1021-00003 · Verimark Hospitality Group · Pre-Litigation Correspondence

bad-faith-implications-letter-ironclad.docx DOCUMENT Antitrust

70 / 75 ← → ✕

CALDERWOOD & HARKNESS LLP Attorneys at Law

Miami Office 333 SE 2nd Avenue, Suite 4400 Miami, FL 33131 Telephone: (305) 814-9000 Facsimile: (305) 814-9001

New York, NY (Headquarters) · Washington, DC

February 15, 2023

Via Certified Mail, Return Receipt Requested, and Electronic Mail

Mr. Victor Haddon Senior Vice President of Claims Ironclad Indemnity Corporation 55 Constitution Boulevard Hartford, CT 06103

Re: Bad-Faith Notice — Wrongful Denial of Business-Interruption Coverage

Insured: Verimark Hospitality Group Inc.

Policy No.: IIC-PRP-2022-07541

Policy Period: July 1, 2022 – July 1, 2023

Claim: Hurricane Callista — Business-Interruption Losses ($60,000,000)

Date of Denial: February 3, 2023

Dear Mr. Haddon:

I. Purpose and Context of This Letter

This firm represents Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK, with its principal offices located at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. Our engagement in this matter is identified under Calderwood & Harkness file number 1021-00003.

The purpose of this letter is to place Ironclad Indemnity Corporation ("Ironclad") on formal notice that its February 3, 2023 denial of VHG's business-interruption claim under Policy No. IIC-PRP-2022-07541 (the "Policy") constitutes bad faith within the meaning of both the Florida statutory framework, specifically Section 624.155 of the Florida Statutes, and Florida common law governing the duty of an insurer to act in good faith when investigating and adjusting first-party insurance claims. Ironclad's denial was issued without any reasonable basis in fact or law and reflects a calculated effort to avoid its contractual obligations to its insured.

Through this letter, VHG demands that Ironclad immediately reconsider and rescind its denial, acknowledge coverage for VHG's Hurricane Callista business-interruption losses, and make prompt payment of VHG's covered losses in full, up to the applicable limits of the Policy. VHG has at all times acted in complete good faith and full compliance with its obligations under the Policy. Ironclad, by contrast, has engaged in a pattern of unreasonable claims handling from the initial issuance of a reservation of rights letter on October 12, 2022 through the formal denial dated February 3, 2023, that demonstrates an institutional refusal to fairly evaluate this claim on its merits.

The facts and circumstances of this denial are set forth in detail below. As you will see, each of the four grounds Ironclad has advanced in support of its denial is either factually unsupported, legally untenable, or both. Taken collectively, Ironclad's stated justifications do not reflect the product of a fair, balanced, and thorough claims investigation; rather, they reflect a results-driven effort to manufacture bases for denying an otherwise plainly covered catastrophic loss.

II. Summary of the Claim and Denial History

A. The Insured Event — Hurricane Callista

Hurricane Callista was designated as a named tropical cyclone by the National Hurricane Center on September 12, 2022, after a tropical depression that had formed in the western Caribbean Sea intensified into a tropical storm and subsequently strengthened into a hurricane. Over the following days, Hurricane Callista tracked northward through the Straits of Florida, rapidly intensifying as it moved over exceptionally warm sea-surface temperatures in the Gulf of Mexico.

On September 18, 2022, at approximately 1:30 PM Eastern Daylight Time, Hurricane Callista made landfall in the Lower Florida Keys near Big Pine Key as a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour. The storm produced catastrophic wind damage across the Florida Keys, the southwestern coast of Florida, and portions of the Gulf Coast extending into Lee and Pinellas Counties. Storm surge associated with Hurricane Callista reached heights of 8 to 14 feet above normally dry ground in Monroe County and 6 to 10 feet above normally dry ground in Lee County, causing devastating coastal flooding in addition to the extreme wind damage.

In advance of the storm's arrival, mandatory evacuation orders were issued by Monroe County on September 16, 2022 and by Lee County on September 17, 2022. These government-ordered evacuations required the closure of VHG's resort properties well before landfall and prevented the return of guests, staff, and management for days to weeks after the storm had passed.

Hurricane Callista inflicted catastrophic physical damage and caused prolonged business interruption at three VHG resort properties, each of which was insured under the Policy:

1. Verimark Grand Key Resort (Mile Marker 48, Marathon, Florida 33050). Grand Key Resort is VHG's flagship property in the Florida Keys — a 312-room luxury resort and marina situated directly on the waterfront. The property sustained catastrophic wind and water damage from Hurricane Callista, including the destruction of multiple guest-room buildings, the marina facilities, the main restaurant and spa complex, and extensive damage to the resort's infrastructure. Grand Key Resort was closed from September 18, 2022 through March 15, 2023, a total period of 178 days. Prior to the loss, Grand Key Resort maintained an average daily rate ("ADR") of $389 and an average occupancy rate of 82%. The estimated business-interruption loss for Grand Key Resort is $31,400,000.

2. Verimark Harborview Hotel & Conference Center (1400 Estero Boulevard, Fort Myers Beach, Florida 33931). Harborview is a 224-room full-service hotel with a 40,000 square-foot conference and event facility. The property suffered severe wind damage to its exterior envelope and interior spaces, and sustained significant storm-surge flooding on its lower floors and in the conference-center wing. Harborview was closed from September 18, 2022 through January 31, 2023, a total period of 135 days. Prior to the loss, Harborview maintained an ADR of $295 and an average occupancy rate of 74%. The estimated business-interruption loss for Harborview is $18,700,000.

3. Verimark Sunset Shores (7200 Gulf Boulevard, St. Pete Beach, Florida 33706). Sunset Shores is a 186-room boutique resort located on the Gulf of Mexico. The property sustained substantial wind damage to roofing systems, windows, and exterior cladding, as well as interior water damage from wind-driven rain. Sunset Shores was fully closed from September 18 through November 30, 2022, a period of 73 days of complete closure, followed by a period of reduced-capacity operation as phased restoration continued through February 2023. The property did not return to full operational capacity until February 28, 2023. Prior to the loss, Sunset Shores maintained an ADR of $342 and an average occupancy rate of 79%. The estimated business-interruption loss for Sunset Shores is $9,900,000.

The total business-interruption loss claimed by VHG across all three properties is $60,000,000. This figure is supported by detailed loss calculations prepared by VHG's forensic accountants and submitted to Ironclad as part of VHG's sworn statement in proof of loss.

B. VHG's Timely and Complete Compliance with Policy Obligations

VHG fully and timely performed each and every obligation required of it under the Policy. VHG submitted its initial notice of loss to Ironclad on September 22, 2022 — just four days after Hurricane Callista made landfall and as soon as safe physical access to the affected properties could be established. In the immediate aftermath of a Category 4 hurricane, roads, bridges, and communications infrastructure throughout the Florida Keys and Gulf Coast were severely impaired. VHG's notice was provided at the earliest practicable opportunity.

Following submission of the notice of loss, VHG cooperated fully and without reservation with Ironclad's independent adjuster, Arbor Claims Services LLC. Arbor's lead adjuster on the VHG account, Denise Whitford, commenced on-site inspections of all three affected properties beginning October 5, 2022. VHG made its personnel, facilities, records, and documentation available to Ms. Whitford and her team throughout the adjustment process. VHG's cooperation included providing access to pre-loss financial records, guest-occupancy data, revenue projections, contractor estimates, and all other materials reasonably requested by Ironclad or Arbor Claims.

On November 15, 2022, VHG submitted a comprehensive sworn statement in proof of loss in the amount of $60,000,000. The proof of loss was accompanied by detailed supporting documentation, including property-by-property loss calculations, forensic accounting analyses, contractor reports, engineering assessments, and historical financial data sufficient to substantiate the claimed losses. VHG responded promptly and completely to each and every supplemental information request from Ironclad and Arbor Claims throughout the claims-handling process.

At no point did Ironclad or Arbor Claims identify any deficiency in VHG's submissions, nor did they request any information that VHG failed to provide. VHG's conduct in connection with this claim has been exemplary, and Ironclad has not — because it cannot — pointed to any failure by VHG to satisfy its policy obligations.

C. Ironclad's Claims Handling Timeline

The history of Ironclad's handling of VHG's claim reveals a pattern of delay, obfuscation, and bad faith.

