated.
Fallback Position. If Vandermeer will not agree to a 100% presumptive allocation for defense costs, C&H recommends negotiating a minimum 80% presumptive allocation to covered loss, with the remaining 20% subject to good-faith negotiation between the insured and the insurer. Even an 80% presumptive allocation represents a significant improvement over the current language, as it establishes a quantitative floor and reduces the scope of potential disputes.
Applicable Layers. Vandermeer National Insurance Company primary. Excess layers to follow form on allocation.
D&O Point 10: Priority of Payments Clause
Priority: Moderate
Issue. The current D&O tower lacks a clear priority of payments clause establishing the order of priority among different categories of insured persons and entities for the receipt of insurance proceeds. This absence creates a significant risk in a bankruptcy or insolvency scenario.
Specifically, if Nexford were to become insolvent or file for bankruptcy protection — a scenario that, while not anticipated, cannot be dismissed given the Company's $1.05 billion funded debt, Veltrano Capital Partners' 68.5% controlling equity position, and the inherent risks of a leveraged capital structure — the insurance proceeds available under the D&O tower could become the subject of competing claims by the Company (or its bankruptcy estate) and individual directors and officers. Without a priority of payments clause, there is no contractual mechanism to ensure that individual directors and officers — the very individuals whom the D&O program is designed to protect — receive the benefit of the insurance proceeds ahead of the corporate entity. In a bankruptcy scenario, the bankruptcy estate could assert a claim to the insurance proceeds as property of the estate, potentially subordinating the interests of individual directors and officers who face personal liability.
Recommended Improvement. C&H recommends the insertion of a priority of payments provision in the Vandermeer primary policy, providing for the following order of priority:
(i) First Priority — Side-A Claims: The insurer shall first pay loss for which no indemnification has been provided to individual insured persons by the Company (i.e., non-indemnifiable loss under Insuring Agreement A / Side-A). This ensures that directors and officers who face personal liability in scenarios where the Company cannot or will not indemnify them — the most acute exposure — have first claim on the insurance proceeds.
(ii) Second Priority — Side-B Claims: The insurer shall then pay loss for which the Company has provided indemnification to individual insured persons (i.e., indemnifiable loss under Insuring Agreement B / Side-B). This reimburses the Company for indemnification payments it has made to individual directors and officers.
(iii) Third Priority — Side-C Claims: The insurer shall then pay loss incurred directly by the Company entity (i.e., entity coverage under Insuring Agreement C / Side-C). Entity claims receive the lowest priority, consistent with the fundamental purpose of D&O insurance as personal protection for individual fiduciaries.
This priority structure is consistent with widely recognized best practices for D&O policy drafting and protects individual directors and officers in the scenarios where protection is most needed — namely, insolvency and bankruptcy, where the Company's ability to indemnify is compromised and the corporate entity may be competing with individuals for limited insurance proceeds.
Fallback Position. If Vandermeer National Insurance Company will not include a priority of payments clause in the primary policy, C&H recommends ensuring that the Harrington Specialty Insurance Co. Side-A DIC provides robust drop-down coverage in bankruptcy and insolvency scenarios (cross-referencing the trigger alignment improvements recommended in D&O Point 5 above). The Side-A DIC serves as an alternative protective mechanism for individual directors and officers, as its dedicated Side-A coverage is not available to the Company entity and therefore is not at risk of being claimed by a bankruptcy estate.
Applicable Layers. Vandermeer National Insurance Company primary. All excess layers should be required to follow form on the priority of payments provision. Harrington Specialty Insurance Co. Side-A DIC serves as a backup protective mechanism.
PART B: PRODUCT-LIABILITY TOWER — 8 NEGOTIATION POINTS
PL Point 1: Increase Product Recall Sub-Limit from $2.5M/$5M to $5M/$10M
Priority: Critical
Issue. The Midland Casualty & Surety Company primary GL/PL policy (Policy No. MCS-GL-2021-55671) contains a product recall sub-limit of $2.5 million per occurrence and $5 million in the aggregate. C&H has concluded, consistent with the analysis set forth in the Product Recall Sub-Limit Adequacy Memorandum dated June 7, 2022, that this sub-limit is materially inadequate given Nexford's product portfolio, manufacturing scale, distribution footprint, and historical recall experience.
