Contract analysis

I. Purpose and Executive Summary The purpose of this memorandum is to provide Verimark Hospitality Group Inc. ("VHG" or the "Company") with a comprehensive analysis of settlement ranges, litigation risks, and our recommended settlement authority in advance of the court-ordered mediation currently scheduled for December 4–5, 2023. The mediation will be conducted before the Honorable Richard Mendelson (Ret.) at Keyston

II. Status of Litigation A. Procedural Posture VHG filed its Complaint against Ironclad Indemnity Corporation ("Ironclad"), Pinnacle Surplus Lines Inc. ("Pinnacle"), Montclair Assurance Company ("Montclair"), and Sovereign Re Ltd. ("Sovereign Re") on March 1, 2023, in the Eleventh Judicial Circuit of Florida, Miami-Dade County. The case has been assigned to the Honorable Catherine Embry, Circuit Judge, and bears Case

III. Analysis of Key Coverage Issues This section provides a detailed analysis of each contested coverage issue, including an assessment of VHG's likelihood of prevailing on each issue and the potential impact on the overall recovery. These assessments are necessarily based on professional judgment and are informed by the current state of the evidence, the applicable law, and our experience with similar disputes in F

1. VHG's Position (Strong) VHG contends that the $15 million named-windstorm sub-limit contained in the Ironclad primary policy (Policy No. IIC-PRP-2022-07541) was deleted during the July 2022 policy renewal. VHG's position is supported by substantial evidence developed during discovery: Broker Testimony. Franklin Orde, the account executive at Tidewater Risk Advisors responsible for VHG's account, testified in his d

2. Defendants' Position Ironclad contends that the formal policy endorsements issued with the 2022–2023 policy did not effectuate the deletion of the windstorm sub-limit. Ironclad points to the fact that the policy manuscript, as issued, continues to contain the $15 million named-windstorm sub-limit on page 47 of the policy form. Ironclad argues that no formal endorsement deleting the sub-limit was ever prepared, exe

3. Risk Assessment We assess the probability that VHG prevails on the windstorm sub-limit issue at approximately 65–70%. Several factors support this assessment: • Florida law firmly establishes the principle of contra proferentem — that ambiguities in insurance policies are construed against the insurer that drafted the policy. The discrepancy between the broker correspondence (confirming deletion) and the policy-as

1. Issue Description Ironclad argues that a substantial portion of the damage at Grand Key Resort, located at Mile Marker 48, Marathon, Florida 33050, resulted from storm surge — which the policy characterizes as "flood" — rather than from wind. The policy contains a flood exclusion, and Ironclad invokes the policy's anti-concurrent causation ("ACC") clause, which provides that loss caused directly or indirectly by f

2. VHG's Position VHG argues that Florida's efficient proximate cause doctrine applies under governing Florida law and that the ACC clause, to the extent it purports to override this doctrine, is unenforceable as a matter of public policy. VHG contends that the named windstorm — Hurricane Callista — was the efficient proximate cause of the damage at all three properties, and that the storm surge was merely a conseque

3. Risk Assessment We assess the probability that VHG prevails on the concurrent causation / flood exclusion issue at approximately 55–60%. This assessment reflects the following considerations: • Florida caselaw on anti-concurrent causation clauses is evolving and does not provide clear guidance. Some decisions have favored policyholders by applying the efficient proximate cause doctrine and declining to enforce ACC

1. Issue Description The policy provides business-interruption coverage for the "period of restoration," defined as the period beginning with the date of the physical loss or damage and ending when the property is repaired, rebuilt, or replaced "with reasonable speed and similar quality." Ironclad argues that BI coverage terminates when repairs "could have been completed with reasonable speed," not necessarily when V

2. VHG's Position VHG contends that the restoration timelines at all three properties were reasonable in light of the extraordinary circumstances created by a Category 4 hurricane. Specifically, VHG has presented evidence that: • Contractor shortages were severe in the affected areas following Hurricane Callista. Marcus Ellsworth, VHG's Chief Executive Officer, testified in his deposition on August 7, 2023, about the

3. Risk Assessment We assess the probability that VHG prevails on the full restoration period at approximately 60%. VHG's position is reasonable and well-supported by the evidence, but defendants have a colorable argument that some acceleration of the restoration timeline was feasible, particularly at Grand Key Resort. Even if the court accepts defendants' shorter restoration theory, the reduction in the BI claim wou

1. Issue Description Ironclad has asserted as an affirmative defense that VHG failed to take reasonable steps to reduce the period of business interruption. Specifically, defendants allege that VHG could have arranged temporary facilities, executed partial reopenings more quickly, or made alternative arrangements for displaced guests and conference bookings that would have reduced the magnitude of the BI losses.

2. VHG's Position VHG has a strong factual record of mitigation efforts. The evidence shows that VHG took affirmative steps to mitigate its losses, including: • Partial reopening of Sunset Shores on November 30, 2022, only 73 days after the hurricane — a relatively prompt reopening given the severity of the damage. The property operated at reduced capacity while repairs continued on affected wings and common areas. •

3. Risk Assessment We assess the probability that defendants prevail on the failure-to-mitigate defense at approximately 15–20%. This defense is weak given VHG's strong factual record of mitigation efforts. Even if a court were to find some deficiency in VHG's mitigation efforts, the potential reduction in the BI claim would be modest — approximately $2 million to $4 million — and would likely overlap with the period

IV. Damages Analysis and Valuation Scenarios A. VHG's Claimed Losses ($60M) VHG's total business-interruption claim is $60,000,000, broken down by property as follows: The Grand Key Resort claim of $31.4 million includes not only lost room revenue but also lost ancillary revenue from marina operations, food and beverage outlets, spa services, and other guest amenities, adjusted for saved variable expenses during the

1. Period of Restoration: Dr. Birk applies the shorter restoration periods advocated by defendants (133–148 days for Grand Key, 105–115 days for Harborview), reducing the loss period and correspondingly reducing the BI calculation.

2. Flood/Storm Surge Allocation: Dr. Birk allocates a larger portion of the Grand Key Resort damage to flood and storm surge (which he treats as excluded under the policy), reducing the covered BI losses at that property by approximately $8 million to $11 million.

3. Occupancy Projections: Dr. Birk applies reduced occupancy projections for the affected properties during the post-hurricane period, based on the theory that regional tourism would have declined following Hurricane Callista even if the properties had been operational. This is a debatable assumption and was effectively challenged during Dr. Birk's deposition on October 23, 2023, where he conceded that his regional t

4. Windstorm Sub-Limit: Dr. Birk's analysis applies the $15 million windstorm sub-limit as a baseline assumption, capping total covered losses from the named windstorm at $15 million. This is, of course, a legal issue rather than an actuarial one, and Dr. Birk acknowledged in his deposition that if the sub-limit is deemed deleted, his loss range would increase to approximately $38 million to $42 million. This last po

V. Litigation Cost Projections A. Costs Incurred to Date Calderwood & Harkness LLP has incurred the following fees and expenses in connection with this engagement through November 2023: • Legal fees incurred through November 2023: approximately $2,200,000. This reflects approximately 2,800 hours of attorney time at the applicable hourly rates, including preparation of the Complaint, written discovery, depositions of

VI. Assessment of Defendants' Settlement Posture A successful mediation strategy requires an accurate assessment of each defendant carrier's settlement posture, including their exposure, their risk tolerance, and the dynamics between the carriers in the insurance tower. We provide our assessment of each carrier below. A. Ironclad Indemnity Corporation Ironclad has the most significant exposure in this case as the pri

VII. Mediation Logistics and Strategy A. Mediator The court-ordered mediation will be conducted by the Honorable Richard Mendelson (Ret.), a former Circuit Court judge with over 25 years on the bench and significant experience in complex insurance coverage disputes. Judge Mendelson is affiliated with Keystone Dispute Resolution Inc. and is widely respected among the insurance bar for his thorough preparation and prag

VIII. Fee Implications of Settlement A. Calderwood & Harkness Fee Structure Calderwood & Harkness's engagement with VHG in this matter is governed by the engagement letter dated August 15, 2022, as amended. The fee structure includes the following components: Hourly Rates. Calderwood & Harkness charges on an hourly basis at the following rates: The blended hourly rate across the team is approximately $785/hour. Conti

IX. Recommendation Based on the foregoing analysis of the coverage issues, the litigation risks, the damages scenarios, the cost projections, and the assessment of the defendants' settlement posture, we make the following recommendations:

1. Settlement Authority Floor: $40,000,000. We recommend that VHG establish a settlement authority floor of $40,000,000 in aggregate from all defendant carriers. This figure represents the minimum settlement that VHG should accept at the December mediation.

2. Target Settlement Range: $45,000,000 to $50,000,000. We recommend that VHG's negotiating team target a settlement in the range of $45 million to $50 million, which represents the upper half of the estimated aggregate settlement range and exceeds the probability-weighted expected value of the litigation.

3. Opening Mediation Demand: $60,000,000. VHG should open the mediation with a demand for the full $60 million claim amount, consistent with the strength of VHG's position and the need to establish a strong negotiating anchor.

4. Rationale for $40 Million Floor. The recommended floor of $40 million is supported by the following considerations: (a) Exceeds net expected value of trial. A settlement of $40 million at the mediation exceeds the probability-weighted expected value of the litigation ($42–$47 million gross, reduced to approximately $38.5–$39.5 million net after additional trial costs of $1.75–$2.4 million). A settlement at or abov

5. Against Settling Below $40 Million. We recommend against settling below $40 million absent a material adverse development in the litigation, such as an adverse ruling on VHG's Motion for Partial Summary Judgment on the windstorm sub-limit or the emergence of new evidence that materially weakens VHG's position on the concurrent causation or period-of-restoration issues. No such developments are anticipated at this

6. Board Authorization. We request that the VHG Board of Directors, or such officer(s) as may be authorized to approve settlement on behalf of the Company, approve the recommended settlement authority range of $40 million to $50 million prior to the December 4, 2023 mediation. Written confirmation of such authorization should be provided to Calderwood & Harkness no later than December 1, 2023.

X. Next Steps In preparation for the December 4–5, 2023 mediation, the following steps must be completed:

1. Finalize Confidential Mediation Position Statement. Calderwood & Harkness will finalize and submit the confidential mediation position statement to Judge Mendelson by November 28, 2023. A draft of the position statement will be circulated to the VHG team for review and comment by November 26, 2023.