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

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Elaine Forsythe, Partner, Calderwood & Harkness LLP

FROM: Tiffany Rosenthal, Associate, Calderwood & Harkness LLP

DATE: September 5, 2022

RE: Preliminary Coverage Analysis — All-Risk Property and Business-Interruption Policies — Verimark Hospitality Group Inc.

MATTER: 1021-00003

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

I. Executive Summary

This memorandum presents a preliminary analysis of the all-risk property and business-interruption insurance program maintained by Verimark Hospitality Group Inc. ("VHG" or the "Company"). The purpose of this analysis is to assess the scope and adequacy of VHG's coverage in advance of the 2022 Atlantic hurricane season and to identify any coverage gaps, ambiguities, or potential disputes that could arise in the event of a major loss affecting the Company's Florida resort properties.

This engagement was opened on August 30, 2022, at the request of Sandra Pellegrini, VHG's Vice President of Risk Management. Ms. Pellegrini has asked the firm to conduct a comprehensive review of the Company's property and business-interruption insurance tower as a proactive measure during peak hurricane season. As of the date of this memorandum, no named storm has been designated in the Gulf of Mexico or western Atlantic that presents an imminent threat to VHG's properties, though tropical weather patterns and seasonal forecasts suggest elevated risk during the September–October period. This memorandum is accordingly framed as a pre-loss coverage review, intended to put the Company and counsel in the best possible position should a significant claim arise.

VHG owns and operates three luxury resort properties located in coastal Florida, each of which is situated in a geographic area that is particularly vulnerable to hurricane activity:

• Verimark Grand Key Resort, Marathon, Florida (Lower Florida Keys);

• Verimark Harborview Hotel & Conference Center, Fort Myers Beach, Florida (Lee County, Gulf Coast); and

• Verimark Sunset Shores, St. Pete Beach, Florida (Pinellas County, Gulf Coast).

The Company's insurance program is structured as a layered tower providing $60,000,000 in total coverage above a $500,000 per-occurrence deductible. The tower consists of four layers: a primary policy issued by Ironclad Indemnity Corporation ($25,000,000), a first excess policy issued by Pinnacle Surplus Lines Inc. ($15,000,000 excess of $25,000,000), a second excess policy issued by Montclair Assurance Company ($10,000,000 excess of $40,000,000), and a third excess policy issued by Sovereign Re Ltd. ($10,000,000 excess of $50,000,000). All policies share a common policy period of July 1, 2022 through July 1, 2023, and the three excess layers are written on a follow-form basis, generally incorporating the terms, conditions, and exclusions of the Ironclad primary policy.

This preliminary review has identified several significant coverage issues that warrant immediate attention and further investigation:

1. Named-Windstorm Sub-Limit ($15M). The most critical issue identified concerns a named-windstorm sub-limit of $15,000,000 for business-interruption losses. The prior policy year (2021–2022) contained this sub-limit. VHG's broker, Tidewater Risk Advisors LLC ("Tidewater"), through account executive Franklin Orde, represented to VHG that the sub-limit was deleted as part of the July 2022 renewal. However, upon preliminary review of the policy documents provided to date, the endorsement purportedly effecting the deletion (Endorsement No. 14) is ambiguous — its language could be read as merely modifying, rather than eliminating, the sub-limit. If the $15,000,000 sub-limit remains in force, VHG's maximum recovery for business-interruption losses arising from a named windstorm would be capped at $15,000,000 under the primary layer, and the follow-form excess layers would likely be similarly constrained. The difference between a $15,000,000 sub-limit and the full $60,000,000 tower is $45,000,000 — an exposure gap of enormous consequence.

2. Flood Exclusion and Anti-Concurrent Causation Clause. The Ironclad primary policy contains a flood exclusion coupled with an anti-concurrent causation ("ACC") clause. In a major hurricane, the interplay of wind damage (covered) and storm surge or flooding (potentially excluded) will be a central coverage battleground, particularly at the Grand Key Resort in Marathon, which is acutely vulnerable to storm surge. The enforceability of ACC clauses under Florida law remains an area of active litigation, and further legal research is needed.

3. Period-of-Restoration Definition. The Ironclad primary policy defines the "period of restoration" using the standard "with reasonable speed" formulation. Insurers routinely challenge the duration of business-interruption claims by arguing that the insured failed to restore operations with reasonable speed. Given the unique post-hurricane reconstruction environment in coastal Florida — including contractor scarcity, supply chain disruptions, and permitting delays — this definition will likely be a significant point of contention.

4. Duty-to-Mitigate Provisions. The policy contains standard duty-to-mitigate language that insurers frequently invoke to reduce business-interruption claims. VHG must be prepared to demonstrate that it took all reasonable steps to minimize interruption.

We recommend that the firm immediately contact Tidewater Risk Advisors to obtain the complete renewal negotiation file to resolve the windstorm sub-limit issue, and that the firm commission additional research memoranda on the specific legal issues identified herein. VHG reported FY 2021 revenue of $412,000,000 and EBITDA of $78,000,000, underscoring the significant financial stake in ensuring that the Company's insurance program functions as intended.

II. Background

A. The Client

Verimark Hospitality Group Inc. is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK." The Company is headquartered at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. VHG is a leading owner and operator of luxury resort hotels and conference centers in the state of Florida, catering primarily to leisure travelers, corporate groups, and conference attendees. The Company's management team includes Marcus Ellsworth (Chief Executive Officer), Diane Calder (Chief Financial Officer), Nathaniel Driscoll (General Counsel), and Sandra Pellegrini (Vice President of Risk Management). Ms. Pellegrini serves as the Company's primary point of contact for insurance and risk management matters and is the individual who engaged Calderwood & Harkness to conduct this review.

For its fiscal year ending December 31, 2021, VHG reported total revenue of approximately $412,000,000 and EBITDA of approximately $78,000,000. The Company's financial performance is heavily concentrated in its three Florida resort properties, all of which are located in coastal areas along the Gulf of Mexico and Florida Keys, making the Company particularly sensitive to hurricane-related disruptions. A prolonged closure of one or more of these properties during peak season (which extends roughly from November through April for leisure travel, and year-round for conference business) could result in tens of millions of dollars in lost revenue and continuing expenses.

VHG's three insured properties at issue in this analysis are described below:

Verimark Grand Key Resort — Marathon, Florida. The Grand Key Resort is located at Mile Marker 48 on the Overseas Highway in Marathon, Florida 33050, in the Lower Florida Keys. The property consists of a 312-room luxury resort with an on-site marina, multiple dining venues, a full-service spa, and recreational facilities. The resort is VHG's flagship property and its highest-performing revenue generator. Pre-loss financial metrics include an average daily rate ("ADR") of $389 and an average occupancy rate of 82%. The property's geographic location in the Lower Keys makes it highly vulnerable to storm surge and direct hurricane impacts; during Hurricane Irma in 2017, the Marathon area sustained severe damage, and portions of the Keys were inaccessible for weeks following landfall. The Grand Key Resort's proximity to the water and its marina facilities present particular exposure to both wind and flood damage.

Verimark Harborview Hotel & Conference Center — Fort Myers Beach, Florida. The Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931, on Estero Island in Lee County. The property consists of a 224-room hotel with a 40,000-square-foot conference facility, two restaurants, a rooftop bar, and beach access. The conference center is a significant revenue driver for VHG, hosting corporate retreats, industry conferences, and other group events year-round. Pre-loss financial metrics include an ADR of $295 and an average occupancy rate of 74%. Fort Myers Beach is a barrier island connected to the mainland by the Matanzas Pass Bridge, and the area is classified as a high-risk flood zone. The property is subject to mandatory evacuation orders during hurricane events, and the island's infrastructure is particularly susceptible to storm surge inundation.

Verimark Sunset Shores — St. Pete Beach, Florida. The Sunset Shores property is located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706, on the Gulf Coast in Pinellas County. The property consists of a 186-room boutique resort with beachfront access, a pool, a restaurant, and event spaces. Pre-loss financial metrics include an ADR of $342 and an average occupancy rate of 79%. St. Pete Beach is a barrier island community on the western coast of Pinellas County, accessible via causeway bridges. While historically the Tampa Bay area has experienced fewer direct hurricane strikes than the Keys or Southwest Florida, weather forecasters have frequently noted that a major hurricane tracking into Tampa Bay would cause catastrophic storm surge in the region, including on the barrier islands.

B. The Insurance Program

VHG's all-risk property and business-interruption insurance program is placed by Tidewater Risk Advisors LLC, an independent insurance brokerage firm with offices at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133. The account executive responsible for VHG's program is Franklin Orde, a senior broker at Tidewater who has managed VHG's insurance placement for at least the last three policy years. The current program was most recently renewed effective July 1, 2022, for a twelve-month policy period ending July 1, 2023.

The program is structured as a layered insurance tower, a common structure for large commercial property risks. The primary layer is written by Ironclad Indemnity Corporation on an all-risk property and business-interruption policy form. Three excess layers sit above the primary, each written on a follow-form basis, meaning they generally incorporate the coverage terms, conditions, and exclusions of the Ironclad primary policy unless the excess policy specifically provides otherwise. The total annual premium for the four-layer program is $1,840,000, allocated as follows: $980,000 for the Ironclad primary, $410,000 for the Pinnacle first excess, $265,000 for the Montclair second excess, and $185,000 for the Sovereign Re third excess.

The total available limit under the program is $60,000,000 per occurrence, above a $500,000 per-occurrence deductible that applies at the primary layer. Business-interruption coverage is included as a component of each policy, consistent with industry practice for large commercial property programs.

C. Purpose of This Memorandum

This matter was opened on August 30, 2022, under Calderwood & Harkness file number 1021-00003. Elaine Forsythe serves as the responsible partner, and Howard Bellamy serves as the billing partner. The engagement was initiated at the request of Sandra Pellegrini, VHG's Vice President of Risk Management, who contacted the firm to request a comprehensive, pre-loss review of VHG's property and business-interruption insurance program. Ms. Pellegrini indicated that VHG had not previously engaged outside counsel to conduct a thorough policy analysis and expressed concern that, in the event of a significant hurricane loss, potential ambiguities or gaps in the insurance tower could materially reduce the Company's recovery.

The purpose of this memorandum is threefold: (1) to provide a layer-by-layer analysis of VHG's insurance tower, describing the principal coverage grants, exclusions, conditions, and sub-limits applicable to each policy; (2) to identify key coverage issues, ambiguities, and potential disputes that could arise in the event of a hurricane-related loss; and (3) to set forth recommendations for further investigation and pre-loss preparation. This memorandum is preliminary in nature and is based on our initial review of the policy documents, declarations pages, and endorsements provided to date by VHG and Tidewater. Certain issues — most notably the windstorm sub-limit deletion question — require additional documentation before a definitive analysis can be rendered.

III. Insurance Tower — Overview

A. Summary Table of Layers

The following table summarizes the four layers of VHG's property and business-interruption insurance tower:

B. Common Policy Period

All four policies share a common policy period of July 1, 2022 through July 1, 2023. This is a standard twelve-month policy term. The common inception and expiration dates ensure that all layers are co-extensive in time, avoiding potential gaps in coverage that could arise if the layers had differing policy periods. The program was renewed on its most recent anniversary date of July 1, 2022, approximately two months before the date of this memorandum. As such, the current policy year is in its early stages, and the full 2022 hurricane season (June 1 through November 30) falls squarely within the policy period.

C. General Structure

All four policies are written on an "all risks" of physical loss or damage basis, which is the broadest form of property coverage available. Under an all-risk policy, all causes of physical loss or damage to insured property are covered unless specifically excluded by the policy language. The burden of proof is allocated as follows: the insured must demonstrate that a covered loss occurred, and the insurer bears the burden of proving that a specific exclusion applies to bar coverage. This allocation is well-established under Florida law and is generally favorable to the insured.