On October 12, 2022, just three weeks after VHG submitted its notice of loss and before Ironclad had undertaken any meaningful investigation, Ironclad issued a reservation of rights letter. Calderwood & Harkness responded to that reservation of rights on October 25, 2022, disputing each of the stated bases in detail and demanding that Ironclad conduct a fair and thorough investigation of the claim. A copy of our October 25, 2022 response is enclosed with this letter for your reference.

Despite receiving VHG's sworn statement in proof of loss on November 15, 2022, and despite having had months to conduct its investigation, Ironclad did not issue its formal denial of coverage until February 3, 2023 — nearly four and a half months after the date of loss and approximately eleven weeks after receipt of the proof of loss. This protracted delay, standing alone, is indicative of bad faith, as Ironclad failed to process a catastrophic first-party claim with the urgency and diligence required by Florida law.

More troublingly, Ironclad's February 3, 2023 denial letter demonstrates that Ironclad did not meaningfully engage with the substantial documentation VHG provided. The denial letter is a perfunctory recitation of boilerplate coverage defenses that bear little relationship to the actual terms of the Policy as negotiated at the July 2022 renewal, and that fail to address or account for the overwhelming evidence of covered loss. The denial was issued without any good-faith basis and reflects Ironclad's institutional determination to avoid payment of this claim by any means available.

D. The Four Stated Bases for Denial

Ironclad's February 3, 2023 denial letter purports to rely on four grounds, each of which is addressed in detail in Section IV below:

1. Named Windstorm Sub-Limit of $15,000,000. Ironclad contends that the Policy contains a $15,000,000 sub-limit applicable to named-windstorm business-interruption losses, and that VHG's recovery is therefore capped at $15,000,000 rather than the full $25,000,000 primary layer limit.

2. Period of Restoration Disputes. Ironclad argues that business-interruption coverage terminates when repairs "could have been completed with reasonable speed" and asserts that VHG unreasonably delayed restoration of the affected properties.

3. Concurrent Causation / Flood Exclusion. Ironclad asserts that portions of the damage at Grand Key Resort resulted from storm surge, which Ironclad characterizes as "flood," and that such damage is excluded under the Policy's flood exclusion, including through the application of an anti-concurrent causation clause.

4. Failure to Mitigate. Ironclad alleges that VHG failed to take reasonable steps to reduce the period of business interruption following Hurricane Callista.

As demonstrated below, none of these grounds withstands scrutiny, and Ironclad's reliance upon them — individually or collectively — constitutes bad faith.

III. Florida Bad-Faith Law — Statutory and Common-Law Framework

A. Florida Statute § 624.155 — Civil Remedy for Bad Faith

Florida law provides insureds with a robust statutory cause of action against insurers that fail to act in good faith in the handling and settlement of insurance claims. Specifically, Section 624.155(1)(b)(1) of the Florida Statutes provides that any person may bring a civil action against an insurer when such person is damaged by the insurer's "[n]ot attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests."

This statutory remedy reflects the Florida Legislature's recognition that the insurance relationship is one of utmost good faith, and that insurers occupy a position of superior bargaining power that demands they be held to a heightened standard of conduct in their dealings with their insureds. The statute authorizes the recovery of consequential damages — including damages that may exceed the limits of the insurance policy — as well as attorneys' fees and costs incurred by the insured in prosecuting the bad-faith claim.

Under Section 624.155(3)(a), the filing of a Civil Remedy Notice with the Florida Department of Financial Services is a condition precedent to the commencement of a bad-faith action. The insurer then has sixty (60) days from receipt of the Civil Remedy Notice to cure its conduct before the insured may file suit. This letter is intended to serve as advance notice to Ironclad of VHG's position and to afford Ironclad an opportunity to correct its wrongful denial before VHG takes the formal step of filing a Civil Remedy Notice. VHG expressly reserves the right to file a Civil Remedy Notice with the Florida Department of Financial Services if Ironclad does not cure its wrongful denial within the timeframes specified herein.

B. Common-Law Bad Faith

In addition to its statutory remedy, Florida recognizes a common-law cause of action for bad-faith failure to pay first-party insurance claims. Under Florida common law, an insurer acts in bad faith when it denies or delays payment of a claim without a reasonable basis for doing so, or when it fails to conduct a fair, balanced, and thorough investigation of the claim before making a coverage determination. See, e.g., Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004); Harborline Industries, 658 So. 2d 55 (Fla. 1995).

The totality of the circumstances standard applied in Florida bad-faith cases examines the insurer's conduct throughout the claims-handling process, including whether the insurer adequately investigated the claim, whether the insurer's coverage determination was supported by a reasonable factual and legal basis, whether the insurer engaged in delay tactics, and whether the insurer placed its own financial interests above those of its insured.

Ironclad's conduct in this matter satisfies both the statutory and common-law standards for bad faith, as detailed in the sections that follow. Each of Ironclad's four stated grounds for denial is either factually baseless or legally unsupportable, and the denial, viewed as a whole, reflects a pattern of unreasonable claims handling designed to avoid Ironclad's contractual obligations to VHG.

C. Ironclad's NAIC Number and Regulatory Standing

Ironclad Indemnity Corporation, NAIC Number 20537, is a Connecticut-domiciled stock insurance company licensed and authorized to transact the business of insurance in the State of Florida. The Policy at issue was issued by Ironclad to VHG and covers VHG's Florida-located properties. As such, Ironclad is subject to the full regulatory authority of the Florida Department of Financial Services and the Florida Office of Insurance Regulation with respect to claims arising from or related to the Policy, including compliance with the Florida Insurance Code and the unfair claims settlement practices provisions of Chapter 626, Part X, of the Florida Statutes.

IV. Ironclad's Denial Lacks Any Reasonable Basis

Each of the four grounds cited by Ironclad in its February 3, 2023 denial is without merit. The following analysis demonstrates not merely that Ironclad's denial was wrong, but that it was unreasonable — a distinction critical to establishing bad faith under Florida law.

A. The Named Windstorm Sub-Limit Was Deleted at the July 2022 Renewal

Ironclad's reliance on a purported $15,000,000 named-windstorm sub-limit for business-interruption losses is flatly contradicted by the documentary record of the July 2022 policy renewal negotiations. This argument is not merely incorrect; it is affirmatively disingenuous, and Ironclad's assertion of it in the denial letter — when its own files contain the evidence of the sub-limit's deletion — is among the clearest indications of bad faith in this entire matter.

During the 2022 renewal cycle, VHG, acting through its insurance broker of record, Tidewater Risk Advisors LLC (account executive Franklin Orde, located at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133), specifically negotiated the express deletion of the named-windstorm sub-limit that had appeared in prior policy years. The removal of this sub-limit was a central objective of VHG's renewal strategy, as VHG recognized the significant hurricane exposure of its Florida coastal resort portfolio and sought to obtain coverage commensurate with that exposure. The deletion of the sub-limit was agreed upon by Ironclad's underwriting department as a term of the renewal, and VHG paid a substantial increase in premium to secure this enhanced coverage.

Specifically, VHG's aggregate annual premium across all layers of its property and business-interruption insurance program increased to $1,840,000, with the Ironclad primary layer premium alone rising to $980,000 — a figure that reflected the broadened coverage resulting from the removal of the named-windstorm sub-limit and other coverage enhancements negotiated at renewal. Ironclad's own underwriting files, including the underwriting submission package, quotation correspondence, binder, and final policy issuance documentation, will confirm that the named-windstorm sub-limit was deleted as a condition of the July 2022 renewal. The premium VHG paid was calculated to reflect this broader coverage, and Ironclad accepted and retained that premium.

Sandra Pellegrini, VHG's Vice President of Risk Management, relied upon the representations of Tidewater Risk Advisors and Ironclad's own underwriting communications in confirming that the named-windstorm sub-limit had been removed from the 2022-2023 policy year. Ironclad's belated assertion of this sub-limit in the context of a coverage denial — months after a catastrophic loss — constitutes an after-the-fact reinterpretation of the Policy terms designed to avoid Ironclad's contractual obligations. Such conduct is the very definition of bad faith.

To be clear, the full primary layer limit for business interruption under Policy No. IIC-PRP-2022-07541 is $25,000,000 per occurrence, above a $500,000 deductible. There is no named-windstorm sub-limit in the current policy. Ironclad's claim to the contrary is unsupported by the Policy as issued and cannot be maintained in good faith.

B. The Period of Restoration Was Reasonable Under the Circumstances

Ironclad's second stated basis for denial — that VHG's period of restoration was unreasonably prolonged — ignores the unprecedented scope of Hurricane Callista's destruction and the practical realities of post-hurricane reconstruction in the Florida Keys and along the Gulf Coast of Florida. This argument is both factually unsupported and legally deficient.