The Company's historical recall experience provides a concrete benchmark. In 2020, Nexford's subsidiaries experienced two product recalls:
(a) Triton Fastener Corp. Voluntary Recall (March 12, 2020): Triton initiated a voluntary recall of certain lots of Grade 8 hex bolts due to a hardness testing anomaly identified during quality assurance review. The total cost of the recall, including notification, logistics, replacement product, and associated professional fees, was approximately $1.1 million.
(b) Nexford Conveyor Systems Advisory Notice (August 7, 2020): NCS issued an advisory notice regarding a potential issue with the tensioning mechanism on certain Model NCS-7200 conveyor systems. While technically classified as an advisory notice rather than a formal recall, the Company incurred approximately $340,000 in associated costs, including field inspections, customer communications, and corrective measures.
The combined cost of these two events was approximately $1.44 million. These were relatively contained events — the Triton recall involved specific lots of a single product line, and the NCS advisory notice affected a limited number of units. A larger-scale recall — for example, a systemic manufacturing defect affecting the full production run of Triton Grade 8 hex bolts (a high-volume product line with broad distribution across the industrial fastener market) or a safety-critical failure in the NCS Model NCS-7200 conveyor system (used in heavy industrial applications where malfunction poses bodily injury risk) — could realistically generate recall costs exceeding the current $2.5 million per-occurrence sub-limit. In such a scenario, a single recall event could exhaust more than half of the current per-occurrence sub-limit, and two events in a single policy period could exhaust the $5 million aggregate.
Nexford ships approximately 42,000 SKUs annually across its three operating subsidiaries — Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc. — creating a broad surface area for potential recall exposure.
Recommended Improvement. Increase the product recall sub-limit in the Midland Casualty primary GL/PL policy to $5 million per occurrence and $10 million in the aggregate, representing a doubling of the current sub-limit. This increase would provide more adequate capacity to absorb a significant recall event while leaving headroom within the aggregate for a potential second event in the same policy period.
Fallback Position. If Midland Casualty & Surety Company is unwilling to provide a $5 million per occurrence / $10 million aggregate product recall sub-limit at a premium that the Company deems reasonable, C&H recommends the following alternative approaches: (a) seek a middle-ground sub-limit of $3.5 million per occurrence / $7.5 million in the aggregate; or (b) explore the placement of a standalone product recall/contamination policy with a separate carrier, to be quoted through Ashford Breckinridge, which would provide dedicated recall capacity outside the GL/PL tower and potentially offer broader covered expenses (including brand rehabilitation costs, which may not be covered under the Midland Casualty policy's recall endorsement).
Applicable Layers. Midland Casualty & Surety Company primary GL/PL.
PL Point 2: Cross-Suit Exclusion — Intercompany Liability Clarification
Priority: Critical
Issue. The Midland Casualty primary GL/PL policy contains an exclusion for "bodily injury" or "property damage" arising out of the products or operations of an "insured" that is asserted against another "insured." Because Nexford Conveyor Systems, LLC, Triton Fastener Corp., and Marlowe Asset Management Precision Machining, Inc. are all Named Insureds under the Midland Casualty policy, this cross-suit exclusion could bar coverage for liability claims between the Company's subsidiaries.
This issue is not theoretical. The Company's supply chain involves significant intercompany integration: Triton Fastener Corp. manufactures fasteners that are incorporated into conveyor systems assembled and sold by Nexford Conveyor Systems, LLC. If a Triton fastener defect causes a conveyor system failure resulting in bodily injury or property damage to a third party, the injured party will likely assert claims against both Triton (as the component manufacturer) and NCS (as the system assembler and seller). In the course of defending such a claim, NCS may assert a cross-claim, contribution claim, or indemnification claim against Triton — or vice versa — seeking to shift responsibility for the loss to the entity whose product was defective. Under the current cross-suit exclusion, such an intercompany claim could be excluded from coverage, leaving the cross-claiming subsidiary without insurance for its contribution or indemnification exposure.
The Cross-Liability and Intercompany Coverage Memorandum dated June 10, 2022 analyzed this issue in detail, including a review of applicable case law interpreting cross-suit exclusions in multi-entity named insured programs.