Each policy includes coverage for both direct physical loss or damage to the insured properties and business-interruption and extra-expense losses resulting from such physical loss or damage. The policies are written on a per-occurrence basis, meaning the limits of liability apply separately to each covered occurrence, rather than in the aggregate for all occurrences during the policy period (subject to certain aggregate sub-limits discussed below). The per-occurrence deductible of $500,000 applies only at the primary layer; the excess layers do not impose separate deductibles.

The three excess policies — Pinnacle, Montclair, and Sovereign Re — are each written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy unless the excess policy specifically states otherwise. This follow-form structure is standard in layered commercial property programs and has the practical effect of making the Ironclad primary policy the governing document for coverage analysis purposes, with limited exceptions for carrier-specific endorsements and provisions in the excess layers.

IV. Primary Layer — Ironclad Indemnity Corporation

A. Policy Identification

The primary layer of VHG's insurance tower is written by Ironclad Indemnity Corporation ("Ironclad"), a Connecticut-domiciled stock insurance company with a principal office at 55 Constitution Boulevard, Hartford, Connecticut 06103. Ironclad is assigned NAIC number 20537 and is a well-established admitted carrier with an A.M. Best financial strength rating of "A" (Excellent). The primary policy is identified as Policy Number IIC-PRP-2022-07541.

The policy provides a limit of liability of $25,000,000 per occurrence for all covered losses, including both property damage and business-interruption losses combined. The per-occurrence deductible is $500,000, which is satisfied before coverage under the primary policy attaches. The policy period is July 1, 2022 through July 1, 2023, consistent with the common policy period across the tower.

As the primary carrier, Ironclad bears the first-dollar exposure (above the deductible) for any covered loss and will be the first carrier to receive notice of any claim. The terms and conditions of the Ironclad primary policy effectively govern the entire tower, given that all three excess carriers write on a follow-form basis. Accordingly, a thorough analysis of the Ironclad policy is essential to understanding the scope of VHG's coverage.

B. Insuring Agreement — Property Damage

The Ironclad primary policy contains a broad insuring agreement for property damage, providing coverage for "direct physical loss of or damage to" insured property at the scheduled locations arising from any cause of loss not otherwise excluded. This is the standard all-risk insuring agreement, and it encompasses a wide range of perils, including windstorm, hurricane, named storm, hail, lightning, fire, explosion, and other natural and man-made causes of loss. The insuring agreement does not require the insured to identify a specific cause of loss; rather, the insured must demonstrate only that a direct physical loss or damage occurred to the insured property, and the burden then shifts to the insurer to prove the applicability of any exclusion.

The policy provides coverage on a replacement cost valuation basis, meaning that the measure of recovery for property damage is the cost to repair, rebuild, or replace the damaged property with materials of like kind and quality, without deduction for depreciation. Replacement cost valuation is the most favorable basis for the insured, as it provides for a full indemnity rather than an actual cash value recovery that would account for the depreciated condition of the damaged property. The policy requires that the insured actually repair or replace the damaged property in order to recover on a replacement cost basis; if the insured elects not to repair or replace, the policy provides recovery on an actual cash value basis.

Covered causes of loss specifically include windstorm and named storm, which are the perils most relevant to this analysis. The policy does not contain a blanket windstorm exclusion. However, as discussed in detail in Section IV.E below, the policy may contain a named-windstorm sub-limit that could significantly reduce available coverage for business-interruption losses arising from a named windstorm.

C. Insuring Agreement — Business Interruption

The Ironclad primary policy includes a business-interruption insuring agreement that provides coverage for the loss of business income sustained by VHG due to the necessary suspension of operations during the "period of restoration" resulting from direct physical loss or damage to insured property caused by a covered peril. The business-interruption coverage is designed to place the insured in the same financial position it would have occupied had the loss not occurred, by covering the actual loss sustained by the insured during the period when normal business operations are interrupted.

The business-interruption coverage encompasses the following components:

Loss of Revenue. The policy covers the reduction in the insured's gross earnings attributable to the suspension of operations. Gross earnings are measured by the insured's historical revenue performance, adjusted for seasonal trends, growth patterns, and other factors that would have affected the insured's revenue during the period of restoration had the loss not occurred.

Continuing Expenses. The policy covers fixed and continuing expenses that the insured must continue to pay during the period of interruption, even though the business is not generating revenue. These include items such as rent, mortgage payments, utilities, salaries for key employees, insurance premiums, and other overhead costs that do not cease during the interruption.

Extra Expense. The policy covers extra expenses incurred by the insured to minimize the period of business interruption or to continue operations at temporary or alternative facilities during the period of restoration. Extra expense coverage is particularly important in the hospitality industry, where an insured may be able to partially resume operations by relocating guests to partner properties, operating from temporary structures, or accelerating restoration through expedited construction.

The measurement formula for business-interruption losses under the Ironclad policy follows the standard "actual loss sustained" methodology. The insured's recovery is measured by the reduction in gross earnings during the period of restoration, less charges and expenses that do not necessarily continue during the period of interruption — commonly referred to as "saved expenses" or "non-continuing expenses." This deduction reflects the principle that the insured should not profit from the loss; expenses that the insured would have incurred in the normal course of business but that cease during the interruption (such as variable costs associated with guest services, food and beverage, and hourly labor) are deducted from the loss calculation.

D. Period of Restoration Definition

The "period of restoration" is one of the most important and frequently litigated terms in business-interruption insurance. The Ironclad primary policy defines the period of restoration as the period that:

(a) begins on the date of direct physical loss or damage caused by a covered peril; and

(b) ends on the earlier of: (i) the date when the insured property should be repaired, rebuilt, or replaced with reasonable speed and with similar quality; or (ii) the date when business is resumed at a new permanent location.

Several aspects of this definition warrant close attention.

First, the phrase "with reasonable speed" is the phrase most commonly at issue in disputes over the duration of business-interruption claims. Insurers routinely invoke this language to argue that the insured delayed the restoration process — whether by failing to promptly engage contractors, failing to obtain necessary permits on an expedited basis, or failing to implement a phased reopening — and that the period of restoration should accordingly be truncated to reflect the time in which a reasonably diligent insured would have completed the restoration. In practice, this standard is inherently subjective and fact-intensive, and disputes over the duration of the period of restoration frequently require expert testimony regarding construction timelines, contractor availability, and industry standards.

Second, the definition specifies that the period of restoration begins on the date of direct physical loss or damage. However, it is important to note that the period of restoration does not begin until after any applicable waiting period under the deductible has been satisfied. In practice, for a large loss that far exceeds the $500,000 deductible, this waiting period is of minimal practical significance.

Third, the reference to repair, rebuilding, or replacement "with similar quality" establishes that VHG is entitled to a period of restoration sufficient to restore its luxury resort properties to their pre-loss condition and quality. An insurer cannot argue that VHG should have completed restoration more quickly by cutting corners or rebuilding to a lower standard.

The period-of-restoration definition presents a significant potential issue for VHG. In the aftermath of a major hurricane affecting the Florida Keys and Gulf Coast, the restoration timeline for VHG's properties could be extended by many months or even years due to factors beyond VHG's control, including severe shortages of qualified contractors and construction labor, disruption of supply chains for building materials, extensive permitting delays due to the volume of construction activity and code compliance reviews, the unique complexities of restoring luxury hospitality properties (which require specialized finishes, fixtures, and systems), and infrastructure damage to roads, bridges, and utilities that may impede access to job sites. Ironclad may challenge VHG's restoration timeline and argue that the period of restoration should be shorter than the actual time required to complete restoration.

E. Named Windstorm Sub-Limit — Critical Issue

This section addresses the single most significant coverage issue identified in this preliminary review.

During the 2021–2022 policy year, the Ironclad primary policy contained a named-windstorm sub-limit of $15,000,000, applicable to business-interruption losses arising from named windstorms (i.e., tropical storms and hurricanes designated by the National Hurricane Center). This sub-limit operated within the policy's $25,000,000 per-occurrence limit, capping VHG's maximum recovery for BI losses from any named-windstorm event at $15,000,000 rather than the full $25,000,000 policy limit.

Sandra Pellegrini, VHG's Vice President of Risk Management, has represented to our firm that the $15,000,000 named-windstorm sub-limit was a priority item for negotiation during the July 2022 renewal. According to Ms. Pellegrini, VHG's broker, Franklin Orde at Tidewater Risk Advisors, successfully negotiated the deletion of the sub-limit with Ironclad's underwriting department as part of the renewal, and VHG understood that the July 2022 renewal policy would provide the full $25,000,000 per-occurrence limit for named-windstorm BI losses without any sub-limit.

However, upon our preliminary review of the policy documents provided to date, the status of the named-windstorm sub-limit is ambiguous. The policy's declarations page references "Endorsement No. 14," which was purportedly issued to effect the deletion of the sub-limit. We have reviewed the text of Endorsement No. 14 as it appears in the policy documents, and the endorsement language is equivocal. Rather than clearly and unambiguously stating that the named-windstorm sub-limit is deleted in its entirety, the endorsement contains language that could be interpreted as merely modifying certain terms and conditions applicable to the sub-limit — for example, revising the definition of "named windstorm" or adjusting the deductible applicable to named-windstorm losses — without eliminating the $15,000,000 cap itself. The endorsement does not contain the clear deletion language (such as "the Named Windstorm Sub-Limit set forth in Section [X] is hereby deleted in its entirety") that would resolve the ambiguity.

The stakes associated with this issue are enormous. If the $15,000,000 named-windstorm sub-limit remains in force under the primary policy, VHG's maximum recovery for business-interruption losses arising from a named windstorm would be capped at $15,000,000 under the Ironclad primary layer. Because the excess layers follow form to the Ironclad primary, the sub-limit would likely cascade upward through the tower. In practical terms, the $15,000,000 sub-limit in the primary layer means that VHG's BI losses from a named windstorm could never exhaust the $25,000,000 primary limit, meaning the Pinnacle first excess layer (which attaches at $25,000,000) would never be triggered for a named-windstorm BI loss. VHG's total recovery for business-interruption losses from a named windstorm would thus be capped at $15,000,000 — a fraction of the $60,000,000 tower that VHG believed it purchased.

Conversely, if the sub-limit was properly deleted at renewal, the full $25,000,000 primary limit would be available for named-windstorm BI losses, and the excess layers would be available upon exhaustion of the underlying limits. The difference between these two scenarios is $45,000,000 in potential coverage — a difference that could be outcome-determinative for VHG in the event of a major hurricane loss.

Recommendation: We recommend that the firm immediately contact Franklin Orde at Tidewater Risk Advisors to obtain the complete renewal negotiation file, including all correspondence between Tidewater and Ironclad's underwriting department regarding the deletion of the named-windstorm sub-limit, the renewal submission, all drafts of endorsements, the final binder as issued, and the final policy form and all endorsements as delivered. We should also request copies of any internal Tidewater memoranda or file notes documenting the negotiation. This documentation will be essential to establishing VHG's position that the sub-limit was deleted and to pursuing a reformation or estoppel argument if the policy language itself is ambiguous.

F. Flood Exclusion

The Ironclad primary policy contains a flood exclusion that excludes coverage for loss or damage "caused by or resulting from" flood. The exclusion defines "flood" broadly to include, but not be limited to, surface water, tidal water, tidal wave, overflow of streams or other bodies of water, spray from any of the foregoing, and storm surge, whether or not driven by wind. This is a standard form flood exclusion found in most commercial property policies.

Critically, the policy also contains an anti-concurrent causation ("ACC") clause, which provides, in relevant part:

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

The ACC clause precedes the enumerated exclusions, including the flood exclusion, and is intended to preclude coverage where both a covered peril (such as wind) and an excluded peril (such as flood or storm surge) contribute to the loss, whether concurrently, sequentially, or in any combination. Under a literal reading of the ACC clause, if any portion of the loss is attributable to flood or storm surge, the entire loss caused by or contributed to by the flood peril would be excluded — even if wind damage (a covered peril) was the predominant or initiating cause of the loss.