The Policy defines the "period of restoration" as the period beginning when the loss occurs and ending when the damaged property is or should be repaired, rebuilt, or replaced with reasonable speed and similar quality. Ironclad seizes upon the "should be" and "reasonable speed" language to argue that VHG could have and should have restored its properties more quickly. But Ironclad has offered no credible evidence — no engineering analysis, no construction timeline study, no expert opinion — to support this contention. Instead, Ironclad has simply asserted, in conclusory fashion, that the restoration periods were too long, without any analysis of the actual conditions that VHG and its contractors confronted.

The reality is that the restoration timelines for each of VHG's three properties were not merely reasonable — they were remarkably efficient given the circumstances. Hurricane Callista was a Category 4 storm with 145 mph sustained winds that devastated the Florida Keys and significant portions of the Gulf Coast. In the aftermath of the storm, the region experienced acute shortages of qualified contractors and construction labor, disruptions to building-material supply chains, extensive damage to transportation infrastructure including roads, bridges, and causeways essential to accessing the Florida Keys, prolonged interruptions to utility services including electrical power and potable water, and significant delays in local permitting and building-inspection processes as municipal governments contended with the overwhelming volume of damage assessments and repair applications.

Grand Key Resort's 178-day closure — from September 18, 2022 through March 15, 2023 — was entirely reasonable for a 312-room luxury resort with marina facilities that sustained catastrophic wind and water damage. The Grand Key property required the complete replacement of multiple guest-room building roofs, the reconstruction of the marina, the renovation of the main restaurant and spa complex, and extensive infrastructure repairs. The restoration involved coordination with multiple contractors and subcontractors, compliance with Monroe County building codes, and the sequencing of work to ensure structural integrity before interior finishes could be installed.

Harborview's 135-day closure — from September 18, 2022 through January 31, 2023 — was likewise appropriate in light of the scope of damage sustained by a 224-room hotel and 40,000 square-foot conference center. The conference-center wing required substantial structural repair, and the lower floors of the hotel tower that had been flooded by storm surge required complete remediation, including mold abatement, before reconstruction could proceed.

Sunset Shores' timeline is perhaps the strongest evidence of VHG's diligent approach to restoration. VHG achieved a partial reopening of Sunset Shores within just 73 days of full closure, and then conducted a phased restoration that brought the property back to full operational capacity by February 28, 2023. This timeline demonstrates VHG's proactive and aggressive approach to restoring its properties and mitigating its business-interruption losses.

It bears emphasis that Ironclad's own independent adjuster, Denise Whitford of Arbor Claims Services LLC, inspected all three properties beginning October 5, 2022 and documented the extensive nature of the damage. Ms. Whitford's inspection reports, which are in Ironclad's possession, confirm the severity of the damage and the magnitude of the reconstruction effort required. Ironclad's claim that VHG unreasonably delayed restoration is not supported by its own adjuster's findings.

C. The Concurrent Causation / Flood Exclusion Argument Is Without Merit

Ironclad's third basis for denial — that portions of VHG's claim are excluded because damage at Grand Key Resort resulted from storm surge, which Ironclad characterizes as "flood" — is contrary to well-established Florida law governing concurrent causation in insurance disputes.

Ironclad's denial letter invokes the Policy's flood exclusion and anti-concurrent causation ("ACC") clause to argue that any damage attributable to storm surge is excluded from coverage, and that the ACC clause precludes coverage even where wind (a covered peril) and storm surge (an excluded peril) combine to cause damage. This argument is a well-worn coverage-avoidance strategy that has been repeatedly rejected by Florida courts.

Under Florida's efficient proximate cause doctrine, where a covered peril (wind) and an excluded peril (storm surge or flood) combine to cause indivisible damage, the insurer bears the burden of segregating the excluded losses from the covered losses. The insurer may not deny the entire claim on the basis that an excluded cause contributed to the damage; rather, it must identify, with specificity and through competent evidence, the portion of the damage attributable to the excluded cause. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); see also Marvista, LLC v. Certain Underwriters at Lloyd's, London, 11th Cir. Case No. 20-12849 (applying Florida law).

Hurricane Callista made landfall as a Category 4 hurricane with sustained winds of 145 miles per hour. Wind was indisputably a dominant — indeed, the predominant — cause of the damage sustained by Grand Key Resort and the other VHG properties. To the extent storm surge also contributed to damage at Grand Key Resort, Ironclad bore the obligation to conduct a competent engineering analysis to allocate losses between wind and flood causes. Ironclad has not performed any such analysis. It has not retained a forensic engineer. It has not produced any expert report distinguishing wind damage from flood damage. Instead, Ironclad has issued a blanket invocation of the flood exclusion and ACC clause to deny the entire claim — a strategy that is both legally impermissible under Florida law and indicative of bad faith.

Moreover, to the extent the ACC clause in the Policy purports to override the efficient proximate cause doctrine, such clauses are subject to careful scrutiny under Florida law and may be unenforceable to the extent they are used to deny coverage for losses predominantly caused by a covered peril. Ironclad cannot rely on a contractual provision of questionable enforceability to deny a catastrophic claim without even undertaking the factual investigation necessary to determine whether the excluded peril actually contributed to the losses at issue.

D. The Failure-to-Mitigate Defense Is Pretextual

Ironclad's fourth and final basis for denial — that VHG failed to take reasonable steps to reduce the period of business interruption — is entirely pretextual and is belied by the factual record.

VHG took immediate and aggressive steps in the aftermath of Hurricane Callista to secure its properties, engage contractors, and commence restoration as soon as physical access was restored. VHG's Chief Executive Officer, Marcus Ellsworth, and its Chief Financial Officer, Diane Calder, personally directed the company's disaster-response and restoration efforts, including the establishment of a centralized restoration command structure, the engagement of multiple general contractors and specialty subcontractors, and the coordination of emergency repairs to prevent further damage to the properties.

VHG incurred substantial extra expense — which it has documented and submitted to Ironclad — to accelerate the restoration timeline. These extra-expense expenditures included the engagement of emergency roofing contractors, the procurement of building materials at premium prices to avoid supply-chain delays, the use of temporary generators and water-treatment systems, and the deployment of additional labor crews on overtime and weekend schedules.

The results of VHG's mitigation efforts speak for themselves. Sunset Shores achieved a partial reopening within just 73 days. Harborview reopened within 135 days. Grand Key Resort — the most severely damaged property, located in the most difficult-to-access location in the Florida Keys — reopened within 178 days. These are remarkable timelines for the restoration of major hospitality properties following a Category 4 hurricane.

Ironclad's denial letter does not identify a single specific mitigation step that VHG failed to take. It does not cite any particular contractor that VHG should have retained but did not. It does not identify any particular repair that VHG unreasonably delayed. It does not point to any alternative restoration approach that would have shortened the interruption period. Instead, Ironclad has asserted, in wholly conclusory terms, that VHG "failed to take reasonable steps" — a naked allegation without any factual foundation. Such bare and unsupported assertions do not constitute a reasonable basis for denial and are further evidence of Ironclad's bad faith.

V. Ironclad's Denial Harms VHG and Its Stakeholders

The consequences of Ironclad's wrongful denial are severe and far-reaching. VHG is a publicly traded company listed on the Nasdaq Stock Market (ticker: VMRK), with fiscal year 2021 total revenue of approximately $412 million and EBITDA of approximately $78 million. The simultaneous loss of three flagship resort properties for periods ranging from 73 to 178 days has materially and adversely impacted VHG's financial performance, cash flows, and shareholder value. VHG's stock price has declined significantly since Hurricane Callista, in part due to the market's uncertainty regarding VHG's ability to recover its insured losses.

The $60,000,000 in business-interruption losses at issue represents a significant portion of VHG's annual revenue and an even more significant portion of its annual earnings. These are precisely the losses that VHG's insurance program was designed and purchased to cover. VHG assembled a comprehensive all-risk property and business-interruption insurance tower with a total capacity of $60,000,000, structured as follows:

• Primary Layer: Ironclad Indemnity Corporation — $25,000,000 per occurrence (Policy No. IIC-PRP-2022-07541)

• First Excess Layer: Pinnacle Surplus Lines Inc. — $15,000,000 excess of $25,000,000 (Policy No. PSL-XS1-2022-3390)

• Second Excess Layer: Montclair Assurance Company — $10,000,000 excess of $40,000,000 (Policy No. MAC-XS2-2022-09817)

• Third Excess Layer: Sovereign Re Ltd. — $10,000,000 excess of $50,000,000 (Policy No. SRL-XS3-2022-5102)

VHG paid aggregate annual premiums of $1,840,000 across this insurance tower — a substantial investment made specifically to protect against catastrophic events such as Hurricane Callista. Ironclad's wrongful denial forces VHG to absorb losses that Ironclad was contractually obligated to indemnify, compounding the devastating impact of the hurricane itself. The ongoing financial harm to VHG, its employees, its shareholders, and its creditors is directly attributable to Ironclad's refusal to honor its contractual obligations.

