PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT NOT FOR DISTRIBUTION WITHOUT PRIOR AUTHORIZATION OF CALDERWOOD & HARKNESS LLP
MEMORANDUM
FROM: Tiffany Rosenthal, Lead Associate, Calderwood & Harkness LLP
TO: Dr. Helen Vasquez, CPA, CFF, Meridian Forensic Economics LLC
DATE: May 1, 2023
RE: Scope of Engagement and Data Requirements — Verimark Hospitality Group Inc. v. Ironclad Indemnity Corp. et al., Case No. 2022-CA-031547 (Eleventh Judicial Circuit of Florida, Miami-Dade County)
ENGAGEMENT REFERENCE: 1021-00003
CC: Elaine Forsythe, Esq. (Responsible Partner); Andrew Fitzpatrick, Esq. (Working Associate)
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I. INTRODUCTION AND PURPOSE OF MEMORANDUM
Dear Dr. Vasquez:
This memorandum is provided in connection with the engagement of Meridian Forensic Economics LLC ("Meridian") as forensic accounting and damages expert for Verimark Hospitality Group Inc. ("VHG" or the "Insured") in the above-captioned matter. As you know, by retention letter dated April 20, 2023, Calderwood & Harkness LLP ("C&H" or the "Firm") formally engaged Meridian to serve in that capacity on behalf of our client. This memorandum supplements and is to be read in conjunction with that retention letter. The purpose of this memorandum is twofold: first, to define with precision the specific scope of your engagement, and second, to identify the categories of data and documentation that C&H will be assembling and producing to you for your analysis.
Your primary task in this engagement is to quantify the business-interruption ("BI") losses sustained by VHG at three Florida resort properties as a result of Hurricane Callista, a Category 4 hurricane that made landfall in the Lower Florida Keys on September 18, 2022. VHG's total claimed BI loss across the three properties is approximately $60,000,000, and your expert opinion will be central to establishing the magnitude of those losses at trial and in any settlement negotiations.
Your expert report must be served on opposing counsel no later than September 15, 2023, consistent with the discovery schedule established by the Honorable Catherine Embry at the case management conference held today, May 1, 2023. To ensure adequate time for internal review and any necessary revisions, we require that a complete interim draft of your expert report be submitted to C&H no later than August 15, 2023. This timeline is discussed in greater detail in Section VII of this memorandum.
For purposes of clarity, the compensation terms set forth in the retention letter are hereby confirmed: Dr. Vasquez's professional rate is $625 per hour, and the rate for supporting analysts at Meridian is $375 per hour. All invoicing should be directed to my attention and will be processed in accordance with the billing procedures described in the retention letter.
The remainder of this memorandum is organized as follows: Section II provides a summary of the relevant background facts and the litigation posture; Section III sets forth the scope of your engagement on a property-by-property basis; Section IV describes the analytical framework and methodology we expect you to employ; Section V identifies the data and documents that C&H will be assembling for your review; Section VI addresses coordination with other retained experts; Section VII sets forth the timeline and deliverables schedule; Section VIII contains important confidentiality and privilege reminders; and Sections IX and X provide contact information and closing matters.
II. BACKGROUND SUMMARY
A. The Insured and Its Business
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 hotels and conference centers throughout the State of Florida. The company has established a strong market presence in the premium and luxury hospitality segments, with a portfolio of properties that cater to both leisure travelers and corporate clients.
The principal executives and officers relevant to this engagement are as follows:
• Marcus Ellsworth — Chief Executive Officer
• Diane Calder — Chief Financial Officer
• Nathaniel Driscoll — General Counsel
• Sandra Pellegrini — Vice President, Risk Management
For fiscal year 2021, VHG reported consolidated revenue of approximately $412 million and consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) of approximately $78 million. These figures will serve as an important reference point for the historical baseline analysis. The three VHG properties at issue in this litigation are described in detail in Section III below. Each property is a distinct profit center with its own financial reporting, and property-level financial data will be essential to your analysis.
B. Hurricane Callista
Hurricane Callista was named by the National Hurricane Center on September 12, 2022, as it organized and intensified over the warm waters of the central Caribbean Sea. The storm tracked northwest through the Straits of Florida, rapidly intensifying before making landfall as a Category 4 hurricane on September 18, 2022, at approximately 1:30 PM EDT in the Lower Florida Keys, with the center of the storm crossing near the Big Pine Key area. At landfall, Hurricane Callista carried maximum sustained winds of approximately 145 miles per hour.
The storm produced catastrophic storm surge, with recorded surge levels of approximately 8 to 14 feet in Monroe County and 6 to 10 feet in Lee County. Rainfall totals of 8 to 15 inches were recorded across South and Southwest Florida in the 48 hours surrounding landfall.