The enforceability of ACC clauses in property insurance policies under Florida law has been the subject of significant litigation, and the case law is not entirely settled. Florida courts have, in some circumstances, declined to enforce ACC clauses and have instead applied the efficient proximate cause doctrine, under which coverage is available when the dominant or efficient proximate cause of the loss is a covered peril, notwithstanding the concurrent or sequential contribution of an excluded peril. The Florida Supreme Court's analysis in Glenrock Enterprises, 208 So. 3d 694 (Fla. 2016), addressed related issues of concurrent causation in the context of construction defect claims, and lower courts have continued to grapple with the application of concurrent causation principles in the hurricane context.

The ACC clause and flood exclusion are particularly relevant to the Grand Key Resort in Marathon, Florida. The Lower Florida Keys are among the most storm-surge-vulnerable areas in the United States. During a major hurricane, storm surge heights in the Keys can reach 10 to 15 feet or more, depending on the storm's intensity, forward speed, and track. Any loss at the Grand Key Resort during a major hurricane event will almost certainly involve a combination of wind damage (from sustained winds and wind-driven rain) and flood/storm surge damage (from rising water). Ironclad can be expected to invoke the flood exclusion and ACC clause to exclude or reduce coverage for any portion of the loss attributable to storm surge, and VHG will need to rebut those arguments with forensic engineering evidence differentiating the causes of damage.

The Harborview Hotel in Fort Myers Beach and the Sunset Shores property in St. Pete Beach are also located on barrier islands that are vulnerable to storm surge, though the degree of vulnerability varies with the specific storm track and intensity. The flood exclusion and ACC clause will be relevant to losses at all three properties.

Recommendation: We recommend commissioning a detailed legal research memorandum on the current state of Florida law regarding anti-concurrent causation clauses, the efficient proximate cause doctrine, and their application to hurricane losses involving concurrent wind and storm surge damage. We also recommend that VHG identify and retain, in advance of any loss, a forensic engineering firm with experience in differentiating wind damage from storm surge/flood damage at coastal properties. Early engagement of such experts will be important to preserving VHG's position on causation issues.

G. Duty to Mitigate / Sue and Labor Clause

The Ironclad primary policy contains standard duty-to-mitigate language requiring the insured to "take all reasonable steps to protect insured property from further damage after a loss and to minimize the period of business interruption." This provision imposes an affirmative obligation on VHG to act diligently in the aftermath of a loss to prevent additional damage and to take steps to resume business operations as promptly as practicable. Failure to satisfy the duty to mitigate can, in theory, result in a reduction of the insured's recovery, either through a direct reduction in the amount of the claim or through an insurer defense that the insured's failure to mitigate extended the period of business interruption beyond what was necessary.

The policy also contains a sue and labor clause, which is a related but distinct provision. The sue and labor clause obligates the insured to take all reasonable measures to protect insured property from further loss after the occurrence of a covered event and provides that the insurer will reimburse the insured for reasonable expenses incurred in so doing. The sue and labor clause creates a reciprocal obligation: VHG must act to protect property, and Ironclad must pay the costs of such protective measures. Expenses incurred under the sue and labor clause are typically recoverable in addition to the policy limits, meaning they do not erode the $25,000,000 per-occurrence limit.

The duty-to-mitigate provision presents a potential issue in the business-interruption context. Ironclad could assert a failure-to-mitigate defense if VHG does not promptly commence restoration work after a loss event, or if VHG does not take steps to partially resume operations during the restoration period — for example, by operating from temporary facilities, implementing a phased reopening of undamaged portions of a resort, or redirecting bookings to unaffected properties. In the luxury hospitality context, partial reopening or operation from temporary facilities may be impracticable or may not generate meaningful revenue, particularly if the resort's amenities and infrastructure are substantially compromised. Nevertheless, VHG should be prepared to document all steps taken to mitigate its losses and to explain any decisions not to pursue partial reopening or temporary operations.

H. Other Key Provisions

Several additional provisions of the Ironclad primary policy are noteworthy:

Vacancy Clause. The policy contains a vacancy clause providing that coverage may be limited or excluded if the insured premises have been "vacant" for more than sixty (60) consecutive days prior to a loss. Under the vacancy clause, if the premises are vacant at the time of the loss, certain causes of loss (such as vandalism, sprinkler leakage, and glass breakage) may be excluded entirely, and the insurer's liability for other covered losses may be reduced by a specified percentage (typically 15%). This provision is not expected to be an issue for VHG given that all three resort properties are actively operating as hotels with regular occupancy. However, if a loss event forces VHG to close a property for an extended period and a subsequent loss occurs during the closure, the vacancy clause could become relevant.

Ordinance or Law Coverage. The policy includes a sub-limit of $5,000,000 for increased costs of construction arising from the enforcement of building codes, zoning ordinances, or other governmental regulations that require the insured to upgrade, modify, or demolish and reconstruct the damaged property in a manner that exceeds the pre-loss condition. Following a major hurricane, building code requirements in Florida may mandate significant upgrades — including enhanced wind-resistance standards, elevated flood requirements, and updated life-safety systems — that increase the cost and duration of restoration. The $5,000,000 sub-limit may be inadequate to cover the full cost of code-mandated upgrades for three large resort properties, and VHG should be advised of this potential gap.

Extended Period of Indemnity. The policy provides an extended period of indemnity of 180 days beyond the end of the physical restoration period. This provision recognizes that even after a damaged property has been physically restored and reopened, the insured may not immediately recover its pre-loss revenue levels. Guest bookings may have shifted to competitors, group and conference contracts may have been reassigned, and the property's reputation and market presence may take time to rebuild. The 180-day extended period of indemnity provides coverage for this "ramp-up" period, allowing VHG to recover for the shortfall between its actual post-reopening revenue and its projected pre-loss revenue for up to 180 days after physical restoration is complete. This is a valuable provision for VHG, as the recovery period for luxury resort properties can be protracted due to the lead times associated with leisure and group bookings.

Civil Authority Coverage. The policy provides up to 30 days of coverage for loss of business income sustained when access to an insured property is prohibited by order of a civil authority (such as a mandatory evacuation order or a post-storm curfew or access restriction) due to physical damage to property in the vicinity of the insured location. Civil authority coverage is triggered when a governmental authority prohibits access to the insured premises, even if the insured property itself has not sustained direct physical damage. This coverage is particularly relevant in hurricane scenarios, where mandatory evacuation orders may be issued days before landfall and access restrictions may remain in place for days or weeks after the storm. The 30-day limitation may be insufficient if access is restricted for a longer period, as has occurred in prior Florida hurricane events.

Ingress/Egress Coverage. The policy includes coverage for loss of business income sustained when ingress to or egress from an insured property is prevented by physical damage to property in the immediate area, regardless of whether a civil authority order has been issued. This coverage is distinct from civil authority coverage and applies when physical damage to surrounding infrastructure — such as roads, bridges, or causeways — prevents guests, employees, and suppliers from reaching the insured property. Given that VHG's Fort Myers Beach and St. Pete Beach properties are located on barrier islands accessible by bridge, and the Grand Key Resort is located on a Keys island accessible via the Overseas Highway, ingress/egress coverage could be a significant component of any claim if bridge or road damage impedes access to the properties.

I. Conditions and Claims Procedures

The Ironclad primary policy contains standard conditions and claims procedures that VHG must comply with in order to preserve its coverage rights:

Notice of Loss. The policy requires the insured to provide prompt written notice of any loss to Ironclad. While the policy does not specify a precise number of days within which notice must be given, "prompt" notice is generally interpreted to mean as soon as reasonably practicable under the circumstances. Failure to provide timely notice can, in some jurisdictions and under some policies, result in a forfeiture of coverage, although Florida law generally requires an insurer to demonstrate prejudice resulting from late notice before coverage may be denied on that basis. Nevertheless, VHG should provide notice to Ironclad (and to all excess carriers) as promptly as possible following any loss event.

Proof of Loss. The policy requires the insured to submit a sworn statement in proof of loss within ninety (90) days of the loss, or as soon as reasonably practicable thereafter. The proof of loss must describe the circumstances of the loss, the extent of the damage, and the amount of the claimed loss, supported by appropriate documentation. In the context of a large and complex business-interruption claim, the preparation of a comprehensive proof of loss may require the engagement of forensic accountants and other experts, and the 90-day deadline may be difficult to meet. VHG should request extensions from Ironclad if necessary, and all such requests should be made in writing.

Examination Under Oath. The policy authorizes Ironclad to require an examination under oath ("EUO") of VHG's officers and employees as often as may be reasonably required. EUOs are a standard feature of property insurance policies and are commonly used by insurers in the investigation of large claims. VHG's cooperation with any EUO request is a condition of coverage; however, VHG is entitled to have legal counsel present during any examination.

Appraisal Clause. The policy contains an appraisal clause providing that, if the parties disagree on the amount of loss, either party may demand appraisal. Upon a demand for appraisal, each party selects a competent and disinterested appraiser, and the two appraisers then select a competent and disinterested umpire. The appraisers independently appraise the loss, and if they agree on the amount, their agreement is binding on both parties. If they cannot agree, they submit their differences to the umpire, and agreement by any two of the three (the two appraisers and the umpire) is binding on both parties. The appraisal process is limited to disputes over the amount of loss and does not extend to coverage disputes (i.e., whether a loss is covered in the first instance). The appraisal clause may be a useful mechanism for resolving valuation disputes with Ironclad without the need for litigation, but it does not provide a forum for resolving the more significant coverage issues identified in this memorandum.

Suit Limitation. The policy contains a suit limitation clause requiring that any legal action against the insurer be commenced within the time allowed by applicable law. Under Florida law, the applicable statute of limitations for a breach of contract action is five years from the date the cause of action accrues. See Fla. Stat. § 95.11(2)(b). However, policy-based suit limitation clauses may shorten this period to as little as two years from the date of loss, and Florida courts have generally upheld reasonable contractual limitations periods in insurance policies. The Ironclad policy's reference to "the time allowed by applicable law" likely refers to the Florida statutory period, but this language should be reviewed carefully to confirm that no shorter contractual limitations period applies.

V. First Excess Layer — Pinnacle Surplus Lines Inc.

A. Policy Identification

The first excess layer of VHG's insurance tower is written by Pinnacle Surplus Lines Inc. ("Pinnacle"), a Texas-domiciled surplus-lines insurer with a principal office at 200 Congress Avenue, Suite 1400, Austin, Texas 78701. Pinnacle is assigned NAIC number 38214. The policy is identified as Policy Number PSL-XS1-2022-3390.

The Pinnacle policy provides a limit of liability of $15,000,000 per occurrence, excess of the $25,000,000 Ironclad primary layer. In other words, the Pinnacle layer attaches — i.e., begins to respond — only after VHG's losses from a covered occurrence exceed $25,000,000 (inclusive of the $500,000 deductible satisfied at the primary level). The Pinnacle layer thus provides coverage for losses between $25,000,000 and $40,000,000. The annual premium for the Pinnacle policy is $410,000, and the policy period is July 1, 2022 through July 1, 2023, consistent with the common policy period.

B. Follow-Form Provisions

The Pinnacle policy is written on a follow-form basis, incorporating by reference all of the terms, conditions, exclusions, and endorsements of the Ironclad primary policy (IIC-PRP-2022-07541), except as specifically modified by the Pinnacle policy or its endorsements. This follow-form structure means that the coverage analysis set forth in Section IV above with respect to the Ironclad primary policy applies with equal force to the Pinnacle first excess layer, unless the Pinnacle policy provides otherwise.

The follow-form nature of the Pinnacle policy has a critical implication for the named-windstorm sub-limit issue discussed in Section IV.E. If the Ironclad primary policy contains a $15,000,000 named-windstorm sub-limit for business-interruption losses that was not deleted at the July 2022 renewal, VHG's maximum BI recovery under the primary layer for a named-windstorm event would be capped at $15,000,000 — well below the $25,000,000 primary limit. Because the Pinnacle layer attaches only after the $25,000,000 primary limit is exhausted, a $15,000,000 sub-limit in the primary layer would mean that VHG's named-windstorm BI losses could never reach the $25,000,000 attachment point, and the Pinnacle layer would never be triggered for a named-windstorm BI claim. This cascading effect underscores the critical importance of resolving the sub-limit deletion issue.

Conversely, if the sub-limit was properly deleted and the full $25,000,000 primary limit is available for named-windstorm BI losses, the Pinnacle layer would be exposed to losses in excess of $25,000,000, and VHG would have access to the full $15,000,000 Pinnacle limit for such losses.

C. Specific Modifications

The Pinnacle policy contains several provisions that vary from or supplement the Ironclad primary policy:

No Separate Deductible. The Pinnacle policy does not impose a separate deductible. The $500,000 per-occurrence deductible is satisfied entirely at the primary layer, and no additional deductible applies at the first excess level. This is consistent with standard layered-program practice.

Named-Windstorm Aggregate Limit. The Pinnacle policy contains a named-windstorm aggregate limit clause providing that Pinnacle's aggregate limit of liability for all named-windstorm losses during the policy period is $15,000,000. Because the per-occurrence limit is also $15,000,000, the aggregate limit effectively creates no additional restriction beyond the per-occurrence cap in the context of a single named-windstorm event. However, if VHG were to experience multiple named-windstorm events during the same policy period, each causing losses in excess of $25,000,000, the aggregate limit would cap Pinnacle's total liability across all such events at $15,000,000. While two or more tower-penetrating named-windstorm events in a single policy year would be unusual, this aggregate limit is worth noting.

No Material Differences on Key Provisions. Our preliminary review has not identified any material differences between the Pinnacle policy and the Ironclad primary policy with respect to the period-of-restoration definition, the flood exclusion, the anti-concurrent causation clause, or other key provisions discussed in Section IV. These provisions are incorporated by reference through the follow-form clause.

D. Surplus-Lines Regulatory Considerations

As a surplus-lines insurer, Pinnacle is not an admitted carrier in Florida. Surplus-lines policies are subject to different regulatory requirements than admitted-carrier policies, and there are several implications of which VHG should be aware.

Most notably, surplus-lines policies are not backed by the Florida Insurance Guaranty Association ("FIGA"), which provides a limited safety net for policyholders of admitted carriers that become insolvent. If Pinnacle were to become insolvent, VHG would not have recourse to FIGA for payment of covered claims under the Pinnacle policy. Based on publicly available financial data, Pinnacle appears to be in sound financial condition, and this is not presently a concern. Nevertheless, VHG's broker, Tidewater, should monitor Pinnacle's financial strength on an ongoing basis.

Additionally, surplus-lines policies in Florida are subject to the Surplus Lines Law, Fla. Stat. §§ 626.913–.937, which requires surplus-lines brokers to file affidavits confirming that the risk was declined by admitted carriers before placement with a surplus-lines insurer. We assume that Tidewater complied with these requirements at the time of placement, but this should be confirmed.

VI. Second Excess Layer — Montclair Assurance Company

A. Policy Identification

The second excess layer of VHG's insurance tower is written by Montclair Assurance Company ("Montclair"), a New York-domiciled admitted carrier with a principal office at 1 Liberty Plaza, 38th Floor, New York, New York 10006. Montclair is assigned NAIC number 15692 and maintains an A.M. Best financial strength rating of "A-" (Excellent). The policy is identified as Policy Number MAC-XS2-2022-09817.

The Montclair policy provides a limit of liability of $10,000,000 per occurrence, excess of $40,000,000 (comprising the $25,000,000 Ironclad primary layer and the $15,000,000 Pinnacle first excess layer). The Montclair layer accordingly provides coverage for losses between $40,000,000 and $50,000,000. The annual premium for the Montclair policy is $265,000, and the policy period is July 1, 2022 through July 1, 2023.

This layer attaches at a relatively high level in the tower, meaning it will be implicated only in the event of a severe loss exceeding $40,000,000. As discussed in Section IX below, our preliminary estimate of VHG's potential business-interruption exposure for a major hurricane event affecting all three properties ranges from $48,000,000 to $67,000,000, suggesting that the Montclair layer could be reached in a significant loss scenario.

B. Follow-Form Provisions

The Montclair policy is written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy, subject to specific modifications set forth in the Montclair policy itself.

The Montclair policy contains a "drop-down" provision that merits attention. Under this provision, if a lower underlying layer is exhausted — whether by payment of losses or by other means — Montclair will "drop down" to provide coverage in excess of the remaining underlying limits, without waiting for the exhausted layer to be restored. In practical terms, if the Ironclad primary and Pinnacle first excess layers are both exhausted by payment of a prior claim during the policy period, the Montclair layer would drop down and attach directly above the exhausted layers. This provision could be beneficial to VHG in a multiple-loss scenario, although its practical application is limited by the per-occurrence structure of the program.

However, the Montclair policy also contains a "maintenance of underlying insurance" clause, which requires VHG to maintain the full underlying limits of $40,000,000 ($25,000,000 primary plus $15,000,000 first excess) throughout the policy period. If VHG fails to maintain the underlying limits — for example, if VHG allows the primary or first excess policy to lapse, or if VHG reduces the underlying limits without Montclair's consent — Montclair is not obligated to drop down to fill the gap, and VHG would be responsible for absorbing any uninsured portion of the loss. This maintenance-of-underlying-insurance requirement is standard in excess insurance policies and should not present an issue as long as VHG maintains its primary and first excess policies in force, but it is a condition that VHG must be aware of and comply with.

C. Specific Provisions

Arbitration Clause. The Montclair policy contains an arbitration clause that differs from the appraisal clause in the Ironclad primary policy. The Montclair arbitration clause provides that any dispute between VHG and Montclair regarding the amount of loss shall be submitted to binding arbitration conducted in accordance with the rules of the American Arbitration Association ("AAA") in New York, New York. The arbitration clause specifies a London-style arbitration format, in which each party appoints an arbitrator with experience in insurance and reinsurance matters, and the two appointed arbitrators select a third arbitrator to serve as chair of the panel. The decision of the majority of the panel is final and binding on both parties and may be entered as a judgment in any court of competent jurisdiction.

This arbitration clause is broader in scope than the Ironclad appraisal clause, which is limited to disputes over the "amount of loss" and does not extend to coverage questions. The Montclair arbitration clause, by its terms, appears to apply to disputes regarding "the amount of loss" — language that is similar in scope to the Ironclad appraisal clause. However, the procedural format (AAA rules, London-style arbitration, New York venue) differs significantly from the informal appraisal process contemplated by the Ironclad policy. If a dispute with Montclair reaches the arbitration stage, the proceedings would be more formal and potentially more costly than an appraisal under the Ironclad policy. Counsel should analyze whether this arbitration clause could be construed to extend to coverage disputes, and whether the New York venue would be enforceable given that VHG's properties are in Florida and the Ironclad primary policy applies Florida law.

Otherwise, the Montclair policy substantially follows the terms of the Ironclad primary policy, and no other material differences have been identified in this preliminary review.

VII. Third Excess Layer — Sovereign Re Ltd.

A. Policy Identification

The third and highest excess layer of VHG's insurance tower is written by Sovereign Re Ltd. ("Sovereign Re"), a Bermuda-domiciled reinsurer and excess insurance carrier with its principal office at 14 Front Street, Hamilton HM 11, Bermuda. The policy is identified as Policy Number SRL-XS3-2022-5102.

The Sovereign Re policy provides a limit of liability of $10,000,000 per occurrence, excess of $50,000,000 (comprising the $25,000,000 Ironclad primary, $15,000,000 Pinnacle first excess, and $10,000,000 Montclair second excess layers). The Sovereign Re layer provides coverage for losses between $50,000,000 and $60,000,000 — the top of VHG's insurance tower. The annual premium for the Sovereign Re policy is $185,000, and the policy period is July 1, 2022 through July 1, 2023.

This is the highest layer in the tower and is reached only if VHG's losses from a single covered occurrence exceed $50,000,000. As discussed in Section IX, our preliminary estimate of potential business-interruption exposure suggests that a loss of this magnitude is plausible but would require a severe and prolonged disruption of operations across multiple properties.

B. Follow-Form Provisions

The Sovereign Re policy is written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy, subject to specific modifications set forth in the Sovereign Re policy itself.

The Sovereign Re policy contains a service-of-suit clause designating a registered agent in New York for purposes of service of process in any legal proceeding arising out of or related to the policy. This provision is standard in policies issued by non-U.S. domiciled carriers and is designed to facilitate enforcement in U.S. courts. The service-of-suit clause provides that Sovereign Re will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction, thereby waiving any objection based on lack of personal jurisdiction or inconvenient forum. This provision is important because, absent such a clause, enforcing a judgment against a Bermuda-domiciled carrier could be complicated by jurisdictional and enforcement issues.

C. Specific Provisions

Choice of Law. The Sovereign Re policy contains a choice-of-law provision specifying that the policy shall be governed by and construed in accordance with the laws of the State of Florida. This is consistent with the Ironclad primary policy and ensures that the same substantive law governs all layers of the tower. The Florida choice-of-law provision means that the legal analyses of Florida insurance jurisprudence set forth throughout this memorandum — including the analysis of ACC clauses, the efficient proximate cause doctrine, and the period-of-restoration standard — are applicable to the Sovereign Re layer as well.

Insolvency Clause. The Sovereign Re policy contains an insolvency clause providing that, if any underlying insurer becomes insolvent, Sovereign Re's liability shall not be increased thereby, and any loss that would have been payable by the insolvent underlying insurer remains the responsibility of the insured. In practical terms, this means that if Ironclad, Pinnacle, or Montclair were to become insolvent and unable to pay their respective shares of a covered loss, VHG would be required to absorb the shortfall, and Sovereign Re would not drop down to fill the gap. Sovereign Re's obligation would remain limited to losses actually in excess of $50,000,000, regardless of whether the underlying layers have been fully paid.

This insolvency clause, while standard in excess insurance, highlights the importance of monitoring the financial stability of all carriers in the tower. Based on currently available information, none of the four carriers appears to present a solvency concern, but VHG and its broker should continue to monitor carrier financial ratings, particularly in the wake of a major hurricane event that could stress carrier balance sheets across the industry.

VIII. Cross-Cutting Coverage Issues

This section consolidates and expands upon the key coverage issues that affect VHG's insurance program across multiple layers of the tower. These are the issues most likely to be contested in the event of a major hurricane loss and should be the focus of further legal research and pre-loss preparation.

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

As discussed in detail in Section IV.E above, the named-windstorm sub-limit is the single most significant coverage issue identified in this preliminary review. The potential impact of this issue cannot be overstated.

If Ironclad successfully asserts that the $15,000,000 named-windstorm sub-limit for business-interruption losses was not deleted at the July 2022 renewal, VHG's maximum BI recovery for a named-windstorm event under the primary layer would be capped at $15,000,000 — a $10,000,000 reduction from the full $25,000,000 primary limit. Because the three excess layers follow form to the Ironclad primary, the sub-limit would likely cascade through the entire tower. In practical terms, the $15,000,000 sub-limit would prevent the primary layer from being fully exhausted by named-windstorm BI losses, which would mean that the Pinnacle first excess layer (attaching at $25,000,000) would never be reached. The Montclair and So

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Elaine Forsythe, Partner, Calderwood & Harkness LLP
FROM: Tiffany Rosenthal, Associate, Calderwood & Harkness LLP
DATE: September 5, 2022
RE: Preliminary Coverage Analysis — All-Risk Property and Business-Interruption Policies — Verimark Hospitality Group Inc.
MATTER: 1021-00003
CLIENT: Verimark Hospitality Group Inc. (Nasdaq: VMRK)
I. Executive Summary
This memorandum presents a preliminary analysis of the all-risk property and business-interruption insurance program maintained by Verimark Hospitality Group Inc. ("VHG" or the "Company"). The purpose of this analysis is to assess the scope and adequacy of VHG's coverage in advance of the 2022 Atlantic hurricane season and to identify any coverage gaps, ambiguities, or potential disputes that could arise in the event of a major loss affecting the Company's Florida resort properties.
This engagement was opened on August 30, 2022, at the request of Sandra Pellegrini, VHG's Vice President of Risk Management. Ms. Pellegrini has asked the firm to conduct a comprehensive review of the Company's property and business-interruption insurance tower as a proactive measure during peak hurricane season. As of the date of this memorandum, no named storm has been designated in the Gulf of Mexico or western Atlantic that presents an imminent threat to VHG's properties, though tropical weather patterns and seasonal forecasts suggest elevated risk during the September–October period. This memorandum is accordingly framed as a pre-loss coverage review, intended to put the Company and counsel in the best possible position should a significant claim arise.
VHG owns and operates three luxury resort properties located in coastal Florida, each of which is situated in a geographic area that is particularly vulnerable to hurricane activity:
• Verimark Grand Key Resort, Marathon, Florida (Lower Florida Keys);
• Verimark Harborview Hotel & Conference Center, Fort Myers Beach, Florida (Lee County, Gulf Coast); and
• Verimark Sunset Shores, St. Pete Beach, Florida (Pinellas County, Gulf Coast).
The Company's insurance program is structured as a layered tower providing $60,000,000 in total coverage above a $500,000 per-occurrence deductible. The tower consists of four layers: a primary policy issued by Ironclad Indemnity Corporation ($25,000,000), a first excess policy issued by Pinnacle Surplus Lines Inc. ($15,000,000 excess of $25,000,000), a second excess policy issued by Montclair Assurance Company ($10,000,000 excess of $40,000,000), and a third excess policy issued by Sovereign Re Ltd. ($10,000,000 excess of $50,000,000). All policies share a common policy period of July 1, 2022 through July 1, 2023, and the three excess layers are written on a follow-form basis, generally incorporating the terms, conditions, and exclusions of the Ironclad primary policy.
This preliminary review has identified several significant coverage issues that warrant immediate attention and further investigation:
1. Named-Windstorm Sub-Limit ($15M). The most critical issue identified concerns a named-windstorm sub-limit of $15,000,000 for business-interruption losses. The prior policy year (2021–2022) contained this sub-limit. VHG's broker, Tidewater Risk Advisors LLC ("Tidewater"), through account executive Franklin Orde, represented to VHG that the sub-limit was deleted as part of the July 2022 renewal. However, upon preliminary review of the policy documents provided to date, the endorsement purportedly effecting the deletion (Endorsement No. 14) is ambiguous — its language could be read as merely modifying, rather than eliminating, the sub-limit. If the $15,000,000 sub-limit remains in force, VHG's maximum recovery for business-interruption losses arising from a named windstorm would be capped at $15,000,000 under the primary layer, and the follow-form excess layers would likely be similarly constrained. The difference between a $15,000,000 sub-limit and the full $60,000,000 tower is $45,000,000 — an exposure gap of enormous consequence.
2. Flood Exclusion and Anti-Concurrent Causation Clause. The Ironclad primary policy contains a flood exclusion coupled with an anti-concurrent causation ("ACC") clause. In a major hurricane, the interplay of wind damage (covered) and storm surge or flooding (potentially excluded) will be a central coverage battleground, particularly at the Grand Key Resort in Marathon, which is acutely vulnerable to storm surge. The enforceability of ACC clauses under Florida law remains an area of active litigation, and further legal research is needed.
3. Period-of-Restoration Definition. The Ironclad primary policy defines the "period of restoration" using the standard "with reasonable speed" formulation. Insurers routinely challenge the duration of business-interruption claims by arguing that the insured failed to restore operations with reasonable speed. Given the unique post-hurricane reconstruction environment in coastal Florida — including contractor scarcity, supply chain disruptions, and permitting delays — this definition will likely be a significant point of contention.
4. Duty-to-Mitigate Provisions. The policy contains standard duty-to-mitigate language that insurers frequently invoke to reduce business-interruption claims. VHG must be prepared to demonstrate that it took all reasonable steps to minimize interruption.
We recommend that the firm immediately contact Tidewater Risk Advisors to obtain the complete renewal negotiation file to resolve the windstorm sub-limit issue, and that the firm commission additional research memoranda on the specific legal issues identified herein. VHG reported FY 2021 revenue of $412,000,000 and EBITDA of $78,000,000, underscoring the significant financial stake in ensuring that the Company's insurance program functions as intended.
II. Background
A. The Client
Verimark Hospitality Group Inc. is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK." The Company is headquartered at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. VHG is a leading owner and operator of luxury resort hotels and conference centers in the state of Florida, catering primarily to leisure travelers, corporate groups, and conference attendees. The Company's management team includes Marcus Ellsworth (Chief Executive Officer), Diane Calder (Chief Financial Officer), Nathaniel Driscoll (General Counsel), and Sandra Pellegrini (Vice President of Risk Management). Ms. Pellegrini serves as the Company's primary point of contact for insurance and risk management matters and is the individual who engaged Calderwood & Harkness to conduct this review.
For its fiscal year ending December 31, 2021, VHG reported total revenue of approximately $412,000,000 and EBITDA of approximately $78,000,000. The Company's financial performance is heavily concentrated in its three Florida resort properties, all of which are located in coastal areas along the Gulf of Mexico and Florida Keys, making the Company particularly sensitive to hurricane-related disruptions. A prolonged closure of one or more of these properties during peak season (which extends roughly from November through April for leisure travel, and year-round for conference business) could result in tens of millions of dollars in lost revenue and continuing expenses.
VHG's three insured properties at issue in this analysis are described below:
Verimark Grand Key Resort — Marathon, Florida. The Grand Key Resort is located at Mile Marker 48 on the Overseas Highway in Marathon, Florida 33050, in the Lower Florida Keys. The property consists of a 312-room luxury resort with an on-site marina, multiple dining venues, a full-service spa, and recreational facilities. The resort is VHG's flagship property and its highest-performing revenue generator. Pre-loss financial metrics include an average daily rate ("ADR") of $389 and an average occupancy rate of 82%. The property's geographic location in the Lower Keys makes it highly vulnerable to storm surge and direct hurricane impacts; during Hurricane Irma in 2017, the Marathon area sustained severe damage, and portions of the Keys were inaccessible for weeks following landfall. The Grand Key Resort's proximity to the water and its marina facilities present particular exposure to both wind and flood damage.
Verimark Harborview Hotel & Conference Center — Fort Myers Beach, Florida. The Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931, on Estero Island in Lee County. The property consists of a 224-room hotel with a 40,000-square-foot conference facility, two restaurants, a rooftop bar, and beach access. The conference center is a significant revenue driver for VHG, hosting corporate retreats, industry conferences, and other group events year-round. Pre-loss financial metrics include an ADR of $295 and an average occupancy rate of 74%. Fort Myers Beach is a barrier island connected to the mainland by the Matanzas Pass Bridge, and the area is classified as a high-risk flood zone. The property is subject to mandatory evacuation orders during hurricane events, and the island's infrastructure is particularly susceptible to storm surge inundation.
Verimark Sunset Shores — St. Pete Beach, Florida. The Sunset Shores property is located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706, on the Gulf Coast in Pinellas County. The property consists of a 186-room boutique resort with beachfront access, a pool, a restaurant, and event spaces. Pre-loss financial metrics include an ADR of $342 and an average occupancy rate of 79%. St. Pete Beach is a barrier island community on the western coast of Pinellas County, accessible via causeway bridges. While historically the Tampa Bay area has experienced fewer direct hurricane strikes than the Keys or Southwest Florida, weather forecasters have frequently noted that a major hurricane tracking into Tampa Bay would cause catastrophic storm surge in the region, including on the barrier islands.
B. The Insurance Program
VHG's all-risk property and business-interruption insurance program is placed by Tidewater Risk Advisors LLC, an independent insurance brokerage firm with offices at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133. The account executive responsible for VHG's program is Franklin Orde, a senior broker at Tidewater who has managed VHG's insurance placement for at least the last three policy years. The current program was most recently renewed effective July 1, 2022, for a twelve-month policy period ending July 1, 2023.
The program is structured as a layered insurance tower, a common structure for large commercial property risks. The primary layer is written by Ironclad Indemnity Corporation on an all-risk property and business-interruption policy form. Three excess layers sit above the primary, each written on a follow-form basis, meaning they generally incorporate the coverage terms, conditions, and exclusions of the Ironclad primary policy unless the excess policy specifically provides otherwise. The total annual premium for the four-layer program is $1,840,000, allocated as follows: $980,000 for the Ironclad primary, $410,000 for the Pinnacle first excess, $265,000 for the Montclair second excess, and $185,000 for the Sovereign Re third excess.
The total available limit under the program is $60,000,000 per occurrence, above a $500,000 per-occurrence deductible that applies at the primary layer. Business-interruption coverage is included as a component of each policy, consistent with industry practice for large commercial property programs.
C. Purpose of This Memorandum
This matter was opened on August 30, 2022, under Calderwood & Harkness file number 1021-00003. Elaine Forsythe serves as the responsible partner, and Howard Bellamy serves as the billing partner. The engagement was initiated at the request of Sandra Pellegrini, VHG's Vice President of Risk Management, who contacted the firm to request a comprehensive, pre-loss review of VHG's property and business-interruption insurance program. Ms. Pellegrini indicated that VHG had not previously engaged outside counsel to conduct a thorough policy analysis and expressed concern that, in the event of a significant hurricane loss, potential ambiguities or gaps in the insurance tower could materially reduce the Company's recovery.
The purpose of this memorandum is threefold: (1) to provide a layer-by-layer analysis of VHG's insurance tower, describing the principal coverage grants, exclusions, conditions, and sub-limits applicable to each policy; (2) to identify key coverage issues, ambiguities, and potential disputes that could arise in the event of a hurricane-related loss; and (3) to set forth recommendations for further investigation and pre-loss preparation. This memorandum is preliminary in nature and is based on our initial review of the policy documents, declarations pages, and endorsements provided to date by VHG and Tidewater. Certain issues — most notably the windstorm sub-limit deletion question — require additional documentation before a definitive analysis can be rendered.
III. Insurance Tower — Overview
A. Summary Table of Layers
The following table summarizes the four layers of VHG's property and business-interruption insurance tower:
B. Common Policy Period
All four policies share a common policy period of July 1, 2022 through July 1, 2023. This is a standard twelve-month policy term. The common inception and expiration dates ensure that all layers are co-extensive in time, avoiding potential gaps in coverage that could arise if the layers had differing policy periods. The program was renewed on its most recent anniversary date of July 1, 2022, approximately two months before the date of this memorandum. As such, the current policy year is in its early stages, and the full 2022 hurricane season (June 1 through November 30) falls squarely within the policy period.
C. General Structure
All four policies are written on an "all risks" of physical loss or damage basis, which is the broadest form of property coverage available. Under an all-risk policy, all causes of physical loss or damage to insured property are covered unless specifically excluded by the policy language. The burden of proof is allocated as follows: the insured must demonstrate that a covered loss occurred, and the insurer bears the burden of proving that a specific exclusion applies to bar coverage. This allocation is well-established under Florida law and is generally favorable to the insured.
Each policy includes coverage for both direct physical loss or damage to the insured properties and business-interruption and extra-expense losses resulting from such physical loss or damage. The policies are written on a per-occurrence basis, meaning the limits of liability apply separately to each covered occurrence, rather than in the aggregate for all occurrences during the policy period (subject to certain aggregate sub-limits discussed below). The per-occurrence deductible of $500,000 applies only at the primary layer; the excess layers do not impose separate deductibles.
The three excess policies — Pinnacle, Montclair, and Sovereign Re — are each written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy unless the excess policy specifically states otherwise. This follow-form structure is standard in layered commercial property programs and has the practical effect of making the Ironclad primary policy the governing document for coverage analysis purposes, with limited exceptions for carrier-specific endorsements and provisions in the excess layers.
IV. Primary Layer — Ironclad Indemnity Corporation
A. Policy Identification
The primary layer of VHG's insurance tower is written by Ironclad Indemnity Corporation ("Ironclad"), a Connecticut-domiciled stock insurance company with a principal office at 55 Constitution Boulevard, Hartford, Connecticut 06103. Ironclad is assigned NAIC number 20537 and is a well-established admitted carrier with an A.M. Best financial strength rating of "A" (Excellent). The primary policy is identified as Policy Number IIC-PRP-2022-07541.
The policy provides a limit of liability of $25,000,000 per occurrence for all covered losses, including both property damage and business-interruption losses combined. The per-occurrence deductible is $500,000, which is satisfied before coverage under the primary policy attaches. The policy period is July 1, 2022 through July 1, 2023, consistent with the common policy period across the tower.
As the primary carrier, Ironclad bears the first-dollar exposure (above the deductible) for any covered loss and will be the first carrier to receive notice of any claim. The terms and conditions of the Ironclad primary policy effectively govern the entire tower, given that all three excess carriers write on a follow-form basis. Accordingly, a thorough analysis of the Ironclad policy is essential to understanding the scope of VHG's coverage.
B. Insuring Agreement — Property Damage
The Ironclad primary policy contains a broad insuring agreement for property damage, providing coverage for "direct physical loss of or damage to" insured property at the scheduled locations arising from any cause of loss not otherwise excluded. This is the standard all-risk insuring agreement, and it encompasses a wide range of perils, including windstorm, hurricane, named storm, hail, lightning, fire, explosion, and other natural and man-made causes of loss. The insuring agreement does not require the insured to identify a specific cause of loss; rather, the insured must demonstrate only that a direct physical loss or damage occurred to the insured property, and the burden then shifts to the insurer to prove the applicability of any exclusion.
The policy provides coverage on a replacement cost valuation basis, meaning that the measure of recovery for property damage is the cost to repair, rebuild, or replace the damaged property with materials of like kind and quality, without deduction for depreciation. Replacement cost valuation is the most favorable basis for the insured, as it provides for a full indemnity rather than an actual cash value recovery that would account for the depreciated condition of the damaged property. The policy requires that the insured actually repair or replace the damaged property in order to recover on a replacement cost basis; if the insured elects not to repair or replace, the policy provides recovery on an actual cash value basis.
Covered causes of loss specifically include windstorm and named storm, which are the perils most relevant to this analysis. The policy does not contain a blanket windstorm exclusion. However, as discussed in detail in Section IV.E below, the policy may contain a named-windstorm sub-limit that could significantly reduce available coverage for business-interruption losses arising from a named windstorm.
C. Insuring Agreement — Business Interruption
The Ironclad primary policy includes a business-interruption insuring agreement that provides coverage for the loss of business income sustained by VHG due to the necessary suspension of operations during the "period of restoration" resulting from direct physical loss or damage to insured property caused by a covered peril. The business-interruption coverage is designed to place the insured in the same financial position it would have occupied had the loss not occurred, by covering the actual loss sustained by the insured during the period when normal business operations are interrupted.
The business-interruption coverage encompasses the following components:
Loss of Revenue. The policy covers the reduction in the insured's gross earnings attributable to the suspension of operations. Gross earnings are measured by the insured's historical revenue performance, adjusted for seasonal trends, growth patterns, and other factors that would have affected the insured's revenue during the period of restoration had the loss not occurred.
Continuing Expenses. The policy covers fixed and continuing expenses that the insured must continue to pay during the period of interruption, even though the business is not generating revenue. These include items such as rent, mortgage payments, utilities, salaries for key employees, insurance premiums, and other overhead costs that do not cease during the interruption.
Extra Expense. The policy covers extra expenses incurred by the insured to minimize the period of business interruption or to continue operations at temporary or alternative facilities during the period of restoration. Extra expense coverage is particularly important in the hospitality industry, where an insured may be able to partially resume operations by relocating guests to partner properties, operating from temporary structures, or accelerating restoration through expedited construction.
The measurement formula for business-interruption losses under the Ironclad policy follows the standard "actual loss sustained" methodology. The insured's recovery is measured by the reduction in gross earnings during the period of restoration, less charges and expenses that do not necessarily continue during the period of interruption — commonly referred to as "saved expenses" or "non-continuing expenses." This deduction reflects the principle that the insured should not profit from the loss; expenses that the insured would have incurred in the normal course of business but that cease during the interruption (such as variable costs associated with guest services, food and beverage, and hourly labor) are deducted from the loss calculation.
D. Period of Restoration Definition
The "period of restoration" is one of the most important and frequently litigated terms in business-interruption insurance. The Ironclad primary policy defines the period of restoration as the period that:
(a) begins on the date of direct physical loss or damage caused by a covered peril; and
(b) ends on the earlier of: (i) the date when the insured property should be repaired, rebuilt, or replaced with reasonable speed and with similar quality; or (ii) the date when business is resumed at a new permanent location.
Several aspects of this definition warrant close attention.
First, the phrase "with reasonable speed" is the phrase most commonly at issue in disputes over the duration of business-interruption claims. Insurers routinely invoke this language to argue that the insured delayed the restoration process — whether by failing to promptly engage contractors, failing to obtain necessary permits on an expedited basis, or failing to implement a phased reopening — and that the period of restoration should accordingly be truncated to reflect the time in which a reasonably diligent insured would have completed the restoration. In practice, this standard is inherently subjective and fact-intensive, and disputes over the duration of the period of restoration frequently require expert testimony regarding construction timelines, contractor availability, and industry standards.
Second, the definition specifies that the period of restoration begins on the date of direct physical loss or damage. However, it is important to note that the period of restoration does not begin until after any applicable waiting period under the deductible has been satisfied. In practice, for a large loss that far exceeds the $500,000 deductible, this waiting period is of minimal practical significance.
Third, the reference to repair, rebuilding, or replacement "with similar quality" establishes that VHG is entitled to a period of restoration sufficient to restore its luxury resort properties to their pre-loss condition and quality. An insurer cannot argue that VHG should have completed restoration more quickly by cutting corners or rebuilding to a lower standard.
The period-of-restoration definition presents a significant potential issue for VHG. In the aftermath of a major hurricane affecting the Florida Keys and Gulf Coast, the restoration timeline for VHG's properties could be extended by many months or even years due to factors beyond VHG's control, including severe shortages of qualified contractors and construction labor, disruption of supply chains for building materials, extensive permitting delays due to the volume of construction activity and code compliance reviews, the unique complexities of restoring luxury hospitality properties (which require specialized finishes, fixtures, and systems), and infrastructure damage to roads, bridges, and utilities that may impede access to job sites. Ironclad may challenge VHG's restoration timeline and argue that the period of restoration should be shorter than the actual time required to complete restoration.
E. Named Windstorm Sub-Limit — Critical Issue
This section addresses the single most significant coverage issue identified in this preliminary review.
During the 2021–2022 policy year, the Ironclad primary policy contained a named-windstorm sub-limit of $15,000,000, applicable to business-interruption losses arising from named windstorms (i.e., tropical storms and hurricanes designated by the National Hurricane Center). This sub-limit operated within the policy's $25,000,000 per-occurrence limit, capping VHG's maximum recovery for BI losses from any named-windstorm event at $15,000,000 rather than the full $25,000,000 policy limit.
Sandra Pellegrini, VHG's Vice President of Risk Management, has represented to our firm that the $15,000,000 named-windstorm sub-limit was a priority item for negotiation during the July 2022 renewal. According to Ms. Pellegrini, VHG's broker, Franklin Orde at Tidewater Risk Advisors, successfully negotiated the deletion of the sub-limit with Ironclad's underwriting department as part of the renewal, and VHG understood that the July 2022 renewal policy would provide the full $25,000,000 per-occurrence limit for named-windstorm BI losses without any sub-limit.
However, upon our preliminary review of the policy documents provided to date, the status of the named-windstorm sub-limit is ambiguous. The policy's declarations page references "Endorsement No. 14," which was purportedly issued to effect the deletion of the sub-limit. We have reviewed the text of Endorsement No. 14 as it appears in the policy documents, and the endorsement language is equivocal. Rather than clearly and unambiguously stating that the named-windstorm sub-limit is deleted in its entirety, the endorsement contains language that could be interpreted as merely modifying certain terms and conditions applicable to the sub-limit — for example, revising the definition of "named windstorm" or adjusting the deductible applicable to named-windstorm losses — without eliminating the $15,000,000 cap itself. The endorsement does not contain the clear deletion language (such as "the Named Windstorm Sub-Limit set forth in Section [X] is hereby deleted in its entirety") that would resolve the ambiguity.
The stakes associated with this issue are enormous. If the $15,000,000 named-windstorm sub-limit remains in force under the primary policy, VHG's maximum recovery for business-interruption losses arising from a named windstorm would be capped at $15,000,000 under the Ironclad primary layer. Because the excess layers follow form to the Ironclad primary, the sub-limit would likely cascade upward through the tower. In practical terms, the $15,000,000 sub-limit in the primary layer means that VHG's BI losses from a named windstorm could never exhaust the $25,000,000 primary limit, meaning the Pinnacle first excess layer (which attaches at $25,000,000) would never be triggered for a named-windstorm BI loss. VHG's total recovery for business-interruption losses from a named windstorm would thus be capped at $15,000,000 — a fraction of the $60,000,000 tower that VHG believed it purchased.
Conversely, if the sub-limit was properly deleted at renewal, the full $25,000,000 primary limit would be available for named-windstorm BI losses, and the excess layers would be available upon exhaustion of the underlying limits. The difference between these two scenarios is $45,000,000 in potential coverage — a difference that could be outcome-determinative for VHG in the event of a major hurricane loss.
Recommendation: We recommend that the firm immediately contact Franklin Orde at Tidewater Risk Advisors to obtain the complete renewal negotiation file, including all correspondence between Tidewater and Ironclad's underwriting department regarding the deletion of the named-windstorm sub-limit, the renewal submission, all drafts of endorsements, the final binder as issued, and the final policy form and all endorsements as delivered. We should also request copies of any internal Tidewater memoranda or file notes documenting the negotiation. This documentation will be essential to establishing VHG's position that the sub-limit was deleted and to pursuing a reformation or estoppel argument if the policy language itself is ambiguous.
F. Flood Exclusion
The Ironclad primary policy contains a flood exclusion that excludes coverage for loss or damage "caused by or resulting from" flood. The exclusion defines "flood" broadly to include, but not be limited to, surface water, tidal water, tidal wave, overflow of streams or other bodies of water, spray from any of the foregoing, and storm surge, whether or not driven by wind. This is a standard form flood exclusion found in most commercial property policies.
Critically, the policy also contains an anti-concurrent causation ("ACC") clause, which provides, in relevant part:
"This policy does not insure against loss or damage caused directly or indirectly by any of the following excluded causes of loss, regardless of any other cause or event that contributes concurrently or in any sequence to the loss."
The ACC clause precedes the enumerated exclusions, including the flood exclusion, and is intended to preclude coverage where both a covered peril (such as wind) and an excluded peril (such as flood or storm surge) contribute to the loss, whether concurrently, sequentially, or in any combination. Under a literal reading of the ACC clause, if any portion of the loss is attributable to flood or storm surge, the entire loss caused by or contributed to by the flood peril would be excluded — even if wind damage (a covered peril) was the predominant or initiating cause of the loss.
The enforceability of ACC clauses in property insurance policies under Florida law has been the subject of significant litigation, and the case law is not entirely settled. Florida courts have, in some circumstances, declined to enforce ACC clauses and have instead applied the efficient proximate cause doctrine, under which coverage is available when the dominant or efficient proximate cause of the loss is a covered peril, notwithstanding the concurrent or sequential contribution of an excluded peril. The Florida Supreme Court's analysis in Glenrock Enterprises, 208 So. 3d 694 (Fla. 2016), addressed related issues of concurrent causation in the context of construction defect claims, and lower courts have continued to grapple with the application of concurrent causation principles in the hurricane context.
The ACC clause and flood exclusion are particularly relevant to the Grand Key Resort in Marathon, Florida. The Lower Florida Keys are among the most storm-surge-vulnerable areas in the United States. During a major hurricane, storm surge heights in the Keys can reach 10 to 15 feet or more, depending on the storm's intensity, forward speed, and track. Any loss at the Grand Key Resort during a major hurricane event will almost certainly involve a combination of wind damage (from sustained winds and wind-driven rain) and flood/storm surge damage (from rising water). Ironclad can be expected to invoke the flood exclusion and ACC clause to exclude or reduce coverage for any portion of the loss attributable to storm surge, and VHG will need to rebut those arguments with forensic engineering evidence differentiating the causes of damage.
The Harborview Hotel in Fort Myers Beach and the Sunset Shores property in St. Pete Beach are also located on barrier islands that are vulnerable to storm surge, though the degree of vulnerability varies with the specific storm track and intensity. The flood exclusion and ACC clause will be relevant to losses at all three properties.
Recommendation: We recommend commissioning a detailed legal research memorandum on the current state of Florida law regarding anti-concurrent causation clauses, the efficient proximate cause doctrine, and their application to hurricane losses involving concurrent wind and storm surge damage. We also recommend that VHG identify and retain, in advance of any loss, a forensic engineering firm with experience in differentiating wind damage from storm surge/flood damage at coastal properties. Early engagement of such experts will be important to preserving VHG's position on causation issues.
G. Duty to Mitigate / Sue and Labor Clause
The Ironclad primary policy contains standard duty-to-mitigate language requiring the insured to "take all reasonable steps to protect insured property from further damage after a loss and to minimize the period of business interruption." This provision imposes an affirmative obligation on VHG to act diligently in the aftermath of a loss to prevent additional damage and to take steps to resume business operations as promptly as practicable. Failure to satisfy the duty to mitigate can, in theory, result in a reduction of the insured's recovery, either through a direct reduction in the amount of the claim or through an insurer defense that the insured's failure to mitigate extended the period of business interruption beyond what was necessary.
The policy also contains a sue and labor clause, which is a related but distinct provision. The sue and labor clause obligates the insured to take all reasonable measures to protect insured property from further loss after the occurrence of a covered event and provides that the insurer will reimburse the insured for reasonable expenses incurred in so doing. The sue and labor clause creates a reciprocal obligation: VHG must act to protect property, and Ironclad must pay the costs of such protective measures. Expenses incurred under the sue and labor clause are typically recoverable in addition to the policy limits, meaning they do not erode the $25,000,000 per-occurrence limit.
The duty-to-mitigate provision presents a potential issue in the business-interruption context. Ironclad could assert a failure-to-mitigate defense if VHG does not promptly commence restoration work after a loss event, or if VHG does not take steps to partially resume operations during the restoration period — for example, by operating from temporary facilities, implementing a phased reopening of undamaged portions of a resort, or redirecting bookings to unaffected properties. In the luxury hospitality context, partial reopening or operation from temporary facilities may be impracticable or may not generate meaningful revenue, particularly if the resort's amenities and infrastructure are substantially compromised. Nevertheless, VHG should be prepared to document all steps taken to mitigate its losses and to explain any decisions not to pursue partial reopening or temporary operations.
H. Other Key Provisions
Several additional provisions of the Ironclad primary policy are noteworthy:
Vacancy Clause. The policy contains a vacancy clause providing that coverage may be limited or excluded if the insured premises have been "vacant" for more than sixty (60) consecutive days prior to a loss. Under the vacancy clause, if the premises are vacant at the time of the loss, certain causes of loss (such as vandalism, sprinkler leakage, and glass breakage) may be excluded entirely, and the insurer's liability for other covered losses may be reduced by a specified percentage (typically 15%). This provision is not expected to be an issue for VHG given that all three resort properties are actively operating as hotels with regular occupancy. However, if a loss event forces VHG to close a property for an extended period and a subsequent loss occurs during the closure, the vacancy clause could become relevant.
Ordinance or Law Coverage. The policy includes a sub-limit of $5,000,000 for increased costs of construction arising from the enforcement of building codes, zoning ordinances, or other governmental regulations that require the insured to upgrade, modify, or demolish and reconstruct the damaged property in a manner that exceeds the pre-loss condition. Following a major hurricane, building code requirements in Florida may mandate significant upgrades — including enhanced wind-resistance standards, elevated flood requirements, and updated life-safety systems — that increase the cost and duration of restoration. The $5,000,000 sub-limit may be inadequate to cover the full cost of code-mandated upgrades for three large resort properties, and VHG should be advised of this potential gap.
Extended Period of Indemnity. The policy provides an extended period of indemnity of 180 days beyond the end of the physical restoration period. This provision recognizes that even after a damaged property has been physically restored and reopened, the insured may not immediately recover its pre-loss revenue levels. Guest bookings may have shifted to competitors, group and conference contracts may have been reassigned, and the property's reputation and market presence may take time to rebuild. The 180-day extended period of indemnity provides coverage for this "ramp-up" period, allowing VHG to recover for the shortfall between its actual post-reopening revenue and its projected pre-loss revenue for up to 180 days after physical restoration is complete. This is a valuable provision for VHG, as the recovery period for luxury resort properties can be protracted due to the lead times associated with leisure and group bookings.
Civil Authority Coverage. The policy provides up to 30 days of coverage for loss of business income sustained when access to an insured property is prohibited by order of a civil authority (such as a mandatory evacuation order or a post-storm curfew or access restriction) due to physical damage to property in the vicinity of the insured location. Civil authority coverage is triggered when a governmental authority prohibits access to the insured premises, even if the insured property itself has not sustained direct physical damage. This coverage is particularly relevant in hurricane scenarios, where mandatory evacuation orders may be issued days before landfall and access restrictions may remain in place for days or weeks after the storm. The 30-day limitation may be insufficient if access is restricted for a longer period, as has occurred in prior Florida hurricane events.
Ingress/Egress Coverage. The policy includes coverage for loss of business income sustained when ingress to or egress from an insured property is prevented by physical damage to property in the immediate area, regardless of whether a civil authority order has been issued. This coverage is distinct from civil authority coverage and applies when physical damage to surrounding infrastructure — such as roads, bridges, or causeways — prevents guests, employees, and suppliers from reaching the insured property. Given that VHG's Fort Myers Beach and St. Pete Beach properties are located on barrier islands accessible by bridge, and the Grand Key Resort is located on a Keys island accessible via the Overseas Highway, ingress/egress coverage could be a significant component of any claim if bridge or road damage impedes access to the properties.
I. Conditions and Claims Procedures
The Ironclad primary policy contains standard conditions and claims procedures that VHG must comply with in order to preserve its coverage rights:
Notice of Loss. The policy requires the insured to provide prompt written notice of any loss to Ironclad. While the policy does not specify a precise number of days within which notice must be given, "prompt" notice is generally interpreted to mean as soon as reasonably practicable under the circumstances. Failure to provide timely notice can, in some jurisdictions and under some policies, result in a forfeiture of coverage, although Florida law generally requires an insurer to demonstrate prejudice resulting from late notice before coverage may be denied on that basis. Nevertheless, VHG should provide notice to Ironclad (and to all excess carriers) as promptly as possible following any loss event.
Proof of Loss. The policy requires the insured to submit a sworn statement in proof of loss within ninety (90) days of the loss, or as soon as reasonably practicable thereafter. The proof of loss must describe the circumstances of the loss, the extent of the damage, and the amount of the claimed loss, supported by appropriate documentation. In the context of a large and complex business-interruption claim, the preparation of a comprehensive proof of loss may require the engagement of forensic accountants and other experts, and the 90-day deadline may be difficult to meet. VHG should request extensions from Ironclad if necessary, and all such requests should be made in writing.
Examination Under Oath. The policy authorizes Ironclad to require an examination under oath ("EUO") of VHG's officers and employees as often as may be reasonably required. EUOs are a standard feature of property insurance policies and are commonly used by insurers in the investigation of large claims. VHG's cooperation with any EUO request is a condition of coverage; however, VHG is entitled to have legal counsel present during any examination.
Appraisal Clause. The policy contains an appraisal clause providing that, if the parties disagree on the amount of loss, either party may demand appraisal. Upon a demand for appraisal, each party selects a competent and disinterested appraiser, and the two appraisers then select a competent and disinterested umpire. The appraisers independently appraise the loss, and if they agree on the amount, their agreement is binding on both parties. If they cannot agree, they submit their differences to the umpire, and agreement by any two of the three (the two appraisers and the umpire) is binding on both parties. The appraisal process is limited to disputes over the amount of loss and does not extend to coverage disputes (i.e., whether a loss is covered in the first instance). The appraisal clause may be a useful mechanism for resolving valuation disputes with Ironclad without the need for litigation, but it does not provide a forum for resolving the more significant coverage issues identified in this memorandum.
Suit Limitation. The policy contains a suit limitation clause requiring that any legal action against the insurer be commenced within the time allowed by applicable law. Under Florida law, the applicable statute of limitations for a breach of contract action is five years from the date the cause of action accrues. See Fla. Stat. § 95.11(2)(b). However, policy-based suit limitation clauses may shorten this period to as little as two years from the date of loss, and Florida courts have generally upheld reasonable contractual limitations periods in insurance policies. The Ironclad policy's reference to "the time allowed by applicable law" likely refers to the Florida statutory period, but this language should be reviewed carefully to confirm that no shorter contractual limitations period applies.
V. First Excess Layer — Pinnacle Surplus Lines Inc.
A. Policy Identification
The first excess layer of VHG's insurance tower is written by Pinnacle Surplus Lines Inc. ("Pinnacle"), a Texas-domiciled surplus-lines insurer with a principal office at 200 Congress Avenue, Suite 1400, Austin, Texas 78701. Pinnacle is assigned NAIC number 38214. The policy is identified as Policy Number PSL-XS1-2022-3390.
The Pinnacle policy provides a limit of liability of $15,000,000 per occurrence, excess of the $25,000,000 Ironclad primary layer. In other words, the Pinnacle layer attaches — i.e., begins to respond — only after VHG's losses from a covered occurrence exceed $25,000,000 (inclusive of the $500,000 deductible satisfied at the primary level). The Pinnacle layer thus provides coverage for losses between $25,000,000 and $40,000,000. The annual premium for the Pinnacle policy is $410,000, and the policy period is July 1, 2022 through July 1, 2023, consistent with the common policy period.
B. Follow-Form Provisions
The Pinnacle policy is written on a follow-form basis, incorporating by reference all of the terms, conditions, exclusions, and endorsements of the Ironclad primary policy (IIC-PRP-2022-07541), except as specifically modified by the Pinnacle policy or its endorsements. This follow-form structure means that the coverage analysis set forth in Section IV above with respect to the Ironclad primary policy applies with equal force to the Pinnacle first excess layer, unless the Pinnacle policy provides otherwise.
The follow-form nature of the Pinnacle policy has a critical implication for the named-windstorm sub-limit issue discussed in Section IV.E. If the Ironclad primary policy contains a $15,000,000 named-windstorm sub-limit for business-interruption losses that was not deleted at the July 2022 renewal, VHG's maximum BI recovery under the primary layer for a named-windstorm event would be capped at $15,000,000 — well below the $25,000,000 primary limit. Because the Pinnacle layer attaches only after the $25,000,000 primary limit is exhausted, a $15,000,000 sub-limit in the primary layer would mean that VHG's named-windstorm BI losses could never reach the $25,000,000 attachment point, and the Pinnacle layer would never be triggered for a named-windstorm BI claim. This cascading effect underscores the critical importance of resolving the sub-limit deletion issue.
Conversely, if the sub-limit was properly deleted and the full $25,000,000 primary limit is available for named-windstorm BI losses, the Pinnacle layer would be exposed to losses in excess of $25,000,000, and VHG would have access to the full $15,000,000 Pinnacle limit for such losses.
C. Specific Modifications
The Pinnacle policy contains several provisions that vary from or supplement the Ironclad primary policy:
No Separate Deductible. The Pinnacle policy does not impose a separate deductible. The $500,000 per-occurrence deductible is satisfied entirely at the primary layer, and no additional deductible applies at the first excess level. This is consistent with standard layered-program practice.
Named-Windstorm Aggregate Limit. The Pinnacle policy contains a named-windstorm aggregate limit clause providing that Pinnacle's aggregate limit of liability for all named-windstorm losses during the policy period is $15,000,000. Because the per-occurrence limit is also $15,000,000, the aggregate limit effectively creates no additional restriction beyond the per-occurrence cap in the context of a single named-windstorm event. However, if VHG were to experience multiple named-windstorm events during the same policy period, each causing losses in excess of $25,000,000, the aggregate limit would cap Pinnacle's total liability across all such events at $15,000,000. While two or more tower-penetrating named-windstorm events in a single policy year would be unusual, this aggregate limit is worth noting.
No Material Differences on Key Provisions. Our preliminary review has not identified any material differences between the Pinnacle policy and the Ironclad primary policy with respect to the period-of-restoration definition, the flood exclusion, the anti-concurrent causation clause, or other key provisions discussed in Section IV. These provisions are incorporated by reference through the follow-form clause.
D. Surplus-Lines Regulatory Considerations
As a surplus-lines insurer, Pinnacle is not an admitted carrier in Florida. Surplus-lines policies are subject to different regulatory requirements than admitted-carrier policies, and there are several implications of which VHG should be aware.
Most notably, surplus-lines policies are not backed by the Florida Insurance Guaranty Association ("FIGA"), which provides a limited safety net for policyholders of admitted carriers that become insolvent. If Pinnacle were to become insolvent, VHG would not have recourse to FIGA for payment of covered claims under the Pinnacle policy. Based on publicly available financial data, Pinnacle appears to be in sound financial condition, and this is not presently a concern. Nevertheless, VHG's broker, Tidewater, should monitor Pinnacle's financial strength on an ongoing basis.
Additionally, surplus-lines policies in Florida are subject to the Surplus Lines Law, Fla. Stat. §§ 626.913–.937, which requires surplus-lines brokers to file affidavits confirming that the risk was declined by admitted carriers before placement with a surplus-lines insurer. We assume that Tidewater complied with these requirements at the time of placement, but this should be confirmed.
VI. Second Excess Layer — Montclair Assurance Company
A. Policy Identification
The second excess layer of VHG's insurance tower is written by Montclair Assurance Company ("Montclair"), a New York-domiciled admitted carrier with a principal office at 1 Liberty Plaza, 38th Floor, New York, New York 10006. Montclair is assigned NAIC number 15692 and maintains an A.M. Best financial strength rating of "A-" (Excellent). The policy is identified as Policy Number MAC-XS2-2022-09817.
The Montclair policy provides a limit of liability of $10,000,000 per occurrence, excess of $40,000,000 (comprising the $25,000,000 Ironclad primary layer and the $15,000,000 Pinnacle first excess layer). The Montclair layer accordingly provides coverage for losses between $40,000,000 and $50,000,000. The annual premium for the Montclair policy is $265,000, and the policy period is July 1, 2022 through July 1, 2023.
This layer attaches at a relatively high level in the tower, meaning it will be implicated only in the event of a severe loss exceeding $40,000,000. As discussed in Section IX below, our preliminary estimate of VHG's potential business-interruption exposure for a major hurricane event affecting all three properties ranges from $48,000,000 to $67,000,000, suggesting that the Montclair layer could be reached in a significant loss scenario.
B. Follow-Form Provisions
The Montclair policy is written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy, subject to specific modifications set forth in the Montclair policy itself.
The Montclair policy contains a "drop-down" provision that merits attention. Under this provision, if a lower underlying layer is exhausted — whether by payment of losses or by other means — Montclair will "drop down" to provide coverage in excess of the remaining underlying limits, without waiting for the exhausted layer to be restored. In practical terms, if the Ironclad primary and Pinnacle first excess layers are both exhausted by payment of a prior claim during the policy period, the Montclair layer would drop down and attach directly above the exhausted layers. This provision could be beneficial to VHG in a multiple-loss scenario, although its practical application is limited by the per-occurrence structure of the program.
However, the Montclair policy also contains a "maintenance of underlying insurance" clause, which requires VHG to maintain the full underlying limits of $40,000,000 ($25,000,000 primary plus $15,000,000 first excess) throughout the policy period. If VHG fails to maintain the underlying limits — for example, if VHG allows the primary or first excess policy to lapse, or if VHG reduces the underlying limits without Montclair's consent — Montclair is not obligated to drop down to fill the gap, and VHG would be responsible for absorbing any uninsured portion of the loss. This maintenance-of-underlying-insurance requirement is standard in excess insurance policies and should not present an issue as long as VHG maintains its primary and first excess policies in force, but it is a condition that VHG must be aware of and comply with.
C. Specific Provisions
Arbitration Clause. The Montclair policy contains an arbitration clause that differs from the appraisal clause in the Ironclad primary policy. The Montclair arbitration clause provides that any dispute between VHG and Montclair regarding the amount of loss shall be submitted to binding arbitration conducted in accordance with the rules of the American Arbitration Association ("AAA") in New York, New York. The arbitration clause specifies a London-style arbitration format, in which each party appoints an arbitrator with experience in insurance and reinsurance matters, and the two appointed arbitrators select a third arbitrator to serve as chair of the panel. The decision of the majority of the panel is final and binding on both parties and may be entered as a judgment in any court of competent jurisdiction.
This arbitration clause is broader in scope than the Ironclad appraisal clause, which is limited to disputes over the "amount of loss" and does not extend to coverage questions. The Montclair arbitration clause, by its terms, appears to apply to disputes regarding "the amount of loss" — language that is similar in scope to the Ironclad appraisal clause. However, the procedural format (AAA rules, London-style arbitration, New York venue) differs significantly from the informal appraisal process contemplated by the Ironclad policy. If a dispute with Montclair reaches the arbitration stage, the proceedings would be more formal and potentially more costly than an appraisal under the Ironclad policy. Counsel should analyze whether this arbitration clause could be construed to extend to coverage disputes, and whether the New York venue would be enforceable given that VHG's properties are in Florida and the Ironclad primary policy applies Florida law.
Otherwise, the Montclair policy substantially follows the terms of the Ironclad primary policy, and no other material differences have been identified in this preliminary review.
VII. Third Excess Layer — Sovereign Re Ltd.
A. Policy Identification
The third and highest excess layer of VHG's insurance tower is written by Sovereign Re Ltd. ("Sovereign Re"), a Bermuda-domiciled reinsurer and excess insurance carrier with its principal office at 14 Front Street, Hamilton HM 11, Bermuda. The policy is identified as Policy Number SRL-XS3-2022-5102.
The Sovereign Re policy provides a limit of liability of $10,000,000 per occurrence, excess of $50,000,000 (comprising the $25,000,000 Ironclad primary, $15,000,000 Pinnacle first excess, and $10,000,000 Montclair second excess layers). The Sovereign Re layer provides coverage for losses between $50,000,000 and $60,000,000 — the top of VHG's insurance tower. The annual premium for the Sovereign Re policy is $185,000, and the policy period is July 1, 2022 through July 1, 2023.
This is the highest layer in the tower and is reached only if VHG's losses from a single covered occurrence exceed $50,000,000. As discussed in Section IX, our preliminary estimate of potential business-interruption exposure suggests that a loss of this magnitude is plausible but would require a severe and prolonged disruption of operations across multiple properties.
B. Follow-Form Provisions
The Sovereign Re policy is written on a follow-form basis, incorporating the terms, conditions, and exclusions of the Ironclad primary policy, subject to specific modifications set forth in the Sovereign Re policy itself.
The Sovereign Re policy contains a service-of-suit clause designating a registered agent in New York for purposes of service of process in any legal proceeding arising out of or related to the policy. This provision is standard in policies issued by non-U.S. domiciled carriers and is designed to facilitate enforcement in U.S. courts. The service-of-suit clause provides that Sovereign Re will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction, thereby waiving any objection based on lack of personal jurisdiction or inconvenient forum. This provision is important because, absent such a clause, enforcing a judgment against a Bermuda-domiciled carrier could be complicated by jurisdictional and enforcement issues.
C. Specific Provisions
Choice of Law. The Sovereign Re policy contains a choice-of-law provision specifying that the policy shall be governed by and construed in accordance with the laws of the State of Florida. This is consistent with the Ironclad primary policy and ensures that the same substantive law governs all layers of the tower. The Florida choice-of-law provision means that the legal analyses of Florida insurance jurisprudence set forth throughout this memorandum — including the analysis of ACC clauses, the efficient proximate cause doctrine, and the period-of-restoration standard — are applicable to the Sovereign Re layer as well.
Insolvency Clause. The Sovereign Re policy contains an insolvency clause providing that, if any underlying insurer becomes insolvent, Sovereign Re's liability shall not be increased thereby, and any loss that would have been payable by the insolvent underlying insurer remains the responsibility of the insured. In practical terms, this means that if Ironclad, Pinnacle, or Montclair were to become insolvent and unable to pay their respective shares of a covered loss, VHG would be required to absorb the shortfall, and Sovereign Re would not drop down to fill the gap. Sovereign Re's obligation would remain limited to losses actually in excess of $50,000,000, regardless of whether the underlying layers have been fully paid.
This insolvency clause, while standard in excess insurance, highlights the importance of monitoring the financial stability of all carriers in the tower. Based on currently available information, none of the four carriers appears to present a solvency concern, but VHG and its broker should continue to monitor carrier financial ratings, particularly in the wake of a major hurricane event that could stress carrier balance sheets across the industry.
VIII. Cross-Cutting Coverage Issues
This section consolidates and expands upon the key coverage issues that affect VHG's insurance program across multiple layers of the tower. These are the issues most likely to be contested in the event of a major hurricane loss and should be the focus of further legal research and pre-loss preparation.
A. Named Windstorm Sub-Limit ($15M)
As discussed in detail in Section IV.E above, the named-windstorm sub-limit is the single most significant coverage issue identified in this preliminary review. The potential impact of this issue cannot be overstated.
If Ironclad successfully asserts that the $15,000,000 named-windstorm sub-limit for business-interruption losses was not deleted at the July 2022 renewal, VHG's maximum BI recovery for a named-windstorm event under the primary layer would be capped at $15,000,000 — a $10,000,000 reduction from the full $25,000,000 primary limit. Because the three excess layers follow form to the Ironclad primary, the sub-limit would likely cascade through the entire tower. In practical terms, the $15,000,000 sub-limit would prevent the primary layer from being fully exhausted by named-windstorm BI losses, which would mean that the Pinnacle first excess layer (attaching at $25,000,000) would never be reached. The Montclair and So

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