VI. Impact on Excess Carriers

Ironclad's wrongful denial of coverage at the primary layer has cascading consequences for VHG's ability to access the remaining layers of its insurance tower. As lead carrier in the program, Ironclad's coverage determination has a direct and predictable influence on the positions taken by the excess-layer carriers:

• Pinnacle Surplus Lines Inc. (First Excess Layer, $15,000,000 xs $25,000,000, Policy No. PSL-XS1-2022-3390) issued a follow-form denial of coverage on February 10, 2023, expressly citing and relying upon Ironclad's February 3, 2023 primary-layer denial as the basis for its own coverage determination. Pinnacle's denial was a direct and foreseeable consequence of Ironclad's action.

• Montclair Assurance Company (Second Excess Layer, $10,000,000 xs $40,000,000, Policy No. MAC-XS2-2022-09817) has issued a reservation of rights but has not yet formally denied coverage. However, Montclair's ability to evaluate and pay VHG's claim is effectively blocked so long as the primary and first excess layers remain unresolved.

• Sovereign Re Ltd. (Third Excess Layer, $10,000,000 xs $50,000,000, Policy No. SRL-XS3-2022-5102) has similarly issued a reservation of rights but has not formally denied coverage. Like Montclair, Sovereign Re's obligations are contingent on the resolution of the underlying layers.

Ironclad's conduct as lead carrier is obstructing VHG's ability to access its full $60,000,000 insurance tower. By wrongfully denying coverage at the primary level, Ironclad has created a domino effect that has frozen VHG's recovery across the entire program. This is not a collateral consequence of Ironclad's denial — it is a foreseeable and direct result. Ironclad may be independently liable for damages caused by the excess carriers' refusal or inability to pay VHG's claim, to the extent that Ironclad's bad-faith denial triggered, encouraged, or provided the basis for those refusals.

VII. Demand for Immediate Action

A. Specific Demands

In light of the foregoing, VHG, through undersigned counsel, demands that Ironclad take the following actions immediately:

1. Immediately rescind its February 3, 2023 denial of coverage and withdraw each of the four stated bases for denial.

2. Acknowledge coverage under Policy No. IIC-PRP-2022-07541 for VHG's Hurricane Callista business-interruption losses up to the full $25,000,000 primary layer limit, less the applicable $500,000 per-occurrence deductible.

3. Make prompt payment of VHG's covered losses as documented in the sworn statement in proof of loss submitted on November 15, 2022, together with any additional amounts that have accrued since that submission.

4. Notify the excess carriers — Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd. — that coverage under the primary layer has been affirmed and that the primary layer will be exhausted by VHG's claim, so that VHG may access the excess layers of its insurance tower for recovery of the balance of its $60,000,000 in losses.

5. Preserve all documents and electronically stored information related to Ironclad's handling of VHG's claim, including but not limited to: internal memoranda and correspondence; communications with Arbor Claims Services LLC and Denise Whitford; communications with any of the excess carriers, including Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd.; underwriting files, including all documents related to the July 2022 renewal and the deletion of the named-windstorm sub-limit; claims committee meeting minutes and presentations; reserve analyses and reserve-setting documentation; actuarial analyses; and any other documents or records relating to Ironclad's evaluation, investigation, or disposition of VHG's claim.

B. Deadline and Consequences

VHG demands a substantive written response to this letter within thirty (30) days of the date hereof — that is, by no later than March 17, 2023. For the avoidance of doubt, VHG does not consider a perfunctory acknowledgment of receipt or a rote reaffirmation of the denial to constitute a "substantive response." VHG expects Ironclad to meaningfully address the specific arguments raised in this letter and to confirm either that it will rescind its denial and commence payment, or to articulate, with specificity and supporting evidence, the basis upon which it maintains its coverage position.

If Ironclad does not rescind its denial and commence payment of VHG's covered losses within the thirty-day period, VHG will take the following actions without further notice:

• File a Civil Remedy Notice under Section 624.155 of the Florida Statutes with the Florida Department of Financial Services, formally initiating the statutory bad-faith process;

• Commence litigation against Ironclad in the appropriate court of competent jurisdiction in the State of Florida, seeking recovery of the full amount of VHG's covered losses under the Policy, together with consequential damages, statutory bad-faith damages, prejudgment interest at the applicable statutory rate, and attorneys' fees and costs incurred in prosecuting VHG's claims; and

• Pursue all other remedies available to VHG under Florida statutory and common law, including but not limited to punitive damages to the extent permitted by Section 624.155 and applicable Florida case law, and any administrative complaints or regulatory proceedings that may be warranted by Ironclad's conduct.

VHG intends to pursue its claims vigorously and to the fullest extent permitted by law. The financial magnitude of this dispute, combined with the egregiousness of Ironclad's claims-handling conduct, warrants the imposition of the most significant remedies available.

VIII. Reservation of Rights by VHG

VHG reserves all rights and remedies available to it under the Policy, Florida statutory law, Florida common law, and any other applicable law. Nothing in this letter shall be construed as a waiver, relinquishment, or limitation of any right, claim, cause of action, or defense that VHG may have against Ironclad or any other party. VHG's enumeration of specific claims and demands in this letter is not intended to be exhaustive and does not preclude VHG from asserting additional claims or seeking additional remedies as the facts and circumstances may warrant.

Without limiting the generality of the foregoing, VHG expressly reserves the right to seek damages beyond the limits of the Policy, including consequential damages for financial harm caused by Ironclad's wrongful denial, statutory penalties and damages under Section 624.155 of the Florida Statutes, and attorneys' fees and costs incurred in connection with the enforcement of VHG's rights.

IX. Privileged and Confidential Communication

This letter is sent in furtherance of settlement negotiations and is protected by applicable settlement privilege under Florida law and federal common law. However, VHG expressly reserves the right to use this letter, and Ironclad's response or failure to respond, as evidence of VHG's compliance with the notice requirements of Section 624.155(3)(a) of the Florida Statutes, and as evidence of Ironclad's knowledge of the bases for VHG's bad-faith claim. Nothing in this letter shall be construed as an offer of compromise or an admission of any fact, and VHG reserves all rights to introduce this letter in evidence in any subsequent proceeding to the extent permitted by applicable law and the Florida Rules of Evidence.

VHG remains willing to engage in good-faith discussions with Ironclad to resolve this claim promptly, fairly, and without the need for protracted and costly litigation. VHG has no desire to litigate if a reasonable resolution can be achieved. However, Ironclad's current posture — a wholesale denial of coverage on grounds that are factually unsupported and legally untenable — leaves VHG no reasonable alternative but to prepare for and pursue formal legal remedies. The ball is now squarely in Ironclad's court.

We request that all future communications regarding this claim, whether from Ironclad directly or from its outside counsel, be directed to the undersigned at Calderwood & Harkness LLP, 333 SE 2nd Avenue, Suite 4400, Miami, Florida 33131. I may also be reached by telephone at (305) 814-9012 and by electronic mail at eforsythe@calderwoodharkness.com.