In anticipation of the storm's arrival, the Monroe County Emergency Management Division issued a mandatory evacuation order on September 16, 2022, and Lee County issued a mandatory evacuation order on September 17, 2022. All three VHG properties suspended operations and evacuated guests and non-essential personnel in compliance with these orders. Each of the three properties sustained catastrophic property damage and prolonged business interruption, the details of which are set forth in Section III.
C. Insurance Program Overview
At the time of Hurricane Callista, VHG maintained an all-risk property and business-interruption insurance program with a policy period of July 1, 2022 through July 1, 2023. The program was structured as a four-layer tower with total limits of $60 million above a $500,000 per-occurrence deductible, as follows:
The total annual premium paid by VHG for this insurance tower was $1,840,000, allocated as follows: Ironclad Indemnity Corporation — $980,000; Pinnacle Surplus Lines Inc. — $410,000; Montclair Assurance Company — $265,000; and Sovereign Re Ltd. — $185,000.
VHG's insurance program is a critical component of this litigation, and your analysis must be conducted with reference to the specific coverage terms, conditions, and endorsements contained in the policies. Complete copies of all four policies, including all endorsements and amendments, will be provided to you as part of the data production described in Section V.
D. Litigation Posture
VHG submitted its sworn statement in proof of loss on November 15, 2022, claiming total business-interruption losses of $60,000,000 across the three affected properties. The sworn statement was supported by detailed schedules prepared by VHG's internal accounting team and submitted in accordance with the notice and proof-of-loss requirements of the Ironclad primary policy.
Ironclad Indemnity Corporation issued a formal coverage denial on February 3, 2023. Pinnacle Surplus Lines Inc. followed with its own denial on February 10, 2023. The excess carriers, Montclair Assurance Company and Sovereign Re Ltd., have reserved their rights but have not issued independent denial letters, as the dispute centers on the primary and first excess layers.
VHG filed its Complaint on March 1, 2023, in the Eleventh Judicial Circuit of Florida, in and for Miami-Dade County, Case No. 2022-CA-031547, before the Honorable Catherine Embry. The Complaint asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief against all four insurers.
The key coverage defenses asserted or anticipated by the defendants are as follows:
(1) Named-Windstorm Sub-Limit. Ironclad contends that a $15 million named-windstorm sub-limit applies to BI losses resulting from Hurricane Callista. VHG's position is that this sub-limit was explicitly deleted at the July 2022 renewal of the policy, and VHG will present the renewal negotiation documentation and broker correspondence to support this contention. If the sub-limit is not enforceable, full tower limits of $60 million are available for BI losses.
(2) Period of Restoration Disputes. Ironclad argues that VHG unreasonably delayed restoration of its properties, thereby inflating the period of interruption and the resulting BI loss. Specifically, Ironclad contends that VHG could and should have restored operations at the Grand Key Resort significantly sooner than the 178-day closure that actually occurred. Your analysis must address this defense directly.
(3) Concurrent Causation / Flood Exclusion. With respect to the Grand Key Resort in particular, Ironclad asserts that a substantial portion of the property damage was caused by storm surge (i.e., flooding) rather than wind, and that the policy's flood exclusion applies to BI losses attributable to flood-caused damage under a concurrent causation analysis. This defense implicates the engineering causation apportionment that Jeffrey Caldwell, PE, is conducting, and your analysis will need to incorporate Mr. Caldwell's findings.
(4) Failure to Mitigate. Defendants contend that VHG failed to take reasonable steps to mitigate its BI losses, including by failing to implement temporary operations, redirect bookings to unaffected properties, or otherwise reduce the duration and extent of the business interruption.
Dr. Vasquez, your expert opinion must address and rebut each of these defenses insofar as they relate to the loss quantification. While the legal questions regarding policy interpretation and coverage are for C&H to address through legal briefing, your damages analysis must be structured in a manner that accounts for each of these contested issues and provides the court and the jury with a clear, defensible picture of VHG's actual BI losses.
III. SCOPE OF ENGAGEMENT — PROPERTY-BY-PROPERTY ANALYSIS
This section describes the scope of your engagement with respect to each of the three affected VHG properties. For each property, we set forth the relevant location and profile information, pre-loss operating metrics, the closure period, the estimated BI loss, and the specific analytical requirements unique to that property.
A. Verimark Grand Key Resort (Marathon, FL)
Location: Mile Marker 48, Marathon, Florida 33050
Property Profile: The Verimark Grand Key Resort is a 312-room luxury resort and marina located on the ocean side of the Overseas Highway in Marathon, in the Middle Florida Keys. The property features full-service dining, a spa and wellness center, water-sports activities, and a 75-slip deep-water marina. The Grand Key Resort is VHG's flagship Keys property and its highest-grossing resort on a per-room basis.
Pre-Loss Operating Metrics:
• Average Daily Rate (ADR): $389
• Occupancy Rate: 82%
• Ancillary Revenue Streams: Marina slip fees and related services, food and beverage (three on-site restaurants and two bars), full-service spa, water-sports activities (snorkeling, diving, fishing charters), and retail operations
Closure Period: The Grand Key Resort ceased operations on September 18, 2022, in conjunction with the mandatory evacuation. The property remained completely closed through March 15, 2023, a total of 178 days of complete closure. The property sustained the most severe damage of the three VHG properties due to its location in the Keys and its exposure to both extreme winds and significant storm surge.
Estimated BI Loss: $31,400,000
Specific Analytical Requirements:
(i) Wind vs. Storm Surge Apportionment. This property presents the most complex analytical challenge due to defendants' concurrent causation / flood exclusion defense. Ironclad asserts that a substantial portion of the property damage at Grand Key was caused by storm surge rather than wind, and that the flood exclusion bars recovery of BI losses attributable to flood-caused property damage. You must construct your analysis in a manner that differentiates wind-caused BI loss from storm-surge-caused BI loss. A separate causation apportionment analysis is being conducted by Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc., and Mr. Caldwell's engineering assessment will provide the underlying data on the physical causation split. Your task will be to translate Mr. Caldwell's engineering causation findings into an economic loss apportionment.
(ii) Marina Revenue. The marina at Grand Key is a significant revenue center. Marina revenue — including slip rental fees, fuel sales, launch services, and related ancillary charges — must be quantified separately from the hotel's room and food and beverage revenue. The marina's revenue profile differs seasonally from the hotel's, and you should analyze marina-specific historical data to develop an accurate "but for" projection.
(iii) Reasonableness of Closure Period. Ironclad has specifically challenged the 178-day closure period at Grand Key, arguing that VHG could have restored operations materially sooner. Your analysis should address whether the 178-day closure period was reasonable given the scope of structural damage, the availability of contractors in the Florida Keys following a Category 4 hurricane, supply-chain constraints for building materials, and the permitting requirements imposed by Monroe County. You should coordinate with Mr. Caldwell on this issue, as his engineering assessment addresses reasonable repair timelines.
(iv) "But For" Revenue Trajectory. You must model the revenue that Grand Key would have earned during the 178-day closure period, and for any post-reopening ramp-up period, had Hurricane Callista not occurred. This model should incorporate historical performance data, seasonal trends (the Keys experience peak season from approximately November through April), forward-looking booking data (reservations on the books as of September 16, 2022), and any other relevant market data.
B. Verimark Harborview Hotel & Conference Center (Fort Myers Beach, FL)
Location: 1400 Estero Boulevard, Fort Myers Beach, Florida 33931
Property Profile: The Verimark Harborview Hotel & Conference Center is a 224-room full-service hotel featuring a 40,000-square-foot conference and event facility. The property serves both leisure travelers and corporate/group clients, with its conference center being a significant revenue driver. The Harborview is located directly on the Gulf of Mexico on the south end of Estero Island.
Pre-Loss Operating Metrics:
• Average Daily Rate (ADR): $295
• Occupancy Rate: 74%
• Conference Center Revenue: To be quantified separately, including group room bookings, event space rental fees, audiovisual and production services, and catering revenue associated with conferences and events
Closure Period: The Harborview ceased operations on September 18, 2022, and remained completely closed through January 31, 2023, a total of 135 days of complete closure. The property sustained significant wind and water damage, particularly to its ground-level conference facilities and beachfront structures.
Estimated BI Loss: $18,700,000
Specific Analytical Requirements:
(i) Lost Conference and Event Revenue. The 40,000-square-foot conference center is a distinguishing feature of the Harborview and a major revenue driver, particularly during the fall and winter months when corporate groups and associations hold annual meetings and events in Southwest Florida. You must quantify the lost conference and event revenue separately, including revenue from contracts that were in place at the time of the hurricane and were subsequently cancelled or relocated to competing venues. This analysis should encompass not only direct event revenue (space rental, AV fees) but also the associated room-block revenue, food and beverage revenue, and other ancillary revenue tied to group bookings.
(ii) Group Booking Pipeline Analysis. C&H will provide you with Harborview's group booking pipeline data for Q4 2022 and Q1 2023 — that is, the confirmed and tentative group bookings that were on the books as of the date of the hurricane. This pipeline data is critical to establishing the revenue that was lost as a direct result of the closure. You should analyze each booking individually, where possible, to determine the revenue that would have been generated and the extent to which any bookings were rebooked at other VHG properties or at competitor venues.
(iii) Seasonal Revenue Patterns. Southwest Florida experiences its peak tourism season from approximately November through April, with the highest occupancy and ADR typically occurring in the January through March timeframe. The Harborview's 135-day closure period (September 18, 2022, through January 31, 2023) encompassed the beginning of the peak season, and the BI loss during this period is expected to be disproportionately weighted toward the latter portion of the closure. Your seasonal analysis should reflect this pattern, using historical monthly revenue data to develop an appropriately weighted "but for" projection.
C. Verimark Sunset Shores (St. Pete Beach, FL)
Location: 7200 Gulf Boulevard, St. Pete Beach, Florida 33706
Property Profile: The Verimark Sunset Shores is a 186-room boutique resort located on the Gulf of Mexico on St. Pete Beach in Pinellas County. The property targets the upscale leisure market and features on-site dining, a pool complex, and beach services. Although the smallest of the three affected properties, Sunset Shores commands a premium ADR and maintains strong occupancy.
Pre-Loss Operating Metrics:
• Average Daily Rate (ADR): $342
• Occupancy Rate: 79%
Closure Period: Sunset Shores presents a more complex closure pattern than the other two properties. The resort was fully closed from September 18 through November 30, 2022, a period of 73 days. The property then underwent a partial reopening on November 30, 2022, with limited room inventory, reduced amenities, and ongoing construction. The property operated at reduced capacity through approximately February 28, 2023, at which point it returned to substantially full operations.
Estimated BI Loss: $9,900,000
Specific Analytical Requirements:
(i) Partial-Capacity Modeling. The partial-closure period at Sunset Shores (November 30, 2022, through approximately February 28, 2023) requires a more nuanced analytical model than a simple full-closure calculation. You must develop a methodology that accounts for the reduced room inventory available during the partial-closure period, the diminished ADR that resulted from the ongoing construction and limited amenities, the reduced ancillary revenue (limited dining, pool access, and beach services), and the overall impact on guest experience and demand.
(ii) Ramp-Up Analysis. Even after the February 28, 2023, return to substantially full capacity, there may have been a period during which occupancy and ADR had not yet recovered to pre-loss levels due to lingering perceptions of construction activity, cancelled recurring bookings, or reduced marketing activity during the closure. If the data supports it, your model should include a post-reopening ramp-up period and quantify any lost revenue during that period.
(iii) Appropriate Partial-Closure Metrics. You should identify and apply the most appropriate metrics for measuring the partial-closure loss, including but not limited to: the actual number of rooms available versus the pre-loss inventory, the actual ADR achieved during the partial-closure period versus the projected "but for" ADR, the percentage of ancillary services that were operational, and the resulting impact on total revenue per available room (RevPAR).
D. Aggregate Loss Reconciliation
The total claimed BI loss across the three properties is calculated as follows:
Your expert report should present both a detailed property-by-property analysis and a consolidated summary that aggregates the losses across all three properties. The final aggregate figure must be reconcilable with VHG's sworn statement in proof of loss, which claimed total BI losses of $60,000,000 and was submitted to the insurers on November 15, 2022. To the extent your analysis yields a figure that differs from the sworn proof of loss, please discuss the variance with C&H before finalizing your report, so that we may address any reconciliation issues.
IV. ANALYTICAL FRAMEWORK AND METHODOLOGY REQUIREMENTS
This section sets forth the analytical framework and methodology that we expect you to employ in conducting your damages analysis. While we defer to your professional judgment regarding the specific techniques and procedures most appropriate for this engagement, the following guidance reflects both the requirements of the applicable insurance policy provisions and the anticipated areas of challenge from the defendants and their damages expert.
A. "But For" Revenue Analysis
The foundation of the BI loss analysis is a "but for" revenue model — that is, a projection of the revenue each property would have earned during the relevant interruption period had Hurricane Callista not occurred. This model must be constructed for each property individually and should incorporate the following elements:
Historical Baselines. You should use FY 2019, FY 2020, and FY 2021 as historical baseline periods for each property. FY 2021 should serve as the primary reference year, given that it represents the most recent full year of pre-loss operations unaffected by Hurricane Callista, and because VHG's FY 2021 consolidated revenue ($412 million) and EBITDA ($78 million) reflect the company's stabilized post-COVID operating performance. FY 2020 data should be used with appropriate adjustments to account for the impact of the COVID-19 pandemic on the hospitality industry, as 2020 was an anomalous year for hotel operations across Florida and nationally. FY 2019 provides a useful pre-pandemic comparison point. Where FY 2022 data is available for the months preceding the hurricane (January through mid-September 2022), that data should also be incorporated, as it reflects the most current operating trends.
Seasonality and Booking Trends. Florida's resort markets exhibit pronounced seasonality, with peak occupancy and ADR during the winter months (approximately November through April) and lower demand during the summer and early fall. Your model must account for this seasonal variation on a property-specific basis, using monthly or weekly historical data to develop seasonal indices or adjustment factors. Additionally, any discernible booking trends — such as year-over-year growth in ADR, increasing occupancy, or changes in revenue mix — should be incorporated into the projection.
Local Market Data and Comparable Property Performance. To the extent available, your "but for" model should be informed by local market data, including STR (Penmark Enterprises) or equivalent industry benchmarking reports for the competitive sets in each property's sub-market. If comparable properties in the same sub-markets that were not affected by Hurricane Callista (or that reopened on different timelines) experienced growth or decline during the relevant period, that data may be relevant to calibrating VHG's "but for" projections.
Forward-Looking Booking Data. A critical element of the "but for" analysis is the forward-looking booking data — that is, the reservations that were actually on the books for each property as of September 16, 2022 (the date of the Monroe County evacuation order and the last date on which VHG's reservation systems reflected pre-hurricane demand). This data covers bookings for Q4 2022 through Q2 2023 and provides direct evidence of the revenue that VHG would have earned absent the hurricane. This data will be produced to you from VHG's reservation systems.
B. Lost Revenue Categories
Your analysis must quantify lost revenue across all applicable revenue categories for each property. The relevant categories include, but are not limited to, the following:
(1) Room Revenue. Calculated as ADR multiplied by occupancy multiplied by available room nights for each property during the relevant interruption period. Room revenue is expected to constitute the largest single component of the BI loss at each property.
(2) Food & Beverage Revenue. All on-site dining and bar revenue, including restaurant revenue, room service, poolside and beach-bar revenue, and banquet/catering revenue not associated with the conference center (which is addressed separately for Harborview).
(3) Conference Center and Event Revenue (Harborview). Revenue derived from the Harborview's 40,000-square-foot conference facility, including space rental fees, audiovisual and production services, catering and banquet revenue associated with conference events, and incremental room revenue from group blocks tied to conference bookings.
(4) Marina Revenue (Grand Key Resort). Revenue derived from the Grand Key Resort's 75-slip marina, including slip rental fees, fuel sales, launch and docking services, boat storage, and related ancillary charges.
(5) Spa, Recreation, and Other Ancillary Revenue. Revenue from spa services, fitness center operations, water-sports activities (snorkeling, diving, fishing charters at Grand Key), resort retail operations, parking fees, resort fees, and any other ancillary revenue streams.
(6) Third-Party Commissions and Management Fees. If any of the three properties generated revenue from third-party management agreements, licensing arrangements, or commissions that were interrupted as a result of Hurricane Callista, those amounts should be included in the analysis.
C. Saved / Avoided Expenses
Under standard business-interruption insurance principles, and consistent with the terms of the Ironclad primary policy, the net BI loss is calculated by subtracting saved or avoided variable expenses from the gross lost revenue. Your analysis must address both continuing expenses and saved expenses with care, as this is an area where defense experts frequently challenge the insured's loss quantification.
Continuing Expenses During Closure Periods. You should identify and quantify the fixed costs and other expenses that VHG continued to incur during the closure periods despite the loss of revenue. These continuing expenses include, but are not limited to: debt service (mortgage and loan payments), insurance premiums (including the premiums for the policies at issue), real property taxes, essential maintenance and security staffing, management and corporate overhead allocations, and any contractual obligations that could not be suspended.
Saved Variable Expenses. You should identify and quantify the variable expenses that VHG avoided or reduced as a result of the closure. These saved expenses include, but are not limited to: labor costs for hourly and seasonal employees who were furloughed or laid off during the closure, food and beverage supply costs, guest amenity and supply costs, utility reductions (electricity, water, gas), laundry and housekeeping supply costs, and other variable operating expenses that fluctuate with occupancy and revenue.
Net BI Loss Calculation. The saved variable expenses should be netted against the gross lost revenue to arrive at the net BI loss for each property. That is:
Net BI Loss = Gross Lost Revenue − Saved Variable Expenses + Extra Expenses
You should be prepared to defend the saved-expense calculation vigorously, as we anticipate that the defendants and their expert, Dr. Warren Birk, will argue that VHG's saved expenses were understated — i.e., that VHG could have reduced more costs during the closure periods and that the net BI loss should therefore be lower than claimed. Your analysis should be supported by detailed expense data showing actual costs incurred during the closure periods versus pre-loss expense levels.
D. Extra Expenses
In addition to the net BI loss, VHG incurred extra expenses to minimize the period of interruption and reduce the overall loss. These extra expenses are covered under the policies as a separate coverage element and should be quantified separately in your analysis. Categories of extra expenses include:
• Costs of temporary facilities and operations (e.g., temporary office space for property management staff, temporary dining facilities for essential personnel)
• Expedited repair costs and premium charges for accelerated construction schedules
• Employee retention costs (bonuses and incentive payments made to key employees to prevent attrition during the closure)
• Relocation expenses (costs of relocating displaced guests to alternative accommodations during the initial period following the hurricane)
• Emergency restoration contractor mobilization and standby charges
• Temporary security, fencing, and debris-removal costs beyond those covered as property damage
E. Period of Restoration Analysis
The Ironclad primary policy defines the "period of restoration" as the period beginning at the time of loss and ending when the property "could have been restored to its pre-loss condition with reasonable speed and similar quality." This definition is critical to the loss quantification because it establishes the temporal boundary of the BI recovery — losses are recoverable only for the period of restoration, and if the insurer can establish that VHG unreasonably delayed restoration, the recoverable period may be shortened.
Dr. Vasquez, you should opine on whether the actual closure periods at each property — 178 days at Grand Key, 135 days at Harborview, and 73 days of full closure plus approximately 90 days of partial operation at Sunset Shores — are consistent with what would reasonably be expected given the scope of damage sustained at each property.
In forming your opinion on this issue, you should coordinate closely with Jeffrey Caldwell, PE, of Caldwell Engineering Associates Inc. (7900 NW 25th Street, Suite 210, Doral, Florida 33122). Mr. Caldwell has been retained to provide engineering assessments of the damage scope at each property and to opine on reasonable repair timelines. His analysis will provide the engineering foundation for your economic opinion regarding the reasonableness of the closure periods.
In addressing Ironclad's contention that VHG unreasonably delayed restoration, your analysis should consider the following factors:
• The availability of qualified contractors in the Florida Keys, Southwest Florida, and the Tampa Bay area in the months following a Category 4 hurricane, when demand for construction services vastly exceeded supply
• Supply-chain constraints for building materials (lumber, drywall, roofing materials, HVAC equipment, electrical components, fixtures, and furnishings), which were exacerbated by both the hurricane and ongoing national supply-chain disruptions
• Permitting timelines imposed by the Monroe County Building Department, the Lee County Department of Community Development, and the Pinellas County Building Services Division
• The scope and complexity of the damage at each property, including structural damage, water intrusion, mold remediation requirements, and the need for full replacement (rather than repair) of certain building systems
• Any force majeure events or other external factors that contributed to delays
F. Mitigation Analysis
To address Ironclad's "failure to mitigate" defense, your analysis should document and evaluate VHG's mitigation efforts during and after the closure periods. Specifically, you should examine and, where appropriate, incorporate the following mitigation activities into your analysis:
• Whether VHG attempted to establish temporary operations at any of the three properties, and if so, the revenue generated by those operations
• Whether VHG made efforts to redirect bookings from the affected properties to unaffected VHG properties or to partner hotels
• The timing and scope of VHG's engagement of emergency restoration contractors
• VHG's communications with local authorities regarding reopening timelines and regulatory requirements
• Any other steps taken by VHG to minimize the duration and financial impact of the business interruption
To the extent that VHG's mitigation efforts resulted in revenue or cost offsets that reduce the net BI loss, those credits should already be reflected in the loss calculation. Your report should clearly identify any mitigation credits and demonstrate that they have been properly accounted for.
V. DATA REQUIREMENTS AND DOCUMENT REQUESTS
This section identifies the categories of data and documentation that C&H will be assembling and producing to Meridian for your analysis. The data will be produced in tranches as it becomes available, with the first tranche expected during the week of May 19, 2023. Please review the categories below and advise us if there are additional categories of data that you will require.
A. Historical Financial Data (to be provided by VHG via C&H)
1. Audited financial statements for VHG's consolidated entity for FY 2019, FY 2020, FY 2021, and FY 2022 (year-to-date through September 2022, or full-year if the FY 2022 audit has been completed).
2. Monthly property-level profit and loss statements for each of the three properties (Grand Key Resort, Harborview Hotel & Conference Center, and Sunset Shores) for the 36 months preceding Hurricane Callista — that is, for the period from October 2019 through September 2022.
3. Monthly revenue breakdowns by category — including rooms, food and beverage, conference center (Harborview), marina (Grand Key), spa, and other ancillary revenue — for each property for the same 36-month period.
4. ADR and occupancy data, on a daily or weekly basis if available, for each property for the same 36-month period. If daily data is available from the properties' property management systems (e.g., Thackeray Solutions), daily data would be preferred.
5. Budget and forecast documents for FY 2022 and FY 2023 that were prepared prior to Hurricane Callista. These documents will provide evidence of VHG's own pre-loss expectations for each property's performance.
6. Capital expenditure records for each property for the preceding three fiscal years (FY 2019, FY 2020, FY 2021), including any planned capital improvements for FY 2022 and FY 2023.
B. Booking and Reservation Data
7. Reservation system data showing bookings on the books as of September 16, 2022 (the date of the Monroe County evacuation order and the last pre-evacuation date) for each property for the period from Q4 2022 through Q2 2023. This data should include individual and group reservations, with detail regarding confirmation status, anticipated revenue, length of stay, and rate.
8. Conference center booking pipeline and executed event contracts for the Harborview Hotel & Conference Center for Q4 2022 and Q1 2023, including signed contracts, proposals, letters of intent, and internal pipeline reports. This data is essential to quantifying the lost conference and event revenue at Harborview.
9. Cancellation and rebooking records from the post-hurricane period, showing which reservations and group bookings were cancelled, which were rebooked at other VHG properties or at competing venues, and which were simply lost.
10. Group sales pipeline reports from VHG's sales and marketing department, reflecting the status of group business development efforts for each property as of the date of the hurricane.
C. Expense Data
11. Detailed operating expense reports by category and by property for the 12 months preceding the loss (September 2021 through August 2022) and for the closure and partial-closure periods (September 2022 through the date of full reopening at each property). These reports will be essential for the saved-expenses and continuing-expenses analysis.
12. Payroll records showing staffing levels (headcount and payroll expense by department) at each property on a monthly basis for the pre-loss period, during the closure period, and post-reopening.
13. Invoices and records of extra expenses incurred to expedite restoration and reduce the interruption period, including invoices from emergency restoration contractors, temporary facility providers, and any other vendors engaged for purposes of mitigation.
14. Utility bills (electricity, water, gas, sewer, waste removal) for each property for both the pre-loss period and the closure period, to facilitate quantification of saved utility expenses.
15. Vendor contracts and supply agreements with force majeure or cancellation provisions, to the extent relevant to the expense analysis and the mitigation defense.
D. Insurance and Claims Data
16. Complete copies of all four policies in the insurance tower, specifically:
• Ironclad Indemnity Corporation, Policy No. IIC-PRP-2022-07541
• Pinnacle Surplus Lines Inc., Policy No. PSL-XS1-2022-3390
• Montclair Assurance Company, Policy No. MAC-XS2-2022-09817
• Sovereign Re Ltd., Policy No. SRL-XS3-2022-5102
Each policy must include all endorsements, amendments, schedules, and declarations pages. In particular, please ensure that the endorsement history related to the named-windstorm sub-limit is complete, including any endorsements added or deleted at the July 2022 renewal.
17. VHG's sworn statement in proof of loss ($60,000,000) submitted November 15, 2022, together with all supporting schedules, exhibits, and attachments.
18. Ironclad's reservation of rights letter dated October 12, 2022, and Ironclad's formal denial letter dated February 3, 2023, as well as Pinnacle's denial letter dated February 10, 2023, and any correspondence from Montclair Assurance Company and Sovereign Re Ltd.
19. Arbor Claims Services LLC — inspection reports, correspondence, and work papers of the independent adjuster, Denise Whitford, who was retained by Ironclad to investigate the claim.
E. Property and Restoration Data
20. Property damage assessments and repair cost estimates for each of the three properties, including assessments prepared by VHG's own consultants and any assessments prepared by or on behalf of the insurers.
21. Contractor proposals, invoices, and construction schedules for the restoration work at each property, showing the scope of work, timeline, and actual costs.
22. Permitting applications and approvals from local building authorities (Monroe County, Lee County, and Pinellas County), including any documentation of delays in the permitting process.
23. Correspondence with contractors regarding availability, scheduling delays, supply-chain issues, and any force majeure notices related to the post-hurricane construction environment.
24. Property reopening reports and post-reopening operating data for each property through at least June 2023, to enable analysis of the post-reopening ramp-up period and to provide the most current available data on each property's recovery trajectory.
F. Market and Comparable Data
25. STR (Penmark Enterprises) reports — or equivalent industry benchmarking reports — for the competitive sets for each property's sub-market: Marathon / Florida Keys (Grand Key Resort); Fort Myers Beach / Lee County (Harborview); and St. Pete Beach / Pinellas County (Sunset Shores). These reports should cover the 36 months preceding the hurricane and the post-hurricane period through the most recently available date.
26. Tourism and visitor data from local convention and visitors bureaus, including the Monroe County Tourist Development Council, the Lee County Visitor & Convention Bureau, and Visit St. Pete/Clearwater, for the pre-loss and post-loss periods.
27. Reports on the area-wide impact of Hurricane Callista on the Florida hospitality market, including competitor closure and reopening timelines, industry publications, and any market assessments prepared by industry groups such as the American Hotel & Lodging Association or the Florida Restaurant & Lodging Association.
VI. COORDINATION WITH OTHER EXPERTS
Your engagement will require coordination with other experts retained by C&H on behalf of VHG. The following information is provided to facilitate that coordination.
Jeffrey Caldwell, PE — Caldwell Engineering Associates Inc.
Mr. Caldwell's firm is located at 7900 NW 25th Street, Suite 210, Doral, Florida 33122. Mr. Caldwell has been retained to serve as VHG's engineering expert and will provide opinions on the following topics: (i) the physical causation of damage at each property (i.e., the apportionment between wind-caused damage and storm-surge/flood-caused damage); (ii) the scope and severity of structural and systems damage at each property; and (iii) reasonable restoration timelines given the scope of damage. Mr. Caldwell's draft report is expected by late August 2023.
Dr. Vasquez, you should coordinate directly with Mr. Caldwell — through C&H, as described in Section VIII — regarding the causation analysis and restoration-timeline issues. His engineering findings will form the factual predicate for your economic apportionment of BI losses between wind-caused and flood/surge-caused interruption, should the court rule that such apportionment is required. We note that Ironclad's concurrent causation / flood exclusion defense is one of the most hotly contested issues in this case, and it may require you to present your BI loss analysis in two formats: one assuming full coverage of all BI losses regardless of the physical cause of damage, and one presenting an apportioned analysis that segregates wind-caused BI losses from flood/surge-caused BI losses. We will provide further guidance on this issue as the legal arguments develop.
Dr. Warren Birk — Graystone Consulting Group LLC (Defense Expert)
The defendants have retained Dr. Warren Birk of Graystone Consulting Group LLC, based in Chicago, Illinois, as their damages expert. Dr. Birk is expected to challenge VHG's loss quantification on multiple fronts, including but not limited to the reasonableness of the closure periods, the adequacy of VHG's mitigation efforts, the calculation of saved expenses, and the methodology used to project "but for" revenue. Dr. Birk's expert report is anticipated to be served on or about September 15, 2023, the same date as your report. Depending on the scheduling order, you may need to prepare a rebuttal expert report responding to Dr. Birk's opinions by October 2, 2023. C&H will provide you with Dr. Birk's report promptly upon receipt, and we will schedule a working session to discuss the rebuttal strategy.
VII. TIMELINE AND DELIVERABLES
The following schedule sets forth the key milestones and deliverables for your engagement. All dates are firm and are driven by the court's discovery schedule:
All draft reports, working papers, and correspondence related to this engagement should be submitted to Tiffany Rosenthal and Andrew Fitzpatrick at Calderwood & Harkness LLP, at the Firm's Miami office:
Calderwood & Harkness LLP 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131
All drafts should be prominently marked:
"DRAFT — PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT"
Please note that the August 15, 2023, deadline for the full draft expert report is an internal deadline that allows C&H one full month for review, discussion, and any necessary revisions before the September 15, 2023, service deadline. We strongly encourage you to submit your draft as early as possible to allow adequate time for a thorough review process.
VIII. CONFIDENTIALITY AND PRIVILEGE REMINDERS
The following confidentiality and privilege reminders are of critical importance and supplement the confidentiality provisions contained in the April 20, 2023, retention letter:
Attorney-Client Privilege and Work-Product Doctrine. All materials provided to you by C&H in connection with this engagement are subject to the attorney-client privilege and/or the work-product doctrine. These protections extend to all documents, data, communications, and analyses exchanged between C&H and Meridian in the course of this engagement. You should take all reasonable steps to preserve these protections.
Non-Disclosure. You should not disclose any information received from C&H, or any work product generated in connection with this engagement, to any third party without the prior written approval of C&H. This includes, without limitation, any discussions with Jeffrey Caldwell, PE, or other experts, which should be coordinated through C&H to preserve the work-product protection.
Communication Protocol. All communications related to this engagement should be directed through Tiffany Rosenthal or Andrew Fitzpatrick at Calderwood & Harkness. Please do not communicate directly with VHG personnel, opposing counsel, or any other party regarding the subject matter of this engagement without prior authorization.
Retention Letter. The confidentiality obligations set forth in the retention letter dated April 20, 2023, remain in full force and effect and are incorporated herein by reference.
Document Retention. Please be advised that all drafts, notes, working papers, correspondence, and other materials generated in connection with this engagement may be discoverable in the course of the litigation. Under applicable Florida law and the Florida Rules of Civil Procedure, documents considered or relied upon by an expert witness in forming opinions may be subject to disclosure in discovery or at deposition. Accordingly, you should consult with C&H before discarding, deleting, or overwriting any analytical work product, and you should be mindful that all written materials — including informal notes, preliminary calculations, and email communications — may ultimately be produced to opposing counsel.
IX. CONTACT INFORMATION
The following contact information is provided for your reference:
Calderwood & Harkness LLP — Miami Office 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131