Recommended Improvement. C&H recommends the addition of a "cross-liability" or "separation of insureds" endorsement to the Midland Casualty primary GL/PL policy. This endorsement would provide that the insurance applies separately to each Named Insured as if a separate policy had been issued to each, except that the aggregate limits of liability stated in the policy shall not be increased by reason of the separation. This is a standard endorsement form (ISO CG 00 01 or equivalent) that is widely available in the commercial general liability market.
The separation of insureds endorsement effectively neutralizes the cross-suit exclusion for intercompany claims by treating each Named Insured as if it were insured under a separate policy. Under this treatment, a cross-claim by NCS against Triton (or vice versa) would be treated as a claim by one insured against an unrelated third party, and the exclusion would not apply.
Fallback Position. If Midland Casualty & Surety Company declines to issue a full separation of insureds endorsement (which would be unusual, as this is a standard endorsement), C&H recommends negotiating a carve-back from the cross-suit exclusion providing coverage for: (i) cross-claims, contribution claims, or indemnification claims between Named Insureds that arise in the context of a claim asserted by an unrelated third party (i.e., where the intercompany claim is triggered by an underlying third-party liability claim); and (ii) subrogation or contribution claims between Named Insureds arising from products liability, including claims arising from component parts manufactured by one Named Insured and incorporated into products assembled or sold by another Named Insured. This fallback preserves coverage for the most important intercompany claim scenarios while potentially addressing any underwriting concern about affirmative intercompany litigation.
Applicable Layers. Midland Casualty & Surety Company primary GL/PL. C&H further recommends that Ashford confirm the Great Basin Insurance Company 1st excess/umbrella follows form on cross-liability, either through its own separation of insureds provision or through express follow-form language incorporating the Midland Casualty endorsement.
PL Point 3: "Other Insurance" Clause Conflicts Between Primary and Excess
Priority: High
Issue. The Midland Casualty primary GL/PL policy and the Great Basin Insurance Company 1st excess/umbrella policy each contain "other insurance" clauses that, as currently drafted, create a potential circular conflict that could delay claims payment or give rise to coverage disputes.
Specifically, the Midland Casualty primary policy designates its coverage as "excess" over any other valid and collectible insurance available to the Named Insured for a covered loss. The Great Basin 1st excess/umbrella policy contains a similar clause designating itself as excess over any other applicable insurance. When both policies designate themselves as "excess" over the same other insurance (or over each other), the resulting circular priority creates an impasse in which each insurer may argue that the other should pay first. This issue was identified and flagged in the Preliminary Coverage Gap Memorandum — PL Tower dated May 27, 2022.
While courts have developed various rules for resolving circular "other insurance" conflicts (including pro-rata allocation, equal shares, and excess-of-excess analysis), these judicial resolutions are unpredictable, jurisdiction-specific, and — most importantly — require the expenditure of time and legal fees that the Company should not have to incur. The purpose of the insurance program is to provide prompt, predictable coverage, and conflicting "other insurance" clauses undermine that objective.
Recommended Improvement. C&H recommends the following two-part approach:
(i) Amend the Midland Casualty primary policy's "other insurance" clause to designate the Midland Casualty coverage as "primary and non-contributory" with respect to any other insurance available to Nexford and its Named Insureds for products liability and completed operations claims. This designation establishes the Midland Casualty policy as the first-responding policy, eliminating the circular conflict.
(ii) Confirm, through endorsement or written confirmation from the Great Basin underwriter, that the Great Basin 1st excess/umbrella policy expressly sits excess of the Midland Casualty primary on a follow-form basis and does not contain any "other insurance" clause that conflicts with or purports to override the Midland Casualty primary's first-position status.
Fallback Position. If "primary and non-contributory" language is not obtainable from Midland Casualty (for example, because Midland Casualty has concerns about its exposure in scenarios involving other primary insurance procured by additional insureds), C&H recommends inserting a coordination clause in both the Midland Casualty and Great Basin policies specifying the order of priority among applicable policies. The coordination clause should reference the vertical exhaustion principle — i.e., the Midland Casualty primary responds first up to its per-occurrence and aggregate limits; the Great Basin umbrella then responds only after the Midland Casualty primary is exhausted — and should expressly state that no other insurance available to any Named Insured shall alter this sequence of priority.
Applicable Layers. Midland Casualty & Surety Company primary GL/PL; Great Basin Insurance Company 1st excess/umbrella.
PL Point 4: Completed Operations Tail — 10-Year Extension Confirmat

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