We look forward to Ironclad's prompt and substantive response.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Elaine Forsythe Partner 333 SE 2nd Avenue, Suite 4400 Miami, FL 33131 Telephone: (305) 814-9012

Email: eforsythe@calderwoodharkness.com

cc: Gregory Stanton, Esq., Fendowell Rourke & Stanton LLP, 280 Trumbull Street, Suite 2200, Hartford, CT 06103 (Outside Counsel for Ironclad Indemnity Corporation)

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

cc: Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc., 1900 Brickell Avenue, Suite 3200, Miami, FL 33129

Enclosures:

1. Copy of Ironclad Indemnity Corporation's Coverage Denial Letter dated February 3, 2023

2. Copy of Calderwood & Harkness LLP's Response to Ironclad's Reservation of Rights Letter dated October 25, 2022

CALDERWOOD & HARKNESS LLP Attorneys at Law
Miami Office 333 SE 2nd Avenue, Suite 4400 Miami, FL 33131 Telephone: (305) 814-9000 Facsimile: (305) 814-9001
New York, NY (Headquarters) · Washington, DC
February 15, 2023
Via Certified Mail, Return Receipt Requested, and Electronic Mail
Mr. Victor Haddon Senior Vice President of Claims Ironclad Indemnity Corporation 55 Constitution Boulevard Hartford, CT 06103
Re: Bad-Faith Notice — Wrongful Denial of Business-Interruption Coverage
Insured: Verimark Hospitality Group Inc.
Policy No.: IIC-PRP-2022-07541
Policy Period: July 1, 2022 – July 1, 2023
Claim: Hurricane Callista — Business-Interruption Losses ($60,000,000)
Date of Denial: February 3, 2023
Dear Mr. Haddon:
I. Purpose and Context of This Letter
This firm represents Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK, with its principal offices located at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. Our engagement in this matter is identified under Calderwood & Harkness file number 1021-00003.
The purpose of this letter is to place Ironclad Indemnity Corporation ("Ironclad") on formal notice that its February 3, 2023 denial of VHG's business-interruption claim under Policy No. IIC-PRP-2022-07541 (the "Policy") constitutes bad faith within the meaning of both the Florida statutory framework, specifically Section 624.155 of the Florida Statutes, and Florida common law governing the duty of an insurer to act in good faith when investigating and adjusting first-party insurance claims. Ironclad's denial was issued without any reasonable basis in fact or law and reflects a calculated effort to avoid its contractual obligations to its insured.
Through this letter, VHG demands that Ironclad immediately reconsider and rescind its denial, acknowledge coverage for VHG's Hurricane Callista business-interruption losses, and make prompt payment of VHG's covered losses in full, up to the applicable limits of the Policy. VHG has at all times acted in complete good faith and full compliance with its obligations under the Policy. Ironclad, by contrast, has engaged in a pattern of unreasonable claims handling from the initial issuance of a reservation of rights letter on October 12, 2022 through the formal denial dated February 3, 2023, that demonstrates an institutional refusal to fairly evaluate this claim on its merits.
The facts and circumstances of this denial are set forth in detail below. As you will see, each of the four grounds Ironclad has advanced in support of its denial is either factually unsupported, legally untenable, or both. Taken collectively, Ironclad's stated justifications do not reflect the product of a fair, balanced, and thorough claims investigation; rather, they reflect a results-driven effort to manufacture bases for denying an otherwise plainly covered catastrophic loss.
II. Summary of the Claim and Denial History
A. The Insured Event — Hurricane Callista
Hurricane Callista was designated as a named tropical cyclone by the National Hurricane Center on September 12, 2022, after a tropical depression that had formed in the western Caribbean Sea intensified into a tropical storm and subsequently strengthened into a hurricane. Over the following days, Hurricane Callista tracked northward through the Straits of Florida, rapidly intensifying as it moved over exceptionally warm sea-surface temperatures in the Gulf of Mexico.
On September 18, 2022, at approximately 1:30 PM Eastern Daylight Time, Hurricane Callista made landfall in the Lower Florida Keys near Big Pine Key as a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour. The storm produced catastrophic wind damage across the Florida Keys, the southwestern coast of Florida, and portions of the Gulf Coast extending into Lee and Pinellas Counties. Storm surge associated with Hurricane Callista reached heights of 8 to 14 feet above normally dry ground in Monroe County and 6 to 10 feet above normally dry ground in Lee County, causing devastating coastal flooding in addition to the extreme wind damage.
In advance of the storm's arrival, mandatory evacuation orders were issued by Monroe County on September 16, 2022 and by Lee County on September 17, 2022. These government-ordered evacuations required the closure of VHG's resort properties well before landfall and prevented the return of guests, staff, and management for days to weeks after the storm had passed.
Hurricane Callista inflicted catastrophic physical damage and caused prolonged business interruption at three VHG resort properties, each of which was insured under the Policy:
1. Verimark Grand Key Resort (Mile Marker 48, Marathon, Florida 33050). Grand Key Resort is VHG's flagship property in the Florida Keys — a 312-room luxury resort and marina situated directly on the waterfront. The property sustained catastrophic wind and water damage from Hurricane Callista, including the destruction of multiple guest-room buildings, the marina facilities, the main restaurant and spa complex, and extensive damage to the resort's infrastructure. Grand Key Resort was closed from September 18, 2022 through March 15, 2023, a total period of 178 days. Prior to the loss, Grand Key Resort maintained an average daily rate ("ADR") of $389 and an average occupancy rate of 82%. The estimated business-interruption loss for Grand Key Resort is $31,400,000.
2. Verimark Harborview Hotel & Conference Center (1400 Estero Boulevard, Fort Myers Beach, Florida 33931). Harborview is a 224-room full-service hotel with a 40,000 square-foot conference and event facility. The property suffered severe wind damage to its exterior envelope and interior spaces, and sustained significant storm-surge flooding on its lower floors and in the conference-center wing. Harborview was closed from September 18, 2022 through January 31, 2023, a total period of 135 days. Prior to the loss, Harborview maintained an ADR of $295 and an average occupancy rate of 74%. The estimated business-interruption loss for Harborview is $18,700,000.
3. Verimark Sunset Shores (7200 Gulf Boulevard, St. Pete Beach, Florida 33706). Sunset Shores is a 186-room boutique resort located on the Gulf of Mexico. The property sustained substantial wind damage to roofing systems, windows, and exterior cladding, as well as interior water damage from wind-driven rain. Sunset Shores was fully closed from September 18 through November 30, 2022, a period of 73 days of complete closure, followed by a period of reduced-capacity operation as phased restoration continued through February 2023. The property did not return to full operational capacity until February 28, 2023. Prior to the loss, Sunset Shores maintained an ADR of $342 and an average occupancy rate of 79%. The estimated business-interruption loss for Sunset Shores is $9,900,000.
The total business-interruption loss claimed by VHG across all three properties is $60,000,000. This figure is supported by detailed loss calculations prepared by VHG's forensic accountants and submitted to Ironclad as part of VHG's sworn statement in proof of loss.
B. VHG's Timely and Complete Compliance with Policy Obligations
VHG fully and timely performed each and every obligation required of it under the Policy. VHG submitted its initial notice of loss to Ironclad on September 22, 2022 — just four days after Hurricane Callista made landfall and as soon as safe physical access to the affected properties could be established. In the immediate aftermath of a Category 4 hurricane, roads, bridges, and communications infrastructure throughout the Florida Keys and Gulf Coast were severely impaired. VHG's notice was provided at the earliest practicable opportunity.
Following submission of the notice of loss, VHG cooperated fully and without reservation with Ironclad's independent adjuster, Arbor Claims Services LLC. Arbor's lead adjuster on the VHG account, Denise Whitford, commenced on-site inspections of all three affected properties beginning October 5, 2022. VHG made its personnel, facilities, records, and documentation available to Ms. Whitford and her team throughout the adjustment process. VHG's cooperation included providing access to pre-loss financial records, guest-occupancy data, revenue projections, contractor estimates, and all other materials reasonably requested by Ironclad or Arbor Claims.
On November 15, 2022, VHG submitted a comprehensive sworn statement in proof of loss in the amount of $60,000,000. The proof of loss was accompanied by detailed supporting documentation, including property-by-property loss calculations, forensic accounting analyses, contractor reports, engineering assessments, and historical financial data sufficient to substantiate the claimed losses. VHG responded promptly and completely to each and every supplemental information request from Ironclad and Arbor Claims throughout the claims-handling process.
At no point did Ironclad or Arbor Claims identify any deficiency in VHG's submissions, nor did they request any information that VHG failed to provide. VHG's conduct in connection with this claim has been exemplary, and Ironclad has not — because it cannot — pointed to any failure by VHG to satisfy its policy obligations.
C. Ironclad's Claims Handling Timeline
The history of Ironclad's handling of VHG's claim reveals a pattern of delay, obfuscation, and bad faith.
