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

windstorm-sub-limit-analysis-memo.docx DOCUMENT Antitrust

8 / 75 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Elaine Forsythe, Partner

FROM: Tiffany Rosenthal, Associate; Andrew Fitzpatrick, Associate

DATE: October 20, 2022

RE: Analysis of Named Windstorm Sub-Limit Deletion Endorsement — Ironclad Indemnity Corporation Primary Policy (IIC-PRP-2022-07541)

CLIENT: Verimark Hospitality Group Inc.

MATTER NO.: 1021-00003

I. Executive Summary

This memorandum analyzes whether the $15,000,000 named-windstorm sub-limit contained in the prior-year Ironclad Indemnity Corporation ("Ironclad" or "IIC") primary property and business-interruption policy was effectively deleted at the July 1, 2022 renewal. The question has become outcome-determinative in the adjustment of Verimark Hospitality Group Inc.'s ("VHG" or the "Company") Hurricane Callista business-interruption claim because of the magnitude of the difference in potential recovery under the two competing interpretations of the policy.

Ironclad's reservation of rights letter dated October 12, 2022 — signed by Victor Haddon, Senior Vice President of Claims — asserts, among other bases for potential coverage limitations, that the named-windstorm sub-limit remains in effect under the 2022–2023 policy year. If Ironclad's position were accepted, business-interruption coverage for Hurricane Callista losses would be capped at $15,000,000 under the primary layer rather than the full $25,000,000 primary layer limit. This single coverage dispute has the potential to reduce VHG's aggregate tower recovery by $10,000,000 or more, depending on the response of the three excess-layer carriers.

Based on our thorough review of (a) broker correspondence from Franklin Orde at Tidewater Risk Advisors LLC ("Tidewater"), the broker of record for VHG's property program, (b) the July 2022 binder issued in connection with the renewal, (c) the issued policy endorsements and declarations page, and (d) the premium increase negotiated at the time of renewal, we conclude that the named-windstorm sub-limit was effectively removed during the 2022 renewal negotiations. The documentary record establishes a clear, unambiguous agreement between VHG (through its broker) and Ironclad's underwriting department to delete the sub-limit endorsement in exchange for a $100,000 premium increase. That agreement was reflected in the binder, confirmed in the issued policy (which omits the sub-limit endorsement entirely), and supported by the premium actually charged.

Accordingly, it is our opinion that VHG is entitled to the full $25,000,000 primary layer limit for business-interruption losses arising from Hurricane Callista, and that Ironclad's reservation of the sub-limit defense is without merit under both the plain language of the issued policy and the applicable principles of Florida insurance law.

If the sub-limit were found to apply, the consequences for VHG would be significant. In addition to capping recovery under the Ironclad primary layer at $15,000,000 for named-windstorm business-interruption losses — a $10,000,000 reduction — the sub-limit could affect the attachment points for the three excess layers sitting above the Ironclad primary (Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd.). The excess carriers have each issued reservations of rights or placed VHG on notice that they are monitoring the sub-limit dispute in the primary layer. The downstream implications for the full $60,000,000 insurance tower are addressed in detail in Section VI below.

II. Background

A. The Insured and the Loss

Verimark Hospitality Group Inc. (Nasdaq: VMRK) is a Delaware corporation headquartered at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. VHG is a publicly traded hospitality and real-estate company that owns and operates luxury resort properties concentrated along the Florida Gulf Coast and the Florida Keys. The Company's senior 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). For fiscal year 2021, VHG reported consolidated revenue of approximately $412,000,000 and EBITDA of approximately $78,000,000. The Company's financial performance is heavily dependent on its Florida resort operations, which account for the majority of its revenue and operating income.

Hurricane Callista was designated as a tropical storm by the National Hurricane Center on September 12, 2022, and rapidly intensified over the warm waters of the Caribbean and the Straits of Florida over the following six days. By the time of landfall, Callista had strengthened to a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour. The hurricane made landfall at approximately 1:30 PM EDT on September 18, 2022, near Big Pine Key in the Lower Florida Keys, Monroe County, Florida. Callista then tracked northward across the Gulf of Mexico, bringing destructive winds, torrential rainfall, and catastrophic storm surge to communities along the southwest Florida coastline.

In advance of Callista's landfall, Monroe County issued a mandatory evacuation order on September 16, 2022, followed by Lee County on September 17, 2022. Storm surge levels reached 8 to 14 feet in Monroe County and 6 to 10 feet in Lee County, causing widespread flooding and structural damage to coastal properties. The hurricane caused billions of dollars in insured losses across the region and was among the costliest hurricane events in Florida in recent years.

Three VHG-owned properties sustained catastrophic damage as a result of Hurricane Callista:

Verimark Grand Key Resort (Mile Marker 48, Marathon, Florida 33050). This is a 312-room luxury resort and marina facility and represents VHG's flagship property in the Florida Keys. The resort sustained severe wind and storm-surge damage, rendering it entirely inoperable. The property was closed from September 18, 2022, through March 15, 2023 — a total of 178 days. Prior to the loss, the Grand Key Resort operated at an average daily rate ("ADR") of $389 per room night with an average occupancy rate of 82%. The estimated business-interruption loss attributable to the Grand Key Resort is $31,400,000, based on historical financial performance, seasonal revenue projections, and continuing expenses incurred during the period of restoration.

Verimark Harborview Hotel & Conference Center (1400 Estero Boulevard, Fort Myers Beach, Florida 33931). This is a 224-room hotel with an approximately 40,000 square foot conference and events facility. The property sustained significant structural damage from both wind and storm surge and was closed from September 18, 2022, through January 31, 2023 — a total of 135 days. Pre-loss ADR was $295 per room night with an average occupancy rate of 74%. The estimated business-interruption loss for the Harborview Hotel & Conference Center is $18,700,000.

Verimark Sunset Shores (7200 Gulf Boulevard, St. Pete Beach, Florida 33706). This is a 186-room boutique resort situated on the Gulf of Mexico. Sunset Shores sustained wind damage and flooding that required a full closure from September 18, 2022, through November 30, 2022 (73 days), followed by an extended period of reduced-capacity operation through February 2023. Full operational capacity was not restored until February 28, 2023. Pre-loss ADR was $342 per room night with an average occupancy rate of 79%. The estimated business-interruption loss for Sunset Shores is $9,900,000.

In total, VHG's claimed business-interruption loss arising from Hurricane Callista across the three affected properties is $60,000,000 ($31,400,000 + $18,700,000 + $9,900,000). This figure does not include physical damage to the properties (which is the subject of separate coverage analysis) and is based on the preliminary loss calculations prepared by VHG's forensic accountants in consultation with Sandra Pellegrini and the Company's finance team.

B. The Insurance Program — Tower Structure

VHG's property and business-interruption insurance program for the policy period at issue (July 1, 2022 through July 1, 2023) is structured as a layered tower consisting of one primary policy and three excess policies, each providing "all risks" coverage for physical loss or damage, including business interruption and extra expense. The tower is described below in ascending order of attachment:

Primary Layer — Ironclad Indemnity Corporation. Ironclad is a Connecticut-domiciled stock insurance company (NAIC No. 20537), with its principal offices at 55 Constitution Boulevard, Hartford, Connecticut 06103. Ironclad issued Policy No. IIC-PRP-2022-07541, providing the primary layer of coverage with a per-occurrence limit of $25,000,000 for business interruption and extra expense. The policy carries a $500,000 deductible applicable to each occurrence. The annual premium for the primary layer is $980,000. The Ironclad primary policy is the policy at issue in this memorandum.

First Excess Layer — Pinnacle Surplus Lines Inc. Pinnacle is a Texas-domiciled surplus-lines insurer (NAIC No. 38214), with its principal offices at 200 Congress Avenue, Suite 1400, Austin, Texas 78701. Pinnacle issued Policy No. PSL-XS1-2022-3390, providing $15,000,000 in excess of $25,000,000 (i.e., attaching at the point of exhaustion of the Ironclad primary layer). The Pinnacle policy is issued on a follow-form basis with the Ironclad primary policy. The annual premium for the first excess layer is $410,000.

Second Excess Layer — Montclair Assurance Company. Montclair is a New York-domiciled admitted carrier (NAIC No. 15692), with its principal offices at 1 Liberty Plaza, 38th Floor, New York, New York 10006. Montclair issued Policy No. MAC-XS2-2022-09817, providing $10,000,000 in excess of $40,000,000 (i.e., attaching at the point of exhaustion of the combined Ironclad and Pinnacle layers). The annual premium for the second excess layer is $265,000.

Third Excess Layer — Sovereign Re Ltd. Sovereign Re is a Bermuda-domiciled reinsurer, with its principal offices at 14 Front Street, Hamilton HM 11, Bermuda. Sovereign Re issued Policy No. SRL-XS3-2022-5102, providing $10,000,000 in excess of $50,000,000 (i.e., attaching at the point of exhaustion of all underlying layers). The annual premium for the third excess layer is $185,000.

The total tower limit is $60,000,000 above the $500,000 deductible, and the total aggregate annual premium across all four layers is $1,840,000. VHG's total claimed business-interruption loss of $60,000,000 would, if fully covered, exhaust the entire tower.

C. Insurance Broker

VHG's property and casualty insurance program is placed through Tidewater Risk Advisors LLC ("Tidewater"), a Miami-based insurance brokerage firm located at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133. Tidewater has served as VHG's broker of record for the property program for at least the last three policy years. The account executive responsible for VHG's property placement is Franklin Orde, a senior broker at Tidewater with over twenty years of experience in commercial property-insurance placement, including significant expertise in Florida catastrophe risk.

Tidewater handled the July 2022 renewal negotiations with Ironclad's underwriting department and was responsible for the placement of the entire four-layer insurance tower. As detailed in Section IV below, Orde was the primary point of contact between VHG and Ironclad during the renewal, and his correspondence with Ironclad's underwriting department is central to the sub-limit deletion issue.

D. Procedural Posture

VHG submitted its initial notice of loss to Ironclad on September 22, 2022, four days after Hurricane Callista's landfall. The notice identified all three affected properties and provided preliminary estimates of physical damage and business-interruption exposure.

Ironclad retained Arbor Claims Services LLC ("Arbor"), an independent adjusting firm with offices at 3300 W. Cypress Street, Suite 400, Tampa, Florida 33607, to investigate and adjust the claim. Denise Whitford, a senior adjuster at Arbor, was designated as the lead adjuster on the VHG claim. Whitford and her team inspected the three affected properties on October 5, 2022, and Arbor's preliminary damage assessment is currently in progress.

On October 12, 2022, Ironclad issued a formal reservation of rights letter addressed to Nathaniel Driscoll (VHG General Counsel) and signed by Victor Haddon, Ironclad's Senior Vice President of Claims. The reservation of rights letter identifies several bases on which Ironclad may seek to limit or deny coverage, including, as relevant here, the assertion that the $15,000,000 named-windstorm sub-limit remains in effect under the current policy and caps business-interruption coverage for Hurricane Callista losses. The reservation of rights letter does not identify any specific endorsement in the current policy that imposes the sub-limit; rather, it references Ironclad's "underwriting intent" and an internal underwriting note.

VHG submitted its sworn statement in proof of loss, claiming $60,000,000 in business-interruption losses, on November 15, 2022. That proof of loss is currently under review by Ironclad and Arbor Claims Services.

This memorandum is prepared to evaluate the sub-limit issue in advance of our response to Ironclad's reservation of rights letter and our forthcoming demand letter, both of which are on a timetable to be sent no later than October 25, 2022.

III. The Named Windstorm Sub-Limit in the Prior-Year Policy

A. The 2021–2022 Policy Year

During the prior policy year (July 1, 2021 through July 1, 2022), the Ironclad primary policy contained an endorsement — specifically, Endorsement No. 7, titled "Named Windstorm Sub-Limit Endorsement" — that imposed a $15,000,000 aggregate sub-limit on all business-interruption and extra-expense losses arising from a "named windstorm" as defined in the endorsement. The endorsement defined "named windstorm" broadly as any storm or weather disturbance that has been designated as a tropical storm, hurricane, or typhoon by the National Hurricane Center of the National Oceanic and Atmospheric Administration, or any equivalent governmental or meteorological authority. This definition would unquestionably encompass Hurricane Callista, which was formally named by the National Hurricane Center on September 12, 2022.

The sub-limit operated on a per-occurrence basis and had the effect of reducing the otherwise applicable $25,000,000 business-interruption limit to $15,000,000 for any occurrence arising from a named windstorm. In practical terms, for VHG — a company whose properties are overwhelmingly located in hurricane-prone coastal Florida — the sub-limit imposed a meaningful restriction on the single most important category of catastrophe risk to which the Company is exposed.

This endorsement was first introduced in the 2020–2021 policy year at Ironclad's insistence, during a period of significant hardening in the commercial property-insurance market. At the time of the 2020 renewal, the Florida catastrophe reinsurance market was under considerable stress, and primary carriers including Ironclad were imposing sub-limits, increased deductibles, and coverage restrictions on named-windstorm exposure as a condition of providing coverage. VHG accepted the sub-limit in the 2020–2021 year and again at the 2021–2022 renewal because market alternatives were limited and VHG's priority was maintaining continuity of its placement with Ironclad, a carrier with which it had a longstanding relationship.

The annual premium charged by Ironclad for the primary layer during the 2021–2022 policy year was $870,000. As detailed below, this figure is significant because the premium increase at the 2022–2023 renewal — to $980,000, an increase of $110,000 — reflects the additional consideration paid by VHG to secure the deletion of the sub-limit endorsement.

B. VHG's Request for Deletion at the 2022 Renewal

As the July 2022 renewal approached, VHG's risk management team — led by Sandra Pellegrini, Vice President of Risk Management — identified the removal of the named-windstorm sub-limit as the top priority for the renewal negotiations. Pellegrini instructed Franklin Orde at Tidewater Risk Advisors to negotiate the deletion of the sub-limit endorsement from the Ironclad primary policy as a condition of VHG's renewal.

The rationale for seeking deletion was straightforward and commercially compelling: given VHG's concentration of high-value assets along the Florida Keys and the Florida Gulf Coast, named-windstorm exposure represents the predominant and most significant catastrophe risk faced by the Company. A $15,000,000 sub-limit on business-interruption coverage for named-windstorm events left VHG with a $10,000,000 gap between the sub-limit and the full primary layer limit — a gap that, as the present claim illustrates, could have a material impact on the Company's ability to recover from a major hurricane event. Pellegrini communicated to Orde that VHG was prepared to accept a meaningful premium increase to secure the removal of the sub-limit, and she authorized Orde to negotiate an increase within an acceptable range. The specific premium range discussed internally at VHG, and communicated by Pellegrini to Orde, was in the range of $80,000 to $120,000 in additional premium, a figure that VHG's board and risk committee considered reasonable given the magnitude of the coverage enhancement.

IV. The July 2022 Renewal Negotiations — Documentary Evidence

The documentary evidence bearing on the sub-limit deletion issue consists of four categories of materials: (1) email correspondence between Franklin Orde (Tidewater) and Ironclad's underwriting department; (2) the July 2022 binder; (3) the issued policy and endorsement schedule; and (4) premium records. Each is discussed below.

A. Tidewater Correspondence with Ironclad Underwriting

The email correspondence between Franklin Orde and Ironclad's underwriting department during the May–June 2022 renewal negotiations establishes a clear, unambiguous agreement to delete the named-windstorm sub-limit in exchange for an additional premium. The key communications are as follows:

Orde Email to Ironclad Underwriting (May 15, 2022). On May 15, 2022, Franklin Orde transmitted an email to Ironclad's underwriting department initiating the renewal discussion for VHG's primary property program. Among the renewal terms requested by VHG, Orde specifically and prominently identified the deletion of the named-windstorm sub-limit endorsement (Endorsement No. 7) for the upcoming July 1, 2022 renewal. Orde's email stated that VHG recognized that the deletion would require additional premium, and that VHG was willing to accept a premium increase "in the range of $80,000 to $120,000" to secure the removal of the sub-limit. Orde emphasized the commercial importance of the deletion to VHG, noting the Company's Florida coastal concentration and the centrality of named-windstorm coverage to VHG's risk-management program.

Ironclad Underwriting Response (May 31, 2022). On May 31, 2022, Ironclad's underwriter — the same individual who had handled the VHG account for the prior two renewal cycles — responded to Orde's request. The underwriter indicated a willingness to "consider removal of the named windstorm sub-limit" subject to two conditions: (1) a minimum premium increase of $100,000, and (2) VHG's agreement on certain other renewal terms, specifically including updated property valuations for all scheduled locations and confirmation of the existing $500,000 per-occurrence deductible. The underwriter's response did not raise any objection to the concept of removing the sub-limit; to the contrary, the email indicated that Ironclad was open to the request provided the additional premium was adequate.

Orde Follow-Up Email (June 8, 2022). On June 8, 2022, Orde transmitted a follow-up email to Ironclad's underwriter confirming VHG's acceptance of the terms set forth in the May 31 response. Orde's email stated, in relevant part: "VHG agrees to the additional $100K premium to delete the named windstorm sub-limit endorsement. Please confirm this will be reflected in the renewal binder." Orde further confirmed that VHG would provide updated property valuations and agreed to maintain the $500,000 deductible. The email is unambiguous in its confirmation of the premium-for-deletion exchange.

Ironclad Underwriting Confirmation (June 14, 2022). On June 14, 2022, Ironclad's underwriter responded with a clear confirmation of the agreement. The email stated: "Confirmed. The named windstorm sub-limit endorsement will not be included in the renewal policy effective July 1, 2022. Final binder to follow." This email constitutes a definitive confirmation from Ironclad's authorized underwriting representative that the sub-limit endorsement would be excluded from the renewal policy. The underwriter who sent this confirmation is the same individual who handled the VHG account in the prior two renewal cycles and who was responsible for the placement of the sub-limit endorsement in the 2020–2021 policy year. There is no ambiguity in this confirmation.

It is also significant that the $100,000 premium increase negotiated for the sub-limit deletion is consistent with the actual premium figures reflected in the policies. The prior-year (2021–2022) annual premium for the Ironclad primary layer was $870,000. The 2022–2023 annual premium is $980,000 — an increase of $110,000. Of that $110,000 increase, $100,000 was allocated specifically to the sub-limit deletion, with the remaining $10,000 attributable to general rate adjustments and the updated property valuations agreed upon during the renewal negotiations. The premium records thus independently corroborate the email correspondence.

B. The July 2022 Binder

Tidewater issued a formal binder confirmation on June 28, 2022, effective July 1, 2022, binding coverage under the Ironclad primary policy for the 2022–2023 policy year. The binder summary is consistent with the agreement reflected in the renewal correspondence and provides additional documentary support for VHG's position.

Specifically, the binder summary lists the primary layer limit as "$25,000,000 per occurrence — Business Interruption and Extra Expense," with no reference whatsoever to a named-windstorm sub-limit or any other sub-limitation on the business-interruption coverage. The binder lists the annual premium as $980,000 and references an "Endorsement Schedule — to follow," indicating that the formal endorsement schedule would be finalized and issued with the formal policy.

Critically, the binder does not list Endorsement No. 7 (the named-windstorm sub-limit endorsement) among the scheduled endorsements for the renewal term. This is a material departure from the prior-year binder, which had expressly listed the named-windstorm sub-limit endorsement as one of the endorsements applicable to the policy. The omission of the sub-limit endorsement from the 2022–2023 binder is entirely consistent with — and further confirms — the agreement reached in the May–June 2022 correspondence to delete the endorsement.

The binder is signed by Franklin Orde on behalf of Tidewater Risk Advisors and bears Ironclad's binder reference number, confirming that it was issued with Ironclad's authorization.

C. The Issued Policy — Endorsement Analysis

Ironclad issued the formal policy (Policy No. IIC-PRP-2022-07541) on or about August 15, 2022, approximately six weeks after the effective date of the renewal. The issued policy is the definitive contractual document between VHG and Ironclad and is the primary point of reference for the coverage analysis.

The policy declarations page lists a business-interruption limit of $25,000,000 per occurrence, with no sub-limit notation, no asterisk or cross-reference to any sub-limiting endorsement, and no other indication that the stated $25,000,000 limit is subject to reduction for named-windstorm events. On its face, the declarations page is clear and unambiguous: the per-occurrence limit for business interruption is $25,000,000.

The endorsement schedule attached to the issued policy lists twelve endorsements, numbered Endorsements 1 through 12. We have reviewed each of the twelve endorsements in detail. None of the twelve endorsements bears the title "Named Windstorm Sub-Limit Endorsement," and none of the twelve endorsements imposes a $15,000,000 sub-limit (or any sub-limit) on business-interruption or extra-expense coverage for named-windstorm events. The named-windstorm sub-limit endorsement that appeared in the prior-year policy as Endorsement No. 7 simply does not exist in the 2022–2023 policy.

There is one point of potential confusion — though we do not believe it creates a genuine ambiguity — related to the numbering of the endorsements. In the 2022–2023 policy, Endorsement No. 7 is titled "Florida Hurricane Deductible Endorsement," and it addresses the application of the $500,000 per-occurrence deductible to hurricane losses. This is an entirely different endorsement from the prior-year Endorsement No. 7, which was the named-windstorm sub-limit endorsement. The reuse of the Endorsement No. 7 designation for a different endorsement is unremarkable — endorsement numbers are sequential identifiers that are reassigned each policy year — but it confirms that the prior-year sub-limit endorsement was not carried forward. A new Endorsement No. 7 was created for the 2022–2023 policy, and it has nothing to do with the named-windstorm sub-limit.

We note one provision in the issued policy that Ironclad could potentially seek to exploit, though we believe any such argument would be meritless. Section IV.C.3 of the policy's "Special Conditions" section contains a general provision stating: "Sub-limits of liability, if any, as set forth in the endorsements attached hereto shall apply." This is a standard boilerplate provision that operates as a cross-reference to endorsements that impose sub-limits. Read in context, the provision simply means that if there are endorsements in the policy that set forth sub-limits, those sub-limits apply. Because no endorsement in the 2022–2023 policy imposes a named-windstorm sub-limit, the provision has no operative effect with respect to named-windstorm business-interruption coverage. Ironclad may nonetheless argue that this provision creates an ambiguity by suggesting the existence of sub-limits not otherwise reflected in the endorsement schedule. As discussed in Section V below, such an argument fails under Florida law.

Additionally, we are aware that Ironclad's reservation of rights letter references an internal underwriting note that allegedly states the named-windstorm sub-limit was "intended to be maintained" despite the premium adjustment. We have not yet obtained this internal note from Ironclad, and Ironclad has not produced it or described its contents beyond the bare reference in the reservation of rights letter. As discussed in Section VII, obtaining this document is a priority. Even if such a note exists, however, it would constitute unilateral internal documentation that was never communicated to VHG or its broker, was contradicted by the underwriter's own written confirmation of the deletion, and cannot override the terms of the issued policy.

V. Legal Analysis

A. Florida Law on Policy Interpretation

Under Florida law, insurance policies are contracts and are subject to the general rules of contract interpretation. The Florida Supreme Court has consistently held that where the language of an insurance policy is clear and unambiguous, the court will enforce the policy according to its plain terms, without resort to rules of construction or extrinsic evidence. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003); Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000). The policy must be read as a whole, giving effect to every provision and construing each provision in harmony with the others. Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938, 942 (Fla. 1979).

Where the policy language is susceptible to more than one reasonable interpretation — that is, where a genuine ambiguity exists — the ambiguity is construed against the insurer and in favor of coverage under the well-established doctrine of contra proferentem. This doctrine is applied with particular force in Florida, where the courts have recognized that insurance policies are contracts of adhesion drafted by the insurer, and that the insured typically has little or no ability to negotiate or modify the policy language. See Deni Assocs. of Fla., Inc. v. State Farm Fire & Cas. Ins. Co., 711 So. 2d 1135, 1139 (Fla. 1998); Berkshire Life Ins. Co. v. Adelberg, 698 So. 2d 828, 830 (Fla. 1997).

Of particular relevance to the present dispute, the Florida Supreme Court has held that where an insurer issues a policy that omits a limitation, exclusion, or restrictive endorsement, the insured is entitled to rely on the policy as issued. The insurer cannot unilaterally reinsert the omitted provision or claim that the policy should be read as though the omitted provision were included. See State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1076 (Fla. 1998). An insurer that issues a policy without a particular limitation bears the consequences of that omission, regardless of whether the omission was intentional or inadvertent.

In the present case, the issued policy (IIC-PRP-2022-07541) does not contain the named-windstorm sub-limit endorsement. The declarations page states a $25,000,000 per-occurrence business-interruption limit without sub-limitation. No endorsement in the policy imposes a named-windstorm sub-limit. Under the foregoing principles, VHG is entitled to enforce the policy as issued — with a full $25,000,000 business-interruption limit and no named-windstorm sub-limit.

B. The Binder as Evidence of Intent

Under Florida law, a binder is a temporary contract of insurance that provides coverage pending the issuance of a formal policy. Florida Statutes § 627.413 governs the issuance and effect of binders in the State of Florida. A binder reflects the terms agreed upon by the parties at the time coverage is bound and is enforceable as a contract of insurance in its own right until superseded by the formal policy.

The binder issued by Tidewater on June 28, 2022, effective July 1, 2022, does not include the named-windstorm sub-limit and lists the full $25,000,000 business-interruption limit per occurrence. The binder's endorsement schedule does not reference the sub-limit endorsement. The binder is therefore consistent with the renewal correspondence and confirms that the parties' agreement, as of the inception of the 2022–2023 policy period, was for coverage without the named-windstorm sub-limit.

If, contrary to our analysis, the issued policy were deemed to be ambiguous with respect to the sub-limit (which we do not concede), the binder and the pre-issuance renewal negotiations would be admissible as extrinsic evidence to resolve the ambiguity. Florida courts have consistently recognized that where a policy is ambiguous, the court may consider the circumstances surrounding the formation of the contract, including pre-policy correspondence, binders, and communications between the broker and the insurer, to determine the parties' intent. See Nat'l Union Fire Ins. Co. of Pittsburgh v. Wallach, 945 So. 2d 1173, 1179 (Fla. 2006); Seaboard Lumber Co. v. U.S. Fire Ins. Co., 470 So. 2d 25, 27 (Fla. 1st DCA 1985).

Broker correspondence is specifically admissible as evidence of the parties' intent in construing insurance policy terms under Florida law. The broker acts as the intermediary between the insured and the insurer, and the communications exchanged during the placement or renewal process are probative evidence of what the parties agreed upon. Here, the Orde correspondence — including the explicit confirmation from Ironclad's underwriter that the sub-limit endorsement would "not be included in the renewal policy" — would be highly probative extrinsic evidence if the policy were found to be ambiguous.

C. The "Four Corners" Argument

Ironclad may argue that the policy must be construed solely within its "four corners" and that extrinsic evidence of the renewal negotiations — including the Orde correspondence, the binder, and the premium allocation — is inadmissible. This argument would be based on the parol evidence rule, which generally prohibits the introduction of prior or contemporaneous agreements to contradict the terms of an integrated written contract.

This argument fails for three independent reasons.

First, the issued policy on its face does not contain the sub-limit endorsement. There is nothing within the "four corners" of the policy that imposes a $15,000,000 named-windstorm sub-limit on business-interruption coverage. To the extent Ironclad is asking the court to read a limitation into the policy that does not exist in the policy's text, it is Ironclad — not VHG — that is seeking to go beyond the four corners of the document. The four-corners rule works in VHG's favor, not against it: the policy, read on its own terms, provides a $25,000,000 BI limit with no named-windstorm sub-limit.

Second, even if the general cross-reference in Section IV.C.3 of the Special Conditions ("Sub-limits of liability, if any, as set forth in the endorsements attached hereto shall apply") were deemed to create an ambiguity — a characterization we would resist — the parol evidence rule does not bar the admission of extrinsic evidence to resolve an ambiguity. It is black-letter law in Florida, as in virtually every jurisdiction, that where a contract is ambiguous, extrinsic evidence is admissible to determine the parties' intent. See Friedman v. Virginia Metal Prods. Corp., 56 So. 2d 515, 517 (Fla. 1952); Restatement (Second) of Contracts § 214(c).

Third, Florida courts regularly consider binders, broker correspondence, and other extrinsic evidence in coverage disputes, including in cases where the insurer has asserted the four-corners rule. The Florida District Courts of Appeal have consistently held that the parol evidence rule does not preclude consideration of evidence bearing on the formation and scope of the insurance contract where the policy is ambiguous or where the parties' intent is in dispute. See, e.g., Guarantee Ins. Co. v. Saltsman, 240 So. 2d 484, 487 (Fla. 3d DCA 1970).

D. The Premium Increase Corroborates Deletion

The premium increase from the 2021–2022 policy year ($870,000) to the 2022–2023 policy year ($980,000) provides strong, objective corroboration of VHG's position. The total increase of $110,000 is directly traceable to the renewal negotiations: $100,000 of the increase was negotiated specifically as the additional consideration for deleting the named-windstorm sub-limit endorsement, and the remaining $10,000 was attributable to general rate adjustments and updated property valuations.

The premium records are not subject to the parol evidence rule because they are part of the policy itself (the premium is stated on the declarations page) and are admissible to confirm the scope of coverage purchased. An insurer that accepts increased premium in exchange for a specific coverage enhancement is bound by the enhanced coverage. The insurer cannot retain the additional premium and simultaneously deny the coverage for which the premium was paid. See U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 883 (Fla. 2007) (stating that coverage terms must be interpreted in light of the "total coverage purchased" and the premium paid).

Moreover, the premium increase is objective, verifiable evidence that is not dependent on the credibility of any particular witness. Even if Ironclad were to dispute the characterization of the increase as "allocated" to the sub-limit deletion, the fact remains that VHG paid $110,000 more in premium for the 2022–2023 year than the prior year, and the only significant coverage change negotiated during the renewal was the deletion of the sub-limit. The inference is compelling and, we submit, dispositive.

E. Estoppel and Waiver Considerations

Even if, arguendo, a technical argument could be made that the sub-limit endorsement was inadvertently omitted from the issued policy rather than intentionally deleted — an argument that is contradicted by the documentary record — Ironclad may be estopped from asserting the sub-limit under the doctrines of equitable estoppel and waiver.

Under Florida law, equitable estoppel requires a showing that (1) the party to be estopped made a representation or engaged in conduct that was material, (2) the other party relied on the representation or conduct, and (3) the relying party would be prejudiced if the first party were permitted to repudiate its representation or conduct. See State v. Harris, 356 So. 2d 315, 317 (Fla. 1978). All three elements are satisfied here.

First, Ironclad's underwriter expressly confirmed in writing on June 14, 2022, that the named-windstorm sub-limit endorsement would "not be included in the renewal policy." The binder issued two weeks later omitted the sub-limit, and the formal policy issued on August 15, 2022, likewise omitted the sub-limit endorsement. These representations and documents — spanning more than two months from the underwriting confirmation through policy issuance — constitute material representations on which VHG was entitled to rely.

Second, VHG relied on the representations of its broker (Orde's confirmation of the deletion), the binder, and the issued policy — all of which omitted the sub-limit — in structuring its risk-management program for the 2022–2023 policy year. Specifically, VHG relied on the deletion of the sub-limit in evaluating whether it needed to purchase additional excess coverage, alternative windstorm protection, or a standalone named-windstorm business-interruption policy to fill the gap between $15,000,000 and $25,000,000. Had VHG known or believed that the sub-limit remained in effect, it would have explored those alternatives. By the time Ironclad asserted the sub-limit in its October 12, 2022 reservation of rights — more than three months after policy inception and after Hurricane Callista had already made landfall — VHG had lost the ability to procure alternative coverage for the gap.

Third, VHG would suffer material prejudice if Ironclad were permitted to assert the sub-limit. The difference between a $25,000,000 limit and a $15,000,000 limit for the primary layer is $10,000,000 in coverage, and the ripple effects through the excess layers could increase the total loss of coverage to an even greater amount.

With respect to waiver, Florida law recognizes that an insurer may waive a policy provision by conduct that is inconsistent with the assertion of that provision. Ironclad had the opportunity to review the binder, review the formal policy at the time of issuance (August 15, 2022), and raise any concerns about the omission of the sub-limit endorsement. Ironclad did not do so. It raised no issue regarding the omission of the sub-limit until the reservation of rights letter of October 12, 2022 — nearly three months after policy inception and only after a covered loss had occurred. This delay supports a finding of waiver, particularly in light of the prejudice to VHG described above.

VI. Impact on the Insurance Tower and Excess Layers

The sub-limit dispute in the Ironclad primary layer has significant implications for the entire insurance tower. The analysis differs depending on whether the sub-limit is found to apply.

A. If the Sub-Limit Does Not Apply (Our Position)

Under VHG's position — which is that the named-windstorm sub-limit was deleted and the full $25,000,000 primary layer limit applies — the tower responds as follows:

Ironclad's primary layer provides the full $25,000,000 business-interruption limit per occurrence. VHG's total claimed business-interruption loss of $60,000,000 exceeds the primary limit, and accordingly the primary layer is fully exhausted by the Hurricane Callista loss.

With the Ironclad primary layer exhausted at $25,000,000, Pinnacle Surplus Lines' first excess layer ($15,000,000 in excess of $25,000,000) is fully implicated. Because the Pinnacle policy is issued on a follow-form basis with the Ironclad primary, and because the Ironclad primary (as properly issued) does not contain a named-windstorm sub-limit, no independent sub-limit applies to the Pinnacle layer. The Pinnacle layer is fully penetrated by the loss.

Montclair Assurance's second excess layer ($10,000,000 in excess of $40,000,000) attaches once the combined Ironclad and Pinnacle layers are exhausted, i.e., at $40,000,000. VHG's $60,000,000 claim exceeds this attachment point, and the Montclair layer is fully penetrated.

Sovereign Re's third excess layer ($10,000,000 in excess of $50,000,000) attaches once the combined underlying layers are exhausted at $50,000,000. VHG's $60,000,000 claim exceeds this attachment point, and the Sovereign Re layer is fully penetrated.

Under this scenario, VHG recovers up to the full $60,000,000 tower limit, less the $500,000 deductible, for a net recovery of $59,500,000 — representing the full measure of VHG's claimed business-interruption loss.

B. If the Sub-Limit Applies (Ironclad's Position)

If, contrary to our analysis, the $15,000,000 named-windstorm sub-limit were found to apply, the consequences for VHG's recovery would be severe and would reverberate through the entire insurance tower.

Under this scenario, Ironclad's exposure for named-windstorm business-interruption losses would be capped at $15,000,000, rather than the full $25,000,000 primary layer limit — a reduction of $10,000,000 at the primary level alone.

The impact on the excess layers is more complex and requires careful analysis of the follow-form and attachment provisions in each excess policy. Pinnacle Surplus Lines' first excess policy follows form with the Ironclad primary. If the sub-limit is deemed to be a term of the Ironclad primary policy, Pinnacle may argue that its layer does not attach because the primary layer is not exhausted at its stated $25,000,000 limit. Rather, Pinnacle might contend, the effective primary cap for named-windstorm business-interruption losses is $15,000,000, and the $10,000,000 difference between the sub-limited amount ($15,000,000) and the stated primary limit ($25,000,000) represents uninsured or uninsurable risk that VHG must bear.

However, the excess layers attach based on the stated primary limit ($25,000,000) as set forth in the schedule of underlying insurance, not based on a sub-limited amount. Preliminary review of the Pinnacle follow-form clause suggests that it references "underlying insurance as described in the Schedule of Underlying Insurance," which lists the Ironclad primary layer at $25,000,000. If Pinnacle's attachment point is defined by the scheduled underlying limit ($25,000,000), then the Pinnacle layer should still attach once $25,000,000 in losses is incurred — but the question becomes whether the $10,000,000 gap between the sub-limited primary recovery ($15,000,000) and the Pinnacle attachment point ($25,000,000) is borne by VHG as a self-insured retention, or whether the excess layers "drop down" to fill the gap. This analysis is policy-specific and depends on the precise language of the Pinnacle excess policy's attachment and follow-form provisions.

Montclair Assurance and Sovereign Re have each reserved their rights but have not issued formal coverage denials. Both excess carriers have indicated, through their respective claims contacts, that they are monitoring the sub-limit dispute in the Ironclad primary layer and that their layers may not be reached if the sub-limit applies. If the sub-limit reduced the effective primary recovery to $15,000,000, the threshold question is whether the excess layers still attach at their scheduled attachment points (requiring $25,000,000, $40,000,000, and $50,000,000 in underlying loss, respectively) or whether the attachment points shift downward to reflect the sub-limited primary recovery. If the attachment points remain fixed at the scheduled amounts, VHG could face a $10,000,000 gap between the sub-limited primary cap and the first excess attachment point — a gap for which no coverage would be available.

In the worst case, the sub-limit could reduce VHG's total recovery across the four-layer tower by $10,000,000 or more, depending on the ultimate positions taken by the three excess carriers and the resolution of the follow-form and attachment issues. The precise quantum of the shortfall will depend on the detailed follow-form analysis described in Section VII.C below.

VII. Outstanding Issues and Recommended Next Steps

A. Obtain Ironclad's Internal Underwriting Notes

Ironclad's reservation of rights letter references an internal underwriting note that allegedly states the named-windstorm sub-limit was "intended to be maintained" in the 2022–2023 policy year despite the premium adjustment. This internal note — if it exists — is the primary documentary basis cited by Ironclad for its assertion of the sub-limit. We have not yet obtained the note, and Ironclad has not produced it or described its contents beyond the single-sentence reference in the reservation of rights letter.

Obtaining this document is a priority. We need to evaluate whether the note is contemporaneous with the renewal negotiations or was created after the fact; whether it reflects the views of the underwriter who confirmed the deletion to Orde (and if not, whose views it reflects); and whether it is consistent or inconsistent with the June 14, 2022 underwriting confirmation email. If the note was created by a different individual, or at a different time, or reflects an internal miscommunication within Ironclad's underwriting department, its probative value would be significantly diminished.

We recommend that our forthcoming demand letter to Ironclad include a specific request for the complete underwriting file for the 2022 renewal, including all internal memoranda, notes, emails, and other communications regarding the named-windstorm sub-limit, the premium calculation for the 2022–2023 policy year, and the decision to issue the policy without the sub-limit endorsement. If Ironclad declines to produce the underwriting file voluntarily, we should be prepared to obtain it through formal discovery in the event litigation is commenced.

B. Confirm Franklin Orde's Willingness to Provide Testimony

Franklin Orde's testimony will be critical to establishing the course of the renewal negotiations and the agreement between VHG (through Tidewater) and Ironclad to delete the named-windstorm sub-limit endorsement. Orde is the individual who communicated VHG's request for deletion, negotiated the premium increase with Ironclad's underwriter, and received the underwriter's written confirmation that the sub-limit endorsement would not be included in the renewal policy. He is also the individual who issued the binder omitting the sub-limit.

We recommend contacting Orde at Tidewater Risk Advisors at the earliest opportunity to confirm his recollection of the renewal negotiations, his understanding of the agreement reached with Ironclad, and his willingness to support VHG's position. Orde is a potential witness regarding policy procurement and the representations made by Ironclad's underwriter during the renewal process. His testimony, if consistent with the documentary record (as we expect it would be), would be powerful evidence in support of VHG's claim.

We note, however, a potential complication. As VHG's broker of record, Orde and Tidewater may have independent exposure if the sub-limit was not in fact deleted and Orde's representations to VHG — that the deletion had been confirmed — were inaccurate. If that scenario were to materialize, VHG could have a professional-liability claim against Tidewater for failing to ensure that the sub-limit was actually removed from the policy. This creates a potential alignment of interests between VHG and Tidewater (both have an interest in establishing that the sub-limit was deleted) but also a potential conflict (if the sub-limit is found to apply, Tidewater's E&O coverage may become relevant, and Orde's testimony may be influenced by his own liability exposure). This dynamic should be monitored as the dispute progresses, and we should be sensitive to the possibility that Tidewater may retain its own counsel if the matter escalates.

C. Review Excess Layer Follow-Form Language

As discussed in Section VI, the sub-limit dispute in the primary layer has significant implications for the attachment and response of the three excess layers. A detailed review of the follow-form clauses, attachment provisions, and definitions of "underlying insurance" in the Pinnacle (PSL-XS1-2022-3390), Montclair (MAC-XS2-2022-09817), and Sovereign Re (SRL-XS3-2022-5102) policies is needed to fully assess the tower-wide impact of the sub-limit dispute.

Andrew Fitzpatrick is conducting this analysis separately. A preliminary Policy Comparison Chart was circulated on September 8, 2022, and the full analysis will be incorporated into a supplemental memorandum once the review is complete. The key questions for each excess policy are: (1) whether the excess policy follows form with the Ironclad primary with respect to sub-limits; (2) whether the excess policy's attachment point is defined by reference to the stated primary limit ($25M) or the amount actually paid under the primary; and (3) whether the excess policy contains a "drop-down" provision that would fill any gap created by a sub-limit in the primary layer.

D. Response to Reservation of Rights

We recommend that our response letter to Ironclad's October 12, 2022 reservation of rights — which we are targeting for transmittal no later than October 25, 2022 — address the sub-limit issue directly, forcefully, and with specific reference to the documentary record. The response should:

1. Demand that Ironclad confirm that the named-windstorm sub-limit was deleted at the 2022 renewal, consistent with the June 14, 2022 underwriting confirmation.

2. Reference the Orde correspondence (May 15, June 8, and June 14, 2022 emails) and the binder (June 28, 2022) as evidence of the agreement to delete the sub-limit.

3. Note that the issued policy does not contain a named-windstorm sub-limit endorsement and that the declarations page lists the full $25,000,000 business-interruption limit without sub-limitation.

4. Identify the $110,000 premium increase as additional consideration paid for the coverage enhancement.

5. Put Ironclad on notice that assertion of a non-existent sub-limit, in the face of clear documentary evidence of its deletion, may constitute bad faith under Florida law, exposing Ironclad to extracontractual liability, including statutory penalties and attorneys' fees under Fla. Stat. § 624.155.

6. Request production of the internal underwriting note referenced in the reservation of rights letter.

E. Preserve All Renewal-Related Documents

We must ensure that the litigation hold notice issued by VHG on September 19, 2022 — two days after Hurricane Callista's anticipated impact and one day after landfall — is sufficiently broad to cover all VHG documents related to the July 2022 renewal. Specifically, the hold should encompass:

• All communications between Sandra Pellegrini and Franklin Orde (or any other Tidewater representative) regarding the sub-limit deletion request, the renewal negotiations, and the terms of the renewed policy.

• All internal VHG board minutes, risk committee materials, presentations, and memoranda discussing the named-windstorm sub-limit, the decision to seek its deletion, and the approval of additional premium for the deletion.

• All communications between VHG personnel (including Pellegrini, Driscoll, Calder, and Ellsworth) regarding the insurance tower structure, the sub-limit, and VHG's risk-management strategy for the 2022–2023 policy year.

• All copies of the binder, the issued policy, prior-year policies, and related documents maintained by VHG's risk-management and legal departments.

We recommend confirming with Nathaniel Driscoll that the litigation hold has been distributed to all relevant custodians and that the preservation obligations are being observed.

VIII. Conclusion

The documentary evidence strongly supports VHG's position that the $15,000,000 named-windstorm sub-limit was deleted at the July 2022 renewal. The evidence forms a coherent and internally consistent chain of documentation that leaves no reasonable doubt as to the parties' agreement:

• The email correspondence between Franklin Orde (Tidewater) and Ironclad's underwriting department expressly confirms the agreement to remove the named-windstorm sub-limit endorsement in exchange for a $100,000 premium increase. Ironclad's own underwriter confirmed on June 14, 2022, that the sub-limit endorsement would "not be included in the renewal policy."

• The July 2022 binder, issued by Tidewater on June 28, 2022, omits the sub-limit and lists the full $25,000,000 business-interruption limit per occurrence.

• The issued policy (IIC-PRP-2022-07541), delivered on or about August 15, 2022, does not contain a named-windstorm sub-limit endorsement. The declarations page states a $25,000,000 per-occurrence business-interruption limit. None of the twelve endorsements in the policy imposes a named-windstorm sub-limit.

• The $110,000 premium increase from the prior year is consistent with — and independently corroborates — the agreement to delete the sub-limit in exchange for $100,000 in additional premium.

Under Florida law, the policy as issued governs, and VHG is entitled to enforce the policy according to its plain terms. Ambiguities, to the extent any exist, are construed against the insurer under the doctrine of contra proferentem. The extrinsic evidence of the renewal negotiations — including the broker correspondence, the binder, and the premium records — further confirms VHG's interpretation and would be admissible to resolve any ambiguity.

We recommend proceeding on the basis that the full $25,000,000 primary layer limit is available for Hurricane Callista business-interruption losses, and that Ironclad's assertion of the sub-limit in its reservation of rights is without merit. Our response to the reservation of rights should address the issue directly, demand that Ironclad withdraw its sub-limit reservation, and put Ironclad on notice of the potential consequences of a bad-faith denial of coverage.

We are available to discuss this analysis at your convenience and will continue to develop the record on the outstanding issues identified in Section VII.

This memorandum is prepared as attorney work product in anticipation of litigation and is protected by the attorney-client privilege and the work-product doctrine. It is intended solely for the use of the attorneys and client representatives identified herein and should not be disclosed to any third party without the prior written consent of this firm.

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Elaine Forsythe, Partner
FROM: Tiffany Rosenthal, Associate; Andrew Fitzpatrick, Associate
DATE: October 20, 2022
RE: Analysis of Named Windstorm Sub-Limit Deletion Endorsement — Ironclad Indemnity Corporation Primary Policy (IIC-PRP-2022-07541)
CLIENT: Verimark Hospitality Group Inc.
MATTER NO.: 1021-00003
I. Executive Summary
This memorandum analyzes whether the $15,000,000 named-windstorm sub-limit contained in the prior-year Ironclad Indemnity Corporation ("Ironclad" or "IIC") primary property and business-interruption policy was effectively deleted at the July 1, 2022 renewal. The question has become outcome-determinative in the adjustment of Verimark Hospitality Group Inc.'s ("VHG" or the "Company") Hurricane Callista business-interruption claim because of the magnitude of the difference in potential recovery under the two competing interpretations of the policy.
Ironclad's reservation of rights letter dated October 12, 2022 — signed by Victor Haddon, Senior Vice President of Claims — asserts, among other bases for potential coverage limitations, that the named-windstorm sub-limit remains in effect under the 2022–2023 policy year. If Ironclad's position were accepted, business-interruption coverage for Hurricane Callista losses would be capped at $15,000,000 under the primary layer rather than the full $25,000,000 primary layer limit. This single coverage dispute has the potential to reduce VHG's aggregate tower recovery by $10,000,000 or more, depending on the response of the three excess-layer carriers.
Based on our thorough review of (a) broker correspondence from Franklin Orde at Tidewater Risk Advisors LLC ("Tidewater"), the broker of record for VHG's property program, (b) the July 2022 binder issued in connection with the renewal, (c) the issued policy endorsements and declarations page, and (d) the premium increase negotiated at the time of renewal, we conclude that the named-windstorm sub-limit was effectively removed during the 2022 renewal negotiations. The documentary record establishes a clear, unambiguous agreement between VHG (through its broker) and Ironclad's underwriting department to delete the sub-limit endorsement in exchange for a $100,000 premium increase. That agreement was reflected in the binder, confirmed in the issued policy (which omits the sub-limit endorsement entirely), and supported by the premium actually charged.
Accordingly, it is our opinion that VHG is entitled to the full $25,000,000 primary layer limit for business-interruption losses arising from Hurricane Callista, and that Ironclad's reservation of the sub-limit defense is without merit under both the plain language of the issued policy and the applicable principles of Florida insurance law.
If the sub-limit were found to apply, the consequences for VHG would be significant. In addition to capping recovery under the Ironclad primary layer at $15,000,000 for named-windstorm business-interruption losses — a $10,000,000 reduction — the sub-limit could affect the attachment points for the three excess layers sitting above the Ironclad primary (Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd.). The excess carriers have each issued reservations of rights or placed VHG on notice that they are monitoring the sub-limit dispute in the primary layer. The downstream implications for the full $60,000,000 insurance tower are addressed in detail in Section VI below.
II. Background
A. The Insured and the Loss
Verimark Hospitality Group Inc. (Nasdaq: VMRK) is a Delaware corporation headquartered at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. VHG is a publicly traded hospitality and real-estate company that owns and operates luxury resort properties concentrated along the Florida Gulf Coast and the Florida Keys. The Company's senior 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). For fiscal year 2021, VHG reported consolidated revenue of approximately $412,000,000 and EBITDA of approximately $78,000,000. The Company's financial performance is heavily dependent on its Florida resort operations, which account for the majority of its revenue and operating income.
Hurricane Callista was designated as a tropical storm by the National Hurricane Center on September 12, 2022, and rapidly intensified over the warm waters of the Caribbean and the Straits of Florida over the following six days. By the time of landfall, Callista had strengthened to a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour. The hurricane made landfall at approximately 1:30 PM EDT on September 18, 2022, near Big Pine Key in the Lower Florida Keys, Monroe County, Florida. Callista then tracked northward across the Gulf of Mexico, bringing destructive winds, torrential rainfall, and catastrophic storm surge to communities along the southwest Florida coastline.
In advance of Callista's landfall, Monroe County issued a mandatory evacuation order on September 16, 2022, followed by Lee County on September 17, 2022. Storm surge levels reached 8 to 14 feet in Monroe County and 6 to 10 feet in Lee County, causing widespread flooding and structural damage to coastal properties. The hurricane caused billions of dollars in insured losses across the region and was among the costliest hurricane events in Florida in recent years.
Three VHG-owned properties sustained catastrophic damage as a result of Hurricane Callista:
Verimark Grand Key Resort (Mile Marker 48, Marathon, Florida 33050). This is a 312-room luxury resort and marina facility and represents VHG's flagship property in the Florida Keys. The resort sustained severe wind and storm-surge damage, rendering it entirely inoperable. The property was closed from September 18, 2022, through March 15, 2023 — a total of 178 days. Prior to the loss, the Grand Key Resort operated at an average daily rate ("ADR") of $389 per room night with an average occupancy rate of 82%. The estimated business-interruption loss attributable to the Grand Key Resort is $31,400,000, based on historical financial performance, seasonal revenue projections, and continuing expenses incurred during the period of restoration.
Verimark Harborview Hotel & Conference Center (1400 Estero Boulevard, Fort Myers Beach, Florida 33931). This is a 224-room hotel with an approximately 40,000 square foot conference and events facility. The property sustained significant structural damage from both wind and storm surge and was closed from September 18, 2022, through January 31, 2023 — a total of 135 days. Pre-loss ADR was $295 per room night with an average occupancy rate of 74%. The estimated business-interruption loss for the Harborview Hotel & Conference Center is $18,700,000.
Verimark Sunset Shores (7200 Gulf Boulevard, St. Pete Beach, Florida 33706). This is a 186-room boutique resort situated on the Gulf of Mexico. Sunset Shores sustained wind damage and flooding that required a full closure from September 18, 2022, through November 30, 2022 (73 days), followed by an extended period of reduced-capacity operation through February 2023. Full operational capacity was not restored until February 28, 2023. Pre-loss ADR was $342 per room night with an average occupancy rate of 79%. The estimated business-interruption loss for Sunset Shores is $9,900,000.
In total, VHG's claimed business-interruption loss arising from Hurricane Callista across the three affected properties is $60,000,000 ($31,400,000 + $18,700,000 + $9,900,000). This figure does not include physical damage to the properties (which is the subject of separate coverage analysis) and is based on the preliminary loss calculations prepared by VHG's forensic accountants in consultation with Sandra Pellegrini and the Company's finance team.
B. The Insurance Program — Tower Structure
VHG's property and business-interruption insurance program for the policy period at issue (July 1, 2022 through July 1, 2023) is structured as a layered tower consisting of one primary policy and three excess policies, each providing "all risks" coverage for physical loss or damage, including business interruption and extra expense. The tower is described below in ascending order of attachment:
Primary Layer — Ironclad Indemnity Corporation. Ironclad is a Connecticut-domiciled stock insurance company (NAIC No. 20537), with its principal offices at 55 Constitution Boulevard, Hartford, Connecticut 06103. Ironclad issued Policy No. IIC-PRP-2022-07541, providing the primary layer of coverage with a per-occurrence limit of $25,000,000 for business interruption and extra expense. The policy carries a $500,000 deductible applicable to each occurrence. The annual premium for the primary layer is $980,000. The Ironclad primary policy is the policy at issue in this memorandum.
First Excess Layer — Pinnacle Surplus Lines Inc. Pinnacle is a Texas-domiciled surplus-lines insurer (NAIC No. 38214), with its principal offices at 200 Congress Avenue, Suite 1400, Austin, Texas 78701. Pinnacle issued Policy No. PSL-XS1-2022-3390, providing $15,000,000 in excess of $25,000,000 (i.e., attaching at the point of exhaustion of the Ironclad primary layer). The Pinnacle policy is issued on a follow-form basis with the Ironclad primary policy. The annual premium for the first excess layer is $410,000.
Second Excess Layer — Montclair Assurance Company. Montclair is a New York-domiciled admitted carrier (NAIC No. 15692), with its principal offices at 1 Liberty Plaza, 38th Floor, New York, New York 10006. Montclair issued Policy No. MAC-XS2-2022-09817, providing $10,000,000 in excess of $40,000,000 (i.e., attaching at the point of exhaustion of the combined Ironclad and Pinnacle layers). The annual premium for the second excess layer is $265,000.
Third Excess Layer — Sovereign Re Ltd. Sovereign Re is a Bermuda-domiciled reinsurer, with its principal offices at 14 Front Street, Hamilton HM 11, Bermuda. Sovereign Re issued Policy No. SRL-XS3-2022-5102, providing $10,000,000 in excess of $50,000,000 (i.e., attaching at the point of exhaustion of all underlying layers). The annual premium for the third excess layer is $185,000.
The total tower limit is $60,000,000 above the $500,000 deductible, and the total aggregate annual premium across all four layers is $1,840,000. VHG's total claimed business-interruption loss of $60,000,000 would, if fully covered, exhaust the entire tower.
C. Insurance Broker
VHG's property and casualty insurance program is placed through Tidewater Risk Advisors LLC ("Tidewater"), a Miami-based insurance brokerage firm located at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133. Tidewater has served as VHG's broker of record for the property program for at least the last three policy years. The account executive responsible for VHG's property placement is Franklin Orde, a senior broker at Tidewater with over twenty years of experience in commercial property-insurance placement, including significant expertise in Florida catastrophe risk.
Tidewater handled the July 2022 renewal negotiations with Ironclad's underwriting department and was responsible for the placement of the entire four-layer insurance tower. As detailed in Section IV below, Orde was the primary point of contact between VHG and Ironclad during the renewal, and his correspondence with Ironclad's underwriting department is central to the sub-limit deletion issue.
D. Procedural Posture
VHG submitted its initial notice of loss to Ironclad on September 22, 2022, four days after Hurricane Callista's landfall. The notice identified all three affected properties and provided preliminary estimates of physical damage and business-interruption exposure.
Ironclad retained Arbor Claims Services LLC ("Arbor"), an independent adjusting firm with offices at 3300 W. Cypress Street, Suite 400, Tampa, Florida 33607, to investigate and adjust the claim. Denise Whitford, a senior adjuster at Arbor, was designated as the lead adjuster on the VHG claim. Whitford and her team inspected the three affected properties on October 5, 2022, and Arbor's preliminary damage assessment is currently in progress.
On October 12, 2022, Ironclad issued a formal reservation of rights letter addressed to Nathaniel Driscoll (VHG General Counsel) and signed by Victor Haddon, Ironclad's Senior Vice President of Claims. The reservation of rights letter identifies several bases on which Ironclad may seek to limit or deny coverage, including, as relevant here, the assertion that the $15,000,000 named-windstorm sub-limit remains in effect under the current policy and caps business-interruption coverage for Hurricane Callista losses. The reservation of rights letter does not identify any specific endorsement in the current policy that imposes the sub-limit; rather, it references Ironclad's "underwriting intent" and an internal underwriting note.
VHG submitted its sworn statement in proof of loss, claiming $60,000,000 in business-interruption losses, on November 15, 2022. That proof of loss is currently under review by Ironclad and Arbor Claims Services.
This memorandum is prepared to evaluate the sub-limit issue in advance of our response to Ironclad's reservation of rights letter and our forthcoming demand letter, both of which are on a timetable to be sent no later than October 25, 2022.
III. The Named Windstorm Sub-Limit in the Prior-Year Policy
A. The 2021–2022 Policy Year
During the prior policy year (July 1, 2021 through July 1, 2022), the Ironclad primary policy contained an endorsement — specifically, Endorsement No. 7, titled "Named Windstorm Sub-Limit Endorsement" — that imposed a $15,000,000 aggregate sub-limit on all business-interruption and extra-expense losses arising from a "named windstorm" as defined in the endorsement. The endorsement defined "named windstorm" broadly as any storm or weather disturbance that has been designated as a tropical storm, hurricane, or typhoon by the National Hurricane Center of the National Oceanic and Atmospheric Administration, or any equivalent governmental or meteorological authority. This definition would unquestionably encompass Hurricane Callista, which was formally named by the National Hurricane Center on September 12, 2022.
The sub-limit operated on a per-occurrence basis and had the effect of reducing the otherwise applicable $25,000,000 business-interruption limit to $15,000,000 for any occurrence arising from a named windstorm. In practical terms, for VHG — a company whose properties are overwhelmingly located in hurricane-prone coastal Florida — the sub-limit imposed a meaningful restriction on the single most important category of catastrophe risk to which the Company is exposed.
This endorsement was first introduced in the 2020–2021 policy year at Ironclad's insistence, during a period of significant hardening in the commercial property-insurance market. At the time of the 2020 renewal, the Florida catastrophe reinsurance market was under considerable stress, and primary carriers including Ironclad were imposing sub-limits, increased deductibles, and coverage restrictions on named-windstorm exposure as a condition of providing coverage. VHG accepted the sub-limit in the 2020–2021 year and again at the 2021–2022 renewal because market alternatives were limited and VHG's priority was maintaining continuity of its placement with Ironclad, a carrier with which it had a longstanding relationship.
The annual premium charged by Ironclad for the primary layer during the 2021–2022 policy year was $870,000. As detailed below, this figure is significant because the premium increase at the 2022–2023 renewal — to $980,000, an increase of $110,000 — reflects the additional consideration paid by VHG to secure the deletion of the sub-limit endorsement.
B. VHG's Request for Deletion at the 2022 Renewal
As the July 2022 renewal approached, VHG's risk management team — led by Sandra Pellegrini, Vice President of Risk Management — identified the removal of the named-windstorm sub-limit as the top priority for the renewal negotiations. Pellegrini instructed Franklin Orde at Tidewater Risk Advisors to negotiate the deletion of the sub-limit endorsement from the Ironclad primary policy as a condition of VHG's renewal.
The rationale for seeking deletion was straightforward and commercially compelling: given VHG's concentration of high-value assets along the Florida Keys and the Florida Gulf Coast, named-windstorm exposure represents the predominant and most significant catastrophe risk faced by the Company. A $15,000,000 sub-limit on business-interruption coverage for named-windstorm events left VHG with a $10,000,000 gap between the sub-limit and the full primary layer limit — a gap that, as the present claim illustrates, could have a material impact on the Company's ability to recover from a major hurricane event. Pellegrini communicated to Orde that VHG was prepared to accept a meaningful premium increase to secure the removal of the sub-limit, and she authorized Orde to negotiate an increase within an acceptable range. The specific premium range discussed internally at VHG, and communicated by Pellegrini to Orde, was in the range of $80,000 to $120,000 in additional premium, a figure that VHG's board and risk committee considered reasonable given the magnitude of the coverage enhancement.
IV. The July 2022 Renewal Negotiations — Documentary Evidence
The documentary evidence bearing on the sub-limit deletion issue consists of four categories of materials: (1) email correspondence between Franklin Orde (Tidewater) and Ironclad's underwriting department; (2) the July 2022 binder; (3) the issued policy and endorsement schedule; and (4) premium records. Each is discussed below.
A. Tidewater Correspondence with Ironclad Underwriting
The email correspondence between Franklin Orde and Ironclad's underwriting department during the May–June 2022 renewal negotiations establishes a clear, unambiguous agreement to delete the named-windstorm sub-limit in exchange for an additional premium. The key communications are as follows:
Orde Email to Ironclad Underwriting (May 15, 2022). On May 15, 2022, Franklin Orde transmitted an email to Ironclad's underwriting department initiating the renewal discussion for VHG's primary property program. Among the renewal terms requested by VHG, Orde specifically and prominently identified the deletion of the named-windstorm sub-limit endorsement (Endorsement No. 7) for the upcoming July 1, 2022 renewal. Orde's email stated that VHG recognized that the deletion would require additional premium, and that VHG was willing to accept a premium increase "in the range of $80,000 to $120,000" to secure the removal of the sub-limit. Orde emphasized the commercial importance of the deletion to VHG, noting the Company's Florida coastal concentration and the centrality of named-windstorm coverage to VHG's risk-management program.
Ironclad Underwriting Response (May 31, 2022). On May 31, 2022, Ironclad's underwriter — the same individual who had handled the VHG account for the prior two renewal cycles — responded to Orde's request. The underwriter indicated a willingness to "consider removal of the named windstorm sub-limit" subject to two conditions: (1) a minimum premium increase of $100,000, and (2) VHG's agreement on certain other renewal terms, specifically including updated property valuations for all scheduled locations and confirmation of the existing $500,000 per-occurrence deductible. The underwriter's response did not raise any objection to the concept of removing the sub-limit; to the contrary, the email indicated that Ironclad was open to the request provided the additional premium was adequate.
Orde Follow-Up Email (June 8, 2022). On June 8, 2022, Orde transmitted a follow-up email to Ironclad's underwriter confirming VHG's acceptance of the terms set forth in the May 31 response. Orde's email stated, in relevant part: "VHG agrees to the additional $100K premium to delete the named windstorm sub-limit endorsement. Please confirm this will be reflected in the renewal binder." Orde further confirmed that VHG would provide updated property valuations and agreed to maintain the $500,000 deductible. The email is unambiguous in its confirmation of the premium-for-deletion exchange.
Ironclad Underwriting Confirmation (June 14, 2022). On June 14, 2022, Ironclad's underwriter responded with a clear confirmation of the agreement. The email stated: "Confirmed. The named windstorm sub-limit endorsement will not be included in the renewal policy effective July 1, 2022. Final binder to follow." This email constitutes a definitive confirmation from Ironclad's authorized underwriting representative that the sub-limit endorsement would be excluded from the renewal policy. The underwriter who sent this confirmation is the same individual who handled the VHG account in the prior two renewal cycles and who was responsible for the placement of the sub-limit endorsement in the 2020–2021 policy year. There is no ambiguity in this confirmation.
It is also significant that the $100,000 premium increase negotiated for the sub-limit deletion is consistent with the actual premium figures reflected in the policies. The prior-year (2021–2022) annual premium for the Ironclad primary layer was $870,000. The 2022–2023 annual premium is $980,000 — an increase of $110,000. Of that $110,000 increase, $100,000 was allocated specifically to the sub-limit deletion, with the remaining $10,000 attributable to general rate adjustments and the updated property valuations agreed upon during the renewal negotiations. The premium records thus independently corroborate the email correspondence.
B. The July 2022 Binder
Tidewater issued a formal binder confirmation on June 28, 2022, effective July 1, 2022, binding coverage under the Ironclad primary policy for the 2022–2023 policy year. The binder summary is consistent with the agreement reflected in the renewal correspondence and provides additional documentary support for VHG's position.
Specifically, the binder summary lists the primary layer limit as "$25,000,000 per occurrence — Business Interruption and Extra Expense," with no reference whatsoever to a named-windstorm sub-limit or any other sub-limitation on the business-interruption coverage. The binder lists the annual premium as $980,000 and references an "Endorsement Schedule — to follow," indicating that the formal endorsement schedule would be finalized and issued with the formal policy.
Critically, the binder does not list Endorsement No. 7 (the named-windstorm sub-limit endorsement) among the scheduled endorsements for the renewal term. This is a material departure from the prior-year binder, which had expressly listed the named-windstorm sub-limit endorsement as one of the endorsements applicable to the policy. The omission of the sub-limit endorsement from the 2022–2023 binder is entirely consistent with — and further confirms — the agreement reached in the May–June 2022 correspondence to delete the endorsement.
The binder is signed by Franklin Orde on behalf of Tidewater Risk Advisors and bears Ironclad's binder reference number, confirming that it was issued with Ironclad's authorization.
C. The Issued Policy — Endorsement Analysis
Ironclad issued the formal policy (Policy No. IIC-PRP-2022-07541) on or about August 15, 2022, approximately six weeks after the effective date of the renewal. The issued policy is the definitive contractual document between VHG and Ironclad and is the primary point of reference for the coverage analysis.
The policy declarations page lists a business-interruption limit of $25,000,000 per occurrence, with no sub-limit notation, no asterisk or cross-reference to any sub-limiting endorsement, and no other indication that the stated $25,000,000 limit is subject to reduction for named-windstorm events. On its face, the declarations page is clear and unambiguous: the per-occurrence limit for business interruption is $25,000,000.
The endorsement schedule attached to the issued policy lists twelve endorsements, numbered Endorsements 1 through 12. We have reviewed each of the twelve endorsements in detail. None of the twelve endorsements bears the title "Named Windstorm Sub-Limit Endorsement," and none of the twelve endorsements imposes a $15,000,000 sub-limit (or any sub-limit) on business-interruption or extra-expense coverage for named-windstorm events. The named-windstorm sub-limit endorsement that appeared in the prior-year policy as Endorsement No. 7 simply does not exist in the 2022–2023 policy.
There is one point of potential confusion — though we do not believe it creates a genuine ambiguity — related to the numbering of the endorsements. In the 2022–2023 policy, Endorsement No. 7 is titled "Florida Hurricane Deductible Endorsement," and it addresses the application of the $500,000 per-occurrence deductible to hurricane losses. This is an entirely different endorsement from the prior-year Endorsement No. 7, which was the named-windstorm sub-limit endorsement. The reuse of the Endorsement No. 7 designation for a different endorsement is unremarkable — endorsement numbers are sequential identifiers that are reassigned each policy year — but it confirms that the prior-year sub-limit endorsement was not carried forward. A new Endorsement No. 7 was created for the 2022–2023 policy, and it has nothing to do with the named-windstorm sub-limit.
We note one provision in the issued policy that Ironclad could potentially seek to exploit, though we believe any such argument would be meritless. Section IV.C.3 of the policy's "Special Conditions" section contains a general provision stating: "Sub-limits of liability, if any, as set forth in the endorsements attached hereto shall apply." This is a standard boilerplate provision that operates as a cross-reference to endorsements that impose sub-limits. Read in context, the provision simply means that if there are endorsements in the policy that set forth sub-limits, those sub-limits apply. Because no endorsement in the 2022–2023 policy imposes a named-windstorm sub-limit, the provision has no operative effect with respect to named-windstorm business-interruption coverage. Ironclad may nonetheless argue that this provision creates an ambiguity by suggesting the existence of sub-limits not otherwise reflected in the endorsement schedule. As discussed in Section V below, such an argument fails under Florida law.
Additionally, we are aware that Ironclad's reservation of rights letter references an internal underwriting note that allegedly states the named-windstorm sub-limit was "intended to be maintained" despite the premium adjustment. We have not yet obtained this internal note from Ironclad, and Ironclad has not produced it or described its contents beyond the bare reference in the reservation of rights letter. As discussed in Section VII, obtaining this document is a priority. Even if such a note exists, however, it would constitute unilateral internal documentation that was never communicated to VHG or its broker, was contradicted by the underwriter's own written confirmation of the deletion, and cannot override the terms of the issued policy.
V. Legal Analysis
A. Florida Law on Policy Interpretation
Under Florida law, insurance policies are contracts and are subject to the general rules of contract interpretation. The Florida Supreme Court has consistently held that where the language of an insurance policy is clear and unambiguous, the court will enforce the policy according to its plain terms, without resort to rules of construction or extrinsic evidence. See Swire Pac. Holdings, Inc. v. Glenrock Assurance Ins. Co., 845 So. 2d 161, 165 (Fla. 2003); Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000). The policy must be read as a whole, giving effect to every provision and construing each provision in harmony with the others. Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938, 942 (Fla. 1979).
Where the policy language is susceptible to more than one reasonable interpretation — that is, where a genuine ambiguity exists — the ambiguity is construed against the insurer and in favor of coverage under the well-established doctrine of contra proferentem. This doctrine is applied with particular force in Florida, where the courts have recognized that insurance policies are contracts of adhesion drafted by the insurer, and that the insured typically has little or no ability to negotiate or modify the policy language. See Deni Assocs. of Fla., Inc. v. State Farm Fire & Cas. Ins. Co., 711 So. 2d 1135, 1139 (Fla. 1998); Berkshire Life Ins. Co. v. Adelberg, 698 So. 2d 828, 830 (Fla. 1997).
Of particular relevance to the present dispute, the Florida Supreme Court has held that where an insurer issues a policy that omits a limitation, exclusion, or restrictive endorsement, the insured is entitled to rely on the policy as issued. The insurer cannot unilaterally reinsert the omitted provision or claim that the policy should be read as though the omitted provision were included. See State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1076 (Fla. 1998). An insurer that issues a policy without a particular limitation bears the consequences of that omission, regardless of whether the omission was intentional or inadvertent.
In the present case, the issued policy (IIC-PRP-2022-07541) does not contain the named-windstorm sub-limit endorsement. The declarations page states a $25,000,000 per-occurrence business-interruption limit without sub-limitation. No endorsement in the policy imposes a named-windstorm sub-limit. Under the foregoing principles, VHG is entitled to enforce the policy as issued — with a full $25,000,000 business-interruption limit and no named-windstorm sub-limit.
B. The Binder as Evidence of Intent
Under Florida law, a binder is a temporary contract of insurance that provides coverage pending the issuance of a formal policy. Florida Statutes § 627.413 governs the issuance and effect of binders in the State of Florida. A binder reflects the terms agreed upon by the parties at the time coverage is bound and is enforceable as a contract of insurance in its own right until superseded by the formal policy.
The binder issued by Tidewater on June 28, 2022, effective July 1, 2022, does not include the named-windstorm sub-limit and lists the full $25,000,000 business-interruption limit per occurrence. The binder's endorsement schedule does not reference the sub-limit endorsement. The binder is therefore consistent with the renewal correspondence and confirms that the parties' agreement, as of the inception of the 2022–2023 policy period, was for coverage without the named-windstorm sub-limit.
If, contrary to our analysis, the issued policy were deemed to be ambiguous with respect to the sub-limit (which we do not concede), the binder and the pre-issuance renewal negotiations would be admissible as extrinsic evidence to resolve the ambiguity. Florida courts have consistently recognized that where a policy is ambiguous, the court may consider the circumstances surrounding the formation of the contract, including pre-policy correspondence, binders, and communications between the broker and the insurer, to determine the parties' intent. See Nat'l Union Fire Ins. Co. of Pittsburgh v. Wallach, 945 So. 2d 1173, 1179 (Fla. 2006); Seaboard Lumber Co. v. U.S. Fire Ins. Co., 470 So. 2d 25, 27 (Fla. 1st DCA 1985).
Broker correspondence is specifically admissible as evidence of the parties' intent in construing insurance policy terms under Florida law. The broker acts as the intermediary between the insured and the insurer, and the communications exchanged during the placement or renewal process are probative evidence of what the parties agreed upon. Here, the Orde correspondence — including the explicit confirmation from Ironclad's underwriter that the sub-limit endorsement would "not be included in the renewal policy" — would be highly probative extrinsic evidence if the policy were found to be ambiguous.
C. The "Four Corners" Argument
Ironclad may argue that the policy must be construed solely within its "four corners" and that extrinsic evidence of the renewal negotiations — including the Orde correspondence, the binder, and the premium allocation — is inadmissible. This argument would be based on the parol evidence rule, which generally prohibits the introduction of prior or contemporaneous agreements to contradict the terms of an integrated written contract.
This argument fails for three independent reasons.
First, the issued policy on its face does not contain the sub-limit endorsement. There is nothing within the "four corners" of the policy that imposes a $15,000,000 named-windstorm sub-limit on business-interruption coverage. To the extent Ironclad is asking the court to read a limitation into the policy that does not exist in the policy's text, it is Ironclad — not VHG — that is seeking to go beyond the four corners of the document. The four-corners rule works in VHG's favor, not against it: the policy, read on its own terms, provides a $25,000,000 BI limit with no named-windstorm sub-limit.
Second, even if the general cross-reference in Section IV.C.3 of the Special Conditions ("Sub-limits of liability, if any, as set forth in the endorsements attached hereto shall apply") were deemed to create an ambiguity — a characterization we would resist — the parol evidence rule does not bar the admission of extrinsic evidence to resolve an ambiguity. It is black-letter law in Florida, as in virtually every jurisdiction, that where a contract is ambiguous, extrinsic evidence is admissible to determine the parties' intent. See Friedman v. Virginia Metal Prods. Corp., 56 So. 2d 515, 517 (Fla. 1952); Restatement (Second) of Contracts § 214(c).
Third, Florida courts regularly consider binders, broker correspondence, and other extrinsic evidence in coverage disputes, including in cases where the insurer has asserted the four-corners rule. The Florida District Courts of Appeal have consistently held that the parol evidence rule does not preclude consideration of evidence bearing on the formation and scope of the insurance contract where the policy is ambiguous or where the parties' intent is in dispute. See, e.g., Guarantee Ins. Co. v. Saltsman, 240 So. 2d 484, 487 (Fla. 3d DCA 1970).
D. The Premium Increase Corroborates Deletion
The premium increase from the 2021–2022 policy year ($870,000) to the 2022–2023 policy year ($980,000) provides strong, objective corroboration of VHG's position. The total increase of $110,000 is directly traceable to the renewal negotiations: $100,000 of the increase was negotiated specifically as the additional consideration for deleting the named-windstorm sub-limit endorsement, and the remaining $10,000 was attributable to general rate adjustments and updated property valuations.
The premium records are not subject to the parol evidence rule because they are part of the policy itself (the premium is stated on the declarations page) and are admissible to confirm the scope of coverage purchased. An insurer that accepts increased premium in exchange for a specific coverage enhancement is bound by the enhanced coverage. The insurer cannot retain the additional premium and simultaneously deny the coverage for which the premium was paid. See U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 883 (Fla. 2007) (stating that coverage terms must be interpreted in light of the "total coverage purchased" and the premium paid).
Moreover, the premium increase is objective, verifiable evidence that is not dependent on the credibility of any particular witness. Even if Ironclad were to dispute the characterization of the increase as "allocated" to the sub-limit deletion, the fact remains that VHG paid $110,000 more in premium for the 2022–2023 year than the prior year, and the only significant coverage change negotiated during the renewal was the deletion of the sub-limit. The inference is compelling and, we submit, dispositive.
E. Estoppel and Waiver Considerations
Even if, arguendo, a technical argument could be made that the sub-limit endorsement was inadvertently omitted from the issued policy rather than intentionally deleted — an argument that is contradicted by the documentary record — Ironclad may be estopped from asserting the sub-limit under the doctrines of equitable estoppel and waiver.
Under Florida law, equitable estoppel requires a showing that (1) the party to be estopped made a representation or engaged in conduct that was material, (2) the other party relied on the representation or conduct, and (3) the relying party would be prejudiced if the first party were permitted to repudiate its representation or conduct. See State v. Harris, 356 So. 2d 315, 317 (Fla. 1978). All three elements are satisfied here.
First, Ironclad's underwriter expressly confirmed in writing on June 14, 2022, that the named-windstorm sub-limit endorsement would "not be included in the renewal policy." The binder issued two weeks later omitted the sub-limit, and the formal policy issued on August 15, 2022, likewise omitted the sub-limit endorsement. These representations and documents — spanning more than two months from the underwriting confirmation through policy issuance — constitute material representations on which VHG was entitled to rely.
Second, VHG relied on the representations of its broker (Orde's confirmation of the deletion), the binder, and the issued policy — all of which omitted the sub-limit — in structuring its risk-management program for the 2022–2023 policy year. Specifically, VHG relied on the deletion of the sub-limit in evaluating whether it needed to purchase additional excess coverage, alternative windstorm protection, or a standalone named-windstorm business-interruption policy to fill the gap between $15,000,000 and $25,000,000. Had VHG known or believed that the sub-limit remained in effect, it would have explored those alternatives. By the time Ironclad asserted the sub-limit in its October 12, 2022 reservation of rights — more than three months after policy inception and after Hurricane Callista had already made landfall — VHG had lost the ability to procure alternative coverage for the gap.
Third, VHG would suffer material prejudice if Ironclad were permitted to assert the sub-limit. The difference between a $25,000,000 limit and a $15,000,000 limit for the primary layer is $10,000,000 in coverage, and the ripple effects through the excess layers could increase the total loss of coverage to an even greater amount.
With respect to waiver, Florida law recognizes that an insurer may waive a policy provision by conduct that is inconsistent with the assertion of that provision. Ironclad had the opportunity to review the binder, review the formal policy at the time of issuance (August 15, 2022), and raise any concerns about the omission of the sub-limit endorsement. Ironclad did not do so. It raised no issue regarding the omission of the sub-limit until the reservation of rights letter of October 12, 2022 — nearly three months after policy inception and only after a covered loss had occurred. This delay supports a finding of waiver, particularly in light of the prejudice to VHG described above.
VI. Impact on the Insurance Tower and Excess Layers
The sub-limit dispute in the Ironclad primary layer has significant implications for the entire insurance tower. The analysis differs depending on whether the sub-limit is found to apply.
A. If the Sub-Limit Does Not Apply (Our Position)
Under VHG's position — which is that the named-windstorm sub-limit was deleted and the full $25,000,000 primary layer limit applies — the tower responds as follows:
Ironclad's primary layer provides the full $25,000,000 business-interruption limit per occurrence. VHG's total claimed business-interruption loss of $60,000,000 exceeds the primary limit, and accordingly the primary layer is fully exhausted by the Hurricane Callista loss.
With the Ironclad primary layer exhausted at $25,000,000, Pinnacle Surplus Lines' first excess layer ($15,000,000 in excess of $25,000,000) is fully implicated. Because the Pinnacle policy is issued on a follow-form basis with the Ironclad primary, and because the Ironclad primary (as properly issued) does not contain a named-windstorm sub-limit, no independent sub-limit applies to the Pinnacle layer. The Pinnacle layer is fully penetrated by the loss.
Montclair Assurance's second excess layer ($10,000,000 in excess of $40,000,000) attaches once the combined Ironclad and Pinnacle layers are exhausted, i.e., at $40,000,000. VHG's $60,000,000 claim exceeds this attachment point, and the Montclair layer is fully penetrated.
Sovereign Re's third excess layer ($10,000,000 in excess of $50,000,000) attaches once the combined underlying layers are exhausted at $50,000,000. VHG's $60,000,000 claim exceeds this attachment point, and the Sovereign Re layer is fully penetrated.
Under this scenario, VHG recovers up to the full $60,000,000 tower limit, less the $500,000 deductible, for a net recovery of $59,500,000 — representing the full measure of VHG's claimed business-interruption loss.
B. If the Sub-Limit Applies (Ironclad's Position)
If, contrary to our analysis, the $15,000,000 named-windstorm sub-limit were found to apply, the consequences for VHG's recovery would be severe and would reverberate through the entire insurance tower.
Under this scenario, Ironclad's exposure for named-windstorm business-interruption losses would be capped at $15,000,000, rather than the full $25,000,000 primary layer limit — a reduction of $10,000,000 at the primary level alone.
The impact on the excess layers is more complex and requires careful analysis of the follow-form and attachment provisions in each excess policy. Pinnacle Surplus Lines' first excess policy follows form with the Ironclad primary. If the sub-limit is deemed to be a term of the Ironclad primary policy, Pinnacle may argue that its layer does not attach because the primary layer is not exhausted at its stated $25,000,000 limit. Rather, Pinnacle might contend, the effective primary cap for named-windstorm business-interruption losses is $15,000,000, and the $10,000,000 difference between the sub-limited amount ($15,000,000) and the stated primary limit ($25,000,000) represents uninsured or uninsurable risk that VHG must bear.
However, the excess layers attach based on the stated primary limit ($25,000,000) as set forth in the schedule of underlying insurance, not based on a sub-limited amount. Preliminary review of the Pinnacle follow-form clause suggests that it references "underlying insurance as described in the Schedule of Underlying Insurance," which lists the Ironclad primary layer at $25,000,000. If Pinnacle's attachment point is defined by the scheduled underlying limit ($25,000,000), then the Pinnacle layer should still attach once $25,000,000 in losses is incurred — but the question becomes whether the $10,000,000 gap between the sub-limited primary recovery ($15,000,000) and the Pinnacle attachment point ($25,000,000) is borne by VHG as a self-insured retention, or whether the excess layers "drop down" to fill the gap. This analysis is policy-specific and depends on the precise language of the Pinnacle excess policy's attachment and follow-form provisions.
Montclair Assurance and Sovereign Re have each reserved their rights but have not issued formal coverage denials. Both excess carriers have indicated, through their respective claims contacts, that they are monitoring the sub-limit dispute in the Ironclad primary layer and that their layers may not be reached if the sub-limit applies. If the sub-limit reduced the effective primary recovery to $15,000,000, the threshold question is whether the excess layers still attach at their scheduled attachment points (requiring $25,000,000, $40,000,000, and $50,000,000 in underlying loss, respectively) or whether the attachment points shift downward to reflect the sub-limited primary recovery. If the attachment points remain fixed at the scheduled amounts, VHG could face a $10,000,000 gap between the sub-limited primary cap and the first excess attachment point — a gap for which no coverage would be available.
In the worst case, the sub-limit could reduce VHG's total recovery across the four-layer tower by $10,000,000 or more, depending on the ultimate positions taken by the three excess carriers and the resolution of the follow-form and attachment issues. The precise quantum of the shortfall will depend on the detailed follow-form analysis described in Section VII.C below.
VII. Outstanding Issues and Recommended Next Steps
A. Obtain Ironclad's Internal Underwriting Notes
Ironclad's reservation of rights letter references an internal underwriting note that allegedly states the named-windstorm sub-limit was "intended to be maintained" in the 2022–2023 policy year despite the premium adjustment. This internal note — if it exists — is the primary documentary basis cited by Ironclad for its assertion of the sub-limit. We have not yet obtained the note, and Ironclad has not produced it or described its contents beyond the single-sentence reference in the reservation of rights letter.
Obtaining this document is a priority. We need to evaluate whether the note is contemporaneous with the renewal negotiations or was created after the fact; whether it reflects the views of the underwriter who confirmed the deletion to Orde (and if not, whose views it reflects); and whether it is consistent or inconsistent with the June 14, 2022 underwriting confirmation email. If the note was created by a different individual, or at a different time, or reflects an internal miscommunication within Ironclad's underwriting department, its probative value would be significantly diminished.
We recommend that our forthcoming demand letter to Ironclad include a specific request for the complete underwriting file for the 2022 renewal, including all internal memoranda, notes, emails, and other communications regarding the named-windstorm sub-limit, the premium calculation for the 2022–2023 policy year, and the decision to issue the policy without the sub-limit endorsement. If Ironclad declines to produce the underwriting file voluntarily, we should be prepared to obtain it through formal discovery in the event litigation is commenced.
B. Confirm Franklin Orde's Willingness to Provide Testimony
Franklin Orde's testimony will be critical to establishing the course of the renewal negotiations and the agreement between VHG (through Tidewater) and Ironclad to delete the named-windstorm sub-limit endorsement. Orde is the individual who communicated VHG's request for deletion, negotiated the premium increase with Ironclad's underwriter, and received the underwriter's written confirmation that the sub-limit endorsement would not be included in the renewal policy. He is also the individual who issued the binder omitting the sub-limit.
We recommend contacting Orde at Tidewater Risk Advisors at the earliest opportunity to confirm his recollection of the renewal negotiations, his understanding of the agreement reached with Ironclad, and his willingness to support VHG's position. Orde is a potential witness regarding policy procurement and the representations made by Ironclad's underwriter during the renewal process. His testimony, if consistent with the documentary record (as we expect it would be), would be powerful evidence in support of VHG's claim.
We note, however, a potential complication. As VHG's broker of record, Orde and Tidewater may have independent exposure if the sub-limit was not in fact deleted and Orde's representations to VHG — that the deletion had been confirmed — were inaccurate. If that scenario were to materialize, VHG could have a professional-liability claim against Tidewater for failing to ensure that the sub-limit was actually removed from the policy. This creates a potential alignment of interests between VHG and Tidewater (both have an interest in establishing that the sub-limit was deleted) but also a potential conflict (if the sub-limit is found to apply, Tidewater's E&O coverage may become relevant, and Orde's testimony may be influenced by his own liability exposure). This dynamic should be monitored as the dispute progresses, and we should be sensitive to the possibility that Tidewater may retain its own counsel if the matter escalates.
C. Review Excess Layer Follow-Form Language
As discussed in Section VI, the sub-limit dispute in the primary layer has significant implications for the attachment and response of the three excess layers. A detailed review of the follow-form clauses, attachment provisions, and definitions of "underlying insurance" in the Pinnacle (PSL-XS1-2022-3390), Montclair (MAC-XS2-2022-09817), and Sovereign Re (SRL-XS3-2022-5102) policies is needed to fully assess the tower-wide impact of the sub-limit dispute.
Andrew Fitzpatrick is conducting this analysis separately. A preliminary Policy Comparison Chart was circulated on September 8, 2022, and the full analysis will be incorporated into a supplemental memorandum once the review is complete. The key questions for each excess policy are: (1) whether the excess policy follows form with the Ironclad primary with respect to sub-limits; (2) whether the excess policy's attachment point is defined by reference to the stated primary limit ($25M) or the amount actually paid under the primary; and (3) whether the excess policy contains a "drop-down" provision that would fill any gap created by a sub-limit in the primary layer.
D. Response to Reservation of Rights
We recommend that our response letter to Ironclad's October 12, 2022 reservation of rights — which we are targeting for transmittal no later than October 25, 2022 — address the sub-limit issue directly, forcefully, and with specific reference to the documentary record. The response should:
1. Demand that Ironclad confirm that the named-windstorm sub-limit was deleted at the 2022 renewal, consistent with the June 14, 2022 underwriting confirmation.
2. Reference the Orde correspondence (May 15, June 8, and June 14, 2022 emails) and the binder (June 28, 2022) as evidence of the agreement to delete the sub-limit.
3. Note that the issued policy does not contain a named-windstorm sub-limit endorsement and that the declarations page lists the full $25,000,000 business-interruption limit without sub-limitation.
4. Identify the $110,000 premium increase as additional consideration paid for the coverage enhancement.
5. Put Ironclad on notice that assertion of a non-existent sub-limit, in the face of clear documentary evidence of its deletion, may constitute bad faith under Florida law, exposing Ironclad to extracontractual liability, including statutory penalties and attorneys' fees under Fla. Stat. § 624.155.
6. Request production of the internal underwriting note referenced in the reservation of rights letter.
E. Preserve All Renewal-Related Documents
We must ensure that the litigation hold notice issued by VHG on September 19, 2022 — two days after Hurricane Callista's anticipated impact and one day after landfall — is sufficiently broad to cover all VHG documents related to the July 2022 renewal. Specifically, the hold should encompass:
• All communications between Sandra Pellegrini and Franklin Orde (or any other Tidewater representative) regarding the sub-limit deletion request, the renewal negotiations, and the terms of the renewed policy.
• All internal VHG board minutes, risk committee materials, presentations, and memoranda discussing the named-windstorm sub-limit, the decision to seek its deletion, and the approval of additional premium for the deletion.
• All communications between VHG personnel (including Pellegrini, Driscoll, Calder, and Ellsworth) regarding the insurance tower structure, the sub-limit, and VHG's risk-management strategy for the 2022–2023 policy year.
• All copies of the binder, the issued policy, prior-year policies, and related documents maintained by VHG's risk-management and legal departments.
We recommend confirming with Nathaniel Driscoll that the litigation hold has been distributed to all relevant custodians and that the preservation obligations are being observed.
VIII. Conclusion
The documentary evidence strongly supports VHG's position that the $15,000,000 named-windstorm sub-limit was deleted at the July 2022 renewal. The evidence forms a coherent and internally consistent chain of documentation that leaves no reasonable doubt as to the parties' agreement:
• The email correspondence between Franklin Orde (Tidewater) and Ironclad's underwriting department expressly confirms the agreement to remove the named-windstorm sub-limit endorsement in exchange for a $100,000 premium increase. Ironclad's own underwriter confirmed on June 14, 2022, that the sub-limit endorsement would "not be included in the renewal policy."
• The July 2022 binder, issued by Tidewater on June 28, 2022, omits the sub-limit and lists the full $25,000,000 business-interruption limit per occurrence.
• The issued policy (IIC-PRP-2022-07541), delivered on or about August 15, 2022, does not contain a named-windstorm sub-limit endorsement. The declarations page states a $25,000,000 per-occurrence business-interruption limit. None of the twelve endorsements in the policy imposes a named-windstorm sub-limit.
• The $110,000 premium increase from the prior year is consistent with — and independently corroborates — the agreement to delete the sub-limit in exchange for $100,000 in additional premium.
Under Florida law, the policy as issued governs, and VHG is entitled to enforce the policy according to its plain terms. Ambiguities, to the extent any exist, are construed against the insurer under the doctrine of contra proferentem. The extrinsic evidence of the renewal negotiations — including the broker correspondence, the binder, and the premium records — further confirms VHG's interpretation and would be admissible to resolve any ambiguity.
We recommend proceeding on the basis that the full $25,000,000 primary layer limit is available for Hurricane Callista business-interruption losses, and that Ironclad's assertion of the sub-limit in its reservation of rights is without merit. Our response to the reservation of rights should address the issue directly, demand that Ironclad withdraw its sub-limit reservation, and put Ironclad on notice of the potential consequences of a bad-faith denial of coverage.
We are available to discuss this analysis at your convenience and will continue to develop the record on the outstanding issues identified in Section VII.
This memorandum is prepared as attorney work product in anticipation of litigation and is protected by the attorney-client privilege and the work-product doctrine. It is intended solely for the use of the attorneys and client representatives identified herein and should not be disclosed to any third party without the prior written consent of this firm.

MEMORANDUM

MATTER NO.: 1021-00003

Record

Parties

Dates

Amounts