flood-exclusion-applicability-memo.docx

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

flood-exclusion-applicability-memo.docx DOCUMENT Antitrust

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MEMORANDUM

TO: Elaine Forsythe, Responsible Partner, Calderwood & Harkness LLP

FROM: Andrew Fitzpatrick, Working Associate, Calderwood & Harkness LLP

DATE: December 2, 2022

RE: Flood Exclusion Applicability to Storm Surge Damage — Ironclad Primary Policy (IIC-PRP-2022-07541); Verimark Hospitality Group Inc. v. Ironclad Indemnity Corp. et al.

ENGAGEMENT: 1021-00003

CLIENT: Verimark Hospitality Group Inc. (Nasdaq: VMRK)

I. Executive Summary

The purpose of this memorandum is to analyze the flood exclusion contained in Ironclad Indemnity Corporation's primary property and business-interruption policy, Policy No. IIC-PRP-2022-07541 (the "Ironclad Policy" or the "Policy"), with a policy period of July 1, 2022 through July 1, 2023, as it applies to storm-surge damage sustained at Verimark Hospitality Group Inc.'s ("VHG") Grand Key Resort, located at Mile Marker 48, Marathon, Florida 33050, during Hurricane Callista. Hurricane Callista was a Category 4 hurricane that made landfall on September 18, 2022, with sustained winds of 145 miles per hour, causing catastrophic damage to VHG's resort portfolio in southwestern and southern Florida.

Ironclad Indemnity Corporation ("Ironclad") has taken the position—first articulated in its October 12, 2022 reservation of rights letter issued by Victor Haddon, Senior Vice President of Claims, and anticipated to be formalized in a coverage denial—that storm surge constitutes "flood" within the meaning of the Policy's flood exclusion, thereby eliminating coverage for a material portion of the Grand Key Resort's business-interruption losses. VHG has claimed business-interruption losses at the Grand Key Resort totaling $31.4 million for the 178-day period of closure from September 18, 2022 through March 15, 2023. The Grand Key Resort claim represents the largest single-property component of VHG's aggregate $60 million business-interruption claim across three affected properties.

This memorandum undertakes four distinct analytical tasks. First, it parses the Policy's flood exclusion language, examining the specific text, defined and undefined terms, and the exclusion's placement within the Policy's broader exclusionary framework. Second, it distinguishes among the three principal damage mechanisms at play—wind-driven rain, storm surge, and tidal or riverine flooding—and explains why these mechanistic distinctions have both factual and legal significance. Third, it analyzes how the flood exclusion interacts with the Policy's anti-concurrent causation ("ACC") clause, which purports to bar coverage for losses involving any combination of covered and excluded perils. The ACC clause is discussed in greater detail in a separate companion memorandum dated November 1, 2022, which this memorandum incorporates by reference and summarizes as relevant. Fourth, it surveys governing Florida law on the applicability of flood exclusions to hurricane-related storm surge, including the efficient proximate cause doctrine and the standards for interpreting exclusionary language in all-risk property policies.

Based on this analysis, it is my conclusion that VHG has strong arguments supporting coverage for the storm-surge-related losses at Grand Key Resort, on multiple independent grounds:

1. Storm surge caused by a named hurricane is not "flood" as that term is properly construed in an all-risk property policy. The flood exclusion was designed to address traditional flood events—riverine flooding, rainfall accumulation, and predictable tidal overflow—not the violent, wind-driven inundation of ocean water that characterizes hurricane storm surge. The Policy does not contain a standalone storm surge exclusion, and its flood exclusion language is, at minimum, ambiguous as applied to storm surge, requiring strict construction in VHG's favor under Florida law.

2. Even if storm surge constitutes "flood," the efficient proximate cause doctrine under Florida law limits the exclusion's reach. Where a covered peril—here, hurricane-force wind—is the efficient proximate cause of the loss, and an excluded peril is a secondary consequence of the covered peril, Florida law preserves coverage for the entire loss.

3. The ACC clause is either unenforceable under Florida law or, at minimum, does not bar coverage for the predominant wind-driven damage at Grand Key Resort. Florida courts have viewed ACC clauses with considerable skepticism, particularly where such clauses attempt to override the efficient proximate cause doctrine and effectively convert an all-risk policy into something far narrower.

This memorandum should be read in conjunction with the November 1, 2022 companion memorandum on Anti-Concurrent Causation Jurisprudence in Florida (Andrew Fitzpatrick), which provides a more granular examination of the ACC clause. Additionally, cross-references are made throughout to Tiffany Rosenthal's November 10, 2022 memorandum analyzing the business-interruption "period of restoration" issues and the October 20, 2022 memorandum by Tiffany Rosenthal and Andrew Fitzpatrick addressing the windstorm sub-limit dispute.

II. Factual Background

A. Hurricane Callista and Damage to Grand Key Resort

Hurricane Callista was first identified as a tropical disturbance in the central Caribbean Sea on September 8, 2022. The National Hurricane Center ("NHC") designated it a tropical storm on September 10, 2022, and elevated it to hurricane status on September 12, 2022, at which time it was formally named. The system intensified rapidly over the warm waters of the Straits of Florida, reaching Category 4 status on the Saffir-Veltason Hurricane Wind Scale on September 17, 2022, with maximum sustained winds of 145 miles per hour.

Hurricane Callista made landfall at approximately 1:30 PM EDT on September 18, 2022, in the Lower Florida Keys, near the Big Pine Key area of Monroe County, Florida. At landfall, the storm maintained Category 4 intensity with sustained winds of 145 miles per hour and a central pressure of approximately 937 millibars. The NHC's post-storm analysis, issued in October 2022, confirmed that Hurricane Callista produced a storm surge of 8 to 14 feet in Monroe County, with the most extreme surge levels recorded in the Middle Keys corridor, which includes the location of VHG's Grand Key Resort.

The Monroe County Emergency Management Office issued a mandatory evacuation order for all residents and visitors in the Florida Keys on September 16, 2022, two days before landfall. VHG, acting in compliance with the evacuation order and consistent with its emergency management protocols, evacuated all guests and non-essential staff from the Grand Key Resort on September 16, 2022, and undertook standard hurricane preparation measures, including the boarding of windows, securing of loose equipment, and powering down of mechanical systems.

The Grand Key Resort is a 312-room luxury resort and marina situated at Mile Marker 48 along U.S. Route 1 in Marathon, Florida 33050. The property occupies approximately 22 acres of waterfront land with direct exposure to both the Atlantic Ocean and the Gulf of Mexico via Florida Bay. Prior to Hurricane Callista, the Grand Key Resort maintained a pre-loss average daily rate ("ADR") of $389 and an average occupancy rate of 82%, reflecting its status as one of the premier hospitality properties in the Florida Keys. The resort's amenities include a 54-slip marina, three restaurants, a 12,000-square-foot spa and fitness facility, two swimming pools, and a 15,000-square-foot conference center.

The property sustained severe damage from both wind and storm surge during Hurricane Callista. The 145 mph sustained winds caused extensive roof destruction, window failures throughout the upper floors of the main resort building, structural compromise to the facade and load-bearing elements, and widespread damage to the conference center and spa facilities. Concurrently, the 8-to-14-foot storm surge inundated the ground-floor areas, lobby, ground-level restaurant spaces, the marina and associated structures, and critical mechanical systems including the HVAC plant, electrical switchgear, and emergency generators.

The Grand Key Resort has been closed continuously since September 18, 2022. VHG projects that the resort will reopen on or about March 15, 2023, following completion of reconstruction and remediation, resulting in a total closure period of approximately 178 days. The estimated business-interruption loss for the Grand Key Resort attributable to this closure is $31.4 million. This figure represents the largest single-property component of VHG's total $60 million aggregate business-interruption claim across all three affected properties.

B. Nature of Damage — Wind vs. Storm Surge

Calderwood & Harkness has retained Caldwell Engineering Associates Inc. ("Caldwell Engineering") to conduct a forensic engineering assessment of the damage to the Grand Key Resort and to differentiate between damage attributable to wind and damage attributable to storm surge. The engagement is led by Jeffrey Caldwell, PE, a licensed professional engineer in the State of Florida with over 25 years of experience in structural forensics and hurricane damage assessment. Caldwell Engineering's principal office is located at 7900 NW 25th Street, Suite 210, Doral, Florida 33122. Although Caldwell Engineering's final report has not yet been issued, preliminary findings are available and inform the factual analysis below.

Wind Damage. Caldwell Engineering's preliminary assessment identifies extensive damage caused directly by the 145 mph sustained winds and associated wind gusts, which likely exceeded 170 mph in localized areas. This wind damage includes: (i) destruction of approximately 60% of the roof system on the main resort building, including complete loss of the roof membrane, insulation, and deck in several sections; (ii) catastrophic failure of windows and curtain-wall glazing systems on the upper three floors (floors four through six) of the main building, with window failure rates exceeding 70% on the windward (southeast-facing) elevation; (iii) structural compromise to the facade system, including separation of cladding panels and exposure of the underlying structural framing; (iv) damage to the conference center roof structure, including uplift and partial collapse of the steel truss system; and (v) extensive damage to the spa building, including loss of the roof and partial wall collapse. Caldwell's preliminary opinion is that this wind damage alone was sufficient to render the Grand Key Resort uninhabitable and inoperable, independent of any storm-surge damage.

Storm-Surge Damage. The storm surge of 8 to 14 feet inundated the ground-floor and lower-level areas of the resort. Storm-surge damage is concentrated in: (i) the ground-floor lobby, reception areas, and retail spaces; (ii) the ground-floor restaurant and kitchen facilities; (iii) the mechanical plant, including the central HVAC system, electrical switchgear, main distribution panels, and emergency generators, all of which were located at or near ground level; (iv) the 54-slip marina, which sustained near-total destruction; and (v) the landscaping, hardscape, and site improvements in the immediate coastal area. Caldwell's preliminary assessment indicates that while the storm-surge damage was significant, particularly to the mechanical systems and marina, it was concentrated at or below the ground-floor level and affected a smaller percentage of the overall building area and structural components compared to the wind damage.

Wind-Driven Rain. A significant component of the interior damage to the upper floors of the Grand Key Resort was caused by wind-driven rain entering through wind-created openings—that is, through the broken windows, compromised roof systems, and facade breaches created by the 145 mph winds. This wind-driven rain caused extensive damage to interior finishes, furnishings, fixtures, and equipment on floors two through six. Wind-driven rain damage is a direct consequence of the wind peril and is mechanistically distinct from storm surge. Water entering a building through openings created by wind is a wind loss, not a flood loss, under standard insurance industry practice and under the terms of the Policy.

Key Factual Point Regarding Concurrence. While wind damage and storm-surge damage were concurrent and, at certain portions of the property, inseparable—particularly at the ground-floor level, where wind-driven structural damage and storm-surge inundation both affected the same areas—Caldwell Engineering's preliminary opinion is that the predominant cause of the property's overall destruction was wind. Critically, the wind damage also enabled and exacerbated the storm-surge infiltration by destroying the structural barriers (walls, doors, windows, and waterproofing systems) that would otherwise have resisted or mitigated the surge's penetration into the building interior. This causal sequence—wind first, then surge penetrating through wind-compromised openings—is significant for the efficient proximate cause analysis discussed in Section IV.B below.

Ironclad's Adjuster Assessment. Ironclad retained Arbor Claims Services LLC ("Arbor Claims") to conduct an independent adjustment of the Grand Key Resort loss. Denise Whitford, the lead independent adjuster assigned by Arbor Claims (principal office at 3300 W. Cypress Street, Suite 400, Tampa, Florida 33607), conducted her initial inspection of the Grand Key Resort on October 5, 2022—approximately 17 days after Hurricane Callista's landfall. Ironclad's coverage position, as articulated in the October 12, 2022 reservation of rights letter, relies in part on Arbor Claims' assessment, which apparently attributes a significant (but, to date, unspecified) portion of the Grand Key Resort's damage to storm surge and flooding. We have not yet obtained Arbor Claims' complete work file or detailed report, and obtaining these materials through discovery will be a priority. It should be noted that the 17-day gap between the storm and Whitford's inspection may affect the reliability of her damage attribution, as post-storm conditions—including cleanup, remediation efforts, and weather-related changes—may have altered the physical evidence available at the time of her site visit.

C. Other VHG Properties — Comparative Context

VHG's business-interruption claim encompasses three properties affected by Hurricane Callista. While the primary focus of this memorandum is the Grand Key Resort, a brief summary of the other two properties provides useful comparative context.

Harborview Hotel & Conference Center. Located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931, the Harborview Hotel is a 224-room full-service hotel and conference center on the Lee County barrier island of Fort Myers Beach. Lee County issued its mandatory evacuation order on September 17, 2022, one day after Monroe County. Although Hurricane Callista's eye did not make direct landfall in Lee County, the property was within the storm's destructive wind field, experiencing estimated sustained winds of 110 to 120 mph. The Lee County coastline experienced storm surge of 6 to 10 feet. The Harborview Hotel sustained combined wind and surge damage, though Caldwell Engineering's preliminary analysis indicates that the property experienced proportionally more wind damage than storm-surge damage compared to Grand Key Resort, owing in part to the slightly lower surge levels in Lee County and the property's somewhat more elevated site. The Harborview Hotel was closed for 135 days, from September 18, 2022 through January 31, 2023, with estimated business-interruption losses of $18.7 million.

Sunset Shores. Located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706, Sunset Shores is a 186-room boutique resort on St. Pete Beach in Pinellas County. This property was at the northern edge of Hurricane Callista's primary impact zone and sustained predominantly wind damage, with less storm-surge exposure than either Grand Key Resort or the Harborview Hotel. Sunset Shores experienced a partial closure of 73 days, followed by an extended period of reduced-capacity operations continuing through February 2023, with estimated business-interruption losses of $9.9 million.

VHG's total business-interruption claim across all three properties is $60 million. The primary analysis in this memorandum focuses on the Grand Key Resort because Ironclad's flood exclusion argument is strongest as applied to that property, given the 8-to-14-foot storm-surge levels recorded in Monroe County and the concentration of ground-level damage at the Grand Key Resort site. If the flood exclusion argument fails as to Grand Key Resort, it will be even weaker as applied to the Harborview Hotel and Sunset Shores, where surge levels were lower and wind damage was proportionally greater.

D. Insurance Program Structure

VHG's property and business-interruption insurance program for the relevant policy period consists of a layered tower totaling $60 million above a $500,000 deductible. The structure is as follows:

All policies in the tower are all-risk policies, covering direct physical loss or damage to covered property, including business-interruption and extra-expense coverage. The Pinnacle Surplus Lines first excess policy is expressly follow-form with the Ironclad primary policy, meaning that the flood exclusion analysis applicable to the Ironclad Policy directly governs the first excess layer as well. The Montclair and Sovereign Re policies contain their own terms and conditions, which must be independently reviewed for any material deviations in flood exclusion wording; however, those policies are only reached if VHG's covered losses exceed $40 million and $50 million, respectively, making the flood exclusion analysis most critical at the primary and first-excess levels where the bulk of the exposure resides.

The total tower of $60 million corresponds precisely to VHG's aggregate claimed business-interruption losses across all three properties. The adequacy of the tower to respond to the full claim therefore depends critically on the resolution of both the flood exclusion issue addressed in this memorandum and the windstorm sub-limit issue addressed in the October 20, 2022 memorandum.

III. Policy Language Analysis

A. The Coverage Grant — All-Risk Framework

The Ironclad primary policy is an "all-risk" property and business-interruption policy. This characterization is significant because of the allocation of burden it creates. Under an all-risk policy, the insuring agreement provides the broadest possible scope of coverage, and exclusions operate to carve out specific, enumerated perils from that broad grant. The Policy's coverage grant provides, in relevant part:

"This Policy insures against all risks of direct physical loss or damage to Covered Property at Covered Locations, unless such loss or damage is specifically excluded or limited elsewhere in this Policy."

Under this framework—and under well-established Florida law and standard insurance principles—the burden allocation is clear. The policyholder bears the initial burden of demonstrating that a loss falls within the coverage grant; that is, VHG must show that the Grand Key Resort suffered "direct physical loss or damage" from a covered peril. This threshold showing is straightforward here: the Grand Key Resort suffered catastrophic physical damage from Hurricane Callista, a named hurricane, and no party disputes that a hurricane is not itself an excluded peril under the all-risk coverage grant.

Once the policyholder has met this threshold burden, the burden shifts to the insurer to prove that a specific exclusion applies to bar or limit coverage. See Wallach v. Rosenberg, 527 So. 2d 1386, 1387 (Fla. 3d DCA 1988) ("Exclusionary clauses are construed even more strictly against the insurer than coverage clauses."). This burden allocation is fundamental to the analysis that follows: Ironclad bears the burden of proving that the flood exclusion applies to eliminate coverage for the storm-surge component of VHG's claim.

The Policy's business-interruption coverage is triggered by physical loss or damage that causes an interruption in business operations during the "period of restoration," which is defined in the Policy and has been analyzed separately in Tiffany Rosenthal's November 10, 2022 memorandum regarding the period of restoration and its calculation. For purposes of this memorandum, it suffices to note that if the underlying physical loss or damage is covered, the consequent business-interruption loss is likewise covered, subject to applicable limits and sub-limits.

B. The Flood Exclusion — Text

The flood exclusion in the Ironclad Policy is set forth in Section IV(B)(3) of the Policy's General Exclusions. The relevant exclusionary language provides:

"This Policy does not insure against loss or damage caused by or resulting from flood, including but not limited to surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether or not driven by wind."

Several features of this language warrant close examination.

The Term "Flood." The exclusion is captioned and framed as a "flood" exclusion. The term "flood" is not independently defined in the Policy's definitions section. The absence of a specific definition is significant: where a policy term is undefined, Florida courts construe it according to its "plain and ordinary meaning" as understood by the average policyholder. See Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000). The plain and ordinary meaning of "flood" to a reasonable policyholder connotes the overflow of water from rivers, lakes, or streams; the accumulation of rainfall on normally dry land; or predictable tidal events—not the violent, wind-driven incursion of ocean water during a hurricane. This interpretive principle is central to VHG's argument that storm surge falls outside the exclusion's intended scope.

The Illustrative List. The exclusion provides an illustrative, non-exhaustive list of phenomena that constitute "flood": "surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing." This list, while broad, reflects the traditional categories of water-related events associated with flood risk. Notably, the list does not include the term "storm surge" or any equivalent phrase. The absence of "storm surge" from a non-exhaustive list is not dispositive—the "including but not limited to" phrasing allows for additional items of the same general character. However, under the canon of construction known as ejusdem generis, the unspecified items in a non-exhaustive list should be of the same kind or character as the items specifically listed. Storm surge—a transient, wind-driven ocean inundation event of catastrophic force and short duration—is categorically different from "surface water" (gradual accumulation of rainfall), "tidal water" (predictable tidal cycles), and "overflow of streams or other bodies of water" (riverine flooding).

The "Whether or Not Driven by Wind" Language. The concluding phrase—"all whether or not driven by wind"—is the linchpin of Ironclad's position. Ironclad will argue that this language was specifically designed to capture wind-propelled water events, including storm surge, and that its inclusion demonstrates the parties' intent to exclude all water damage regardless of its wind-driven origin. VHG's response to this argument is twofold. First, the phrase "whether or not driven by wind" modifies the enumerated items in the preceding list ("surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing")—it clarifies that those specific categories of flood are excluded regardless of a wind component, but it does not independently expand the definition of "flood" to include an entirely distinct meteorological phenomenon like hurricane storm surge. Second, even if the language is ambiguous as to whether it captures storm surge, the ambiguity must be resolved in VHG's favor under Florida's well-established rule of contra proferentem, which construes ambiguous insurance policy language against the insurer and in favor of coverage. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003).

Absence of a Standalone Storm Surge Exclusion. The Policy does not contain a separately captioned or defined "storm surge" exclusion. This is significant. If Ironclad intended to exclude storm surge—a well-known and well-understood risk in coastal Florida property insurance—it could have done so explicitly. The insurance industry is well aware of the distinction between storm surge and traditional flooding. The National Flood Insurance Program ("NFIP") has maintained a separate, explicit definition that encompasses storm surge since the program's inception. Some commercial property insurers have adopted specific storm surge exclusions or endorsements. Ironclad's decision not to include a specific storm surge exclusion, and instead to rely on a general flood exclusion, supports the conclusion that the parties did not intend the flood exclusion to capture storm surge.

Distinction from NFIP Definitions. The NFIP Standard Flood Insurance Policy ("SFIP") defines "flood" to explicitly include "the inland or shoreline inundation or unusual and rapid accumulation of runoff of surface waters from any source" and specifically encompasses "storm surge." The Ironclad Policy is not an NFIP policy. It is a private, all-risk commercial property policy issued in the surplus lines market. The NFIP definition should not be imported into the Ironclad Policy, and any attempt by Ironclad to do so should be resisted. The NFIP definition exists in a fundamentally different regulatory and contractual context—the NFIP is a government-subsidized program specifically designed to provide flood coverage, and its expansive definition of "flood" serves the program's purposes. The Ironclad Policy, by contrast, is a private all-risk policy that covers a broad range of perils, including windstorm, and excludes only those perils specifically enumerated. Grafting the NFIP definition onto the Ironclad Policy would impermissibly narrow the all-risk coverage grant that VHG purchased and for which it paid substantial premiums.

C. The Anti-Concurrent Causation (ACC) Clause — Brief Overview

The Ironclad Policy contains an anti-concurrent causation clause that precedes and governs the enumerated exclusions, including the flood exclusion. The ACC clause provides, in relevant part:

"This Policy does not insure against loss or damage caused directly or indirectly by any of the following excluded causes or events. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."

The practical effect of the ACC clause, if enforceable, is substantial: it would bar recovery for any loss in which an excluded peril (such as "flood") is a contributing cause, even if a covered peril (such as windstorm) is also a contributing cause—and even if the covered peril is the predominant, efficient, or initiating cause of the loss. In the context of Hurricane Callista, the ACC clause would potentially allow Ironclad to deny coverage for the entirety of the Grand Key Resort loss if any portion of that loss is attributable to storm surge, so long as storm surge qualifies as "flood" under the exclusion.

The enforceability of ACC clauses under Florida law is a complex and evolving question that is addressed in detail in the companion memorandum dated November 1, 2022 (Andrew Fitzpatrick, "Florida Anti-Concurrent Causation Jurisprudence"). That memorandum is incorporated herein by reference. For purposes of this memorandum, the key points are summarized in Section IV.C below.

D. Wind-Driven Rain Endorsement / Provisions

The Ironclad Policy does not contain a specific endorsement addressing wind-driven rain damage. However, the Policy's coverage grant and the general principles governing all-risk property insurance support the conclusion that wind-driven rain damage is covered as a wind loss, not excluded as a flood loss.

Wind-driven rain damage occurs when rainwater enters a building through openings created by wind—that is, through broken windows, compromised roofing systems, or other breaches in the building envelope caused by the force of the wind. This mechanism is categorically different from storm surge. Wind-driven rain does not involve the rise or accumulation of water on the ground surface; it involves the horizontal propulsion of rainwater through wind-created openings. The water intrusion is a direct and immediate consequence of the wind's force, both in propelling the rain and in creating the openings through which it enters.

Standard insurance industry practice recognizes this distinction. The Quillon Group ("ISO") commercial property forms, which are widely used as benchmarks in the industry, generally treat water damage resulting from rain entering through wind-created openings as a covered wind loss, not a flood loss. The Ironclad Policy, while not an ISO-form policy, should be interpreted consistently with this industry understanding, particularly given the absence of any language in the Policy suggesting that wind-driven rain is excluded under the flood exclusion.

This distinction is practically important because a significant portion of the interior damage to the upper floors of the Grand Key Resort was caused by wind-driven rain entering through the massive window failures and roof breaches created by Hurricane Callista's 145 mph winds. This damage is unambiguously attributable to wind—it occurred above the storm-surge inundation level, it entered through wind-created openings, and it was driven by the force of the wind itself. Ironclad cannot plausibly characterize this damage as "flood" regardless of how broadly it construes the flood exclusion.

IV. Legal Analysis — Florida Law

A. Classification of Storm Surge: "Flood" or Not?

The central legal question presented by Ironclad's coverage position is whether hurricane-generated storm surge constitutes "flood" within the meaning of a private all-risk property policy's flood exclusion. This is ultimately a question of policy interpretation governed by Florida law. For the reasons set forth below, VHG has strong arguments that the answer is no.

1. Argument That Storm Surge Is Not "Flood"

Storm surge is a direct consequence of hurricane-force winds pushing ocean water inland. It is a wind-driven phenomenon, fundamentally different in its mechanism, origin, and character from the types of water events that the flood exclusion was historically designed to address. The National Weather Service defines storm surge as "an abnormal rise of water generated by a storm, over and above the predicted astronomical tides." That rise is caused primarily by the force of the wind: the sustained winds of a hurricane drive ocean water toward shore and push it up onto normally dry land. Without the wind, there is no storm surge. Storm surge is not the product of rainfall accumulation, river overflow, snowmelt, or any of the other mechanisms associated with traditional flooding.

The flood exclusion in the Ironclad Policy was historically designed to address gradual, predictable, or non-wind-related water events. The enumerated examples in the exclusion—"surface water, waves, tidal water, overflow of streams or other bodies of water"—reflect this design purpose. These are categories of water events that are either gradual (rainfall accumulation producing surface water), predictable (tidal water), or attributable to non-wind causes (overflow of streams or rivers). Hurricane storm surge is none of these things: it is sudden, unpredictable in magnitude, and entirely wind-driven.

Under Florida insurance law, policy exclusions are strictly construed against the insurer and in favor of coverage. This is a bedrock principle of Florida insurance jurisprudence, applicable with particular force to exclusionary clauses in all-risk policies. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003) ("[E]xclusions in insurance contracts are construed more strictly against the insurer than coverage clauses."); Taurus Holdings, Inc. v. U.S. Fid. & Guar. Co., 913 So. 2d 528, 532 (Fla. 2005) ("[E]xclusionary clauses … are to be strictly construed against the insurer."). If there is any ambiguity in whether the term "flood" encompasses hurricane-generated storm surge, that ambiguity must be resolved in VHG's favor.

Florida courts have construed flood exclusions narrowly in the hurricane context. While Florida appellate decisions directly addressing whether storm surge is "flood" are limited, the broader pattern of Florida insurance jurisprudence strongly favors narrow construction of flood exclusions and strict adherence to the rule that the insurer must clearly and unambiguously exclude a peril to avoid coverage. The Florida Supreme Court has repeatedly emphasized that an insurer seeking to rely on an exclusion must demonstrate that the exclusion "clearly and unambiguously" applies to the loss at issue. See Deni Assocs. of Fla., Inc. v. State Farm Fire & Cas. Ins. Co., 711 So. 2d 1135, 1139 (Fla. 1998). Where the exclusion is susceptible to more than one reasonable interpretation, it must be construed against the insurer.

Moreover, the reasonable expectations of the policyholder support VHG's position. VHG, a sophisticated commercial property owner operating luxury resorts in coastal Florida, purchased an all-risk property policy specifically to obtain the broadest available coverage for its hurricane-exposed properties. VHG's reasonable expectation was that its all-risk policy would cover damage from hurricanes—the most significant peril to which its Florida Keys resort is exposed—including all consequences of hurricane-force winds. A reasonable policyholder would not expect a "flood" exclusion to eviscerate coverage for the defining characteristic of a hurricane—the wind-driven water that accompanies it.

2. Ironclad's Likely Counterarguments

Ironclad will make several counterarguments, each of which can be effectively addressed.

First, Ironclad will argue that the "whether or not driven by wind" language was specifically added to capture wind-propelled water events, including storm surge. This argument has surface appeal but ultimately fails. The "whether or not driven by wind" phrase, read in context, modifies the preceding enumerated items. It clarifies that "surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing" are excluded whether or not wind is a contributing factor. This addresses the well-known problem of wind-driven rain and wind-propelled waves—relatively minor water events that become more severe when accompanied by wind. It does not, however, independently expand the definition of "flood" to encompass storm surge, which is an entirely separate meteorological phenomenon of a different order of magnitude and character.

Second, Ironclad will argue that "surface water" and "waves" in the exclusion arguably cover storm surge. Storm surge, however, is not "surface water" in any commonly understood sense. "Surface water" refers to water on the surface of the ground from rainfall, snowmelt, or other precipitation—not the massive, wind-driven incursion of ocean water during a hurricane. Nor is storm surge accurately described as "waves." A wave is an oscillation of the water surface; storm surge is a sustained rise in water level driven by wind and atmospheric pressure. The distinction is not merely semantic—it reflects fundamentally different physical phenomena with different causes, characteristics, and effects.

Third, Ironclad will cite decisions from other jurisdictions, most notably the post-Hurricane Katrina decisions from Mississippi and the Fifth Circuit Court of Appeals, that have held storm surge falls within the scope of flood exclusions. These decisions are discussed further below, but they are distinguishable on multiple grounds: they arose under different state law, involved different policy language, and were decided in a legal context (Mississippi law) that does not apply the same strict construction principles as Florida.

3. Persuasive Authority from Other Jurisdictions

The most prominent decisions addressing the storm-surge/flood question arose out of Hurricane Katrina in 2005, primarily in Mississippi. In Leonard v. Nationwide Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007), the Fifth Circuit, applying Mississippi law, held that storm surge caused by Hurricane Katrina constituted "flood" within the meaning of a homeowner's policy's flood exclusion, and that the policy's ACC clause barred coverage for losses caused by concurrent wind and surge. Similarly, in In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007), the Fifth Circuit upheld the application of flood exclusions to storm-surge damage in the New Orleans context.

These decisions are not controlling in Florida, and they should be carefully distinguished. Mississippi law does not follow the efficient proximate cause doctrine; Mississippi applies a "concurrent causation" framework that is more favorable to insurers. Florida, by contrast, follows the efficient proximate cause doctrine, which provides that where a covered peril initiates or is the predominant cause of a chain of events leading to loss, coverage is preserved even if an excluded peril is also a contributing cause. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016). Additionally, the specific policy language at issue in the Mississippi cases differed in material respects from the Ironclad Policy language. The Mississippi cases generally involved homeowner's policies with different exclusionary frameworks, and the courts' reasoning rested in part on the specific relationship between private insurance and the NFIP in the Mississippi regulatory context, which does not apply in Florida.

Post-Katrina decisions from Louisiana and Texas are more mixed. In Chauvin v. State Farm Fire & Casualty Co., 450 F. Supp. 2d 660 (E.D. La. 2006), the court found that the flood exclusion in a homeowner's policy did not unambiguously apply to storm surge, though this decision was later qualified by appellate rulings. Texas courts have generally deferred to the specific policy language and have reached differing results depending on the wording of the exclusion. The variability in these outcomes underscores the principle that the interpretation of a flood exclusion is a question of specific policy language and governing state law, not a universal rule.

B. Florida's Efficient Proximate Cause Doctrine

Even if this Court were to conclude that storm surge constitutes "flood" within the meaning of the Ironclad Policy's flood exclusion, coverage would still be preserved under Florida's efficient proximate cause ("EPC") doctrine.

The EPC doctrine provides that where a covered peril sets in motion a chain of events that includes an excluded peril, and the covered peril is the "efficient proximate cause" of the loss, coverage exists. The "efficient proximate cause" is the cause that sets the chain of events in motion and is the predominant or moving cause of the loss. This doctrine is well-established in Florida insurance law and has been applied by Florida courts in the context of multi-peril losses, including hurricane-related claims. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); Fayad v. Clarendon Nat'l Ins. Co., 899 So. 2d 1082 (Fla. 2005).

The application of the EPC doctrine to the Grand Key Resort loss is straightforward. Hurricane Callista's 145 mph winds were the efficient proximate cause of both the wind damage and the storm surge damage at the property. The storm surge was not an independent, concurrent peril operating separately from the wind; it was a direct, foreseeable, and inevitable consequence of the wind itself. Without the 145 mph sustained winds of Hurricane Callista, there would have been no 8-to-14-foot storm surge in Monroe County. The storm surge was the product of the wind, generated by the same physical forces that caused the roof destruction, window failures, and structural damage. Wind was both the initiating cause and the predominant cause of the entire chain of damage.

This causal relationship is supported by the meteorological evidence. The National Weather Service's storm surge forecasting models are driven primarily by wind speed and direction. The NHC's storm surge warnings for Monroe County were issued based on the wind characteristics of Hurricane Callista. The physical mechanism of storm surge—wind forcing ocean water onshore through sustained pressure and friction—is well understood and establishes wind as the proximate and predominant cause of the surge.

The EPC analysis is further supported by the specific factual circumstances at Grand Key Resort. Caldwell Engineering's preliminary findings indicate that the wind damage preceded and enabled the storm-surge damage: the wind destroyed the structural barriers (exterior walls, windows, doors, and waterproofing systems) that would have resisted or mitigated the storm surge's penetration into the building interior. The causal sequence at Grand Key Resort was: (1) 145 mph winds struck the property, causing catastrophic structural damage; (2) wind-created breaches in the building envelope allowed storm-surge water to penetrate further and faster into the interior than it would have through an intact structure; and (3) the combined effects rendered the property uninhabitable and inoperable. Under the EPC doctrine, wind—as the initiating, predominant, and moving cause of this entire sequence—is the efficient proximate cause, and coverage should be preserved for the entire loss.

Key Florida decisions applying or discussing the EPC doctrine in analogous contexts include Glenrock Enterprises, 208 So. 3d 694 (Fla. 2016), in which the Florida Supreme Court reaffirmed the continuing vitality of the EPC doctrine in Florida insurance law. While Sebo addressed defective construction rather than hurricane damage, the court's reasoning—that the EPC doctrine requires courts to identify the predominant cause of a loss and to provide coverage where that cause is a covered peril—applies with equal force here. Additionally, in Fayad v. Clarendon National Insurance Co., 899 So. 2d 1082 (Fla. 2005), the Florida Supreme Court addressed the interplay between covered and excluded perils and emphasized the importance of identifying the "efficient proximate cause" rather than permitting the insurer to isolate a secondary excluded peril to deny the entire claim.

It bears emphasis that the EPC doctrine applies as a default rule of Florida law unless validly overridden by the policy's ACC clause. The enforceability of the ACC clause is discussed in Section IV.C below.

C. Enforceability of the ACC Clause Under Florida Law

As detailed in the November 1, 2022 companion memorandum (incorporated herein by reference), VHG has strong arguments that the ACC clause in the Ironclad Policy is either unenforceable under Florida law or, at minimum, limited in its application to the facts of this case.

Florida courts have viewed ACC clauses with considerable skepticism. The ACC clause represents an attempt by the insurer to contractually override the EPC doctrine—a judicially created doctrine that Florida courts have recognized as fundamental to the fair administration of insurance contracts. An ACC clause, by its terms, purports to eliminate coverage for any loss in which an excluded peril is a contributing cause, even if the excluded peril is merely a secondary or incidental consequence of a covered peril that is the predominant cause of the loss. This result is inconsistent with the reasonable expectations of policyholders who purchase all-risk coverage and with the public policy underlying the EPC doctrine.

Several Florida courts have held ACC clauses unenforceable as against public policy when they operate to exclude coverage for a covered peril that is the dominant cause of loss. While the Florida Supreme Court has not issued a definitive ruling on the enforceability of ACC clauses in all contexts, the lower appellate courts have expressed significant reservations. In particular, courts have questioned whether an ACC clause can convert what would otherwise be a covered loss under an all-risk policy into an uncovered loss simply because an excluded peril—often one that is itself caused by the covered peril—is also present.

Even courts that have enforced ACC clauses in other contexts have generally required that the excluded peril be a "but-for" cause and an independent, concurrent cause of the loss—not merely a secondary effect or inevitable consequence of the covered peril. This distinction is critical in the hurricane context. Storm surge during Hurricane Callista was not an independent, concurrent cause operating alongside wind; it was a direct, inevitable, and inseparable effect of the wind itself. The wind and the surge were not two separate events happening to coincide; they were a single, indivisible hurricane event in which wind generated surge as one of its primary destructive mechanisms. Under this analysis, the ACC clause should not apply because there is no genuine "concurrent" causation—there is a single cause (wind) producing multiple effects (structural damage and water inundation), all of which are within the causal chain initiated by the covered peril.

Decisions from other jurisdictions enforcing ACC clauses—most notably the Fifth Circuit decisions in Leonard v. Nationwide Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007), and related Katrina cases—are not controlling in Florida. Those decisions applied Mississippi law, which does not follow the EPC doctrine, and arose in a different regulatory and jurisprudential context. Florida courts are not bound by the Fifth Circuit's interpretation of ACC clauses under Mississippi law, and the weight of Florida authority supports a narrower application of such clauses.

For a more comprehensive treatment of these issues, including a detailed case-by-case analysis of Florida decisions addressing ACC clauses, I refer to the November 1, 2022 companion memorandum.

D. Apportionment / Segregation of Damages

As an alternative argument—applicable only in the event that the Court finds the flood exclusion enforceable and the ACC clause valid—VHG is entitled to recover for all damage attributable to wind and wind-driven rain, with only the discrete, separable storm-surge damage excluded.

Under Florida law, where covered and excluded causes of loss can be segregated, the insured is entitled to recover the covered portion of the loss. See Fla. Stat. § 627.701(4)(a); see also Citizens Prop. Ins. Corp. v. Hilliard, 127 So. 3d 1246 (Fla. 4th DCA 2013). The insurer may not use the presence of an excluded cause as a basis for denying the entire claim where the covered and excluded portions of the loss are capable of being separated and quantified.

Caldwell Engineering Associates' forensic analysis will be critical to establishing the apportionment of Grand Key Resort's damage between wind-caused and surge-caused components. As noted above, Caldwell's preliminary findings indicate that the predominant structural damage was caused by wind, including roof destruction, window failures, facade damage, and structural compromise to the upper floors. Storm-surge damage was concentrated at the ground-floor level, affecting the lobby, ground-floor restaurant, mechanical systems, and the marina. While the mechanical system damage is significant—particularly the HVAC plant and electrical switchgear—it represents a separable and smaller component of the overall loss compared to the extensive wind damage throughout the property.

Critically, even under a worst-case apportionment scenario—one that attributes the maximum defensible portion of the loss to storm surge—VHG's wind-only business-interruption losses at Grand Key Resort would substantially exceed the amounts at issue. Caldwell's preliminary assessment suggests that even if all ground-level damage were attributed entirely to storm surge (a generous assumption for Ironclad, as some ground-level damage was clearly wind-caused), the wind-caused damage alone was sufficient to close the Grand Key Resort for the entire 178-day period. The upper-floor guest rooms and public spaces required full reconstruction due to wind and wind-driven rain damage, and the timeline for that reconstruction—not the ground-floor storm-surge remediation—was the critical-path item driving the overall period of restoration. Under this analysis, even with full apportionment, VHG's covered wind-only business-interruption loss at Grand Key Resort would remain in the range of $20 million to $25 million.

When combined with the wind-caused business-interruption losses at the Harborview Hotel and Sunset Shores—which are subject to weaker flood exclusion arguments given the lower storm-surge levels at those properties—VHG's total wind-only business-interruption claim across all three properties would still far exceed the disputed amounts and would likely exhaust or nearly exhaust the primary policy limits even without any storm-surge attribution. This apportionment argument therefore provides a robust fallback position even under the most adverse assumptions.

Dr. Helen Vasquez of Meridian Forensic Economics LLC is being asked to prepare an alternative damages quantification that includes a wind-only apportionment scenario alongside the primary full-coverage quantification, as discussed further in Section VIII.B below.

E. Burden of Proof

Florida law places the burden of proof squarely on the insurer to establish the applicability of any exclusion. See Wallach v. Rosenberg, 527 So. 2d 1386, 1387 (Fla. 3d DCA 1988); Brightmoor Indemnity Co. v. Pridgen, 498 So. 2d 1245, 1248 (Fla. 1986). In the context of this dispute, the burden allocation operates as follows:

VHG's Burden. VHG must demonstrate that the Grand Key Resort suffered "direct physical loss or damage" from a covered peril, giving rise to business-interruption losses during the period of restoration. This burden is easily met. The Grand Key Resort suffered catastrophic physical damage from Hurricane Callista, a named hurricane that is a covered peril under the all-risk policy. The property has been closed for 178 days as a direct result of that damage. No party contests these facts.

Ironclad's Burden. Ironclad bears the burden of proving each element necessary to invoke the flood exclusion. Specifically, Ironclad must prove: (1) that storm surge constitutes "flood" within the meaning of the Policy's flood exclusion—a legal question that, as discussed above, is at minimum debatable and subject to strict construction against Ironclad; (2) that the flood exclusion applies to the specific losses claimed by VHG, which requires Ironclad to demonstrate that the storm-surge component of the damage is the cause of the business-interruption losses, rather than the wind damage that independently rendered the property uninhabitable; (3) that the ACC clause is enforceable under Florida law to bar coverage for concurrent wind-and-surge claims—a proposition that faces substantial legal hurdles, as discussed in Section IV.C above and in the November 1, 2022 companion memorandum; and (4) if apportionment is at issue, that the storm-surge-attributable portion of the loss is quantifiable and separable from the covered wind-attributable portion, which in turn requires Ironclad to present competent forensic evidence supporting its damage allocation—evidence that, based on the Arbor Claims assessment to date, appears conclusory and insufficiently detailed.

This burden allocation is significant from a litigation strategy perspective. Ironclad cannot simply assert that "some flooding occurred" and thereby shift the burden to VHG to prove the absence of flood. Ironclad must affirmatively demonstrate, through admissible evidence, that the flood exclusion applies to the specific losses at issue and that the exclusion operates to bar coverage under the applicable legal standards.

V. Distinction Among Damage Mechanisms

A clear understanding of the distinct damage mechanisms at play is essential to the legal analysis and to the presentation of VHG's claim. The following taxonomy sets forth the four principal damage mechanisms, their characteristics, and their coverage implications.

A. Wind Damage

The direct structural damage caused by Hurricane Callista's 145 mph sustained winds represents the most significant category of damage at the Grand Key Resort. This includes roof destruction across approximately 60% of the main resort building, catastrophic window and curtain-wall failures on the upper floors, facade damage and cladding separation, structural compromise to the conference center roof system, and partial wall collapse at the spa building. This damage was caused by the direct application of wind force to the building structure, independent of any water-related mechanism.

Wind damage of this nature is unambiguously covered under the Ironclad Policy's all-risk coverage grant. There is no wind exclusion in the Policy. Ironclad does not contend otherwise; its position is limited to asserting the flood exclusion and the windstorm sub-limit. The wind damage alone was sufficient to render the Grand Key Resort uninhabitable and to necessitate the full 178-day closure period. This point is critical: even if every dollar of storm-surge damage were excluded, the wind damage independently supports a substantial business-interruption claim. The windstorm sub-limit issue, which is the subject of the separate October 20, 2022 memorandum by Tiffany Rosenthal and Andrew Fitzpatrick, raises a separate question regarding the applicable limit for wind-caused business-interruption losses, but does not affect the threshold question of coverage.

B. Wind-Driven Rain

Wind-driven rain damage refers to water intrusion caused by rainwater entering the building through openings created by wind. At the Grand Key Resort, wind-driven rain entered through the shattered windows on the upper floors, through the compromised roof system, and through facade breaches caused by wind-driven cladding separation. This wind-driven rain caused extensive damage to interior finishes (drywall, flooring, ceiling systems), furnishings, fixtures, and equipment on floors two through six of the main resort building.

Wind-driven rain is not "flood." It is a direct and immediate consequence of the wind peril. The water does not rise from below; it enters horizontally or from above through wind-created openings. Standard insurance industry practice, consistent with ISO commercial property forms and industry custom, treats water damage from rain entering through wind-created openings as a wind loss. The Policy's flood exclusion refers to "surface water, waves, tidal water, overflow of streams or other bodies of water"—none of which describes the mechanism of wind-driven rain intrusion through building envelope breaches.

Ironclad has not, to date, asserted that wind-driven rain damage is excluded under the flood exclusion. Its October 12, 2022 reservation of rights letter focuses on "storm surge and flooding" as the basis for the flood exclusion defense. VHG should, however, be prepared for the possibility that Ironclad may attempt to reclassify some wind-driven rain damage as "flood" damage during the adjustment process, particularly with respect to lower-floor water intrusion where the origin of the water (rain through wind-created openings vs. rising storm surge) may be difficult to distinguish. Caldwell Engineering's forensic analysis should specifically address the distinction between wind-driven rain intrusion and storm-surge inundation at each level of the building.

C. Storm Surge

Storm surge is the abnormal rise of ocean water driven inland by hurricane-force winds. At the Grand Key Resort, the 8-to-14-foot storm surge produced by Hurricane Callista inundated the ground-floor and below-grade areas of the property, including the lobby, ground-floor restaurant and kitchen, the mechanical plant (HVAC, electrical switchgear, emergency generators), the 54-slip marina, and associated exterior improvements.

Storm surge is the contested damage mechanism in this dispute. Its critical attribute for coverage purposes is its mechanistic link to wind: storm surge is caused by wind. It is not an independent weather event arising separately from the hurricane; it is a direct product of the same sustained winds that caused the structural damage to the building. The National Weather Service, the NHC, and the meteorological community uniformly recognize storm surge as a wind-driven phenomenon. Storm surge magnitude is principally a function of wind speed, wind direction, storm size, and coastal topography. In the case of Hurricane Callista, the 8-to-14-foot storm surge in Monroe County was a direct and predictable consequence of the 145 mph sustained winds at landfall.

Ironclad's position is that storm surge is "flood" regardless of its wind-driven origin, relying on the "whether or not driven by wind" language in the flood exclusion. As discussed in Section IV.A above, this position is subject to strong challenge under Florida law.

VHG's position is that storm surge during a hurricane is fundamentally a wind-driven phenomenon that should not be characterized as "flood" in an all-risk policy context. The flood exclusion was designed to address traditional flood events, not the defining destructive mechanism of a hurricane. At minimum, even if the Court finds storm surge to be "flood," Florida's EPC doctrine preserves coverage because wind was the efficient proximate cause of both the surge and the structural damage, and the ACC clause is unenforceable or inapplicable to the facts of this case.

D. Tidal Flooding / Riverine Flooding

Traditional "flood"—the type of water event that the flood exclusion was designed to address—encompasses the overflow of rivers, creeks, and streams; the accumulation of rainfall on normally dry land; and predictable tidal events such as coastal high tides and king tides. These events are characterized by their gradual onset, their predictability (in the case of tidal flooding), and their origin in non-wind-related causes (rainfall, snowmelt, tidal cycles, or dam failure).

No traditional flooding of this type occurred at the Grand Key Resort during Hurricane Callista. The property is not situated near any river, stream, or inland waterway. The water intrusion at Grand Key Resort was entirely attributable to two mechanisms: (1) storm surge—wind-driven ocean water pushed inland by Hurricane Callista's winds; and (2) wind-driven rain entering through wind-created openings. Neither of these is "flood" in the traditional sense.

This distinction is significant because it demonstrates that the flood exclusion, as written and as historically understood, was not designed to address the type of water damage that occurred at Grand Key Resort. The exclusion's enumerated examples—"surface water, waves, tidal water, overflow of streams or other bodies of water"—describe traditional flood mechanisms, not hurricane storm surge. Applying the exclusion to storm su

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION AND ATTORNEY WORK PRODUCT THIS MEMORANDUM IS PREPARED IN ANTICIPATION OF LITIGATION AND IS PROTECTED FROM DISCLOSURE BY THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK PRODUCT DOCTRINE
MEMORANDUM
TO: Elaine Forsythe, Responsible Partner, Calderwood & Harkness LLP
FROM: Andrew Fitzpatrick, Working Associate, Calderwood & Harkness LLP
DATE: December 2, 2022
RE: Flood Exclusion Applicability to Storm Surge Damage — Ironclad Primary Policy (IIC-PRP-2022-07541); Verimark Hospitality Group Inc. v. Ironclad Indemnity Corp. et al.
ENGAGEMENT: 1021-00003
CLIENT: Verimark Hospitality Group Inc. (Nasdaq: VMRK)
I. Executive Summary
The purpose of this memorandum is to analyze the flood exclusion contained in Ironclad Indemnity Corporation's primary property and business-interruption policy, Policy No. IIC-PRP-2022-07541 (the "Ironclad Policy" or the "Policy"), with a policy period of July 1, 2022 through July 1, 2023, as it applies to storm-surge damage sustained at Verimark Hospitality Group Inc.'s ("VHG") Grand Key Resort, located at Mile Marker 48, Marathon, Florida 33050, during Hurricane Callista. Hurricane Callista was a Category 4 hurricane that made landfall on September 18, 2022, with sustained winds of 145 miles per hour, causing catastrophic damage to VHG's resort portfolio in southwestern and southern Florida.
Ironclad Indemnity Corporation ("Ironclad") has taken the position—first articulated in its October 12, 2022 reservation of rights letter issued by Victor Haddon, Senior Vice President of Claims, and anticipated to be formalized in a coverage denial—that storm surge constitutes "flood" within the meaning of the Policy's flood exclusion, thereby eliminating coverage for a material portion of the Grand Key Resort's business-interruption losses. VHG has claimed business-interruption losses at the Grand Key Resort totaling $31.4 million for the 178-day period of closure from September 18, 2022 through March 15, 2023. The Grand Key Resort claim represents the largest single-property component of VHG's aggregate $60 million business-interruption claim across three affected properties.
This memorandum undertakes four distinct analytical tasks. First, it parses the Policy's flood exclusion language, examining the specific text, defined and undefined terms, and the exclusion's placement within the Policy's broader exclusionary framework. Second, it distinguishes among the three principal damage mechanisms at play—wind-driven rain, storm surge, and tidal or riverine flooding—and explains why these mechanistic distinctions have both factual and legal significance. Third, it analyzes how the flood exclusion interacts with the Policy's anti-concurrent causation ("ACC") clause, which purports to bar coverage for losses involving any combination of covered and excluded perils. The ACC clause is discussed in greater detail in a separate companion memorandum dated November 1, 2022, which this memorandum incorporates by reference and summarizes as relevant. Fourth, it surveys governing Florida law on the applicability of flood exclusions to hurricane-related storm surge, including the efficient proximate cause doctrine and the standards for interpreting exclusionary language in all-risk property policies.
Based on this analysis, it is my conclusion that VHG has strong arguments supporting coverage for the storm-surge-related losses at Grand Key Resort, on multiple independent grounds:
1. Storm surge caused by a named hurricane is not "flood" as that term is properly construed in an all-risk property policy. The flood exclusion was designed to address traditional flood events—riverine flooding, rainfall accumulation, and predictable tidal overflow—not the violent, wind-driven inundation of ocean water that characterizes hurricane storm surge. The Policy does not contain a standalone storm surge exclusion, and its flood exclusion language is, at minimum, ambiguous as applied to storm surge, requiring strict construction in VHG's favor under Florida law.
2. Even if storm surge constitutes "flood," the efficient proximate cause doctrine under Florida law limits the exclusion's reach. Where a covered peril—here, hurricane-force wind—is the efficient proximate cause of the loss, and an excluded peril is a secondary consequence of the covered peril, Florida law preserves coverage for the entire loss.
3. The ACC clause is either unenforceable under Florida law or, at minimum, does not bar coverage for the predominant wind-driven damage at Grand Key Resort. Florida courts have viewed ACC clauses with considerable skepticism, particularly where such clauses attempt to override the efficient proximate cause doctrine and effectively convert an all-risk policy into something far narrower.
This memorandum should be read in conjunction with the November 1, 2022 companion memorandum on Anti-Concurrent Causation Jurisprudence in Florida (Andrew Fitzpatrick), which provides a more granular examination of the ACC clause. Additionally, cross-references are made throughout to Tiffany Rosenthal's November 10, 2022 memorandum analyzing the business-interruption "period of restoration" issues and the October 20, 2022 memorandum by Tiffany Rosenthal and Andrew Fitzpatrick addressing the windstorm sub-limit dispute.
II. Factual Background
A. Hurricane Callista and Damage to Grand Key Resort
Hurricane Callista was first identified as a tropical disturbance in the central Caribbean Sea on September 8, 2022. The National Hurricane Center ("NHC") designated it a tropical storm on September 10, 2022, and elevated it to hurricane status on September 12, 2022, at which time it was formally named. The system intensified rapidly over the warm waters of the Straits of Florida, reaching Category 4 status on the Saffir-Veltason Hurricane Wind Scale on September 17, 2022, with maximum sustained winds of 145 miles per hour.
Hurricane Callista made landfall at approximately 1:30 PM EDT on September 18, 2022, in the Lower Florida Keys, near the Big Pine Key area of Monroe County, Florida. At landfall, the storm maintained Category 4 intensity with sustained winds of 145 miles per hour and a central pressure of approximately 937 millibars. The NHC's post-storm analysis, issued in October 2022, confirmed that Hurricane Callista produced a storm surge of 8 to 14 feet in Monroe County, with the most extreme surge levels recorded in the Middle Keys corridor, which includes the location of VHG's Grand Key Resort.
The Monroe County Emergency Management Office issued a mandatory evacuation order for all residents and visitors in the Florida Keys on September 16, 2022, two days before landfall. VHG, acting in compliance with the evacuation order and consistent with its emergency management protocols, evacuated all guests and non-essential staff from the Grand Key Resort on September 16, 2022, and undertook standard hurricane preparation measures, including the boarding of windows, securing of loose equipment, and powering down of mechanical systems.
The Grand Key Resort is a 312-room luxury resort and marina situated at Mile Marker 48 along U.S. Route 1 in Marathon, Florida 33050. The property occupies approximately 22 acres of waterfront land with direct exposure to both the Atlantic Ocean and the Gulf of Mexico via Florida Bay. Prior to Hurricane Callista, the Grand Key Resort maintained a pre-loss average daily rate ("ADR") of $389 and an average occupancy rate of 82%, reflecting its status as one of the premier hospitality properties in the Florida Keys. The resort's amenities include a 54-slip marina, three restaurants, a 12,000-square-foot spa and fitness facility, two swimming pools, and a 15,000-square-foot conference center.
The property sustained severe damage from both wind and storm surge during Hurricane Callista. The 145 mph sustained winds caused extensive roof destruction, window failures throughout the upper floors of the main resort building, structural compromise to the facade and load-bearing elements, and widespread damage to the conference center and spa facilities. Concurrently, the 8-to-14-foot storm surge inundated the ground-floor areas, lobby, ground-level restaurant spaces, the marina and associated structures, and critical mechanical systems including the HVAC plant, electrical switchgear, and emergency generators.
The Grand Key Resort has been closed continuously since September 18, 2022. VHG projects that the resort will reopen on or about March 15, 2023, following completion of reconstruction and remediation, resulting in a total closure period of approximately 178 days. The estimated business-interruption loss for the Grand Key Resort attributable to this closure is $31.4 million. This figure represents the largest single-property component of VHG's total $60 million aggregate business-interruption claim across all three affected properties.
B. Nature of Damage — Wind vs. Storm Surge
Calderwood & Harkness has retained Caldwell Engineering Associates Inc. ("Caldwell Engineering") to conduct a forensic engineering assessment of the damage to the Grand Key Resort and to differentiate between damage attributable to wind and damage attributable to storm surge. The engagement is led by Jeffrey Caldwell, PE, a licensed professional engineer in the State of Florida with over 25 years of experience in structural forensics and hurricane damage assessment. Caldwell Engineering's principal office is located at 7900 NW 25th Street, Suite 210, Doral, Florida 33122. Although Caldwell Engineering's final report has not yet been issued, preliminary findings are available and inform the factual analysis below.
Wind Damage. Caldwell Engineering's preliminary assessment identifies extensive damage caused directly by the 145 mph sustained winds and associated wind gusts, which likely exceeded 170 mph in localized areas. This wind damage includes: (i) destruction of approximately 60% of the roof system on the main resort building, including complete loss of the roof membrane, insulation, and deck in several sections; (ii) catastrophic failure of windows and curtain-wall glazing systems on the upper three floors (floors four through six) of the main building, with window failure rates exceeding 70% on the windward (southeast-facing) elevation; (iii) structural compromise to the facade system, including separation of cladding panels and exposure of the underlying structural framing; (iv) damage to the conference center roof structure, including uplift and partial collapse of the steel truss system; and (v) extensive damage to the spa building, including loss of the roof and partial wall collapse. Caldwell's preliminary opinion is that this wind damage alone was sufficient to render the Grand Key Resort uninhabitable and inoperable, independent of any storm-surge damage.
Storm-Surge Damage. The storm surge of 8 to 14 feet inundated the ground-floor and lower-level areas of the resort. Storm-surge damage is concentrated in: (i) the ground-floor lobby, reception areas, and retail spaces; (ii) the ground-floor restaurant and kitchen facilities; (iii) the mechanical plant, including the central HVAC system, electrical switchgear, main distribution panels, and emergency generators, all of which were located at or near ground level; (iv) the 54-slip marina, which sustained near-total destruction; and (v) the landscaping, hardscape, and site improvements in the immediate coastal area. Caldwell's preliminary assessment indicates that while the storm-surge damage was significant, particularly to the mechanical systems and marina, it was concentrated at or below the ground-floor level and affected a smaller percentage of the overall building area and structural components compared to the wind damage.
Wind-Driven Rain. A significant component of the interior damage to the upper floors of the Grand Key Resort was caused by wind-driven rain entering through wind-created openings—that is, through the broken windows, compromised roof systems, and facade breaches created by the 145 mph winds. This wind-driven rain caused extensive damage to interior finishes, furnishings, fixtures, and equipment on floors two through six. Wind-driven rain damage is a direct consequence of the wind peril and is mechanistically distinct from storm surge. Water entering a building through openings created by wind is a wind loss, not a flood loss, under standard insurance industry practice and under the terms of the Policy.
Key Factual Point Regarding Concurrence. While wind damage and storm-surge damage were concurrent and, at certain portions of the property, inseparable—particularly at the ground-floor level, where wind-driven structural damage and storm-surge inundation both affected the same areas—Caldwell Engineering's preliminary opinion is that the predominant cause of the property's overall destruction was wind. Critically, the wind damage also enabled and exacerbated the storm-surge infiltration by destroying the structural barriers (walls, doors, windows, and waterproofing systems) that would otherwise have resisted or mitigated the surge's penetration into the building interior. This causal sequence—wind first, then surge penetrating through wind-compromised openings—is significant for the efficient proximate cause analysis discussed in Section IV.B below.
Ironclad's Adjuster Assessment. Ironclad retained Arbor Claims Services LLC ("Arbor Claims") to conduct an independent adjustment of the Grand Key Resort loss. Denise Whitford, the lead independent adjuster assigned by Arbor Claims (principal office at 3300 W. Cypress Street, Suite 400, Tampa, Florida 33607), conducted her initial inspection of the Grand Key Resort on October 5, 2022—approximately 17 days after Hurricane Callista's landfall. Ironclad's coverage position, as articulated in the October 12, 2022 reservation of rights letter, relies in part on Arbor Claims' assessment, which apparently attributes a significant (but, to date, unspecified) portion of the Grand Key Resort's damage to storm surge and flooding. We have not yet obtained Arbor Claims' complete work file or detailed report, and obtaining these materials through discovery will be a priority. It should be noted that the 17-day gap between the storm and Whitford's inspection may affect the reliability of her damage attribution, as post-storm conditions—including cleanup, remediation efforts, and weather-related changes—may have altered the physical evidence available at the time of her site visit.
C. Other VHG Properties — Comparative Context
VHG's business-interruption claim encompasses three properties affected by Hurricane Callista. While the primary focus of this memorandum is the Grand Key Resort, a brief summary of the other two properties provides useful comparative context.
Harborview Hotel & Conference Center. Located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931, the Harborview Hotel is a 224-room full-service hotel and conference center on the Lee County barrier island of Fort Myers Beach. Lee County issued its mandatory evacuation order on September 17, 2022, one day after Monroe County. Although Hurricane Callista's eye did not make direct landfall in Lee County, the property was within the storm's destructive wind field, experiencing estimated sustained winds of 110 to 120 mph. The Lee County coastline experienced storm surge of 6 to 10 feet. The Harborview Hotel sustained combined wind and surge damage, though Caldwell Engineering's preliminary analysis indicates that the property experienced proportionally more wind damage than storm-surge damage compared to Grand Key Resort, owing in part to the slightly lower surge levels in Lee County and the property's somewhat more elevated site. The Harborview Hotel was closed for 135 days, from September 18, 2022 through January 31, 2023, with estimated business-interruption losses of $18.7 million.
Sunset Shores. Located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706, Sunset Shores is a 186-room boutique resort on St. Pete Beach in Pinellas County. This property was at the northern edge of Hurricane Callista's primary impact zone and sustained predominantly wind damage, with less storm-surge exposure than either Grand Key Resort or the Harborview Hotel. Sunset Shores experienced a partial closure of 73 days, followed by an extended period of reduced-capacity operations continuing through February 2023, with estimated business-interruption losses of $9.9 million.
VHG's total business-interruption claim across all three properties is $60 million. The primary analysis in this memorandum focuses on the Grand Key Resort because Ironclad's flood exclusion argument is strongest as applied to that property, given the 8-to-14-foot storm-surge levels recorded in Monroe County and the concentration of ground-level damage at the Grand Key Resort site. If the flood exclusion argument fails as to Grand Key Resort, it will be even weaker as applied to the Harborview Hotel and Sunset Shores, where surge levels were lower and wind damage was proportionally greater.
D. Insurance Program Structure
VHG's property and business-interruption insurance program for the relevant policy period consists of a layered tower totaling $60 million above a $500,000 deductible. The structure is as follows:
All policies in the tower are all-risk policies, covering direct physical loss or damage to covered property, including business-interruption and extra-expense coverage. The Pinnacle Surplus Lines first excess policy is expressly follow-form with the Ironclad primary policy, meaning that the flood exclusion analysis applicable to the Ironclad Policy directly governs the first excess layer as well. The Montclair and Sovereign Re policies contain their own terms and conditions, which must be independently reviewed for any material deviations in flood exclusion wording; however, those policies are only reached if VHG's covered losses exceed $40 million and $50 million, respectively, making the flood exclusion analysis most critical at the primary and first-excess levels where the bulk of the exposure resides.
The total tower of $60 million corresponds precisely to VHG's aggregate claimed business-interruption losses across all three properties. The adequacy of the tower to respond to the full claim therefore depends critically on the resolution of both the flood exclusion issue addressed in this memorandum and the windstorm sub-limit issue addressed in the October 20, 2022 memorandum.
III. Policy Language Analysis
A. The Coverage Grant — All-Risk Framework
The Ironclad primary policy is an "all-risk" property and business-interruption policy. This characterization is significant because of the allocation of burden it creates. Under an all-risk policy, the insuring agreement provides the broadest possible scope of coverage, and exclusions operate to carve out specific, enumerated perils from that broad grant. The Policy's coverage grant provides, in relevant part:
"This Policy insures against all risks of direct physical loss or damage to Covered Property at Covered Locations, unless such loss or damage is specifically excluded or limited elsewhere in this Policy."
Under this framework—and under well-established Florida law and standard insurance principles—the burden allocation is clear. The policyholder bears the initial burden of demonstrating that a loss falls within the coverage grant; that is, VHG must show that the Grand Key Resort suffered "direct physical loss or damage" from a covered peril. This threshold showing is straightforward here: the Grand Key Resort suffered catastrophic physical damage from Hurricane Callista, a named hurricane, and no party disputes that a hurricane is not itself an excluded peril under the all-risk coverage grant.
Once the policyholder has met this threshold burden, the burden shifts to the insurer to prove that a specific exclusion applies to bar or limit coverage. See Wallach v. Rosenberg, 527 So. 2d 1386, 1387 (Fla. 3d DCA 1988) ("Exclusionary clauses are construed even more strictly against the insurer than coverage clauses."). This burden allocation is fundamental to the analysis that follows: Ironclad bears the burden of proving that the flood exclusion applies to eliminate coverage for the storm-surge component of VHG's claim.
The Policy's business-interruption coverage is triggered by physical loss or damage that causes an interruption in business operations during the "period of restoration," which is defined in the Policy and has been analyzed separately in Tiffany Rosenthal's November 10, 2022 memorandum regarding the period of restoration and its calculation. For purposes of this memorandum, it suffices to note that if the underlying physical loss or damage is covered, the consequent business-interruption loss is likewise covered, subject to applicable limits and sub-limits.
B. The Flood Exclusion — Text
The flood exclusion in the Ironclad Policy is set forth in Section IV(B)(3) of the Policy's General Exclusions. The relevant exclusionary language provides:
"This Policy does not insure against loss or damage caused by or resulting from flood, including but not limited to surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether or not driven by wind."
Several features of this language warrant close examination.
The Term "Flood." The exclusion is captioned and framed as a "flood" exclusion. The term "flood" is not independently defined in the Policy's definitions section. The absence of a specific definition is significant: where a policy term is undefined, Florida courts construe it according to its "plain and ordinary meaning" as understood by the average policyholder. See Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000). The plain and ordinary meaning of "flood" to a reasonable policyholder connotes the overflow of water from rivers, lakes, or streams; the accumulation of rainfall on normally dry land; or predictable tidal events—not the violent, wind-driven incursion of ocean water during a hurricane. This interpretive principle is central to VHG's argument that storm surge falls outside the exclusion's intended scope.
The Illustrative List. The exclusion provides an illustrative, non-exhaustive list of phenomena that constitute "flood": "surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing." This list, while broad, reflects the traditional categories of water-related events associated with flood risk. Notably, the list does not include the term "storm surge" or any equivalent phrase. The absence of "storm surge" from a non-exhaustive list is not dispositive—the "including but not limited to" phrasing allows for additional items of the same general character. However, under the canon of construction known as ejusdem generis, the unspecified items in a non-exhaustive list should be of the same kind or character as the items specifically listed. Storm surge—a transient, wind-driven ocean inundation event of catastrophic force and short duration—is categorically different from "surface water" (gradual accumulation of rainfall), "tidal water" (predictable tidal cycles), and "overflow of streams or other bodies of water" (riverine flooding).
The "Whether or Not Driven by Wind" Language. The concluding phrase—"all whether or not driven by wind"—is the linchpin of Ironclad's position. Ironclad will argue that this language was specifically designed to capture wind-propelled water events, including storm surge, and that its inclusion demonstrates the parties' intent to exclude all water damage regardless of its wind-driven origin. VHG's response to this argument is twofold. First, the phrase "whether or not driven by wind" modifies the enumerated items in the preceding list ("surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing")—it clarifies that those specific categories of flood are excluded regardless of a wind component, but it does not independently expand the definition of "flood" to include an entirely distinct meteorological phenomenon like hurricane storm surge. Second, even if the language is ambiguous as to whether it captures storm surge, the ambiguity must be resolved in VHG's favor under Florida's well-established rule of contra proferentem, which construes ambiguous insurance policy language against the insurer and in favor of coverage. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003).
Absence of a Standalone Storm Surge Exclusion. The Policy does not contain a separately captioned or defined "storm surge" exclusion. This is significant. If Ironclad intended to exclude storm surge—a well-known and well-understood risk in coastal Florida property insurance—it could have done so explicitly. The insurance industry is well aware of the distinction between storm surge and traditional flooding. The National Flood Insurance Program ("NFIP") has maintained a separate, explicit definition that encompasses storm surge since the program's inception. Some commercial property insurers have adopted specific storm surge exclusions or endorsements. Ironclad's decision not to include a specific storm surge exclusion, and instead to rely on a general flood exclusion, supports the conclusion that the parties did not intend the flood exclusion to capture storm surge.
Distinction from NFIP Definitions. The NFIP Standard Flood Insurance Policy ("SFIP") defines "flood" to explicitly include "the inland or shoreline inundation or unusual and rapid accumulation of runoff of surface waters from any source" and specifically encompasses "storm surge." The Ironclad Policy is not an NFIP policy. It is a private, all-risk commercial property policy issued in the surplus lines market. The NFIP definition should not be imported into the Ironclad Policy, and any attempt by Ironclad to do so should be resisted. The NFIP definition exists in a fundamentally different regulatory and contractual context—the NFIP is a government-subsidized program specifically designed to provide flood coverage, and its expansive definition of "flood" serves the program's purposes. The Ironclad Policy, by contrast, is a private all-risk policy that covers a broad range of perils, including windstorm, and excludes only those perils specifically enumerated. Grafting the NFIP definition onto the Ironclad Policy would impermissibly narrow the all-risk coverage grant that VHG purchased and for which it paid substantial premiums.
C. The Anti-Concurrent Causation (ACC) Clause — Brief Overview
The Ironclad Policy contains an anti-concurrent causation clause that precedes and governs the enumerated exclusions, including the flood exclusion. The ACC clause provides, in relevant part:
"This Policy does not insure against loss or damage caused directly or indirectly by any of the following excluded causes or events. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."
The practical effect of the ACC clause, if enforceable, is substantial: it would bar recovery for any loss in which an excluded peril (such as "flood") is a contributing cause, even if a covered peril (such as windstorm) is also a contributing cause—and even if the covered peril is the predominant, efficient, or initiating cause of the loss. In the context of Hurricane Callista, the ACC clause would potentially allow Ironclad to deny coverage for the entirety of the Grand Key Resort loss if any portion of that loss is attributable to storm surge, so long as storm surge qualifies as "flood" under the exclusion.
The enforceability of ACC clauses under Florida law is a complex and evolving question that is addressed in detail in the companion memorandum dated November 1, 2022 (Andrew Fitzpatrick, "Florida Anti-Concurrent Causation Jurisprudence"). That memorandum is incorporated herein by reference. For purposes of this memorandum, the key points are summarized in Section IV.C below.
D. Wind-Driven Rain Endorsement / Provisions
The Ironclad Policy does not contain a specific endorsement addressing wind-driven rain damage. However, the Policy's coverage grant and the general principles governing all-risk property insurance support the conclusion that wind-driven rain damage is covered as a wind loss, not excluded as a flood loss.
Wind-driven rain damage occurs when rainwater enters a building through openings created by wind—that is, through broken windows, compromised roofing systems, or other breaches in the building envelope caused by the force of the wind. This mechanism is categorically different from storm surge. Wind-driven rain does not involve the rise or accumulation of water on the ground surface; it involves the horizontal propulsion of rainwater through wind-created openings. The water intrusion is a direct and immediate consequence of the wind's force, both in propelling the rain and in creating the openings through which it enters.
Standard insurance industry practice recognizes this distinction. The Quillon Group ("ISO") commercial property forms, which are widely used as benchmarks in the industry, generally treat water damage resulting from rain entering through wind-created openings as a covered wind loss, not a flood loss. The Ironclad Policy, while not an ISO-form policy, should be interpreted consistently with this industry understanding, particularly given the absence of any language in the Policy suggesting that wind-driven rain is excluded under the flood exclusion.
This distinction is practically important because a significant portion of the interior damage to the upper floors of the Grand Key Resort was caused by wind-driven rain entering through the massive window failures and roof breaches created by Hurricane Callista's 145 mph winds. This damage is unambiguously attributable to wind—it occurred above the storm-surge inundation level, it entered through wind-created openings, and it was driven by the force of the wind itself. Ironclad cannot plausibly characterize this damage as "flood" regardless of how broadly it construes the flood exclusion.
IV. Legal Analysis — Florida Law
A. Classification of Storm Surge: "Flood" or Not?
The central legal question presented by Ironclad's coverage position is whether hurricane-generated storm surge constitutes "flood" within the meaning of a private all-risk property policy's flood exclusion. This is ultimately a question of policy interpretation governed by Florida law. For the reasons set forth below, VHG has strong arguments that the answer is no.
1. Argument That Storm Surge Is Not "Flood"
Storm surge is a direct consequence of hurricane-force winds pushing ocean water inland. It is a wind-driven phenomenon, fundamentally different in its mechanism, origin, and character from the types of water events that the flood exclusion was historically designed to address. The National Weather Service defines storm surge as "an abnormal rise of water generated by a storm, over and above the predicted astronomical tides." That rise is caused primarily by the force of the wind: the sustained winds of a hurricane drive ocean water toward shore and push it up onto normally dry land. Without the wind, there is no storm surge. Storm surge is not the product of rainfall accumulation, river overflow, snowmelt, or any of the other mechanisms associated with traditional flooding.
The flood exclusion in the Ironclad Policy was historically designed to address gradual, predictable, or non-wind-related water events. The enumerated examples in the exclusion—"surface water, waves, tidal water, overflow of streams or other bodies of water"—reflect this design purpose. These are categories of water events that are either gradual (rainfall accumulation producing surface water), predictable (tidal water), or attributable to non-wind causes (overflow of streams or rivers). Hurricane storm surge is none of these things: it is sudden, unpredictable in magnitude, and entirely wind-driven.
Under Florida insurance law, policy exclusions are strictly construed against the insurer and in favor of coverage. This is a bedrock principle of Florida insurance jurisprudence, applicable with particular force to exclusionary clauses in all-risk policies. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003) ("[E]xclusions in insurance contracts are construed more strictly against the insurer than coverage clauses."); Taurus Holdings, Inc. v. U.S. Fid. & Guar. Co., 913 So. 2d 528, 532 (Fla. 2005) ("[E]xclusionary clauses … are to be strictly construed against the insurer."). If there is any ambiguity in whether the term "flood" encompasses hurricane-generated storm surge, that ambiguity must be resolved in VHG's favor.
Florida courts have construed flood exclusions narrowly in the hurricane context. While Florida appellate decisions directly addressing whether storm surge is "flood" are limited, the broader pattern of Florida insurance jurisprudence strongly favors narrow construction of flood exclusions and strict adherence to the rule that the insurer must clearly and unambiguously exclude a peril to avoid coverage. The Florida Supreme Court has repeatedly emphasized that an insurer seeking to rely on an exclusion must demonstrate that the exclusion "clearly and unambiguously" applies to the loss at issue. See Deni Assocs. of Fla., Inc. v. State Farm Fire & Cas. Ins. Co., 711 So. 2d 1135, 1139 (Fla. 1998). Where the exclusion is susceptible to more than one reasonable interpretation, it must be construed against the insurer.
Moreover, the reasonable expectations of the policyholder support VHG's position. VHG, a sophisticated commercial property owner operating luxury resorts in coastal Florida, purchased an all-risk property policy specifically to obtain the broadest available coverage for its hurricane-exposed properties. VHG's reasonable expectation was that its all-risk policy would cover damage from hurricanes—the most significant peril to which its Florida Keys resort is exposed—including all consequences of hurricane-force winds. A reasonable policyholder would not expect a "flood" exclusion to eviscerate coverage for the defining characteristic of a hurricane—the wind-driven water that accompanies it.
2. Ironclad's Likely Counterarguments
Ironclad will make several counterarguments, each of which can be effectively addressed.
First, Ironclad will argue that the "whether or not driven by wind" language was specifically added to capture wind-propelled water events, including storm surge. This argument has surface appeal but ultimately fails. The "whether or not driven by wind" phrase, read in context, modifies the preceding enumerated items. It clarifies that "surface water, waves, tidal water, overflow of streams or other bodies of water, or spray from any of the foregoing" are excluded whether or not wind is a contributing factor. This addresses the well-known problem of wind-driven rain and wind-propelled waves—relatively minor water events that become more severe when accompanied by wind. It does not, however, independently expand the definition of "flood" to encompass storm surge, which is an entirely separate meteorological phenomenon of a different order of magnitude and character.
Second, Ironclad will argue that "surface water" and "waves" in the exclusion arguably cover storm surge. Storm surge, however, is not "surface water" in any commonly understood sense. "Surface water" refers to water on the surface of the ground from rainfall, snowmelt, or other precipitation—not the massive, wind-driven incursion of ocean water during a hurricane. Nor is storm surge accurately described as "waves." A wave is an oscillation of the water surface; storm surge is a sustained rise in water level driven by wind and atmospheric pressure. The distinction is not merely semantic—it reflects fundamentally different physical phenomena with different causes, characteristics, and effects.
Third, Ironclad will cite decisions from other jurisdictions, most notably the post-Hurricane Katrina decisions from Mississippi and the Fifth Circuit Court of Appeals, that have held storm surge falls within the scope of flood exclusions. These decisions are discussed further below, but they are distinguishable on multiple grounds: they arose under different state law, involved different policy language, and were decided in a legal context (Mississippi law) that does not apply the same strict construction principles as Florida.
3. Persuasive Authority from Other Jurisdictions
The most prominent decisions addressing the storm-surge/flood question arose out of Hurricane Katrina in 2005, primarily in Mississippi. In Leonard v. Nationwide Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007), the Fifth Circuit, applying Mississippi law, held that storm surge caused by Hurricane Katrina constituted "flood" within the meaning of a homeowner's policy's flood exclusion, and that the policy's ACC clause barred coverage for losses caused by concurrent wind and surge. Similarly, in In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007), the Fifth Circuit upheld the application of flood exclusions to storm-surge damage in the New Orleans context.
These decisions are not controlling in Florida, and they should be carefully distinguished. Mississippi law does not follow the efficient proximate cause doctrine; Mississippi applies a "concurrent causation" framework that is more favorable to insurers. Florida, by contrast, follows the efficient proximate cause doctrine, which provides that where a covered peril initiates or is the predominant cause of a chain of events leading to loss, coverage is preserved even if an excluded peril is also a contributing cause. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016). Additionally, the specific policy language at issue in the Mississippi cases differed in material respects from the Ironclad Policy language. The Mississippi cases generally involved homeowner's policies with different exclusionary frameworks, and the courts' reasoning rested in part on the specific relationship between private insurance and the NFIP in the Mississippi regulatory context, which does not apply in Florida.
Post-Katrina decisions from Louisiana and Texas are more mixed. In Chauvin v. State Farm Fire & Casualty Co., 450 F. Supp. 2d 660 (E.D. La. 2006), the court found that the flood exclusion in a homeowner's policy did not unambiguously apply to storm surge, though this decision was later qualified by appellate rulings. Texas courts have generally deferred to the specific policy language and have reached differing results depending on the wording of the exclusion. The variability in these outcomes underscores the principle that the interpretation of a flood exclusion is a question of specific policy language and governing state law, not a universal rule.
B. Florida's Efficient Proximate Cause Doctrine
Even if this Court were to conclude that storm surge constitutes "flood" within the meaning of the Ironclad Policy's flood exclusion, coverage would still be preserved under Florida's efficient proximate cause ("EPC") doctrine.
The EPC doctrine provides that where a covered peril sets in motion a chain of events that includes an excluded peril, and the covered peril is the "efficient proximate cause" of the loss, coverage exists. The "efficient proximate cause" is the cause that sets the chain of events in motion and is the predominant or moving cause of the loss. This doctrine is well-established in Florida insurance law and has been applied by Florida courts in the context of multi-peril losses, including hurricane-related claims. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); Fayad v. Clarendon Nat'l Ins. Co., 899 So. 2d 1082 (Fla. 2005).
The application of the EPC doctrine to the Grand Key Resort loss is straightforward. Hurricane Callista's 145 mph winds were the efficient proximate cause of both the wind damage and the storm surge damage at the property. The storm surge was not an independent, concurrent peril operating separately from the wind; it was a direct, foreseeable, and inevitable consequence of the wind itself. Without the 145 mph sustained winds of Hurricane Callista, there would have been no 8-to-14-foot storm surge in Monroe County. The storm surge was the product of the wind, generated by the same physical forces that caused the roof destruction, window failures, and structural damage. Wind was both the initiating cause and the predominant cause of the entire chain of damage.
This causal relationship is supported by the meteorological evidence. The National Weather Service's storm surge forecasting models are driven primarily by wind speed and direction. The NHC's storm surge warnings for Monroe County were issued based on the wind characteristics of Hurricane Callista. The physical mechanism of storm surge—wind forcing ocean water onshore through sustained pressure and friction—is well understood and establishes wind as the proximate and predominant cause of the surge.
The EPC analysis is further supported by the specific factual circumstances at Grand Key Resort. Caldwell Engineering's preliminary findings indicate that the wind damage preceded and enabled the storm-surge damage: the wind destroyed the structural barriers (exterior walls, windows, doors, and waterproofing systems) that would have resisted or mitigated the storm surge's penetration into the building interior. The causal sequence at Grand Key Resort was: (1) 145 mph winds struck the property, causing catastrophic structural damage; (2) wind-created breaches in the building envelope allowed storm-surge water to penetrate further and faster into the interior than it would have through an intact structure; and (3) the combined effects rendered the property uninhabitable and inoperable. Under the EPC doctrine, wind—as the initiating, predominant, and moving cause of this entire sequence—is the efficient proximate cause, and coverage should be preserved for the entire loss.
Key Florida decisions applying or discussing the EPC doctrine in analogous contexts include Glenrock Enterprises, 208 So. 3d 694 (Fla. 2016), in which the Florida Supreme Court reaffirmed the continuing vitality of the EPC doctrine in Florida insurance law. While Sebo addressed defective construction rather than hurricane damage, the court's reasoning—that the EPC doctrine requires courts to identify the predominant cause of a loss and to provide coverage where that cause is a covered peril—applies with equal force here. Additionally, in Fayad v. Clarendon National Insurance Co., 899 So. 2d 1082 (Fla. 2005), the Florida Supreme Court addressed the interplay between covered and excluded perils and emphasized the importance of identifying the "efficient proximate cause" rather than permitting the insurer to isolate a secondary excluded peril to deny the entire claim.
It bears emphasis that the EPC doctrine applies as a default rule of Florida law unless validly overridden by the policy's ACC clause. The enforceability of the ACC clause is discussed in Section IV.C below.
C. Enforceability of the ACC Clause Under Florida Law
As detailed in the November 1, 2022 companion memorandum (incorporated herein by reference), VHG has strong arguments that the ACC clause in the Ironclad Policy is either unenforceable under Florida law or, at minimum, limited in its application to the facts of this case.
Florida courts have viewed ACC clauses with considerable skepticism. The ACC clause represents an attempt by the insurer to contractually override the EPC doctrine—a judicially created doctrine that Florida courts have recognized as fundamental to the fair administration of insurance contracts. An ACC clause, by its terms, purports to eliminate coverage for any loss in which an excluded peril is a contributing cause, even if the excluded peril is merely a secondary or incidental consequence of a covered peril that is the predominant cause of the loss. This result is inconsistent with the reasonable expectations of policyholders who purchase all-risk coverage and with the public policy underlying the EPC doctrine.
Several Florida courts have held ACC clauses unenforceable as against public policy when they operate to exclude coverage for a covered peril that is the dominant cause of loss. While the Florida Supreme Court has not issued a definitive ruling on the enforceability of ACC clauses in all contexts, the lower appellate courts have expressed significant reservations. In particular, courts have questioned whether an ACC clause can convert what would otherwise be a covered loss under an all-risk policy into an uncovered loss simply because an excluded peril—often one that is itself caused by the covered peril—is also present.
Even courts that have enforced ACC clauses in other contexts have generally required that the excluded peril be a "but-for" cause and an independent, concurrent cause of the loss—not merely a secondary effect or inevitable consequence of the covered peril. This distinction is critical in the hurricane context. Storm surge during Hurricane Callista was not an independent, concurrent cause operating alongside wind; it was a direct, inevitable, and inseparable effect of the wind itself. The wind and the surge were not two separate events happening to coincide; they were a single, indivisible hurricane event in which wind generated surge as one of its primary destructive mechanisms. Under this analysis, the ACC clause should not apply because there is no genuine "concurrent" causation—there is a single cause (wind) producing multiple effects (structural damage and water inundation), all of which are within the causal chain initiated by the covered peril.
Decisions from other jurisdictions enforcing ACC clauses—most notably the Fifth Circuit decisions in Leonard v. Nationwide Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007), and related Katrina cases—are not controlling in Florida. Those decisions applied Mississippi law, which does not follow the EPC doctrine, and arose in a different regulatory and jurisprudential context. Florida courts are not bound by the Fifth Circuit's interpretation of ACC clauses under Mississippi law, and the weight of Florida authority supports a narrower application of such clauses.
For a more comprehensive treatment of these issues, including a detailed case-by-case analysis of Florida decisions addressing ACC clauses, I refer to the November 1, 2022 companion memorandum.
D. Apportionment / Segregation of Damages
As an alternative argument—applicable only in the event that the Court finds the flood exclusion enforceable and the ACC clause valid—VHG is entitled to recover for all damage attributable to wind and wind-driven rain, with only the discrete, separable storm-surge damage excluded.
Under Florida law, where covered and excluded causes of loss can be segregated, the insured is entitled to recover the covered portion of the loss. See Fla. Stat. § 627.701(4)(a); see also Citizens Prop. Ins. Corp. v. Hilliard, 127 So. 3d 1246 (Fla. 4th DCA 2013). The insurer may not use the presence of an excluded cause as a basis for denying the entire claim where the covered and excluded portions of the loss are capable of being separated and quantified.
Caldwell Engineering Associates' forensic analysis will be critical to establishing the apportionment of Grand Key Resort's damage between wind-caused and surge-caused components. As noted above, Caldwell's preliminary findings indicate that the predominant structural damage was caused by wind, including roof destruction, window failures, facade damage, and structural compromise to the upper floors. Storm-surge damage was concentrated at the ground-floor level, affecting the lobby, ground-floor restaurant, mechanical systems, and the marina. While the mechanical system damage is significant—particularly the HVAC plant and electrical switchgear—it represents a separable and smaller component of the overall loss compared to the extensive wind damage throughout the property.
Critically, even under a worst-case apportionment scenario—one that attributes the maximum defensible portion of the loss to storm surge—VHG's wind-only business-interruption losses at Grand Key Resort would substantially exceed the amounts at issue. Caldwell's preliminary assessment suggests that even if all ground-level damage were attributed entirely to storm surge (a generous assumption for Ironclad, as some ground-level damage was clearly wind-caused), the wind-caused damage alone was sufficient to close the Grand Key Resort for the entire 178-day period. The upper-floor guest rooms and public spaces required full reconstruction due to wind and wind-driven rain damage, and the timeline for that reconstruction—not the ground-floor storm-surge remediation—was the critical-path item driving the overall period of restoration. Under this analysis, even with full apportionment, VHG's covered wind-only business-interruption loss at Grand Key Resort would remain in the range of $20 million to $25 million.
When combined with the wind-caused business-interruption losses at the Harborview Hotel and Sunset Shores—which are subject to weaker flood exclusion arguments given the lower storm-surge levels at those properties—VHG's total wind-only business-interruption claim across all three properties would still far exceed the disputed amounts and would likely exhaust or nearly exhaust the primary policy limits even without any storm-surge attribution. This apportionment argument therefore provides a robust fallback position even under the most adverse assumptions.
Dr. Helen Vasquez of Meridian Forensic Economics LLC is being asked to prepare an alternative damages quantification that includes a wind-only apportionment scenario alongside the primary full-coverage quantification, as discussed further in Section VIII.B below.
E. Burden of Proof
Florida law places the burden of proof squarely on the insurer to establish the applicability of any exclusion. See Wallach v. Rosenberg, 527 So. 2d 1386, 1387 (Fla. 3d DCA 1988); Brightmoor Indemnity Co. v. Pridgen, 498 So. 2d 1245, 1248 (Fla. 1986). In the context of this dispute, the burden allocation operates as follows:
VHG's Burden. VHG must demonstrate that the Grand Key Resort suffered "direct physical loss or damage" from a covered peril, giving rise to business-interruption losses during the period of restoration. This burden is easily met. The Grand Key Resort suffered catastrophic physical damage from Hurricane Callista, a named hurricane that is a covered peril under the all-risk policy. The property has been closed for 178 days as a direct result of that damage. No party contests these facts.
Ironclad's Burden. Ironclad bears the burden of proving each element necessary to invoke the flood exclusion. Specifically, Ironclad must prove: (1) that storm surge constitutes "flood" within the meaning of the Policy's flood exclusion—a legal question that, as discussed above, is at minimum debatable and subject to strict construction against Ironclad; (2) that the flood exclusion applies to the specific losses claimed by VHG, which requires Ironclad to demonstrate that the storm-surge component of the damage is the cause of the business-interruption losses, rather than the wind damage that independently rendered the property uninhabitable; (3) that the ACC clause is enforceable under Florida law to bar coverage for concurrent wind-and-surge claims—a proposition that faces substantial legal hurdles, as discussed in Section IV.C above and in the November 1, 2022 companion memorandum; and (4) if apportionment is at issue, that the storm-surge-attributable portion of the loss is quantifiable and separable from the covered wind-attributable portion, which in turn requires Ironclad to present competent forensic evidence supporting its damage allocation—evidence that, based on the Arbor Claims assessment to date, appears conclusory and insufficiently detailed.
This burden allocation is significant from a litigation strategy perspective. Ironclad cannot simply assert that "some flooding occurred" and thereby shift the burden to VHG to prove the absence of flood. Ironclad must affirmatively demonstrate, through admissible evidence, that the flood exclusion applies to the specific losses at issue and that the exclusion operates to bar coverage under the applicable legal standards.
V. Distinction Among Damage Mechanisms
A clear understanding of the distinct damage mechanisms at play is essential to the legal analysis and to the presentation of VHG's claim. The following taxonomy sets forth the four principal damage mechanisms, their characteristics, and their coverage implications.
A. Wind Damage
The direct structural damage caused by Hurricane Callista's 145 mph sustained winds represents the most significant category of damage at the Grand Key Resort. This includes roof destruction across approximately 60% of the main resort building, catastrophic window and curtain-wall failures on the upper floors, facade damage and cladding separation, structural compromise to the conference center roof system, and partial wall collapse at the spa building. This damage was caused by the direct application of wind force to the building structure, independent of any water-related mechanism.
Wind damage of this nature is unambiguously covered under the Ironclad Policy's all-risk coverage grant. There is no wind exclusion in the Policy. Ironclad does not contend otherwise; its position is limited to asserting the flood exclusion and the windstorm sub-limit. The wind damage alone was sufficient to render the Grand Key Resort uninhabitable and to necessitate the full 178-day closure period. This point is critical: even if every dollar of storm-surge damage were excluded, the wind damage independently supports a substantial business-interruption claim. The windstorm sub-limit issue, which is the subject of the separate October 20, 2022 memorandum by Tiffany Rosenthal and Andrew Fitzpatrick, raises a separate question regarding the applicable limit for wind-caused business-interruption losses, but does not affect the threshold question of coverage.
B. Wind-Driven Rain
Wind-driven rain damage refers to water intrusion caused by rainwater entering the building through openings created by wind. At the Grand Key Resort, wind-driven rain entered through the shattered windows on the upper floors, through the compromised roof system, and through facade breaches caused by wind-driven cladding separation. This wind-driven rain caused extensive damage to interior finishes (drywall, flooring, ceiling systems), furnishings, fixtures, and equipment on floors two through six of the main resort building.
Wind-driven rain is not "flood." It is a direct and immediate consequence of the wind peril. The water does not rise from below; it enters horizontally or from above through wind-created openings. Standard insurance industry practice, consistent with ISO commercial property forms and industry custom, treats water damage from rain entering through wind-created openings as a wind loss. The Policy's flood exclusion refers to "surface water, waves, tidal water, overflow of streams or other bodies of water"—none of which describes the mechanism of wind-driven rain intrusion through building envelope breaches.
Ironclad has not, to date, asserted that wind-driven rain damage is excluded under the flood exclusion. Its October 12, 2022 reservation of rights letter focuses on "storm surge and flooding" as the basis for the flood exclusion defense. VHG should, however, be prepared for the possibility that Ironclad may attempt to reclassify some wind-driven rain damage as "flood" damage during the adjustment process, particularly with respect to lower-floor water intrusion where the origin of the water (rain through wind-created openings vs. rising storm surge) may be difficult to distinguish. Caldwell Engineering's forensic analysis should specifically address the distinction between wind-driven rain intrusion and storm-surge inundation at each level of the building.
C. Storm Surge
Storm surge is the abnormal rise of ocean water driven inland by hurricane-force winds. At the Grand Key Resort, the 8-to-14-foot storm surge produced by Hurricane Callista inundated the ground-floor and below-grade areas of the property, including the lobby, ground-floor restaurant and kitchen, the mechanical plant (HVAC, electrical switchgear, emergency generators), the 54-slip marina, and associated exterior improvements.
Storm surge is the contested damage mechanism in this dispute. Its critical attribute for coverage purposes is its mechanistic link to wind: storm surge is caused by wind. It is not an independent weather event arising separately from the hurricane; it is a direct product of the same sustained winds that caused the structural damage to the building. The National Weather Service, the NHC, and the meteorological community uniformly recognize storm surge as a wind-driven phenomenon. Storm surge magnitude is principally a function of wind speed, wind direction, storm size, and coastal topography. In the case of Hurricane Callista, the 8-to-14-foot storm surge in Monroe County was a direct and predictable consequence of the 145 mph sustained winds at landfall.
Ironclad's position is that storm surge is "flood" regardless of its wind-driven origin, relying on the "whether or not driven by wind" language in the flood exclusion. As discussed in Section IV.A above, this position is subject to strong challenge under Florida law.
VHG's position is that storm surge during a hurricane is fundamentally a wind-driven phenomenon that should not be characterized as "flood" in an all-risk policy context. The flood exclusion was designed to address traditional flood events, not the defining destructive mechanism of a hurricane. At minimum, even if the Court finds storm surge to be "flood," Florida's EPC doctrine preserves coverage because wind was the efficient proximate cause of both the surge and the structural damage, and the ACC clause is unenforceable or inapplicable to the facts of this case.
D. Tidal Flooding / Riverine Flooding
Traditional "flood"—the type of water event that the flood exclusion was designed to address—encompasses the overflow of rivers, creeks, and streams; the accumulation of rainfall on normally dry land; and predictable tidal events such as coastal high tides and king tides. These events are characterized by their gradual onset, their predictability (in the case of tidal flooding), and their origin in non-wind-related causes (rainfall, snowmelt, tidal cycles, or dam failure).
No traditional flooding of this type occurred at the Grand Key Resort during Hurricane Callista. The property is not situated near any river, stream, or inland waterway. The water intrusion at Grand Key Resort was entirely attributable to two mechanisms: (1) storm surge—wind-driven ocean water pushed inland by Hurricane Callista's winds; and (2) wind-driven rain entering through wind-created openings. Neither of these is "flood" in the traditional sense.
This distinction is significant because it demonstrates that the flood exclusion, as written and as historically understood, was not designed to address the type of water damage that occurred at Grand Key Resort. The exclusion's enumerated examples—"surface water, waves, tidal water, overflow of streams or other bodies of water"—describe traditional flood mechanisms, not hurricane storm surge. Applying the exclusion to storm su

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ENGAGEMENT: 1021-00003

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