On October 12, 2022, just three weeks after VHG submitted its notice of loss and before Ironclad had undertaken any meaningful investigation, Ironclad issued a reservation of rights letter. Calderwood & Harkness responded to that reservation of rights on October 25, 2022, disputing each of the stated bases in detail and demanding that Ironclad conduct a fair and thorough investigation of the claim. A copy of our October 25, 2022 response is enclosed with this letter for your reference.
Despite receiving VHG's sworn statement in proof of loss on November 15, 2022, and despite having had months to conduct its investigation, Ironclad did not issue its formal denial of coverage until February 3, 2023 — nearly four and a half months after the date of loss and approximately eleven weeks after receipt of the proof of loss. This protracted delay, standing alone, is indicative of bad faith, as Ironclad failed to process a catastrophic first-party claim with the urgency and diligence required by Florida law.
More troublingly, Ironclad's February 3, 2023 denial letter demonstrates that Ironclad did not meaningfully engage with the substantial documentation VHG provided. The denial letter is a perfunctory recitation of boilerplate coverage defenses that bear little relationship to the actual terms of the Policy as negotiated at the July 2022 renewal, and that fail to address or account for the overwhelming evidence of covered loss. The denial was issued without any good-faith basis and reflects Ironclad's institutional determination to avoid payment of this claim by any means available.
D. The Four Stated Bases for Denial
Ironclad's February 3, 2023 denial letter purports to rely on four grounds, each of which is addressed in detail in Section IV below:
1. Named Windstorm Sub-Limit of $15,000,000. Ironclad contends that the Policy contains a $15,000,000 sub-limit applicable to named-windstorm business-interruption losses, and that VHG's recovery is therefore capped at $15,000,000 rather than the full $25,000,000 primary layer limit.
2. Period of Restoration Disputes. Ironclad argues that business-interruption coverage terminates when repairs "could have been completed with reasonable speed" and asserts that VHG unreasonably delayed restoration of the affected properties.
3. Concurrent Causation / Flood Exclusion. Ironclad asserts that portions of the damage at Grand Key Resort resulted from storm surge, which Ironclad characterizes as "flood," and that such damage is excluded under the Policy's flood exclusion, including through the application of an anti-concurrent causation clause.
4. Failure to Mitigate. Ironclad alleges that VHG failed to take reasonable steps to reduce the period of business interruption following Hurricane Callista.
As demonstrated below, none of these grounds withstands scrutiny, and Ironclad's reliance upon them — individually or collectively — constitutes bad faith.
III. Florida Bad-Faith Law — Statutory and Common-Law Framework
A. Florida Statute § 624.155 — Civil Remedy for Bad Faith
Florida law provides insureds with a robust statutory cause of action against insurers that fail to act in good faith in the handling and settlement of insurance claims. Specifically, Section 624.155(1)(b)(1) of the Florida Statutes provides that any person may bring a civil action against an insurer when such person is damaged by the insurer's "[n]ot attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests."
This statutory remedy reflects the Florida Legislature's recognition that the insurance relationship is one of utmost good faith, and that insurers occupy a position of superior bargaining power that demands they be held to a heightened standard of conduct in their dealings with their insureds. The statute authorizes the recovery of consequential damages — including damages that may exceed the limits of the insurance policy — as well as attorneys' fees and costs incurred by the insured in prosecuting the bad-faith claim.
Under Section 624.155(3)(a), the filing of a Civil Remedy Notice with the Florida Department of Financial Services is a condition precedent to the commencement of a bad-faith action. The insurer then has sixty (60) days from receipt of the Civil Remedy Notice to cure its conduct before the insured may file suit. This letter is intended to serve as advance notice to Ironclad of VHG's position and to afford Ironclad an opportunity to correct its wrongful denial before VHG takes the formal step of filing a Civil Remedy Notice. VHG expressly reserves the right to file a Civil Remedy Notice with the Florida Department of Financial Services if Ironclad does not cure its wrongful denial within the timeframes specified herein.
B. Common-Law Bad Faith
In addition to its statutory remedy, Florida recognizes a common-law cause of action for bad-faith failure to pay first-party insurance claims. Under Florida common law, an insurer acts in bad faith when it denies or delays payment of a claim without a reasonable basis for doing so, or when it fails to conduct a fair, balanced, and thorough investigation of the claim before making a coverage determination. See, e.g., Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004); Harborline Industries, 658 So. 2d 55 (Fla. 1995).
The totality of the circumstances standard applied in Florida bad-faith cases examines the insurer's conduct throughout the claims-handling process, including whether the insurer adequately investigated the claim, whether the insurer's coverage determination was supported by a reasonable factual and legal basis, whether the insurer engaged in delay tactics, and whether the insurer placed its own financial interests above those of its insured.
Ironclad's conduct in this matter satisfies both the statutory and common-law standards for bad faith, as detailed in the sections that follow. Each of Ironclad's four stated grounds for denial is either factually baseless or legally unsupportable, and the denial, viewed as a whole, reflects a pattern of unreasonable claims handling designed to avoid Ironclad's contractual obligations to VHG.
C. Ironclad's NAIC Number and Regulatory Standing
Ironclad Indemnity Corporation, NAIC Number 20537, is a Connecticut-domiciled stock insurance company licensed and authorized to transact the business of insurance in the State of Florida. The Policy at issue was issued by Ironclad to VHG and covers VHG's Florida-located properties. As such, Ironclad is subject to the full regulatory authority of the Florida Department of Financial Services and the Florida Office of Insurance Regulation with respect to claims arising from or related to the Policy, including compliance with the Florida Insurance Code and the unfair claims settlement practices provisions of Chapter 626, Part X, of the Florida Statutes.
IV. Ironclad's Denial Lacks Any Reasonable Basis
Each of the four grounds cited by Ironclad in its February 3, 2023 denial is without merit. The following analysis demonstrates not merely that Ironclad's denial was wrong, but that it was unreasonable — a distinction critical to establishing bad faith under Florida law.
A. The Named Windstorm Sub-Limit Was Deleted at the July 2022 Renewal
Ironclad's reliance on a purported $15,000,000 named-windstorm sub-limit for business-interruption losses is flatly contradicted by the documentary record of the July 2022 policy renewal negotiations. This argument is not merely incorrect; it is affirmatively disingenuous, and Ironclad's assertion of it in the denial letter — when its own files contain the evidence of the sub-limit's deletion — is among the clearest indications of bad faith in this entire matter.
During the 2022 renewal cycle, VHG, acting through its insurance broker of record, Tidewater Risk Advisors LLC (account executive Franklin Orde, located at 2600 S. Bayshore Drive, Suite 800, Miami, Florida 33133), specifically negotiated the express deletion of the named-windstorm sub-limit that had appeared in prior policy years. The removal of this sub-limit was a central objective of VHG's renewal strategy, as VHG recognized the significant hurricane exposure of its Florida coastal resort portfolio and sought to obtain coverage commensurate with that exposure. The deletion of the sub-limit was agreed upon by Ironclad's underwriting department as a term of the renewal, and VHG paid a substantial increase in premium to secure this enhanced coverage.
Specifically, VHG's aggregate annual premium across all layers of its property and business-interruption insurance program increased to $1,840,000, with the Ironclad primary layer premium alone rising to $980,000 — a figure that reflected the broadened coverage resulting from the removal of the named-windstorm sub-limit and other coverage enhancements negotiated at renewal. Ironclad's own underwriting files, including the underwriting submission package, quotation correspondence, binder, and final policy issuance documentation, will confirm that the named-windstorm sub-limit was deleted as a condition of the July 2022 renewal. The premium VHG paid was calculated to reflect this broader coverage, and Ironclad accepted and retained that premium.
Sandra Pellegrini, VHG's Vice President of Risk Management, relied upon the representations of Tidewater Risk Advisors and Ironclad's own underwriting communications in confirming that the named-windstorm sub-limit had been removed from the 2022-2023 policy year. Ironclad's belated assertion of this sub-limit in the context of a coverage denial — months after a catastrophic loss — constitutes an after-the-fact reinterpretation of the Policy terms designed to avoid Ironclad's contractual obligations. Such conduct is the very definition of bad faith.
To be clear, the full primary layer limit for business interruption under Policy No. IIC-PRP-2022-07541 is $25,000,000 per occurrence, above a $500,000 deductible. There is no named-windstorm sub-limit in the current policy. Ironclad's claim to the contrary is unsupported by the Policy as issued and cannot be maintained in good faith.
B. The Period of Restoration Was Reasonable Under the Circumstances
