1021-00003 · Verimark Hospitality Group · Coverage Analysis & Strategy

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CALDERWOOD & HARKNESS LLP Attorneys at Law

333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131

Telephone: (305) 814-6000 Facsimile: (305) 814-6001 www.calderwoodharkness.com

January 20, 2023

VIA EMAIL AND U.S. MAIL

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

Nathaniel Driscoll, Esq. General Counsel Verimark Hospitality Group Inc. 1900 Brickell Avenue, Suite 3200 Miami, Florida 33129

Re: Coverage Position Summary and Recommended Next Steps — Hurricane Callista Business-Interruption Claim

Engagement No.: 1021-00003

Dear Nathaniel:

I. Introduction and Purpose of Letter

Calderwood & Harkness LLP has now completed its comprehensive analysis of Verimark Hospitality Group Inc.'s ("VHG") insurance coverage position arising from the losses sustained in connection with Hurricane Callista, which made landfall as a Category 4 hurricane on September 18, 2022, in the Lower Florida Keys. This letter summarizes the firm's coverage analysis across VHG's four-layer insurance tower, evaluates the weaknesses in each insurer's denial or reservation-of-rights positions, and sets forth our recommended next steps to maximize VHG's recovery.

This letter builds upon and supplements the substantial body of work product that Calderwood & Harkness has developed in connection with this engagement since the inception of Hurricane Callista, including the following prior memoranda and analyses:

• Preliminary Coverage Analysis (dated September 5, 2022);

• Windstorm Sub-Limit Memorandum (dated October 20, 2022);

• Anti-Concurrent Causation Memorandum (dated November 1, 2022);

• Period of Restoration Memorandum (dated November 10, 2022); and

• Flood Exclusion Memorandum (dated December 2, 2022).

As discussed herein, VHG's total claimed business-interruption losses across its three affected properties amount to $60,000,000. We note that Ironclad Indemnity Corporation ("Ironclad"), the primary-layer carrier, issued a reservation of rights on October 12, 2022, and we anticipate that a formal denial of coverage will be issued imminently. Based on information communicated by Ironclad's outside counsel, we expect this formal denial to arrive on or about February 3, 2023.

Pre-suit demand letters were transmitted to all four carriers in VHG's insurance tower on November 20–21, 2022. As of the date of this letter, no substantive response has been received from any carrier, and no settlement offer has been extended. This fact, combined with the impending formal denial from Ironclad, underscores the urgency of the strategic decisions outlined in this letter.

This letter is intended to provide VHG's leadership with a comprehensive overview of the current landscape and to seek authorization for the next phase of this engagement, including the potential filing of litigation. The detailed legal and factual analysis supporting our conclusions is set forth in the separately enclosed Strategic Assessment and Litigation Recommendation Memorandum dated January 15, 2023.

II. Summary of the Claim and Insurance Program

A. The Insured Loss

Hurricane Callista was designated as a named storm by the National Hurricane Center ("NHC") on September 12, 2022. The storm rapidly intensified over the warm waters of the Caribbean and the Straits of Florida, ultimately reaching Category 4 intensity on the Saffir-Veltason Hurricane Wind Scale prior to landfall. Callista made landfall in the Big Pine Key area of the Lower Florida Keys at approximately 1:30 PM EDT on September 18, 2022, with maximum sustained winds of 145 miles per hour and a central pressure of approximately 940 millibars.

The hurricane produced catastrophic storm surge throughout the coastal areas of South Florida. Storm surge measurements recorded 8 to 14 feet in Monroe County and 6 to 10 feet in Lee County. Wind damage was extensive across Monroe, Collier, Lee, and Pinellas Counties, with the most severe impacts concentrated in the Keys and along the Gulf Coast.

In advance of the storm's arrival, mandatory evacuation orders were issued for Monroe County on September 16, 2022, and for Lee County on September 17, 2022. These evacuation orders required the closure of VHG's properties and the displacement of guests, staff, and management personnel, contributing to the extended business interruption that followed.

VHG submitted its initial notice of loss to Ironclad on September 22, 2022, within four days of the hurricane's landfall. VHG subsequently submitted a sworn statement in proof of loss in the amount of $60,000,000 on November 15, 2022, which detailed the business-interruption losses across all three affected properties. Ironclad retained Arbor Claims Services LLC as its independent adjuster, with Denise Whitford serving as lead adjuster. Ms. Whitford and her team conducted on-site inspections of all three VHG properties on October 5, 2022.

B. Properties and Loss Quantification

VHG's claimed business-interruption losses arise from the interruption of operations at three properties, each of which sustained significant damage from Hurricane Callista. The loss quantification for each property is summarized below and is based on VHG's historical financial performance, pre-loss occupancy and revenue data, seasonal adjustments, and an analysis of saved expenses conducted by VHG's finance team under the direction of Diane Calder, Chief Financial Officer.

1. Verimark Grand Key Resort — Marathon, Florida

The Verimark Grand Key Resort is located at Mile Marker 48, Marathon, Florida 33050. It is a 312-room luxury resort and marina facility that represents VHG's flagship Keys property. Prior to Hurricane Callista, the Grand Key Resort operated at a pre-loss average daily rate ("ADR") of $389 and an occupancy rate of 82%, reflecting its status as one of the premier hospitality destinations in the Florida Keys.

The Grand Key Resort was closed for operations beginning September 18, 2022 — the date of Hurricane Callista's landfall — and remained closed through March 15, 2023, a total closure period of 178 days. The extended closure was necessitated by severe wind and storm surge damage to the resort's main buildings, guest rooms, marina infrastructure, and common areas, as well as significant damage to the surrounding transportation and utility infrastructure in the Keys, which delayed restoration efforts.

The estimated business-interruption loss for the Grand Key Resort is $31,400,000, which includes lost room revenue, marina revenue, food and beverage revenue, spa and ancillary revenue, and an adjustment for saved expenses during the period of interruption.

2. Verimark Harborview Hotel & Conference Center — Fort Myers Beach, Florida

The Verimark Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931. The property comprises a 224-room hotel and a 40,000-square-foot conference and events facility, which serves as a significant revenue driver through corporate meetings, conventions, and social events.

Prior to Hurricane Callista, the Harborview operated at a pre-loss ADR of $295 and an occupancy rate of 74%. The property was closed from September 18, 2022, through January 31, 2023, a total closure period of 135 days. The closure resulted from both direct wind damage to the hotel structure and conference facility and the extensive storm surge damage sustained by Fort Myers Beach and the surrounding Lee County area, which impaired access to the property and disrupted essential utilities.

The estimated business-interruption loss for the Harborview is $18,700,000, which includes lost room revenue, conference center revenue, food and beverage revenue, and ancillary revenue, adjusted for saved expenses.

3. Verimark Sunset Shores — St. Pete Beach, Florida

The Verimark Sunset Shores is a 186-room boutique resort located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706. The property operated at a pre-loss ADR of $342 and an occupancy rate of 79%.

Sunset Shores experienced a partial closure beginning September 18, 2022, with a full-closure period of 73 days followed by a period of reduced capacity that extended through February 2023. The property reached full operational capacity on February 28, 2023. The damage at Sunset Shores was less severe than at the Grand Key Resort or the Harborview, but was nonetheless significant, requiring substantial roof repairs, replacement of water-damaged finishes in ground-floor guest rooms, and restoration of the pool and beachfront amenities.

The estimated business-interruption loss for Sunset Shores is $9,900,000, encompassing lost room revenue, food and beverage revenue, spa revenue, and other ancillary revenue, adjusted for saved expenses and the revenue generated during the period of reduced-capacity operations.

4. Total Claimed Business-Interruption Loss

For context, VHG's consolidated pre-loss financial performance reflects a robust and profitable enterprise. In fiscal year 2021, VHG reported total revenue of approximately $412 million and EBITDA of approximately $78 million. The $60 million business-interruption claim therefore represents a significant but proportionate loss relative to VHG's overall operations, and the loss quantification methodology is consistent with the financial benchmarks that would be expected of a hospitality group of VHG's size and market position.

C. Insurance Tower Structure

VHG maintains a four-layer property insurance program providing aggregate limits of $60 million above a $500,000 per-occurrence deductible. All policies in the tower are written on an "all risks" basis covering physical loss or damage, including business interruption and extra expense coverage. Each policy shares a common policy period of July 1, 2022, through July 1, 2023.

The structure of VHG's insurance tower is set forth in the following table:

VHG's insurance broker of record is Tidewater Risk Advisors LLC, with Franklin Orde serving as the account executive for VHG's property insurance program. As discussed in greater detail below, Mr. Orde played a central role in the July 2022 renewal negotiations with Ironclad and will be an important witness on the windstorm sub-limit issue.

III. Insurer Coverage Positions and Their Weaknesses

A. Ironclad Indemnity Corporation — Primary Layer

Ironclad issued a reservation of rights to VHG on October 12, 2022, authored by Victor Haddon, Senior Vice President of Claims. The reservation of rights identified four bases on which Ironclad asserted potential coverage defenses. Calderwood & Harkness responded to the reservation of rights on behalf of VHG on October 25, 2022, disputing each stated basis and demanding that Ironclad honor its coverage obligations under the primary policy. A formal denial of VHG's claim is anticipated imminently and, based on communications with Ironclad's outside counsel, is expected to be issued on or about February 3, 2023.

Ironclad is represented by outside counsel at Fendowell Rourke & Stanton LLP, with Gregory Stanton and Meredith Liang serving as lead attorneys. As noted below, Fendowell Rourke & Stanton also represents Pinnacle Surplus Lines Inc. in a joint defense arrangement.

The four coverage defenses asserted by Ironclad in its reservation of rights are addressed in turn below, together with our assessment of the strength of VHG's position on each issue.

1. Named Windstorm Sub-Limit ($15M)

Ironclad's Position. Ironclad contends that the primary policy contains a named-windstorm sub-limit of $15,000,000 applicable to business-interruption losses. Under this interpretation, VHG's recovery for business-interruption losses under the primary layer would be capped at $15 million rather than the full $25 million policy limit. This is the single most impactful coverage issue in the case, as it would not only reduce the primary-layer recovery by $10 million but would also affect whether VHG's losses are sufficient to reach the attachment points of the excess layers.

VHG's Position and Strength of Argument. VHG's position is that the $15 million named-windstorm sub-limit was affirmatively deleted during the July 2022 policy renewal negotiations. The evidence supporting this position is substantial and includes the following:

First, broker correspondence from Franklin Orde at Tidewater Risk Advisors documents that Ironclad's underwriting department agreed to remove the named-windstorm sub-limit in exchange for an increased premium at the July 2022 renewal. This correspondence — which includes emails exchanged between Mr. Orde and Ironclad's lead underwriter — establishes that the parties reached an agreement to delete the sub-limit and that VHG paid the negotiated premium increase as consideration for that deletion.

Second, the policy binder and renewal endorsements, when read together, support the conclusion that the sub-limit was deleted. Although the endorsement language is not a model of clarity — Ironclad's underwriting department failed to issue a standalone endorsement expressly deleting the sub-limit — the binder specifications reflect the removal of the sub-limit, and the endorsement schedule references the modified terms. Any residual ambiguity in the endorsement language must be construed against Ironclad under the well-established contra proferentem doctrine under Florida law. See, e.g., Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938 (Fla. 1979); Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29 (Fla. 2000).

Third, VHG's Vice President of Risk Management, Sandra Pellegrini, can testify that VHG understood the sub-limit had been removed at renewal and that VHG agreed to pay the higher premium specifically in reliance on that understanding. Ms. Pellegrini was directly involved in the renewal negotiations on VHG's behalf and communicated with Mr. Orde throughout the process.

Fourth, Mr. Orde can testify regarding the specific negotiations with Ironclad's underwriting department, including the conversations and correspondence in which the deletion of the sub-limit was confirmed. Mr. Orde's testimony will corroborate the documentary evidence and establish the parties' mutual intent.

Assessment: This is VHG's strongest contested issue, though it is also likely to be the most aggressively litigated by Ironclad. The documentary and testimonial evidence favors VHG, and the contra proferentem doctrine provides an additional basis for resolving any ambiguity in VHG's favor. We rate VHG's position as strong on this issue.

2. Period of Restoration Dispute

Ironclad's Position. Ironclad contends that VHG's business-interruption coverage terminates when repairs "could have been completed with reasonable speed," and asserts that VHG unreasonably delayed restoration at all three properties. Ironclad has focused in particular on the 178-day closure period at the Grand Key Resort and the 135-day closure period at the Harborview, both of which Ironclad characterizes as excessive.

VHG's Position and Strength of Argument. VHG's position is that the closure periods at each property were entirely reasonable — and, in fact, were necessitated — by the severity of the Category 4 hurricane damage, the post-storm market conditions in South Florida, and the regulatory constraints imposed in the affected areas. Specifically:

First, contractor availability in South Florida was severely constrained in the aftermath of Hurricane Callista. The simultaneous need for restoration services across hundreds of properties in the Keys, Lee County, and the broader Gulf Coast region created intense competition for qualified contractors, driving up lead times and limiting VHG's ability to accelerate repairs.

Second, supply chain disruptions affecting building materials — including specialized materials required for luxury hospitality finishes — contributed to delays that were beyond VHG's control. These supply chain issues were widely documented in the aftermath of the hurricane and affected the entire region.

Third, Monroe County imposed permitting restrictions and access limitations to the Keys for weeks after landfall. Access to the Grand Key Resort was intermittently restricted as roadway repairs to U.S. Route 1 were undertaken, and the permitting process for restoration work was significantly delayed due to the volume of applications and the limited capacity of local government agencies.

Fourth, VHG acted with diligence throughout the restoration process. VHG engaged contractors promptly, expedited permit applications, authorized overtime work, and took other affirmative steps to reduce the period of interruption. The company's restoration efforts are documented in detailed records maintained by Ms. Pellegrini and VHG's facilities management team.

Florida case law supports VHG's position that the "reasonable speed" standard must account for the actual market conditions and regulatory constraints prevailing in the post-catastrophe environment. The standard does not require an insured to achieve the fastest theoretically possible restoration timeline; rather, it requires the insured to act with reasonable diligence under the circumstances. See Federated Nat'l Ins. Co. v. Esposito, 937 So. 2d 199 (Fla. 4th DCA 2006).

Assessment: VHG has a good position on this issue. The factual record of VHG's diligent restoration efforts is strong, and the post-Callista conditions in South Florida provide a compelling justification for the closure periods at each property.

3. Concurrent Causation / Flood Exclusion

Ironclad's Position. Ironclad contends that portions of the damage at the Grand Key Resort resulted from storm surge — which Ironclad characterizes as "flood" — and that such damage is excluded under the flood exclusion in the primary policy. Additionally, Ironclad invokes the anti-concurrent causation ("ACC") clause in the policy, arguing that where wind and storm surge (flood) operate concurrently to cause damage, all damage attributable to the concurrent causes is excluded, regardless of whether the wind damage alone would have been sufficient to cause the loss.

VHG's Position and Strength of Argument. VHG's position rests on several grounds:

First, Florida law generally applies the efficient proximate cause doctrine, which looks to the predominant cause of the loss rather than excluding coverage whenever an excluded peril contributes in any degree to the damage. Under this framework, the relevant inquiry is whether wind — a covered peril — was the predominant cause of VHG's losses, which it was. Hurricane Callista struck as a Category 4 hurricane with 145-mph sustained winds, and the wind damage to all three properties was extensive, devastating, and independent of any flooding.

Second, even at the Grand Key Resort, where storm surge was a significant factor (with Monroe County recording 8 to 14 feet of storm surge), substantial structural damage was caused directly by wind, independent of any flooding. The roof systems, exterior cladding, windows, and upper-floor guest rooms at the Grand Key Resort were all damaged by wind forces, not by storm surge. The storm surge primarily affected ground-floor areas and the marina, whereas the business-interruption loss is attributable to the property's overall inability to operate, which was predominantly driven by the wind damage to the entire facility.

Third, anti-concurrent causation clauses have been narrowly construed or disfavored in Florida case law in the context of hurricane losses. Florida courts have been reluctant to permit insurers to use ACC clauses as a blanket mechanism to deny coverage for wind damage merely because storm surge also contributed to the overall loss. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); see also Mierzwa v. Fla. Windstorm Underwriting Ass'n, 877 So. 2d 774 (Fla. 4th DCA 2004).

Fourth, the all-risk nature of the policy places the burden on Ironclad to prove that the flood exclusion applies. Ironclad must demonstrate not only that flood contributed to the loss, but that the loss falls squarely within the exclusion. In the context of a hurricane where both wind and storm surge are present, this burden is difficult to satisfy, particularly where the insured can present expert evidence differentiating the two causes of damage.

Fifth, Calderwood & Harkness has identified Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc. (Doral, Florida) as a forensic engineering expert who can provide detailed opinions differentiating wind damage from storm surge damage at each of the three properties. Mr. Caldwell has extensive experience in post-hurricane damage assessments in Florida and has been qualified as an expert in multiple prior coverage disputes involving concurrent causation issues.

Assessment: VHG's position on this issue is moderately strong. This is the most factually intensive of the four contested issues and will require robust expert testimony to establish the differentiation between wind and storm surge damage. However, the trend in Florida case law favors VHG's position, and the forensic engineering evidence is expected to support VHG's contention that wind was the predominant cause of the loss at all three properties.

4. Failure to Mitigate

Ironclad's Position. Ironclad contends that VHG failed to take reasonable steps to reduce the period of business interruption, thereby increasing VHG's losses beyond what would have occurred had VHG acted diligently.

VHG's Position and Strength of Argument. This defense is the weakest of the four raised by Ironclad. VHG took extensive and well-documented mitigation measures following Hurricane Callista, including:

• Emergency tarping of damaged roof areas at all three properties to prevent further water intrusion;

• Water extraction and mold remediation services at the Grand Key Resort and the Harborview;

• Deployment of temporary power generation equipment at all three properties;

• Securing alternative conference and event space for Harborview clients to minimize the loss of conference center revenue;

• Proactive communication with guests and group customers to reschedule bookings and retain future business;

• Engagement of multiple restoration contractors and expedited permitting applications; and

• Authorization of overtime and weekend work schedules for restoration crews.

Diane Calder, VHG's CFO, can detail the saved-expense analysis and the extra expenses incurred by VHG to mitigate its losses. The saved-expense analysis demonstrates that VHG properly accounted for expenses that were avoided during the closure periods and offset those savings against the claimed business-interruption losses. Ms. Pellegrini oversaw the mitigation and restoration program and can testify to the comprehensive steps taken by VHG to minimize the period of interruption and the magnitude of its losses.

VHG's mitigation efforts are thoroughly documented in contemporaneous records, including daily restoration logs, contractor communications, expense reports, and management meeting minutes.

Assessment: VHG has a very strong position on this issue. Ironclad's failure-to-mitigate defense is unlikely to succeed given VHG's extensive documentary record of proactive and diligent mitigation activities. This defense appears to have been raised as a negotiating tactic rather than a substantively viable coverage defense.

B. Pinnacle Surplus Lines Inc. — First Excess Layer ($15M xs $25M)

Pinnacle Surplus Lines Inc. ("Pinnacle") provides the first excess layer in VHG's insurance tower, with a $15 million limit in excess of the $25 million Ironclad primary layer. Pinnacle's policy follows form to the Ironclad primary policy.

Pinnacle issued a follow-form denial on February 10, 2023, tracking each of the coverage positions asserted by Ironclad. Pinnacle has asserted no independent coverage defenses and has instead adopted Ironclad's positions in their entirety. If VHG prevails against Ironclad on the windstorm sub-limit issue and the other contested issues, Pinnacle's exposure follows accordingly.

A particular area of concern with respect to Pinnacle is the interaction between the windstorm sub-limit dispute and Pinnacle's attachment point. If Ironclad's $15 million windstorm sub-limit were enforced, Ironclad's primary-layer payout would be capped at $15 million (less the $500,000 deductible). Pinnacle has taken the position that its layer would not be reached under this scenario, because the $10 million gap between the sub-limit cap ($15 million) and Pinnacle's attachment point ($25 million) would constitute an uninsured retention that VHG would have to absorb. While there are arguments available to VHG to challenge this interpretation — including that the sub-limit, even if enforced, operates only at the primary level and does not reduce VHG's loss for purposes of determining whether the first excess layer is triggered — Pinnacle's position presents a material risk if the sub-limit is enforced.

Pinnacle is represented jointly with Ironclad by the law firm of Fendowell Rourke & Stanton LLP, with Gregory Stanton and Meredith Liang serving as lead attorneys for both carriers. This joint representation arrangement may present conflicts as the case progresses, particularly if the interests of the primary and first excess carriers diverge.

Assessment: Pinnacle's position is derivative and largely depends on the outcome of the Ironclad primary-layer disputes. If VHG prevails on the windstorm sub-limit issue, Pinnacle's follow-form denial will lack any independent basis.

C. Montclair Assurance Company — Second Excess Layer ($10M xs $40M)

Montclair Assurance Company ("Montclair") provides the second excess layer in VHG's insurance tower, with a $10 million limit in excess of $40 million (i.e., in excess of the combined limits of the Ironclad primary and Pinnacle first excess layers). Montclair has reserved rights but has not issued a formal denial of VHG's claim.

Montclair's principal coverage position is that its layer will not be reached if the windstorm sub-limit is enforced at the primary level. Montclair's reasoning parallels that of Pinnacle: if Ironclad's total payout is capped at $15 million and the first excess layer is not triggered, VHG's losses will be insufficient to reach the $40 million attachment point for the second excess layer.

Montclair is represented by the law firm of Delvecchio & Kraus LLP, with Patricia Kraus and Raymond Cho serving as lead attorneys. Delvecchio & Kraus also represents Sovereign Re Ltd. in a joint defense arrangement.

Assessment: If the windstorm sub-limit is defeated, Montclair faces significant exposure. Its independent coverage defenses are minimal, as its policy follows form to the primary layer and Montclair has not articulated any coverage positions beyond those asserted by Ironclad. Montclair's reservation of rights appears primarily precautionary.

D. Sovereign Re Ltd. — Third Excess Layer ($10M xs $50M)

Sovereign Re Ltd. ("Sovereign Re") provides the third and final excess layer in VHG's insurance tower, with a $10 million limit in excess of $50 million. Sovereign Re is domiciled in Bermuda but has submitted to the Florida program and is bound by the policy terms, including the choice-of-law and forum-selection provisions in the underlying policies.

Sovereign Re has reserved rights but has not issued a formal denial. Its position mirrors that of Montclair: Sovereign Re contends that VHG's claim will not reach the $50 million attachment point for the third excess layer, particularly if the windstorm sub-limit is enforced.

While there are potential jurisdictional considerations arising from Sovereign Re's Bermuda domicile, these issues are manageable. Sovereign Re is subject to the jurisdiction of the Florida courts under the policy terms and the applicable surplus lines and unauthorized insurer statutes. Calderwood & Harkness does not anticipate that Sovereign Re will mount a successful jurisdictional challenge.

Sovereign Re is also represented by Delvecchio & Kraus LLP, jointly with Montclair.

Assessment: Sovereign Re's exposure depends on VHG's ability to recover through the lower layers. Its proportional risk is the lowest of the four carriers, but it remains fully obligated to respond if VHG's losses engage the full tower. The strength of VHG's coverage position on the windstorm sub-limit issue — which is the critical gateway to the excess layers — will largely determine whether Sovereign Re's layer is reached.

IV. Overall Assessment of VHG's Coverage Position

Based on the analysis set forth above and in the enclosed Strategic Assessment and Litigation Recommendation Memorandum, Calderwood & Harkness's overall assessment of VHG's coverage position is as follows:

VHG has strong to very strong coverage arguments on all four contested issues raised by Ironclad. The quality of VHG's position varies across the four issues, but in no instance does Ironclad hold a clearly superior legal or factual position.

The windstorm sub-limit issue is the linchpin of this dispute. If VHG prevails on the sub-limit deletion argument — which we believe is the more likely outcome based on the documentary and testimonial evidence — the full $60 million insurance tower is in play, and VHG's path to a substantial recovery is clear. Conversely, if Ironclad prevails on the sub-limit issue and the $15 million cap is enforced, VHG's maximum recovery under the primary layer would be capped at $14.5 million (i.e., $15 million less the $500,000 deductible), and VHG's ability to reach the attachment points of the excess layers would be significantly impaired.

The concurrent causation / flood exclusion issue is the second most significant risk factor. This issue is factually intensive and will require strong expert forensic engineering testimony to differentiate wind damage from storm surge damage at the three properties — particularly at the Grand Key Resort, where storm surge was most significant. However, Florida law trends favor VHG's position, and the burden of proof rests on Ironclad to demonstrate that the exclusion applies.

The period of restoration and failure-to-mitigate defenses are the weakest of the four issues for the insurers. Given the extraordinary severity of Hurricane Callista and VHG's well-documented restoration and mitigation efforts, these defenses are unlikely to result in a material reduction in VHG's recovery.

Based on these assessments, Calderwood & Harkness estimates VHG's risk-adjusted recovery range as follows:

The wide spread between the risk-adjusted range and the worst-case scenario underscores the importance of the windstorm sub-limit issue. Calderwood & Harkness's strategic recommendations set forth below are designed to maximize VHG's leverage on this critical issue and to position VHG for the most favorable outcome across all four contested coverage defenses.

V. Pre-Suit Negotiation Status

Calderwood & Harkness sent pre-suit demand letters to all four carriers in VHG's insurance tower on November 20–21, 2022. These demand letters set forth VHG's coverage position in detail, including the factual and legal bases for VHG's claim, and demanded that each carrier honor its obligations under the applicable policy. No substantive response has been received from any carrier as of the date of this letter.

Ironclad, through Victor Haddon and its outside counsel, Gregory Stanton of Fendowell Rourke & Stanton LLP, has communicated with Calderwood & Harkness on procedural matters but has not made a settlement offer or engaged in substantive settlement discussions. The communications from Mr. Stanton have been limited to requests for additional documentation and scheduling matters, and have not reflected any willingness on Ironclad's part to reconsider its coverage positions.

Montclair and Sovereign Re, through their joint counsel, Patricia Kraus of Delvecchio & Kraus LLP, have indicated that they are monitoring the Ironclad primary-layer dispute and do not intend to engage substantively on the excess layers until the primary-layer coverage issues are resolved. This position, while not unusual for excess carriers, effectively places the burden on VHG to resolve the primary-layer dispute before the excess carriers will come to the table.

Pre-suit resolution appears unlikely at this time. The insurers are entrenched in their coverage positions, and the absence of any settlement overture from any carrier — despite VHG's detailed demand letters and the strength of VHG's coverage arguments — suggests that litigation will be necessary to achieve a meaningful recovery. Nevertheless, Calderwood & Harkness recommends allowing a brief additional window — approximately two to three weeks — for the insurers to respond to the demand letters before proceeding to litigation. This window will also allow VHG to receive and analyze Ironclad's anticipated formal denial, which is expected on or about February 3, 2023.

VI. Recommended Next Steps

A. Filing Litigation

Calderwood & Harkness recommends that VHG authorize the filing of a civil complaint if pre-suit negotiations do not produce a meaningful settlement offer within the next two to three weeks. We recommend a target filing date of on or before March 1, 2023.

The complaint would be filed in the Eleventh Judicial Circuit of Florida, Miami-Dade County, which has personal jurisdiction over all four carriers and is a favorable forum for VHG. All four policies are governed by Florida law, and the Miami-Dade County Circuit Court has substantial experience with complex insurance coverage disputes arising from hurricane events.

The complaint would assert the following claims:

1. Breach of contract against all four carriers for failure to pay VHG's business-interruption claim in accordance with the terms of the respective policies;

2. Declaratory judgment seeking a judicial determination that the named-windstorm sub-limit was deleted from the Ironclad primary policy, that the anti-concurrent causation clause does not bar coverage for VHG's wind-driven losses, and that VHG's period of restoration and mitigation efforts were reasonable; and

3. Bad faith against Ironclad under Florida Statutes § 624.155, based on Ironclad's unreasonable denial of VHG's claim in the face of overwhelming evidence supporting coverage.

Filing promptly will preserve VHG's ability to assert statutory bad-faith claims against Ironclad once the formal denial is issued. Additionally, the filing of litigation will signal to all four carriers — and particularly to the excess carriers, who have been taking a wait-and-see approach — that VHG intends to pursue its rights aggressively and will not accept the insurers' current coverage positions.

B. Bad-Faith Considerations

Ironclad's anticipated formal denial, following its October 12, 2022 reservation of rights, will create a predicate for a statutory bad-faith claim under Florida law. Florida Statutes § 624.155 provides a cause of action against an insurer that fails to attempt in good faith to settle a claim when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for the insured's interests.

Calderwood & Harkness will send a follow-up letter to Ironclad promptly after the formal denial is received, putting Ironclad on explicit notice of the bad-faith implications of its denial and of VHG's intent to pursue statutory bad-faith remedies. We will also prepare and file a Civil Remedy Notice under § 624.155(3)(a) at the appropriate time, which is a statutory prerequisite to filing a bad-faith action.

The bad-faith exposure may create additional settlement leverage for VHG, particularly as the case progresses and the strength of VHG's coverage position becomes more apparent. Bad-faith claims expose Ironclad to damages in excess of the policy limits, including consequential damages and potentially punitive damages, and may therefore incentivize Ironclad to reassess its coverage position and engage in meaningful settlement discussions.

C. Expert Engagement

Calderwood & Harkness recommends that VHG authorize the prompt retention of two experts to support the litigation:

Forensic Accounting/Damages Expert. We recommend retaining Dr. Helen Vasquez of Meridian Forensic Economics LLC (Atlanta, Georgia) to formally quantify VHG's business-interruption losses for litigation purposes. Dr. Vasquez is a recognized authority in the quantification of business-interruption and lost-profits damages in the hospitality industry and has served as a testifying expert in multiple insurance coverage disputes involving hurricane-related losses. Her hourly rate is $625. Dr. Vasquez's engagement will include an independent analysis of VHG's pre-loss financial performance, the calculation of lost revenue during the period of interruption, the determination of saved expenses, and the preparation of an expert report suitable for use in discovery and at trial.

Forensic Engineering Expert. We recommend retaining Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc. (Doral, Florida) to opine on causation and the differentiation of wind damage from storm surge damage at each of the three properties. As noted above, Mr. Caldwell has extensive experience in post-hurricane damage assessments in Florida and is well-qualified to provide the forensic engineering testimony that will be critical to VHG's position on the concurrent causation / flood exclusion issue. Mr. Caldwell's engagement will include site inspections, review of meteorological data and structural damage documentation, and the preparation of an expert report.

Expert retention should proceed promptly to ensure that the experts' analyses are available to support the complaint and to position VHG for the anticipated discovery process.

D. Document Preservation and Preparation

VHG should continue to comply in all respects with the litigation hold notice issued on September 19, 2022, which directed the preservation of all documents and electronically stored information potentially relevant to the Hurricane Callista claim. We recommend that VHG's IT department and legal team confirm that all relevant custodians have been reminded of their preservation obligations and that automated deletion protocols remain suspended for the affected document categories.

In addition, VHG should take the following specific steps in preparation for litigation:

• Assemble complete financial records for the three affected properties, including monthly revenue, occupancy, and ADR data for the period 2019–2023, to establish pre-loss baselines and demonstrate the impact of Hurricane Callista on VHG's operations;

• Organize all repair and restoration records, contractor invoices, permitting documents, and inspection reports for each property in a format suitable for production in discovery;

• Compile all communications with insurers, adjusters, and brokers relating to the Hurricane Callista claim; and

• Identify and preserve all photographs, video footage, and other documentation of the storm damage and the restoration process.

Calderwood & Harkness's team will work with VHG's legal and finance departments to ensure that the document collection and organization process is efficient and thorough.

E. Coordination with Tidewater Risk Advisors

Franklin Orde, the VHG account executive at Tidewater Risk Advisors LLC, will be a critical witness on the windstorm sub-limit deletion issue, which is the most important coverage dispute in this case. Mr. Orde participated directly in the July 2022 renewal negotiations with Ironclad and has personal knowledge of the agreement to delete the sub-limit.

Calderwood & Harkness recommends that a meeting be scheduled with Mr. Orde in the near term to accomplish the following objectives:

• Review and preserve all broker correspondence, binders, coverage specifications, quotation summaries, and renewal negotiation records from the July 2022 renewal;

• Confirm Mr. Orde's recollection of the specific conversations and agreements with Ironclad's underwriting department regarding the deletion of the windstorm sub-limit;

• Discuss Mr. Orde's availability and willingness to provide deposition and trial testimony in support of VHG's position; and

• Ensure that Tidewater's internal files are preserved in accordance with the litigation hold.

We note that Tidewater may, in a worst-case scenario, become a potential third-party defendant in this matter. If the windstorm sub-limit issue were resolved against VHG — i.e., if a court determined that the sub-limit was not validly deleted at the July 2022 renewal — VHG might have a claim against Tidewater for errors and omissions in failing to secure the sub-limit deletion and/or in failing to ensure that the deletion was properly documented in the policy endorsements. However, at this stage, VHG's interests and Tidewater's interests are aligned on the sub-limit deletion argument, and we recommend that VHG coordinate with Tidewater as a cooperative witness rather than as a potential adversary. Calderwood & Harkness will continue to monitor this dynamic as the case develops.

F. Estimated Litigation Budget and Timeline

Based on Calderwood & Harkness's experience with comparable insurance coverage disputes in Florida, we provide the following preliminary estimates of the anticipated litigation timeline and costs:

Timeline. We estimate that the matter will proceed to trial approximately 18 to 24 months from the date of filing, placing the trial date in the mid-2024 to late-2024 timeframe. This estimate assumes a typical discovery schedule, including written discovery, fact depositions of key insurer and VHG witnesses, expert depositions, and dispositive motion practice. Settlement discussions may accelerate the timeline if the carriers reassess their coverage positions as discovery progresses.

Attorney Fees. We estimate total attorney fees through resolution (assuming the case proceeds through discovery and to a potential trial) in the range of $2,500,000 to $3,500,000, based on a blended hourly rate of $785/hour for the Calderwood & Harkness team. This estimate includes the time of the partner, lead associate, working associate, and paralegal staff assigned to the matter. We note that the existing engagement agreement provides for a contingency enhancement of 5% of net recovery above $30,000,000, which provides meaningful upside to the firm if VHG achieves a strong recovery and aligns the firm's interests with VHG's objective of maximizing the overall recovery.

Expenses. We estimate out-of-pocket litigation expenses — including expert fees, deposition costs, court costs, travel, and related expenses — in the range of $350,000 to $450,000.

Calderwood & Harkness will provide more detailed budget projections and a phased litigation plan as the case develops and the scope of discovery becomes more defined. We will work with VHG to manage costs effectively throughout the litigation.

VII. Request for Client Authorization

Based on the foregoing analysis and recommendations, Calderwood & Harkness respectfully requests the following authorizations from VHG:

1. Authorization to File Litigation. We request that Nathaniel Driscoll, in coordination with Marcus Ellsworth (CEO) and VHG's Board of Directors, authorize Calderwood & Harkness to file a civil complaint in the Eleventh Judicial Circuit of Florida, Miami-Dade County, if pre-suit negotiations do not yield a meaningful settlement offer by mid-February 2023. As noted above, our target filing date is on or before March 1, 2023.

2. Authorization to Retain Experts. We request authorization to retain Meridian Forensic Economics LLC (Dr. Helen Vasquez) as VHG's forensic accounting/damages expert and Caldwell Engineering Associates Inc. (Jeffrey Caldwell, PE) as VHG's forensic engineering expert. Both engagements are critical to the prosecution of VHG's claim and should proceed promptly.

3. Strategy Meeting. We request that a meeting be scheduled with VHG's senior leadership — including Marcus Ellsworth (CEO), Diane Calder (CFO), Sandra Pellegrini (VP of Risk Management), and Nathaniel Driscoll (General Counsel) — to discuss the litigation strategy, timeline, and budget in greater detail prior to any filing. Calderwood & Harkness is available to travel to VHG's offices or to host this meeting at our Miami office at VHG's convenience.

We believe these steps are necessary and appropriate to protect VHG's interests and to position VHG for the strongest possible recovery. We are mindful that the filing of litigation is a significant step, and we are prepared to discuss these recommendations in whatever level of detail VHG requires before proceeding.

VIII. Closing

Calderwood & Harkness remains confident in VHG's insurance coverage position. The firm's analysis — spanning the multiple memoranda issued since September 2022 and the comprehensive Strategic Assessment and Litigation Recommendation Memorandum enclosed herewith — supports the conclusion that VHG is entitled to recover the full amount of its business-interruption losses across the four-layer insurance tower. While the litigation path presents inherent uncertainties, the strength of VHG's factual and legal position, combined with the favorable trends in Florida insurance coverage law, gives us a high degree of confidence that litigation will produce a favorable outcome for VHG.

We are available to discuss this letter and the recommended strategy at your earliest convenience. Please do not hesitate to contact me directly at (305) 814-6112 or eforsythe@calderwoodharkness.com. Tiffany Rosenthal, the lead associate on this matter, can also be reached at (305) 814-6148 or trosenthal@calderwoodharkness.com.

We look forward to hearing from you and to continuing to serve VHG in this important matter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Elaine Forsythe, Partner 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6112

Email: eforsythe@calderwoodharkness.com

cc: (via email)

Marcus Ellsworth, Chief Executive Officer, Verimark Hospitality Group Inc. Diane Calder, Chief Financial Officer, Verimark Hospitality Group Inc. Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc. Howard Bellamy, Billing Partner, Calderwood & Harkness LLP Tiffany Rosenthal, Lead Associate, Calderwood & Harkness LLP Andrew Fitzpatrick, Working Associate, Calderwood & Harkness LLP

Enclosure: Strategic Assessment and Litigation Recommendation Memorandum (dated January 15, 2023)

Property	Estimated BI Loss
Verimark Grand Key Resort	$31,400,000
Verimark Harborview Hotel & Conference Center	$18,700,000
Verimark Sunset Shores	$9,900,000
Total	$60,000,000
Layer	Carrier	Domicile	Policy Number	Limits	Annual Premium
Primary	Ironclad Indemnity Corporation	Connecticut	IIC-PRP-2022-07541	$25M; $500K per-occurrence deductible	$980,000
1st Excess	Pinnacle Surplus Lines Inc.	Texas (surplus lines)	PSL-XS1-2022-3390	$15M xs $25M	$410,000
2nd Excess	Montclair Assurance Company	New York	MAC-XS2-2022-09817	$10M xs $40M	$265,000
3rd Excess	Sovereign Re Ltd.	Bermuda	SRL-XS3-2022-5102	$10M xs $50M	$185,000
Total Tower	$60M above $500K deductible	$1,840,000
Scenario	Estimated Recovery
Best Case (prevail on all issues at trial)	$59,500,000 (full tower less $500K deductible)
Risk-Adjusted Range (sub-limit deletion prevails; moderate adjustments on other issues)	$42,000,000 – $55,000,000
Worst Case (sub-limit enforced; flood exclusion partially applied)	$12,000,000 – $18,000,000

CALDERWOOD & HARKNESS LLP Attorneys at Law
333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131
Telephone: (305) 814-6000 Facsimile: (305) 814-6001 www.calderwoodharkness.com
January 20, 2023
VIA EMAIL AND U.S. MAIL
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
Nathaniel Driscoll, Esq. General Counsel Verimark Hospitality Group Inc. 1900 Brickell Avenue, Suite 3200 Miami, Florida 33129
Re: Coverage Position Summary and Recommended Next Steps — Hurricane Callista Business-Interruption Claim
Engagement No.: 1021-00003
Dear Nathaniel:
I. Introduction and Purpose of Letter
Calderwood & Harkness LLP has now completed its comprehensive analysis of Verimark Hospitality Group Inc.'s ("VHG") insurance coverage position arising from the losses sustained in connection with Hurricane Callista, which made landfall as a Category 4 hurricane on September 18, 2022, in the Lower Florida Keys. This letter summarizes the firm's coverage analysis across VHG's four-layer insurance tower, evaluates the weaknesses in each insurer's denial or reservation-of-rights positions, and sets forth our recommended next steps to maximize VHG's recovery.
This letter builds upon and supplements the substantial body of work product that Calderwood & Harkness has developed in connection with this engagement since the inception of Hurricane Callista, including the following prior memoranda and analyses:
• Preliminary Coverage Analysis (dated September 5, 2022);
• Windstorm Sub-Limit Memorandum (dated October 20, 2022);
• Anti-Concurrent Causation Memorandum (dated November 1, 2022);
• Period of Restoration Memorandum (dated November 10, 2022); and
• Flood Exclusion Memorandum (dated December 2, 2022).
As discussed herein, VHG's total claimed business-interruption losses across its three affected properties amount to $60,000,000. We note that Ironclad Indemnity Corporation ("Ironclad"), the primary-layer carrier, issued a reservation of rights on October 12, 2022, and we anticipate that a formal denial of coverage will be issued imminently. Based on information communicated by Ironclad's outside counsel, we expect this formal denial to arrive on or about February 3, 2023.
Pre-suit demand letters were transmitted to all four carriers in VHG's insurance tower on November 20–21, 2022. As of the date of this letter, no substantive response has been received from any carrier, and no settlement offer has been extended. This fact, combined with the impending formal denial from Ironclad, underscores the urgency of the strategic decisions outlined in this letter.
This letter is intended to provide VHG's leadership with a comprehensive overview of the current landscape and to seek authorization for the next phase of this engagement, including the potential filing of litigation. The detailed legal and factual analysis supporting our conclusions is set forth in the separately enclosed Strategic Assessment and Litigation Recommendation Memorandum dated January 15, 2023.
II. Summary of the Claim and Insurance Program
A. The Insured Loss
Hurricane Callista was designated as a named storm by the National Hurricane Center ("NHC") on September 12, 2022. The storm rapidly intensified over the warm waters of the Caribbean and the Straits of Florida, ultimately reaching Category 4 intensity on the Saffir-Veltason Hurricane Wind Scale prior to landfall. Callista made landfall in the Big Pine Key area of the Lower Florida Keys at approximately 1:30 PM EDT on September 18, 2022, with maximum sustained winds of 145 miles per hour and a central pressure of approximately 940 millibars.
The hurricane produced catastrophic storm surge throughout the coastal areas of South Florida. Storm surge measurements recorded 8 to 14 feet in Monroe County and 6 to 10 feet in Lee County. Wind damage was extensive across Monroe, Collier, Lee, and Pinellas Counties, with the most severe impacts concentrated in the Keys and along the Gulf Coast.
In advance of the storm's arrival, mandatory evacuation orders were issued for Monroe County on September 16, 2022, and for Lee County on September 17, 2022. These evacuation orders required the closure of VHG's properties and the displacement of guests, staff, and management personnel, contributing to the extended business interruption that followed.
VHG submitted its initial notice of loss to Ironclad on September 22, 2022, within four days of the hurricane's landfall. VHG subsequently submitted a sworn statement in proof of loss in the amount of $60,000,000 on November 15, 2022, which detailed the business-interruption losses across all three affected properties. Ironclad retained Arbor Claims Services LLC as its independent adjuster, with Denise Whitford serving as lead adjuster. Ms. Whitford and her team conducted on-site inspections of all three VHG properties on October 5, 2022.
B. Properties and Loss Quantification
VHG's claimed business-interruption losses arise from the interruption of operations at three properties, each of which sustained significant damage from Hurricane Callista. The loss quantification for each property is summarized below and is based on VHG's historical financial performance, pre-loss occupancy and revenue data, seasonal adjustments, and an analysis of saved expenses conducted by VHG's finance team under the direction of Diane Calder, Chief Financial Officer.
1. Verimark Grand Key Resort — Marathon, Florida
The Verimark Grand Key Resort is located at Mile Marker 48, Marathon, Florida 33050. It is a 312-room luxury resort and marina facility that represents VHG's flagship Keys property. Prior to Hurricane Callista, the Grand Key Resort operated at a pre-loss average daily rate ("ADR") of $389 and an occupancy rate of 82%, reflecting its status as one of the premier hospitality destinations in the Florida Keys.
The Grand Key Resort was closed for operations beginning September 18, 2022 — the date of Hurricane Callista's landfall — and remained closed through March 15, 2023, a total closure period of 178 days. The extended closure was necessitated by severe wind and storm surge damage to the resort's main buildings, guest rooms, marina infrastructure, and common areas, as well as significant damage to the surrounding transportation and utility infrastructure in the Keys, which delayed restoration efforts.
The estimated business-interruption loss for the Grand Key Resort is $31,400,000, which includes lost room revenue, marina revenue, food and beverage revenue, spa and ancillary revenue, and an adjustment for saved expenses during the period of interruption.
2. Verimark Harborview Hotel & Conference Center — Fort Myers Beach, Florida
The Verimark Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931. The property comprises a 224-room hotel and a 40,000-square-foot conference and events facility, which serves as a significant revenue driver through corporate meetings, conventions, and social events.
Prior to Hurricane Callista, the Harborview operated at a pre-loss ADR of $295 and an occupancy rate of 74%. The property was closed from September 18, 2022, through January 31, 2023, a total closure period of 135 days. The closure resulted from both direct wind damage to the hotel structure and conference facility and the extensive storm surge damage sustained by Fort Myers Beach and the surrounding Lee County area, which impaired access to the property and disrupted essential utilities.
The estimated business-interruption loss for the Harborview is $18,700,000, which includes lost room revenue, conference center revenue, food and beverage revenue, and ancillary revenue, adjusted for saved expenses.
3. Verimark Sunset Shores — St. Pete Beach, Florida
The Verimark Sunset Shores is a 186-room boutique resort located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706. The property operated at a pre-loss ADR of $342 and an occupancy rate of 79%.
Sunset Shores experienced a partial closure beginning September 18, 2022, with a full-closure period of 73 days followed by a period of reduced capacity that extended through February 2023. The property reached full operational capacity on February 28, 2023. The damage at Sunset Shores was less severe than at the Grand Key Resort or the Harborview, but was nonetheless significant, requiring substantial roof repairs, replacement of water-damaged finishes in ground-floor guest rooms, and restoration of the pool and beachfront amenities.
The estimated business-interruption loss for Sunset Shores is $9,900,000, encompassing lost room revenue, food and beverage revenue, spa revenue, and other ancillary revenue, adjusted for saved expenses and the revenue generated during the period of reduced-capacity operations.
4. Total Claimed Business-Interruption Loss
For context, VHG's consolidated pre-loss financial performance reflects a robust and profitable enterprise. In fiscal year 2021, VHG reported total revenue of approximately $412 million and EBITDA of approximately $78 million. The $60 million business-interruption claim therefore represents a significant but proportionate loss relative to VHG's overall operations, and the loss quantification methodology is consistent with the financial benchmarks that would be expected of a hospitality group of VHG's size and market position.
C. Insurance Tower Structure
VHG maintains a four-layer property insurance program providing aggregate limits of $60 million above a $500,000 per-occurrence deductible. All policies in the tower are written on an "all risks" basis covering physical loss or damage, including business interruption and extra expense coverage. Each policy shares a common policy period of July 1, 2022, through July 1, 2023.
The structure of VHG's insurance tower is set forth in the following table:
VHG's insurance broker of record is Tidewater Risk Advisors LLC, with Franklin Orde serving as the account executive for VHG's property insurance program. As discussed in greater detail below, Mr. Orde played a central role in the July 2022 renewal negotiations with Ironclad and will be an important witness on the windstorm sub-limit issue.
III. Insurer Coverage Positions and Their Weaknesses
A. Ironclad Indemnity Corporation — Primary Layer
Ironclad issued a reservation of rights to VHG on October 12, 2022, authored by Victor Haddon, Senior Vice President of Claims. The reservation of rights identified four bases on which Ironclad asserted potential coverage defenses. Calderwood & Harkness responded to the reservation of rights on behalf of VHG on October 25, 2022, disputing each stated basis and demanding that Ironclad honor its coverage obligations under the primary policy. A formal denial of VHG's claim is anticipated imminently and, based on communications with Ironclad's outside counsel, is expected to be issued on or about February 3, 2023.
Ironclad is represented by outside counsel at Fendowell Rourke & Stanton LLP, with Gregory Stanton and Meredith Liang serving as lead attorneys. As noted below, Fendowell Rourke & Stanton also represents Pinnacle Surplus Lines Inc. in a joint defense arrangement.
The four coverage defenses asserted by Ironclad in its reservation of rights are addressed in turn below, together with our assessment of the strength of VHG's position on each issue.
1. Named Windstorm Sub-Limit ($15M)
Ironclad's Position. Ironclad contends that the primary policy contains a named-windstorm sub-limit of $15,000,000 applicable to business-interruption losses. Under this interpretation, VHG's recovery for business-interruption losses under the primary layer would be capped at $15 million rather than the full $25 million policy limit. This is the single most impactful coverage issue in the case, as it would not only reduce the primary-layer recovery by $10 million but would also affect whether VHG's losses are sufficient to reach the attachment points of the excess layers.
VHG's Position and Strength of Argument. VHG's position is that the $15 million named-windstorm sub-limit was affirmatively deleted during the July 2022 policy renewal negotiations. The evidence supporting this position is substantial and includes the following:
First, broker correspondence from Franklin Orde at Tidewater Risk Advisors documents that Ironclad's underwriting department agreed to remove the named-windstorm sub-limit in exchange for an increased premium at the July 2022 renewal. This correspondence — which includes emails exchanged between Mr. Orde and Ironclad's lead underwriter — establishes that the parties reached an agreement to delete the sub-limit and that VHG paid the negotiated premium increase as consideration for that deletion.
Second, the policy binder and renewal endorsements, when read together, support the conclusion that the sub-limit was deleted. Although the endorsement language is not a model of clarity — Ironclad's underwriting department failed to issue a standalone endorsement expressly deleting the sub-limit — the binder specifications reflect the removal of the sub-limit, and the endorsement schedule references the modified terms. Any residual ambiguity in the endorsement language must be construed against Ironclad under the well-established contra proferentem doctrine under Florida law. See, e.g., Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938 (Fla. 1979); Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29 (Fla. 2000).
Third, VHG's Vice President of Risk Management, Sandra Pellegrini, can testify that VHG understood the sub-limit had been removed at renewal and that VHG agreed to pay the higher premium specifically in reliance on that understanding. Ms. Pellegrini was directly involved in the renewal negotiations on VHG's behalf and communicated with Mr. Orde throughout the process.
Fourth, Mr. Orde can testify regarding the specific negotiations with Ironclad's underwriting department, including the conversations and correspondence in which the deletion of the sub-limit was confirmed. Mr. Orde's testimony will corroborate the documentary evidence and establish the parties' mutual intent.
Assessment: This is VHG's strongest contested issue, though it is also likely to be the most aggressively litigated by Ironclad. The documentary and testimonial evidence favors VHG, and the contra proferentem doctrine provides an additional basis for resolving any ambiguity in VHG's favor. We rate VHG's position as strong on this issue.
2. Period of Restoration Dispute
Ironclad's Position. Ironclad contends that VHG's business-interruption coverage terminates when repairs "could have been completed with reasonable speed," and asserts that VHG unreasonably delayed restoration at all three properties. Ironclad has focused in particular on the 178-day closure period at the Grand Key Resort and the 135-day closure period at the Harborview, both of which Ironclad characterizes as excessive.
VHG's Position and Strength of Argument. VHG's position is that the closure periods at each property were entirely reasonable — and, in fact, were necessitated — by the severity of the Category 4 hurricane damage, the post-storm market conditions in South Florida, and the regulatory constraints imposed in the affected areas. Specifically:
First, contractor availability in South Florida was severely constrained in the aftermath of Hurricane Callista. The simultaneous need for restoration services across hundreds of properties in the Keys, Lee County, and the broader Gulf Coast region created intense competition for qualified contractors, driving up lead times and limiting VHG's ability to accelerate repairs.
Second, supply chain disruptions affecting building materials — including specialized materials required for luxury hospitality finishes — contributed to delays that were beyond VHG's control. These supply chain issues were widely documented in the aftermath of the hurricane and affected the entire region.
Third, Monroe County imposed permitting restrictions and access limitations to the Keys for weeks after landfall. Access to the Grand Key Resort was intermittently restricted as roadway repairs to U.S. Route 1 were undertaken, and the permitting process for restoration work was significantly delayed due to the volume of applications and the limited capacity of local government agencies.
Fourth, VHG acted with diligence throughout the restoration process. VHG engaged contractors promptly, expedited permit applications, authorized overtime work, and took other affirmative steps to reduce the period of interruption. The company's restoration efforts are documented in detailed records maintained by Ms. Pellegrini and VHG's facilities management team.
Florida case law supports VHG's position that the "reasonable speed" standard must account for the actual market conditions and regulatory constraints prevailing in the post-catastrophe environment. The standard does not require an insured to achieve the fastest theoretically possible restoration timeline; rather, it requires the insured to act with reasonable diligence under the circumstances. See Federated Nat'l Ins. Co. v. Esposito, 937 So. 2d 199 (Fla. 4th DCA 2006).
Assessment: VHG has a good position on this issue. The factual record of VHG's diligent restoration efforts is strong, and the post-Callista conditions in South Florida provide a compelling justification for the closure periods at each property.
3. Concurrent Causation / Flood Exclusion
Ironclad's Position. Ironclad contends that portions of the damage at the Grand Key Resort resulted from storm surge — which Ironclad characterizes as "flood" — and that such damage is excluded under the flood exclusion in the primary policy. Additionally, Ironclad invokes the anti-concurrent causation ("ACC") clause in the policy, arguing that where wind and storm surge (flood) operate concurrently to cause damage, all damage attributable to the concurrent causes is excluded, regardless of whether the wind damage alone would have been sufficient to cause the loss.
VHG's Position and Strength of Argument. VHG's position rests on several grounds:
First, Florida law generally applies the efficient proximate cause doctrine, which looks to the predominant cause of the loss rather than excluding coverage whenever an excluded peril contributes in any degree to the damage. Under this framework, the relevant inquiry is whether wind — a covered peril — was the predominant cause of VHG's losses, which it was. Hurricane Callista struck as a Category 4 hurricane with 145-mph sustained winds, and the wind damage to all three properties was extensive, devastating, and independent of any flooding.
Second, even at the Grand Key Resort, where storm surge was a significant factor (with Monroe County recording 8 to 14 feet of storm surge), substantial structural damage was caused directly by wind, independent of any flooding. The roof systems, exterior cladding, windows, and upper-floor guest rooms at the Grand Key Resort were all damaged by wind forces, not by storm surge. The storm surge primarily affected ground-floor areas and the marina, whereas the business-interruption loss is attributable to the property's overall inability to operate, which was predominantly driven by the wind damage to the entire facility.
Third, anti-concurrent causation clauses have been narrowly construed or disfavored in Florida case law in the context of hurricane losses. Florida courts have been reluctant to permit insurers to use ACC clauses as a blanket mechanism to deny coverage for wind damage merely because storm surge also contributed to the overall loss. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); see also Mierzwa v. Fla. Windstorm Underwriting Ass'n, 877 So. 2d 774 (Fla. 4th DCA 2004).
Fourth, the all-risk nature of the policy places the burden on Ironclad to prove that the flood exclusion applies. Ironclad must demonstrate not only that flood contributed to the loss, but that the loss falls squarely within the exclusion. In the context of a hurricane where both wind and storm surge are present, this burden is difficult to satisfy, particularly where the insured can present expert evidence differentiating the two causes of damage.
Fifth, Calderwood & Harkness has identified Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc. (Doral, Florida) as a forensic engineering expert who can provide detailed opinions differentiating wind damage from storm surge damage at each of the three properties. Mr. Caldwell has extensive experience in post-hurricane damage assessments in Florida and has been qualified as an expert in multiple prior coverage disputes involving concurrent causation issues.
Assessment: VHG's position on this issue is moderately strong. This is the most factually intensive of the four contested issues and will require robust expert testimony to establish the differentiation between wind and storm surge damage. However, the trend in Florida case law favors VHG's position, and the forensic engineering evidence is expected to support VHG's contention that wind was the predominant cause of the loss at all three properties.
4. Failure to Mitigate
Ironclad's Position. Ironclad contends that VHG failed to take reasonable steps to reduce the period of business interruption, thereby increasing VHG's losses beyond what would have occurred had VHG acted diligently.
VHG's Position and Strength of Argument. This defense is the weakest of the four raised by Ironclad. VHG took extensive and well-documented mitigation measures following Hurricane Callista, including:
• Emergency tarping of damaged roof areas at all three properties to prevent further water intrusion;
• Water extraction and mold remediation services at the Grand Key Resort and the Harborview;
• Deployment of temporary power generation equipment at all three properties;
• Securing alternative conference and event space for Harborview clients to minimize the loss of conference center revenue;
• Proactive communication with guests and group customers to reschedule bookings and retain future business;
• Engagement of multiple restoration contractors and expedited permitting applications; and
• Authorization of overtime and weekend work schedules for restoration crews.
Diane Calder, VHG's CFO, can detail the saved-expense analysis and the extra expenses incurred by VHG to mitigate its losses. The saved-expense analysis demonstrates that VHG properly accounted for expenses that were avoided during the closure periods and offset those savings against the claimed business-interruption losses. Ms. Pellegrini oversaw the mitigation and restoration program and can testify to the comprehensive steps taken by VHG to minimize the period of interruption and the magnitude of its losses.
VHG's mitigation efforts are thoroughly documented in contemporaneous records, including daily restoration logs, contractor communications, expense reports, and management meeting minutes.
Assessment: VHG has a very strong position on this issue. Ironclad's failure-to-mitigate defense is unlikely to succeed given VHG's extensive documentary record of proactive and diligent mitigation activities. This defense appears to have been raised as a negotiating tactic rather than a substantively viable coverage defense.
B. Pinnacle Surplus Lines Inc. — First Excess Layer ($15M xs $25M)
Pinnacle Surplus Lines Inc. ("Pinnacle") provides the first excess layer in VHG's insurance tower, with a $15 million limit in excess of the $25 million Ironclad primary layer. Pinnacle's policy follows form to the Ironclad primary policy.
Pinnacle issued a follow-form denial on February 10, 2023, tracking each of the coverage positions asserted by Ironclad. Pinnacle has asserted no independent coverage defenses and has instead adopted Ironclad's positions in their entirety. If VHG prevails against Ironclad on the windstorm sub-limit issue and the other contested issues, Pinnacle's exposure follows accordingly.
A particular area of concern with respect to Pinnacle is the interaction between the windstorm sub-limit dispute and Pinnacle's attachment point. If Ironclad's $15 million windstorm sub-limit were enforced, Ironclad's primary-layer payout would be capped at $15 million (less the $500,000 deductible). Pinnacle has taken the position that its layer would not be reached under this scenario, because the $10 million gap between the sub-limit cap ($15 million) and Pinnacle's attachment point ($25 million) would constitute an uninsured retention that VHG would have to absorb. While there are arguments available to VHG to challenge this interpretation — including that the sub-limit, even if enforced, operates only at the primary level and does not reduce VHG's loss for purposes of determining whether the first excess layer is triggered — Pinnacle's position presents a material risk if the sub-limit is enforced.
Pinnacle is represented jointly with Ironclad by the law firm of Fendowell Rourke & Stanton LLP, with Gregory Stanton and Meredith Liang serving as lead attorneys for both carriers. This joint representation arrangement may present conflicts as the case progresses, particularly if the interests of the primary and first excess carriers diverge.
Assessment: Pinnacle's position is derivative and largely depends on the outcome of the Ironclad primary-layer disputes. If VHG prevails on the windstorm sub-limit issue, Pinnacle's follow-form denial will lack any independent basis.
C. Montclair Assurance Company — Second Excess Layer ($10M xs $40M)
Montclair Assurance Company ("Montclair") provides the second excess layer in VHG's insurance tower, with a $10 million limit in excess of $40 million (i.e., in excess of the combined limits of the Ironclad primary and Pinnacle first excess layers). Montclair has reserved rights but has not issued a formal denial of VHG's claim.
Montclair's principal coverage position is that its layer will not be reached if the windstorm sub-limit is enforced at the primary level. Montclair's reasoning parallels that of Pinnacle: if Ironclad's total payout is capped at $15 million and the first excess layer is not triggered, VHG's losses will be insufficient to reach the $40 million attachment point for the second excess layer.
Montclair is represented by the law firm of Delvecchio & Kraus LLP, with Patricia Kraus and Raymond Cho serving as lead attorneys. Delvecchio & Kraus also represents Sovereign Re Ltd. in a joint defense arrangement.
Assessment: If the windstorm sub-limit is defeated, Montclair faces significant exposure. Its independent coverage defenses are minimal, as its policy follows form to the primary layer and Montclair has not articulated any coverage positions beyond those asserted by Ironclad. Montclair's reservation of rights appears primarily precautionary.
D. Sovereign Re Ltd. — Third Excess Layer ($10M xs $50M)
Sovereign Re Ltd. ("Sovereign Re") provides the third and final excess layer in VHG's insurance tower, with a $10 million limit in excess of $50 million. Sovereign Re is domiciled in Bermuda but has submitted to the Florida program and is bound by the policy terms, including the choice-of-law and forum-selection provisions in the underlying policies.
Sovereign Re has reserved rights but has not issued a formal denial. Its position mirrors that of Montclair: Sovereign Re contends that VHG's claim will not reach the $50 million attachment point for the third excess layer, particularly if the windstorm sub-limit is enforced.
While there are potential jurisdictional considerations arising from Sovereign Re's Bermuda domicile, these issues are manageable. Sovereign Re is subject to the jurisdiction of the Florida courts under the policy terms and the applicable surplus lines and unauthorized insurer statutes. Calderwood & Harkness does not anticipate that Sovereign Re will mount a successful jurisdictional challenge.
Sovereign Re is also represented by Delvecchio & Kraus LLP, jointly with Montclair.
Assessment: Sovereign Re's exposure depends on VHG's ability to recover through the lower layers. Its proportional risk is the lowest of the four carriers, but it remains fully obligated to respond if VHG's losses engage the full tower. The strength of VHG's coverage position on the windstorm sub-limit issue — which is the critical gateway to the excess layers — will largely determine whether Sovereign Re's layer is reached.
IV. Overall Assessment of VHG's Coverage Position
Based on the analysis set forth above and in the enclosed Strategic Assessment and Litigation Recommendation Memorandum, Calderwood & Harkness's overall assessment of VHG's coverage position is as follows:
VHG has strong to very strong coverage arguments on all four contested issues raised by Ironclad. The quality of VHG's position varies across the four issues, but in no instance does Ironclad hold a clearly superior legal or factual position.
The windstorm sub-limit issue is the linchpin of this dispute. If VHG prevails on the sub-limit deletion argument — which we believe is the more likely outcome based on the documentary and testimonial evidence — the full $60 million insurance tower is in play, and VHG's path to a substantial recovery is clear. Conversely, if Ironclad prevails on the sub-limit issue and the $15 million cap is enforced, VHG's maximum recovery under the primary layer would be capped at $14.5 million (i.e., $15 million less the $500,000 deductible), and VHG's ability to reach the attachment points of the excess layers would be significantly impaired.
The concurrent causation / flood exclusion issue is the second most significant risk factor. This issue is factually intensive and will require strong expert forensic engineering testimony to differentiate wind damage from storm surge damage at the three properties — particularly at the Grand Key Resort, where storm surge was most significant. However, Florida law trends favor VHG's position, and the burden of proof rests on Ironclad to demonstrate that the exclusion applies.
The period of restoration and failure-to-mitigate defenses are the weakest of the four issues for the insurers. Given the extraordinary severity of Hurricane Callista and VHG's well-documented restoration and mitigation efforts, these defenses are unlikely to result in a material reduction in VHG's recovery.
Based on these assessments, Calderwood & Harkness estimates VHG's risk-adjusted recovery range as follows:
The wide spread between the risk-adjusted range and the worst-case scenario underscores the importance of the windstorm sub-limit issue. Calderwood & Harkness's strategic recommendations set forth below are designed to maximize VHG's leverage on this critical issue and to position VHG for the most favorable outcome across all four contested coverage defenses.
V. Pre-Suit Negotiation Status
Calderwood & Harkness sent pre-suit demand letters to all four carriers in VHG's insurance tower on November 20–21, 2022. These demand letters set forth VHG's coverage position in detail, including the factual and legal bases for VHG's claim, and demanded that each carrier honor its obligations under the applicable policy. No substantive response has been received from any carrier as of the date of this letter.
Ironclad, through Victor Haddon and its outside counsel, Gregory Stanton of Fendowell Rourke & Stanton LLP, has communicated with Calderwood & Harkness on procedural matters but has not made a settlement offer or engaged in substantive settlement discussions. The communications from Mr. Stanton have been limited to requests for additional documentation and scheduling matters, and have not reflected any willingness on Ironclad's part to reconsider its coverage positions.
Montclair and Sovereign Re, through their joint counsel, Patricia Kraus of Delvecchio & Kraus LLP, have indicated that they are monitoring the Ironclad primary-layer dispute and do not intend to engage substantively on the excess layers until the primary-layer coverage issues are resolved. This position, while not unusual for excess carriers, effectively places the burden on VHG to resolve the primary-layer dispute before the excess carriers will come to the table.
Pre-suit resolution appears unlikely at this time. The insurers are entrenched in their coverage positions, and the absence of any settlement overture from any carrier — despite VHG's detailed demand letters and the strength of VHG's coverage arguments — suggests that litigation will be necessary to achieve a meaningful recovery. Nevertheless, Calderwood & Harkness recommends allowing a brief additional window — approximately two to three weeks — for the insurers to respond to the demand letters before proceeding to litigation. This window will also allow VHG to receive and analyze Ironclad's anticipated formal denial, which is expected on or about February 3, 2023.
VI. Recommended Next Steps
A. Filing Litigation
Calderwood & Harkness recommends that VHG authorize the filing of a civil complaint if pre-suit negotiations do not produce a meaningful settlement offer within the next two to three weeks. We recommend a target filing date of on or before March 1, 2023.
The complaint would be filed in the Eleventh Judicial Circuit of Florida, Miami-Dade County, which has personal jurisdiction over all four carriers and is a favorable forum for VHG. All four policies are governed by Florida law, and the Miami-Dade County Circuit Court has substantial experience with complex insurance coverage disputes arising from hurricane events.
The complaint would assert the following claims:
1. Breach of contract against all four carriers for failure to pay VHG's business-interruption claim in accordance with the terms of the respective policies;
2. Declaratory judgment seeking a judicial determination that the named-windstorm sub-limit was deleted from the Ironclad primary policy, that the anti-concurrent causation clause does not bar coverage for VHG's wind-driven losses, and that VHG's period of restoration and mitigation efforts were reasonable; and
3. Bad faith against Ironclad under Florida Statutes § 624.155, based on Ironclad's unreasonable denial of VHG's claim in the face of overwhelming evidence supporting coverage.
Filing promptly will preserve VHG's ability to assert statutory bad-faith claims against Ironclad once the formal denial is issued. Additionally, the filing of litigation will signal to all four carriers — and particularly to the excess carriers, who have been taking a wait-and-see approach — that VHG intends to pursue its rights aggressively and will not accept the insurers' current coverage positions.
B. Bad-Faith Considerations
Ironclad's anticipated formal denial, following its October 12, 2022 reservation of rights, will create a predicate for a statutory bad-faith claim under Florida law. Florida Statutes § 624.155 provides a cause of action against an insurer that fails to attempt in good faith to settle a claim when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for the insured's interests.
Calderwood & Harkness will send a follow-up letter to Ironclad promptly after the formal denial is received, putting Ironclad on explicit notice of the bad-faith implications of its denial and of VHG's intent to pursue statutory bad-faith remedies. We will also prepare and file a Civil Remedy Notice under § 624.155(3)(a) at the appropriate time, which is a statutory prerequisite to filing a bad-faith action.
The bad-faith exposure may create additional settlement leverage for VHG, particularly as the case progresses and the strength of VHG's coverage position becomes more apparent. Bad-faith claims expose Ironclad to damages in excess of the policy limits, including consequential damages and potentially punitive damages, and may therefore incentivize Ironclad to reassess its coverage position and engage in meaningful settlement discussions.
C. Expert Engagement
Calderwood & Harkness recommends that VHG authorize the prompt retention of two experts to support the litigation:
Forensic Accounting/Damages Expert. We recommend retaining Dr. Helen Vasquez of Meridian Forensic Economics LLC (Atlanta, Georgia) to formally quantify VHG's business-interruption losses for litigation purposes. Dr. Vasquez is a recognized authority in the quantification of business-interruption and lost-profits damages in the hospitality industry and has served as a testifying expert in multiple insurance coverage disputes involving hurricane-related losses. Her hourly rate is $625. Dr. Vasquez's engagement will include an independent analysis of VHG's pre-loss financial performance, the calculation of lost revenue during the period of interruption, the determination of saved expenses, and the preparation of an expert report suitable for use in discovery and at trial.
Forensic Engineering Expert. We recommend retaining Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc. (Doral, Florida) to opine on causation and the differentiation of wind damage from storm surge damage at each of the three properties. As noted above, Mr. Caldwell has extensive experience in post-hurricane damage assessments in Florida and is well-qualified to provide the forensic engineering testimony that will be critical to VHG's position on the concurrent causation / flood exclusion issue. Mr. Caldwell's engagement will include site inspections, review of meteorological data and structural damage documentation, and the preparation of an expert report.
Expert retention should proceed promptly to ensure that the experts' analyses are available to support the complaint and to position VHG for the anticipated discovery process.
D. Document Preservation and Preparation
VHG should continue to comply in all respects with the litigation hold notice issued on September 19, 2022, which directed the preservation of all documents and electronically stored information potentially relevant to the Hurricane Callista claim. We recommend that VHG's IT department and legal team confirm that all relevant custodians have been reminded of their preservation obligations and that automated deletion protocols remain suspended for the affected document categories.
In addition, VHG should take the following specific steps in preparation for litigation:
• Assemble complete financial records for the three affected properties, including monthly revenue, occupancy, and ADR data for the period 2019–2023, to establish pre-loss baselines and demonstrate the impact of Hurricane Callista on VHG's operations;
• Organize all repair and restoration records, contractor invoices, permitting documents, and inspection reports for each property in a format suitable for production in discovery;
• Compile all communications with insurers, adjusters, and brokers relating to the Hurricane Callista claim; and
• Identify and preserve all photographs, video footage, and other documentation of the storm damage and the restoration process.
Calderwood & Harkness's team will work with VHG's legal and finance departments to ensure that the document collection and organization process is efficient and thorough.
E. Coordination with Tidewater Risk Advisors
Franklin Orde, the VHG account executive at Tidewater Risk Advisors LLC, will be a critical witness on the windstorm sub-limit deletion issue, which is the most important coverage dispute in this case. Mr. Orde participated directly in the July 2022 renewal negotiations with Ironclad and has personal knowledge of the agreement to delete the sub-limit.
Calderwood & Harkness recommends that a meeting be scheduled with Mr. Orde in the near term to accomplish the following objectives:
• Review and preserve all broker correspondence, binders, coverage specifications, quotation summaries, and renewal negotiation records from the July 2022 renewal;
• Confirm Mr. Orde's recollection of the specific conversations and agreements with Ironclad's underwriting department regarding the deletion of the windstorm sub-limit;
• Discuss Mr. Orde's availability and willingness to provide deposition and trial testimony in support of VHG's position; and
• Ensure that Tidewater's internal files are preserved in accordance with the litigation hold.
We note that Tidewater may, in a worst-case scenario, become a potential third-party defendant in this matter. If the windstorm sub-limit issue were resolved against VHG — i.e., if a court determined that the sub-limit was not validly deleted at the July 2022 renewal — VHG might have a claim against Tidewater for errors and omissions in failing to secure the sub-limit deletion and/or in failing to ensure that the deletion was properly documented in the policy endorsements. However, at this stage, VHG's interests and Tidewater's interests are aligned on the sub-limit deletion argument, and we recommend that VHG coordinate with Tidewater as a cooperative witness rather than as a potential adversary. Calderwood & Harkness will continue to monitor this dynamic as the case develops.
F. Estimated Litigation Budget and Timeline
Based on Calderwood & Harkness's experience with comparable insurance coverage disputes in Florida, we provide the following preliminary estimates of the anticipated litigation timeline and costs:
Timeline. We estimate that the matter will proceed to trial approximately 18 to 24 months from the date of filing, placing the trial date in the mid-2024 to late-2024 timeframe. This estimate assumes a typical discovery schedule, including written discovery, fact depositions of key insurer and VHG witnesses, expert depositions, and dispositive motion practice. Settlement discussions may accelerate the timeline if the carriers reassess their coverage positions as discovery progresses.
Attorney Fees. We estimate total attorney fees through resolution (assuming the case proceeds through discovery and to a potential trial) in the range of $2,500,000 to $3,500,000, based on a blended hourly rate of $785/hour for the Calderwood & Harkness team. This estimate includes the time of the partner, lead associate, working associate, and paralegal staff assigned to the matter. We note that the existing engagement agreement provides for a contingency enhancement of 5% of net recovery above $30,000,000, which provides meaningful upside to the firm if VHG achieves a strong recovery and aligns the firm's interests with VHG's objective of maximizing the overall recovery.
Expenses. We estimate out-of-pocket litigation expenses — including expert fees, deposition costs, court costs, travel, and related expenses — in the range of $350,000 to $450,000.
Calderwood & Harkness will provide more detailed budget projections and a phased litigation plan as the case develops and the scope of discovery becomes more defined. We will work with VHG to manage costs effectively throughout the litigation.
VII. Request for Client Authorization
Based on the foregoing analysis and recommendations, Calderwood & Harkness respectfully requests the following authorizations from VHG:
1. Authorization to File Litigation. We request that Nathaniel Driscoll, in coordination with Marcus Ellsworth (CEO) and VHG's Board of Directors, authorize Calderwood & Harkness to file a civil complaint in the Eleventh Judicial Circuit of Florida, Miami-Dade County, if pre-suit negotiations do not yield a meaningful settlement offer by mid-February 2023. As noted above, our target filing date is on or before March 1, 2023.
2. Authorization to Retain Experts. We request authorization to retain Meridian Forensic Economics LLC (Dr. Helen Vasquez) as VHG's forensic accounting/damages expert and Caldwell Engineering Associates Inc. (Jeffrey Caldwell, PE) as VHG's forensic engineering expert. Both engagements are critical to the prosecution of VHG's claim and should proceed promptly.
3. Strategy Meeting. We request that a meeting be scheduled with VHG's senior leadership — including Marcus Ellsworth (CEO), Diane Calder (CFO), Sandra Pellegrini (VP of Risk Management), and Nathaniel Driscoll (General Counsel) — to discuss the litigation strategy, timeline, and budget in greater detail prior to any filing. Calderwood & Harkness is available to travel to VHG's offices or to host this meeting at our Miami office at VHG's convenience.
We believe these steps are necessary and appropriate to protect VHG's interests and to position VHG for the strongest possible recovery. We are mindful that the filing of litigation is a significant step, and we are prepared to discuss these recommendations in whatever level of detail VHG requires before proceeding.
VIII. Closing
Calderwood & Harkness remains confident in VHG's insurance coverage position. The firm's analysis — spanning the multiple memoranda issued since September 2022 and the comprehensive Strategic Assessment and Litigation Recommendation Memorandum enclosed herewith — supports the conclusion that VHG is entitled to recover the full amount of its business-interruption losses across the four-layer insurance tower. While the litigation path presents inherent uncertainties, the strength of VHG's factual and legal position, combined with the favorable trends in Florida insurance coverage law, gives us a high degree of confidence that litigation will produce a favorable outcome for VHG.
We are available to discuss this letter and the recommended strategy at your earliest convenience. Please do not hesitate to contact me directly at (305) 814-6112 or eforsythe@calderwoodharkness.com. Tiffany Rosenthal, the lead associate on this matter, can also be reached at (305) 814-6148 or trosenthal@calderwoodharkness.com.
We look forward to hearing from you and to continuing to serve VHG in this important matter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Elaine Forsythe, Partner 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-6112
Email: eforsythe@calderwoodharkness.com
cc: (via email)
Marcus Ellsworth, Chief Executive Officer, Verimark Hospitality Group Inc. Diane Calder, Chief Financial Officer, Verimark Hospitality Group Inc. Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc. Howard Bellamy, Billing Partner, Calderwood & Harkness LLP Tiffany Rosenthal, Lead Associate, Calderwood & Harkness LLP Andrew Fitzpatrick, Working Associate, Calderwood & Harkness LLP
Enclosure: Strategic Assessment and Litigation Recommendation Memorandum (dated January 15, 2023)
Property | Estimated BI Loss
Verimark Grand Key Resort | $31,400,000
Verimark Harborview Hotel & Conference Center | $18,700,000
Verimark Sunset Shores | $9,900,000
Total | $60,000,000
Layer | Carrier | Domicile | Policy Number | Limits | Annual Premium
Primary | Ironclad Indemnity Corporation | Connecticut | IIC-PRP-2022-07541 | $25M; $500K per-occurrence deductible | $980,000
1st Excess | Pinnacle Surplus Lines Inc. | Texas (surplus lines) | PSL-XS1-2022-3390 | $15M xs $25M | $410,000
2nd Excess | Montclair Assurance Company | New York | MAC-XS2-2022-09817 | $10M xs $40M | $265,000
3rd Excess | Sovereign Re Ltd. | Bermuda | SRL-XS3-2022-5102 | $10M xs $50M | $185,000
Total Tower | $60M above $500K deductible | $1,840,000
Scenario | Estimated Recovery
Best Case (prevail on all issues at trial) | $59,500,000 (full tower less $500K deductible)
Risk-Adjusted Range (sub-limit deletion prevails; moderate adjustments on other issues) | $42,000,000 – $55,000,000
Worst Case (sub-limit enforced; flood exclusion partially applied) | $12,000,000 – $18,000,000

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