Ironclad's second stated basis for denial — that VHG's period of restoration was unreasonably prolonged — ignores the unprecedented scope of Hurricane Callista's destruction and the practical realities of post-hurricane reconstruction in the Florida Keys and along the Gulf Coast of Florida. This argument is both factually unsupported and legally deficient.
The Policy defines the "period of restoration" as the period beginning when the loss occurs and ending when the damaged property is or should be repaired, rebuilt, or replaced with reasonable speed and similar quality. Ironclad seizes upon the "should be" and "reasonable speed" language to argue that VHG could have and should have restored its properties more quickly. But Ironclad has offered no credible evidence — no engineering analysis, no construction timeline study, no expert opinion — to support this contention. Instead, Ironclad has simply asserted, in conclusory fashion, that the restoration periods were too long, without any analysis of the actual conditions that VHG and its contractors confronted.
The reality is that the restoration timelines for each of VHG's three properties were not merely reasonable — they were remarkably efficient given the circumstances. Hurricane Callista was a Category 4 storm with 145 mph sustained winds that devastated the Florida Keys and significant portions of the Gulf Coast. In the aftermath of the storm, the region experienced acute shortages of qualified contractors and construction labor, disruptions to building-material supply chains, extensive damage to transportation infrastructure including roads, bridges, and causeways essential to accessing the Florida Keys, prolonged interruptions to utility services including electrical power and potable water, and significant delays in local permitting and building-inspection processes as municipal governments contended with the overwhelming volume of damage assessments and repair applications.
Grand Key Resort's 178-day closure — from September 18, 2022 through March 15, 2023 — was entirely reasonable for a 312-room luxury resort with marina facilities that sustained catastrophic wind and water damage. The Grand Key property required the complete replacement of multiple guest-room building roofs, the reconstruction of the marina, the renovation of the main restaurant and spa complex, and extensive infrastructure repairs. The restoration involved coordination with multiple contractors and subcontractors, compliance with Monroe County building codes, and the sequencing of work to ensure structural integrity before interior finishes could be installed.
Harborview's 135-day closure — from September 18, 2022 through January 31, 2023 — was likewise appropriate in light of the scope of damage sustained by a 224-room hotel and 40,000 square-foot conference center. The conference-center wing required substantial structural repair, and the lower floors of the hotel tower that had been flooded by storm surge required complete remediation, including mold abatement, before reconstruction could proceed.
Sunset Shores' timeline is perhaps the strongest evidence of VHG's diligent approach to restoration. VHG achieved a partial reopening of Sunset Shores within just 73 days of full closure, and then conducted a phased restoration that brought the property back to full operational capacity by February 28, 2023. This timeline demonstrates VHG's proactive and aggressive approach to restoring its properties and mitigating its business-interruption losses.
It bears emphasis that Ironclad's own independent adjuster, Denise Whitford of Arbor Claims Services LLC, inspected all three properties beginning October 5, 2022 and documented the extensive nature of the damage. Ms. Whitford's inspection reports, which are in Ironclad's possession, confirm the severity of the damage and the magnitude of the reconstruction effort required. Ironclad's claim that VHG unreasonably delayed restoration is not supported by its own adjuster's findings.
C. The Concurrent Causation / Flood Exclusion Argument Is Without Merit
Ironclad's third basis for denial — that portions of VHG's claim are excluded because damage at Grand Key Resort resulted from storm surge, which Ironclad characterizes as "flood" — is contrary to well-established Florida law governing concurrent causation in insurance disputes.
Ironclad's denial letter invokes the Policy's flood exclusion and anti-concurrent causation ("ACC") clause to argue that any damage attributable to storm surge is excluded from coverage, and that the ACC clause precludes coverage even where wind (a covered peril) and storm surge (an excluded peril) combine to cause damage. This argument is a well-worn coverage-avoidance strategy that has been repeatedly rejected by Florida courts.
Under Florida's efficient proximate cause doctrine, where a covered peril (wind) and an excluded peril (storm surge or flood) combine to cause indivisible damage, the insurer bears the burden of segregating the excluded losses from the covered losses. The insurer may not deny the entire claim on the basis that an excluded cause contributed to the damage; rather, it must identify, with specificity and through competent evidence, the portion of the damage attributable to the excluded cause. See Ostrander Partners LLC, 208 So. 3d 694 (Fla. 2016); see also Marvista, LLC v. Certain Underwriters at Lloyd's, London, 11th Cir. Case No. 20-12849 (applying Florida law).
Hurricane Callista made landfall as a Category 4 hurricane with sustained winds of 145 miles per hour. Wind was indisputably a dominant — indeed, the predominant — cause of the damage sustained by Grand Key Resort and the other VHG properties. To the extent storm surge also contributed to damage at Grand Key Resort, Ironclad bore the obligation to conduct a competent engineering analysis to allocate losses between wind and flood causes. Ironclad has not performed any such analysis. It has not retained a forensic engineer. It has not produced any expert report distinguishing wind damage from flood damage. Instead, Ironclad has issued a blanket invocation of the flood exclusion and ACC clause to deny the entire claim — a strategy that is both legally impermissible under Florida law and indicative of bad faith.
Moreover, to the extent the ACC clause in the Policy purports to override the efficient proximate cause doctrine, such clauses are subject to careful scrutiny under Florida law and may be unenforceable to the extent they are used to deny coverage for losses predominantly caused by a covered peril. Ironclad cannot rely on a contractual provision of questionable enforceability to deny a catastrophic claim without even undertaking the factual investigation necessary to determine whether the excluded peril actually contributed to the losses at issue.
D. The Failure-to-Mitigate Defense Is Pretextual
Ironclad's fourth and final basis for denial — that VHG failed to take reasonable steps to reduce the period of business interruption — is entirely pretextual and is belied by the factual record.
VHG took immediate and aggressive steps in the aftermath of Hurricane Callista to secure its properties, engage contractors, and commence restoration as soon as physical access was restored. VHG's Chief Executive Officer, Marcus Ellsworth, and its Chief Financial Officer, Diane Calder, personally directed the company's disaster-response and restoration efforts, including the establishment of a centralized restoration command structure, the engagement of multiple general contractors and specialty subcontractors, and the coordination of emergency repairs to prevent further damage to the properties.
VHG incurred substantial extra expense — which it has documented and submitted to Ironclad — to accelerate the restoration timeline. These extra-expense expenditures included the engagement of emergency roofing contractors, the procurement of building materials at premium prices to avoid supply-chain delays, the use of temporary generators and water-treatment systems, and the deployment of additional labor crews on overtime and weekend schedules.
The results of VHG's mitigation efforts speak for themselves. Sunset Shores achieved a partial reopening within just 73 days. Harborview reopened within 135 days. Grand Key Resort — the most severely damaged property, located in the most difficult-to-access location in the Florida Keys — reopened within 178 days. These are remarkable timelines for the restoration of major hospitality properties following a Category 4 hurricane.
Ironclad's denial letter does not identify a single specific mitigation step that VHG failed to take. It does not cite any particular contractor that VHG should have retained but did not. It does not identify any particular repair that VHG unreasonably delayed. It does not point to any alternative restoration approach that would have shortened the interruption period. Instead, Ironclad has asserted, in wholly conclusory terms, that VHG "failed to take reasonable steps" — a naked allegation without any factual foundation. Such bare and unsupported assertions do not constitute a reasonable basis for denial and are further evidence of Ironclad's bad faith.
V. Ironclad's Denial Harms VHG and Its Stakeholders
The consequences of Ironclad's wrongful denial are severe and far-reaching. VHG is a publicly traded company listed on the Nasdaq Stock Market (ticker: VMRK), with fiscal year 2021 total revenue of approximately $412 million and EBITDA of approximately $78 million. The simultaneous loss of three flagship resort properties for periods ranging from 73 to 178 days has materially and adversely impacted VHG's financial performance, cash flows, and shareholder value. VHG's stock price has declined significantly since Hurricane Callista, in part due to the market's uncertainty regarding VHG's ability to recover its insured losses.
The $60,000,000 in business-interruption losses at issue represents a significant portion of VHG's annual revenue and an even more significant portion of its annual earnings. These are precisely the losses that VHG's insurance program was designed and purchased to cover. VHG assembled a comprehensive all-risk property and business-interruption insurance tower with a total capacity of $60,000,000, structured as follows:
• Primary Layer: Ironclad Indemnity Corporation — $25,000,000 per occurrence (Policy No. IIC-PRP-2022-07541)
• First Excess Layer: Pinnacle Surplus Lines Inc. — $15,000,000 excess of $25,000,000 (Policy No. PSL-XS1-2022-3390)
• Second Excess Layer: Montclair Assurance Company — $10,000,000 excess of $40,000,000 (Policy No. MAC-XS2-2022-09817)
• Third Excess Layer: Sovereign Re Ltd. — $10,000,000 excess of $50,000,000 (Policy No. SRL-XS3-2022-5102)
VHG paid aggregate annual premiums of $1,840,000 across this insurance tower — a substantial investment made specifically to protect against catastrophic events such as Hurricane Callista. Ironclad's wrongful denial forces VHG to absorb losses that Ironclad was contractually obligated to indemnify, compounding the devastating impact of the hurricane itself. The ongoing financial harm to VHG, its employees, its shareholders, and its creditors is directly attributable to Ironclad's refusal to honor its contractual obligations.
VI. Impact on Excess Carriers
Ironclad's wrongful denial of coverage at the primary layer has cascading consequences for VHG's ability to access the remaining layers of its insurance tower. As lead carrier in the program, Ironclad's coverage determination has a direct and predictable influence on the positions taken by the excess-layer carriers:
• Pinnacle Surplus Lines Inc. (First Excess Layer, $15,000,000 xs $25,000,000, Policy No. PSL-XS1-2022-3390) issued a follow-form denial of coverage on February 10, 2023, expressly citing and relying upon Ironclad's February 3, 2023 primary-layer denial as the basis for its own coverage determination. Pinnacle's denial was a direct and foreseeable consequence of Ironclad's action.
• Montclair Assurance Company (Second Excess Layer, $10,000,000 xs $40,000,000, Policy No. MAC-XS2-2022-09817) has issued a reservation of rights but has not yet formally denied coverage. However, Montclair's ability to evaluate and pay VHG's claim is effectively blocked so long as the primary and first excess layers remain unresolved.
• Sovereign Re Ltd. (Third Excess Layer, $10,000,000 xs $50,000,000, Policy No. SRL-XS3-2022-5102) has similarly issued a reservation of rights but has not formally denied coverage. Like Montclair, Sovereign Re's obligations are contingent on the resolution of the underlying layers.
Ironclad's conduct as lead carrier is obstructing VHG's ability to access its full $60,000,000 insurance tower. By wrongfully denying coverage at the primary level, Ironclad has created a domino effect that has frozen VHG's recovery across the entire program. This is not a collateral consequence of Ironclad's denial — it is a foreseeable and direct result. Ironclad may be independently liable for damages caused by the excess carriers' refusal or inability to pay VHG's claim, to the extent that Ironclad's bad-faith denial triggered, encouraged, or provided the basis for those refusals.
VII. Demand for Immediate Action
A. Specific Demands
In light of the foregoing, VHG, through undersigned counsel, demands that Ironclad take the following actions immediately:
1. Immediately rescind its February 3, 2023 denial of coverage and withdraw each of the four stated bases for denial.
2. Acknowledge coverage under Policy No. IIC-PRP-2022-07541 for VHG's Hurricane Callista business-interruption losses up to the full $25,000,000 primary layer limit, less the applicable $500,000 per-occurrence deductible.
3. Make prompt payment of VHG's covered losses as documented in the sworn statement in proof of loss submitted on November 15, 2022, together with any additional amounts that have accrued since that submission.
4. Notify the excess carriers — Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd. — that coverage under the primary layer has been affirmed and that the primary layer will be exhausted by VHG's claim, so that VHG may access the excess layers of its insurance tower for recovery of the balance of its $60,000,000 in losses.
5. Preserve all documents and electronically stored information related to Ironclad's handling of VHG's claim, including but not limited to: internal memoranda and correspondence; communications with Arbor Claims Services LLC and Denise Whitford; communications with any of the excess carriers, including Pinnacle Surplus Lines Inc., Montclair Assurance Company, and Sovereign Re Ltd.; underwriting files, including all documents related to the July 2022 renewal and the deletion of the named-windstorm sub-limit; claims committee meeting minutes and presentations; reserve analyses and reserve-setting documentation; actuarial analyses; and any other documents or records relating to Ironclad's evaluation, investigation, or disposition of VHG's claim.
B. Deadline and Consequences
VHG demands a substantive written response to this letter within thirty (30) days of the date hereof — that is, by no later than March 17, 2023. For the avoidance of doubt, VHG does not consider a perfunctory acknowledgment of receipt or a rote reaffirmation of the denial to constitute a "substantive response." VHG expects Ironclad to meaningfully address the specific arguments raised in this letter and to confirm either that it will rescind its denial and commence payment, or to articulate, with specificity and supporting evidence, the basis upon which it maintains its coverage position.
If Ironclad does not rescind its denial and commence payment of VHG's covered losses within the thirty-day period, VHG will take the following actions without further notice:
• File a Civil Remedy Notice under Section 624.155 of the Florida Statutes with the Florida Department of Financial Services, formally initiating the statutory bad-faith process;
• Commence litigation against Ironclad in the appropriate court of competent jurisdiction in the State of Florida, seeking recovery of the full amount of VHG's covered losses under the Policy, together with consequential damages, statutory bad-faith damages, prejudgment interest at the applicable statutory rate, and attorneys' fees and costs incurred in prosecuting VHG's claims; and
• Pursue all other remedies available to VHG under Florida statutory and common law, including but not limited to punitive damages to the extent permitted by Section 624.155 and applicable Florida case law, and any administrative complaints or regulatory proceedings that may be warranted by Ironclad's conduct.
VHG intends to pursue its claims vigorously and to the fullest extent permitted by law. The financial magnitude of this dispute, combined with the egregiousness of Ironclad's claims-handling conduct, warrants the imposition of the most significant remedies available.
VIII. Reservation of Rights by VHG
VHG reserves all rights and remedies available to it under the Policy, Florida statutory law, Florida common law, and any other applicable law. Nothing in this letter shall be construed as a waiver, relinquishment, or limitation of any right, claim, cause of action, or defense that VHG may have against Ironclad or any other party. VHG's enumeration of specific claims and demands in this letter is not intended to be exhaustive and does not preclude VHG from asserting additional claims or seeking additional remedies as the facts and circumstances may warrant.
Without limiting the generality of the foregoing, VHG expressly reserves the right to seek damages beyond the limits of the Policy, including consequential damages for financial harm caused by Ironclad's wrongful denial, statutory penalties and damages under Section 624.155 of the Florida Statutes, and attorneys' fees and costs incurred in connection with the enforcement of VHG's rights.
IX. Privileged and Confidential Communication
This letter is sent in furtherance of settlement negotiations and is protected by applicable settlement privilege under Florida law and federal common law. However, VHG expressly reserves the right to use this letter, and Ironclad's response or failure to respond, as evidence of VHG's compliance with the notice requirements of Section 624.155(3)(a) of the Florida Statutes, and as evidence of Ironclad's knowledge of the bases for VHG's bad-faith claim. Nothing in this letter shall be construed as an offer of compromise or an admission of any fact, and VHG reserves all rights to introduce this letter in evidence in any subsequent proceeding to the extent permitted by applicable law and the Florida Rules of Evidence.
VHG remains willing to engage in good-faith discussions with Ironclad to resolve this claim promptly, fairly, and without the need for protracted and costly litigation. VHG has no desire to litigate if a reasonable resolution can be achieved. However, Ironclad's current posture — a wholesale denial of coverage on grounds that are factually unsupported and legally untenable — leaves VHG no reasonable alternative but to prepare for and pursue formal legal remedies. The ball is now squarely in Ironclad's court.
We request that all future communications regarding this claim, whether from Ironclad directly or from its outside counsel, be directed to the undersigned at Calderwood & Harkness LLP, 333 SE 2nd Avenue, Suite 4400, Miami, Florida 33131. I may also be reached by telephone at (305) 814-9012 and by electronic mail at eforsythe@calderwoodharkness.com.
We look forward to Ironclad's prompt and substantive response.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Elaine Forsythe Partner 333 SE 2nd Avenue, Suite 4400 Miami, FL 33131 Telephone: (305) 814-9012
Email: eforsythe@calderwoodharkness.com
cc: Gregory Stanton, Esq., Fendowell Rourke & Stanton LLP, 280 Trumbull Street, Suite 2200, Hartford, CT 06103 (Outside Counsel for Ironclad Indemnity Corporation)
cc: Nathaniel Driscoll, Esq., General Counsel, Verimark Hospitality Group Inc., 1900 Brickell Avenue, Suite 3200, Miami, FL 33129
cc: Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc., 1900 Brickell Avenue, Suite 3200, Miami, FL 33129
Enclosures:
1. Copy of Ironclad Indemnity Corporation's Coverage Denial Letter dated February 3, 2023
2. Copy of Calderwood & Harkness LLP's Response to Ironclad's Reservation of Rights Letter dated October 25, 2022

CALDERWOOD & HARKNESS LLP Attorneys at Law

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts