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

demand-letter-sovereign-re.docx DOCUMENT Antitrust

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CALDERWOOD & HARKNESS LLP Attorneys at Law

333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 555-7200 Facsimile: (305) 555-7201 www.calderwoodharkness.com

November 21, 2022

VIA FACSIMILE AND EMAIL

Sovereign Re Ltd. 14 Front Street Hamilton HM 11, Bermuda

Attention: Claims Department / General Counsel

Re: Verimark Hospitality Group Inc. — Demand for Payment Under Policy No. SRL-XS3-2022-5102 Policy Period: July 1, 2022 – July 1, 2023 Loss Date: September 18, 2022 (Hurricane Callista) Claim: Business-Interruption Losses — Third Excess Layer ($10,000,000 xs $50,000,000)

Dear Sir or Madam:

This firm represents Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker: VMRK), with its principal offices located at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. This engagement is referenced internally as Matter No. 1021-00003, and I am writing in my capacity as the Responsible Partner for this matter.

The purpose of this letter is to make a formal demand upon Sovereign Re Ltd. ("Sovereign Re") for the immediate payment of the full Ten Million Dollars ($10,000,000) limit of liability under Sovereign Re's third excess layer policy, bearing Policy No. SRL-XS3-2022-5102, which attaches at Fifty Million Dollars ($50,000,000) in excess of underlying limits. As set forth in detail below, VHG's total business-interruption losses arising from Hurricane Callista, which made landfall on September 18, 2022, exceed Sixty Million Dollars ($60,000,000), thereby exhausting the entire insurance tower — including the full limit of Sovereign Re's layer. Sovereign Re's obligation to pay is clear, unambiguous, and presently due.

I. THE INSURED AND THE INSURANCE PROGRAM

A. VHG's Business

Verimark Hospitality Group Inc. is a publicly traded hospitality and real-estate company listed on the Nasdaq Stock Market under the ticker symbol VMRK. VHG owns and operates luxury resort hotels, marinas, and conference centers throughout the State of Florida. For the fiscal year ended December 31, 2021, VHG reported total revenues of approximately $412 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $78 million. VHG's senior management includes Marcus Ellsworth, Chief Executive Officer; Diane Calder, Chief Financial Officer; Nathaniel Driscoll, General Counsel; and Sandra Pellegrini, Vice President of Risk Management. VHG is a sophisticated enterprise with a well-documented risk management program and a long history of maintaining comprehensive property and casualty insurance coverage for its Florida resort portfolio.

B. The Insurance Tower

For the policy period July 1, 2022 through July 1, 2023, VHG's property and business-interruption insurance program was placed by Tidewater Risk Advisors LLC, the broker of record for VHG's property program. The account executive responsible for the placement was Franklin Orde. All policies in the program were written on an "all risks" basis, providing coverage for all risks of direct physical loss or damage, including business interruption and extra expense, subject only to stated exclusions, conditions, and limitations.

The total tower limit is Sixty Million Dollars ($60,000,000) in excess of a Five Hundred Thousand Dollar ($500,000) per-occurrence deductible. The aggregate annual premium paid by VHG across all layers of the tower was One Million Eight Hundred Forty Thousand Dollars ($1,840,000). The tower is structured as follows:

Each excess layer was placed on a follow-form basis, following the terms and conditions of the Ironclad Indemnity Corporation primary policy, subject to the specific terms, conditions, and endorsements set forth in the respective excess policies. VHG paid all premiums in full and on time for the policy period in question, and all policies were in full force and effect on the date of loss.

C. Sovereign Re's Policy

Sovereign Re's policy, bearing Policy No. SRL-XS3-2022-5102, constitutes the third excess layer in VHG's property and business-interruption insurance tower. The policy provides Ten Million Dollars ($10,000,000) in limits of liability and attaches at Fifty Million Dollars ($50,000,000), meaning that it becomes payable upon the exhaustion of the combined limits of the Ironclad primary policy ($25,000,000), the Pinnacle first excess policy ($15,000,000), and the Montclair second excess policy ($10,000,000). The policy period runs from July 1, 2022 through July 1, 2023. VHG paid an annual premium of One Hundred Eighty-Five Thousand Dollars ($185,000) for the Sovereign Re layer. The policy follows form to the terms and conditions of the Ironclad Indemnity Corporation primary policy, subject to the specific terms, conditions, and endorsements of the Sovereign Re excess policy itself.

II. THE LOSS — HURRICANE CALLISTA

A. Hurricane Facts

Hurricane Callista was designated and named by the National Hurricane Center of the National Oceanic and Atmospheric Administration on September 12, 2022. Over the following six days, Hurricane Callista intensified rapidly as it moved across the warm waters of the Gulf of Mexico. On September 18, 2022, at approximately 1:30 PM Eastern Daylight Time, Hurricane Callista made landfall as a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour, in the Lower Florida Keys near the Big Pine Key area.

The storm generated catastrophic storm surge of eight to fourteen (8–14) feet in Monroe County and six to ten (6–10) feet in Lee County, along with torrential rainfall and destructive wind gusts. Monroe County issued a mandatory evacuation order for all residents and visitors on September 16, 2022. Lee County followed with its own mandatory evacuation order on September 17, 2022. Hurricane Callista caused widespread devastation across the southwestern coast and island communities of Florida, resulting in billions of dollars in total insured losses across the region.

B. Damage to VHG's Properties

Three of VHG's premier resort properties suffered catastrophic property damage and prolonged business interruption as a direct result of Hurricane Callista. Each property was forced to cease all operations, resulting in the complete loss of room revenue, ancillary revenue, and conference and event revenue for extended periods. The damage to each property and the resulting business-interruption losses are summarized below.

1. Verimark Grand Key Resort (Marathon, Florida). The Verimark Grand Key Resort is located at Mile Marker 48, Marathon, Florida 33050. The property is a 312-room luxury resort and marina situated on the oceanfront in the Florida Keys. Prior to Hurricane Callista, the resort maintained an average daily rate ("ADR") of $389 and an average occupancy rate of 82%, reflecting strong demand and premium positioning in the Florida Keys luxury hospitality market.

Hurricane Callista inflicted catastrophic damage to the Verimark Grand Key Resort. The property sustained severe structural damage from sustained Category 4 winds, including significant roof damage to the main hotel building and guest room wings, destruction of the marina facilities, and widespread water intrusion affecting guest rooms, public areas, and back-of-house operations. The resort was forced to close entirely on September 18, 2022 and did not reopen to guests until March 15, 2023 — a total closure period of 178 days.

The estimated business-interruption loss attributable to the Verimark Grand Key Resort is $31,400,000. This figure includes lost room revenue, lost ancillary revenue (marina operations, food and beverage outlets, spa services, and recreational activities), and lost resort fees, all adjusted for expenses that were saved or would not have been incurred during the period of restoration. The loss calculation is based on VHG's historical financial performance at the property, adjusted for seasonality and forward-looking booking data, and was prepared by VHG's forensic accountants in accordance with standard insurance accounting methodologies.

2. Verimark Harborview Hotel & Conference Center (Fort Myers Beach, Florida). The Verimark Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931. The property comprises a 224-room full-service hotel together with a 40,000-square-foot state-of-the-art conference and event facility. Prior to Hurricane Callista, the Harborview maintained an ADR of $295 and an average occupancy rate of 74%. The property is a significant venue for corporate conferences, conventions, and destination events, and its conference and event revenue constitutes a substantial component of overall property income.

Hurricane Callista caused extensive structural and water damage to the Harborview property. Storm surge in the Fort Myers Beach area inundated the ground-level facilities, destroying mechanical systems, furnishings, and fixtures. Wind damage to the upper floors compromised the building envelope, leading to extensive water intrusion. The property was forced to close entirely on September 18, 2022 and remained closed through January 31, 2023 — a total closure period of 135 days.

The estimated business-interruption loss attributable to the Verimark Harborview Hotel & Conference Center is $18,700,000. This figure encompasses lost room revenue, lost food and beverage revenue, and, critically, the substantial loss of conference and event revenue from cancelled bookings during the fourth quarter of 2022 and early January 2023, which is historically the Harborview's peak conference season. The loss is adjusted for expenses saved during the closure period.

3. Verimark Sunset Shores (St. Pete Beach, Florida). The Verimark Sunset Shores is located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706. The property is a 186-room boutique resort situated on the Gulf of Mexico. Prior to Hurricane Callista, the Sunset Shores maintained an ADR of $342 and an average occupancy rate of 79%.

Hurricane Callista caused significant wind and water damage to the Sunset Shores property. The resort was forced into a complete closure from September 18, 2022 through November 30, 2022 — a period of 73 days. Following the initial closure, the property reopened at significantly reduced capacity while repairs to damaged guest room wings and public areas continued. The property did not return to full operational capacity until approximately February 28, 2023.

The estimated business-interruption loss attributable to the Verimark Sunset Shores is $9,900,000. This figure accounts for the complete loss of revenue during the 73-day full closure, the reduced revenue during the period of limited capacity operations from December 2022 through February 2023, and the associated extra expenses incurred in connection with the phased reopening. Saved expenses have been deducted from the claimed amount.

C. Total Claimed Loss

The aggregate business-interruption losses across VHG's three affected resort properties are as follows:

VHG's total claimed business-interruption loss of Sixty Million Dollars ($60,000,000) exceeds the entire $60,000,000 tower limit above the $500,000 per-occurrence deductible, fully exhausting all four layers of VHG's property and business-interruption insurance program, including the entirety of Sovereign Re's $10,000,000 third excess layer.

III. NOTICE AND PROOF OF LOSS

VHG has fully complied with all notice and proof-of-loss requirements under the applicable policies. VHG submitted its initial notice of loss to Ironclad Indemnity Corporation, as lead carrier under the primary policy, on September 22, 2022 — within four days of Hurricane Callista's landfall. Ironclad retained Arbor Claims Services LLC as the independent adjusting firm for the loss. Denise Whitford, the lead adjuster assigned by Arbor Claims Services, conducted initial on-site inspections of each of the three affected VHG properties beginning on October 5, 2022.

On November 15, 2022, VHG submitted its sworn statement in proof of loss, documenting aggregate business-interruption losses of Sixty Million Dollars ($60,000,000) across the three properties. The sworn statement was prepared in accordance with the requirements of the Ironclad primary policy, upon which the excess policies, including Sovereign Re's policy, follow form.

VHG has complied with all notice requirements, cooperation obligations, and proof-of-loss conditions under each policy in the tower, including as applicable to Sovereign Re's third excess layer policy. Copies of the initial notice of loss and the sworn statement in proof of loss have been or are being provided to Sovereign Re under separate cover or as enclosures to this demand letter.

IV. COVERAGE ANALYSIS — SOVEREIGN RE'S OBLIGATION TO PAY

A. All-Risk Coverage

Each policy in VHG's insurance tower, including Sovereign Re's third excess layer policy, provides "all risks" coverage for direct physical loss or damage, including business-interruption losses and extra expense. Under the well-established principles governing all-risk insurance policies, the insured bears only the burden of establishing that a covered loss has occurred; the burden then shifts to the insurer to prove the applicability of any exclusion. See, e.g., Wallach v. Rosenberg, 527 So. 2d 1386 (Fla. 3d DCA 1988); State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072 (Fla. 3d DCA 1998).

Hurricane Callista constitutes a covered occurrence under the policies. The catastrophic wind damage, structural damage, storm-surge damage, and resulting extended business interruption at all three VHG properties fall squarely within the broad coverage grant of the all-risk policies. There is no question that the losses VHG has sustained are the direct result of a covered peril.

B. Exhaustion of Underlying Layers

VHG's total business-interruption loss of $60,000,000 exceeds the combined limits of the primary layer ($25,000,000), the first excess layer ($15,000,000), and the second excess layer ($10,000,000), which together total $50,000,000 in underlying limits. Upon the exhaustion of the underlying $50,000,000 in limits, Sovereign Re's third excess layer attaches and Sovereign Re becomes liable for its full $10,000,000 limit of liability.

The remaining loss above the $50,000,000 underlying attachment point is precisely $10,000,000, which equals the full limit of Sovereign Re's third excess layer. Accordingly, Sovereign Re is obligated to pay the entirety of its $10,000,000 policy limit. There is no partial-loss issue; the loss fully exhausts Sovereign Re's layer.

It is well settled that an excess insurer's obligation to pay is triggered upon the exhaustion of the underlying layers, regardless of whether the underlying insurers have actually made payment, so long as the insured's loss equals or exceeds the attachment point of the excess policy. See Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928); see also Stempel, Stempel on Insurance Contracts § 3.04 (3d ed.). VHG's loss indisputably exceeds the attachment point, and Sovereign Re's obligation to pay its full limits is therefore ripe and unconditional.

C. No Applicable Exclusions

VHG is aware that Ironclad Indemnity Corporation issued a reservation of rights letter dated October 12, 2022, in which Ironclad asserted various coverage defenses including, among others: (i) a purported named-windstorm sub-limit of $15,000,000; (ii) concurrent causation and/or flood exclusion arguments; (iii) disputes regarding the period of restoration at the affected properties; and (iv) contentions that VHG failed to mitigate its losses.

VHG vigorously disputes each of these positions. Each is factually and legally meritless:

Named-Windstorm Sub-Limit. The named-windstorm sub-limit of $15,000,000 that appeared in VHG's prior-year policy was expressly deleted from the Ironclad primary policy at the July 2022 renewal. This deletion was confirmed in writing in broker correspondence from Tidewater Risk Advisors LLC and is reflected in the final, bound policy terms. The full $25,000,000 primary limit applies to windstorm losses, including losses arising from Hurricane Callista, without any sub-limit.

Concurrent Causation / Flood Exclusion. To the extent any carrier invokes the flood exclusion or concurrent causation arguments to reduce coverage, such arguments are inapplicable. Under the efficient proximate cause doctrine as applied by Florida courts, where wind is the efficient proximate cause of the damage, coverage for the entirety of the resulting loss is not precluded merely because flooding or storm surge may have contributed concurrently to portions of the damage. See Ostrander Partners LLC, Inc., 208 So. 3d 694 (Fla. 2016). The overwhelming cause of the damage and resulting business interruption at VHG's properties was the Category 4 hurricane winds and wind-driven rain, which constitutes a covered peril under the all-risk policies.

Period of Restoration. VHG's claimed period of restoration at each affected property is reasonable and well-supported by the facts. The severity of the damage inflicted by a Category 4 hurricane, the scale of the necessary repairs, the widespread disruption to construction supply chains and labor availability in southwest Florida in the aftermath of Hurricane Callista, and the regulatory and permitting requirements applicable to major commercial reconstruction projects all support the restoration timelines VHG has documented.

Duty to Mitigate. VHG undertook extensive and diligent mitigation efforts in the immediate aftermath of Hurricane Callista and throughout the restoration process. VHG engaged emergency response contractors within 48 hours of the storm's passage, implemented water extraction and mold remediation protocols, secured the damaged structures, and expedited the procurement of construction materials and labor. VHG did not unreasonably delay the restoration of any property.

Critically, even if any of these coverage defenses had merit at the primary level — which VHG categorically denies — such defenses do not diminish or extinguish Sovereign Re's obligation to pay its full layer limit once the underlying layers are exhausted by the loss. Sovereign Re's follow-form policy provides coverage for the same perils as the primary policy, and the loss arising from Hurricane Callista is unambiguously covered. VHG reserves all rights to challenge any and all coverage defenses raised by any carrier in the tower in any forum.

V. DEMAND FOR PAYMENT

Based on the foregoing, Verimark Hospitality Group Inc. hereby formally demands that Sovereign Re Ltd. pay the full Ten Million Dollars ($10,000,000) limit of liability under Policy No. SRL-XS3-2022-5102 for the business-interruption losses sustained as a result of Hurricane Callista.

Payment should be made within thirty (30) days of the date of this letter — that is, on or before December 21, 2022. Wire transfer instructions will be provided promptly upon confirmation of Sovereign Re's intent to honor this demand and remit payment.

VI. CONSEQUENCES OF FAILURE TO PAY

VHG has suffered catastrophic losses as a direct result of Hurricane Callista. VHG is entitled to prompt and full payment under the terms of the Sovereign Re policy. The business-interruption losses are substantial, documented, and indisputable, and they clearly exhaust every layer of VHG's insurance tower.

Should Sovereign Re fail or refuse to honor its contractual obligations under Policy No. SRL-XS3-2022-5102 within the time period set forth above, VHG will have no alternative but to pursue all available legal remedies. Sovereign Re's failure to pay will expose it to liability for, among other things:

(a) Breach of contract and recovery of the full $10,000,000 policy limit, together with prejudgment interest;

(b) Consequential and incidental damages arising from Sovereign Re's failure to indemnify VHG in a timely manner;

(c) Bad-faith claims under applicable law, including but not limited to Florida's bad-faith statutes, Fla. Stat. §§ 624.155 and 626.9541, and the common law of bad faith, which may expose Sovereign Re to liability for damages well in excess of the policy limits, including extra-contractual damages and punitive damages;

(d) Statutory penalties and interest as provided under applicable law; and

(e) Recovery of attorneys' fees and costs incurred in enforcing VHG's rights under the policy.

VHG reserves all rights and remedies available to it under the policy, at law, and in equity. The foregoing enumeration of potential claims and remedies is not exhaustive and shall not be construed as a limitation on VHG's rights.

VII. RESERVATION OF RIGHTS

Nothing in this demand letter shall be construed as a waiver, limitation, or relinquishment of any right, claim, remedy, or defense available to Verimark Hospitality Group Inc. under the Sovereign Re policy, under any other policy in the insurance tower, at law, or in equity. VHG expressly reserves all claims, including but not limited to claims for breach of contract, declaratory judgment, bad faith, statutory violations, and any other claims or causes of action arising from or relating to Sovereign Re's handling of this loss, its coverage determination, or its failure to make timely payment.

VHG further reserves all of its rights against all other carriers in the insurance tower — including Ironclad Indemnity Corporation, Pinnacle Surplus Lines Inc., and Montclair Assurance Company — as well as any other potentially responsible parties, including but not limited to reinsurers, managing general agents, and any other entities with obligations related to the Hurricane Callista loss.

VIII. REQUEST FOR RESPONSE AND CONTACT INFORMATION

VHG requests a substantive written response to this demand within thirty (30) days of the date hereof. Any response should address Sovereign Re's position with respect to coverage, the amount of the claim, and the timeline for payment.

All correspondence, notices, and communications regarding this matter should be directed to the undersigned at the following address:

Elaine Forsythe, Partner Calderwood & Harkness LLP 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 555-7200

Email: eforsythe@calderwoodharkness.com

Please reference Matter No. 1021-00003 in all correspondence and communications regarding this claim.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Elaine Forsythe Partner

cc: Nathaniel Driscoll, General Counsel, Verimark Hospitality Group Inc. Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc. Franklin Orde, Account Executive, Tidewater Risk Advisors LLC

Encl.:

1. Sworn Statement in Proof of Loss (dated November 15, 2022)

2. Summary of Business-Interruption Loss Calculations by Property

Layer	Carrier	Domicile	Policy Number	Limits	Attachment	Annual Premium
Primary	Ironclad Indemnity Corporation	Connecticut	IIC-PRP-2022-07541	$25,000,000	$500,000 deductible	$980,000
First Excess	Pinnacle Surplus Lines Inc.	Texas	PSL-XS1-2022-3390	$15,000,000	xs $25,000,000	$410,000
Second Excess	Montclair Assurance Company	New York	MAC-XS2-2022-09817	$10,000,000	xs $40,000,000	$265,000
Third Excess	Sovereign Re Ltd.	Bermuda	SRL-XS3-2022-5102	$10,000,000	xs $50,000,000	$185,000
Property	Business-Interruption Loss
Verimark Grand Key Resort	$31,400,000
Verimark Harborview Hotel & Conference Center	$18,700,000
Verimark Sunset Shores	$9,900,000
Total	$60,000,000

CALDERWOOD & HARKNESS LLP Attorneys at Law
333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 555-7200 Facsimile: (305) 555-7201 www.calderwoodharkness.com
November 21, 2022
VIA FACSIMILE AND EMAIL
Sovereign Re Ltd. 14 Front Street Hamilton HM 11, Bermuda
Attention: Claims Department / General Counsel
Re: Verimark Hospitality Group Inc. — Demand for Payment Under Policy No. SRL-XS3-2022-5102 Policy Period: July 1, 2022 – July 1, 2023 Loss Date: September 18, 2022 (Hurricane Callista) Claim: Business-Interruption Losses — Third Excess Layer ($10,000,000 xs $50,000,000)
Dear Sir or Madam:
This firm represents Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker: VMRK), with its principal offices located at 1900 Brickell Avenue, Suite 3200, Miami, Florida 33129. This engagement is referenced internally as Matter No. 1021-00003, and I am writing in my capacity as the Responsible Partner for this matter.
The purpose of this letter is to make a formal demand upon Sovereign Re Ltd. ("Sovereign Re") for the immediate payment of the full Ten Million Dollars ($10,000,000) limit of liability under Sovereign Re's third excess layer policy, bearing Policy No. SRL-XS3-2022-5102, which attaches at Fifty Million Dollars ($50,000,000) in excess of underlying limits. As set forth in detail below, VHG's total business-interruption losses arising from Hurricane Callista, which made landfall on September 18, 2022, exceed Sixty Million Dollars ($60,000,000), thereby exhausting the entire insurance tower — including the full limit of Sovereign Re's layer. Sovereign Re's obligation to pay is clear, unambiguous, and presently due.
I. THE INSURED AND THE INSURANCE PROGRAM
A. VHG's Business
Verimark Hospitality Group Inc. is a publicly traded hospitality and real-estate company listed on the Nasdaq Stock Market under the ticker symbol VMRK. VHG owns and operates luxury resort hotels, marinas, and conference centers throughout the State of Florida. For the fiscal year ended December 31, 2021, VHG reported total revenues of approximately $412 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $78 million. VHG's senior management includes Marcus Ellsworth, Chief Executive Officer; Diane Calder, Chief Financial Officer; Nathaniel Driscoll, General Counsel; and Sandra Pellegrini, Vice President of Risk Management. VHG is a sophisticated enterprise with a well-documented risk management program and a long history of maintaining comprehensive property and casualty insurance coverage for its Florida resort portfolio.
B. The Insurance Tower
For the policy period July 1, 2022 through July 1, 2023, VHG's property and business-interruption insurance program was placed by Tidewater Risk Advisors LLC, the broker of record for VHG's property program. The account executive responsible for the placement was Franklin Orde. All policies in the program were written on an "all risks" basis, providing coverage for all risks of direct physical loss or damage, including business interruption and extra expense, subject only to stated exclusions, conditions, and limitations.
The total tower limit is Sixty Million Dollars ($60,000,000) in excess of a Five Hundred Thousand Dollar ($500,000) per-occurrence deductible. The aggregate annual premium paid by VHG across all layers of the tower was One Million Eight Hundred Forty Thousand Dollars ($1,840,000). The tower is structured as follows:
Each excess layer was placed on a follow-form basis, following the terms and conditions of the Ironclad Indemnity Corporation primary policy, subject to the specific terms, conditions, and endorsements set forth in the respective excess policies. VHG paid all premiums in full and on time for the policy period in question, and all policies were in full force and effect on the date of loss.
C. Sovereign Re's Policy
Sovereign Re's policy, bearing Policy No. SRL-XS3-2022-5102, constitutes the third excess layer in VHG's property and business-interruption insurance tower. The policy provides Ten Million Dollars ($10,000,000) in limits of liability and attaches at Fifty Million Dollars ($50,000,000), meaning that it becomes payable upon the exhaustion of the combined limits of the Ironclad primary policy ($25,000,000), the Pinnacle first excess policy ($15,000,000), and the Montclair second excess policy ($10,000,000). The policy period runs from July 1, 2022 through July 1, 2023. VHG paid an annual premium of One Hundred Eighty-Five Thousand Dollars ($185,000) for the Sovereign Re layer. The policy follows form to the terms and conditions of the Ironclad Indemnity Corporation primary policy, subject to the specific terms, conditions, and endorsements of the Sovereign Re excess policy itself.
II. THE LOSS — HURRICANE CALLISTA
A. Hurricane Facts
Hurricane Callista was designated and named by the National Hurricane Center of the National Oceanic and Atmospheric Administration on September 12, 2022. Over the following six days, Hurricane Callista intensified rapidly as it moved across the warm waters of the Gulf of Mexico. On September 18, 2022, at approximately 1:30 PM Eastern Daylight Time, Hurricane Callista made landfall as a Category 4 hurricane on the Saffir-Veltason Hurricane Wind Scale, with maximum sustained winds of approximately 145 miles per hour, in the Lower Florida Keys near the Big Pine Key area.
The storm generated catastrophic storm surge of eight to fourteen (8–14) feet in Monroe County and six to ten (6–10) feet in Lee County, along with torrential rainfall and destructive wind gusts. Monroe County issued a mandatory evacuation order for all residents and visitors on September 16, 2022. Lee County followed with its own mandatory evacuation order on September 17, 2022. Hurricane Callista caused widespread devastation across the southwestern coast and island communities of Florida, resulting in billions of dollars in total insured losses across the region.
B. Damage to VHG's Properties
Three of VHG's premier resort properties suffered catastrophic property damage and prolonged business interruption as a direct result of Hurricane Callista. Each property was forced to cease all operations, resulting in the complete loss of room revenue, ancillary revenue, and conference and event revenue for extended periods. The damage to each property and the resulting business-interruption losses are summarized below.
1. Verimark Grand Key Resort (Marathon, Florida). The Verimark Grand Key Resort is located at Mile Marker 48, Marathon, Florida 33050. The property is a 312-room luxury resort and marina situated on the oceanfront in the Florida Keys. Prior to Hurricane Callista, the resort maintained an average daily rate ("ADR") of $389 and an average occupancy rate of 82%, reflecting strong demand and premium positioning in the Florida Keys luxury hospitality market.
Hurricane Callista inflicted catastrophic damage to the Verimark Grand Key Resort. The property sustained severe structural damage from sustained Category 4 winds, including significant roof damage to the main hotel building and guest room wings, destruction of the marina facilities, and widespread water intrusion affecting guest rooms, public areas, and back-of-house operations. The resort was forced to close entirely on September 18, 2022 and did not reopen to guests until March 15, 2023 — a total closure period of 178 days.
The estimated business-interruption loss attributable to the Verimark Grand Key Resort is $31,400,000. This figure includes lost room revenue, lost ancillary revenue (marina operations, food and beverage outlets, spa services, and recreational activities), and lost resort fees, all adjusted for expenses that were saved or would not have been incurred during the period of restoration. The loss calculation is based on VHG's historical financial performance at the property, adjusted for seasonality and forward-looking booking data, and was prepared by VHG's forensic accountants in accordance with standard insurance accounting methodologies.
2. Verimark Harborview Hotel & Conference Center (Fort Myers Beach, Florida). The Verimark Harborview Hotel & Conference Center is located at 1400 Estero Boulevard, Fort Myers Beach, Florida 33931. The property comprises a 224-room full-service hotel together with a 40,000-square-foot state-of-the-art conference and event facility. Prior to Hurricane Callista, the Harborview maintained an ADR of $295 and an average occupancy rate of 74%. The property is a significant venue for corporate conferences, conventions, and destination events, and its conference and event revenue constitutes a substantial component of overall property income.
Hurricane Callista caused extensive structural and water damage to the Harborview property. Storm surge in the Fort Myers Beach area inundated the ground-level facilities, destroying mechanical systems, furnishings, and fixtures. Wind damage to the upper floors compromised the building envelope, leading to extensive water intrusion. The property was forced to close entirely on September 18, 2022 and remained closed through January 31, 2023 — a total closure period of 135 days.
The estimated business-interruption loss attributable to the Verimark Harborview Hotel & Conference Center is $18,700,000. This figure encompasses lost room revenue, lost food and beverage revenue, and, critically, the substantial loss of conference and event revenue from cancelled bookings during the fourth quarter of 2022 and early January 2023, which is historically the Harborview's peak conference season. The loss is adjusted for expenses saved during the closure period.
3. Verimark Sunset Shores (St. Pete Beach, Florida). The Verimark Sunset Shores is located at 7200 Gulf Boulevard, St. Pete Beach, Florida 33706. The property is a 186-room boutique resort situated on the Gulf of Mexico. Prior to Hurricane Callista, the Sunset Shores maintained an ADR of $342 and an average occupancy rate of 79%.
Hurricane Callista caused significant wind and water damage to the Sunset Shores property. The resort was forced into a complete closure from September 18, 2022 through November 30, 2022 — a period of 73 days. Following the initial closure, the property reopened at significantly reduced capacity while repairs to damaged guest room wings and public areas continued. The property did not return to full operational capacity until approximately February 28, 2023.
The estimated business-interruption loss attributable to the Verimark Sunset Shores is $9,900,000. This figure accounts for the complete loss of revenue during the 73-day full closure, the reduced revenue during the period of limited capacity operations from December 2022 through February 2023, and the associated extra expenses incurred in connection with the phased reopening. Saved expenses have been deducted from the claimed amount.
C. Total Claimed Loss
The aggregate business-interruption losses across VHG's three affected resort properties are as follows:
VHG's total claimed business-interruption loss of Sixty Million Dollars ($60,000,000) exceeds the entire $60,000,000 tower limit above the $500,000 per-occurrence deductible, fully exhausting all four layers of VHG's property and business-interruption insurance program, including the entirety of Sovereign Re's $10,000,000 third excess layer.
III. NOTICE AND PROOF OF LOSS
VHG has fully complied with all notice and proof-of-loss requirements under the applicable policies. VHG submitted its initial notice of loss to Ironclad Indemnity Corporation, as lead carrier under the primary policy, on September 22, 2022 — within four days of Hurricane Callista's landfall. Ironclad retained Arbor Claims Services LLC as the independent adjusting firm for the loss. Denise Whitford, the lead adjuster assigned by Arbor Claims Services, conducted initial on-site inspections of each of the three affected VHG properties beginning on October 5, 2022.
On November 15, 2022, VHG submitted its sworn statement in proof of loss, documenting aggregate business-interruption losses of Sixty Million Dollars ($60,000,000) across the three properties. The sworn statement was prepared in accordance with the requirements of the Ironclad primary policy, upon which the excess policies, including Sovereign Re's policy, follow form.
VHG has complied with all notice requirements, cooperation obligations, and proof-of-loss conditions under each policy in the tower, including as applicable to Sovereign Re's third excess layer policy. Copies of the initial notice of loss and the sworn statement in proof of loss have been or are being provided to Sovereign Re under separate cover or as enclosures to this demand letter.
IV. COVERAGE ANALYSIS — SOVEREIGN RE'S OBLIGATION TO PAY
A. All-Risk Coverage
Each policy in VHG's insurance tower, including Sovereign Re's third excess layer policy, provides "all risks" coverage for direct physical loss or damage, including business-interruption losses and extra expense. Under the well-established principles governing all-risk insurance policies, the insured bears only the burden of establishing that a covered loss has occurred; the burden then shifts to the insurer to prove the applicability of any exclusion. See, e.g., Wallach v. Rosenberg, 527 So. 2d 1386 (Fla. 3d DCA 1988); State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072 (Fla. 3d DCA 1998).
Hurricane Callista constitutes a covered occurrence under the policies. The catastrophic wind damage, structural damage, storm-surge damage, and resulting extended business interruption at all three VHG properties fall squarely within the broad coverage grant of the all-risk policies. There is no question that the losses VHG has sustained are the direct result of a covered peril.
B. Exhaustion of Underlying Layers
VHG's total business-interruption loss of $60,000,000 exceeds the combined limits of the primary layer ($25,000,000), the first excess layer ($15,000,000), and the second excess layer ($10,000,000), which together total $50,000,000 in underlying limits. Upon the exhaustion of the underlying $50,000,000 in limits, Sovereign Re's third excess layer attaches and Sovereign Re becomes liable for its full $10,000,000 limit of liability.
The remaining loss above the $50,000,000 underlying attachment point is precisely $10,000,000, which equals the full limit of Sovereign Re's third excess layer. Accordingly, Sovereign Re is obligated to pay the entirety of its $10,000,000 policy limit. There is no partial-loss issue; the loss fully exhausts Sovereign Re's layer.
It is well settled that an excess insurer's obligation to pay is triggered upon the exhaustion of the underlying layers, regardless of whether the underlying insurers have actually made payment, so long as the insured's loss equals or exceeds the attachment point of the excess policy. See Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928); see also Stempel, Stempel on Insurance Contracts § 3.04 (3d ed.). VHG's loss indisputably exceeds the attachment point, and Sovereign Re's obligation to pay its full limits is therefore ripe and unconditional.
C. No Applicable Exclusions
VHG is aware that Ironclad Indemnity Corporation issued a reservation of rights letter dated October 12, 2022, in which Ironclad asserted various coverage defenses including, among others: (i) a purported named-windstorm sub-limit of $15,000,000; (ii) concurrent causation and/or flood exclusion arguments; (iii) disputes regarding the period of restoration at the affected properties; and (iv) contentions that VHG failed to mitigate its losses.
VHG vigorously disputes each of these positions. Each is factually and legally meritless:
Named-Windstorm Sub-Limit. The named-windstorm sub-limit of $15,000,000 that appeared in VHG's prior-year policy was expressly deleted from the Ironclad primary policy at the July 2022 renewal. This deletion was confirmed in writing in broker correspondence from Tidewater Risk Advisors LLC and is reflected in the final, bound policy terms. The full $25,000,000 primary limit applies to windstorm losses, including losses arising from Hurricane Callista, without any sub-limit.
Concurrent Causation / Flood Exclusion. To the extent any carrier invokes the flood exclusion or concurrent causation arguments to reduce coverage, such arguments are inapplicable. Under the efficient proximate cause doctrine as applied by Florida courts, where wind is the efficient proximate cause of the damage, coverage for the entirety of the resulting loss is not precluded merely because flooding or storm surge may have contributed concurrently to portions of the damage. See Ostrander Partners LLC, Inc., 208 So. 3d 694 (Fla. 2016). The overwhelming cause of the damage and resulting business interruption at VHG's properties was the Category 4 hurricane winds and wind-driven rain, which constitutes a covered peril under the all-risk policies.
Period of Restoration. VHG's claimed period of restoration at each affected property is reasonable and well-supported by the facts. The severity of the damage inflicted by a Category 4 hurricane, the scale of the necessary repairs, the widespread disruption to construction supply chains and labor availability in southwest Florida in the aftermath of Hurricane Callista, and the regulatory and permitting requirements applicable to major commercial reconstruction projects all support the restoration timelines VHG has documented.
Duty to Mitigate. VHG undertook extensive and diligent mitigation efforts in the immediate aftermath of Hurricane Callista and throughout the restoration process. VHG engaged emergency response contractors within 48 hours of the storm's passage, implemented water extraction and mold remediation protocols, secured the damaged structures, and expedited the procurement of construction materials and labor. VHG did not unreasonably delay the restoration of any property.
Critically, even if any of these coverage defenses had merit at the primary level — which VHG categorically denies — such defenses do not diminish or extinguish Sovereign Re's obligation to pay its full layer limit once the underlying layers are exhausted by the loss. Sovereign Re's follow-form policy provides coverage for the same perils as the primary policy, and the loss arising from Hurricane Callista is unambiguously covered. VHG reserves all rights to challenge any and all coverage defenses raised by any carrier in the tower in any forum.
V. DEMAND FOR PAYMENT
Based on the foregoing, Verimark Hospitality Group Inc. hereby formally demands that Sovereign Re Ltd. pay the full Ten Million Dollars ($10,000,000) limit of liability under Policy No. SRL-XS3-2022-5102 for the business-interruption losses sustained as a result of Hurricane Callista.
Payment should be made within thirty (30) days of the date of this letter — that is, on or before December 21, 2022. Wire transfer instructions will be provided promptly upon confirmation of Sovereign Re's intent to honor this demand and remit payment.
VI. CONSEQUENCES OF FAILURE TO PAY
VHG has suffered catastrophic losses as a direct result of Hurricane Callista. VHG is entitled to prompt and full payment under the terms of the Sovereign Re policy. The business-interruption losses are substantial, documented, and indisputable, and they clearly exhaust every layer of VHG's insurance tower.
Should Sovereign Re fail or refuse to honor its contractual obligations under Policy No. SRL-XS3-2022-5102 within the time period set forth above, VHG will have no alternative but to pursue all available legal remedies. Sovereign Re's failure to pay will expose it to liability for, among other things:
(a) Breach of contract and recovery of the full $10,000,000 policy limit, together with prejudgment interest;
(b) Consequential and incidental damages arising from Sovereign Re's failure to indemnify VHG in a timely manner;
(c) Bad-faith claims under applicable law, including but not limited to Florida's bad-faith statutes, Fla. Stat. §§ 624.155 and 626.9541, and the common law of bad faith, which may expose Sovereign Re to liability for damages well in excess of the policy limits, including extra-contractual damages and punitive damages;
(d) Statutory penalties and interest as provided under applicable law; and
(e) Recovery of attorneys' fees and costs incurred in enforcing VHG's rights under the policy.
VHG reserves all rights and remedies available to it under the policy, at law, and in equity. The foregoing enumeration of potential claims and remedies is not exhaustive and shall not be construed as a limitation on VHG's rights.
VII. RESERVATION OF RIGHTS
Nothing in this demand letter shall be construed as a waiver, limitation, or relinquishment of any right, claim, remedy, or defense available to Verimark Hospitality Group Inc. under the Sovereign Re policy, under any other policy in the insurance tower, at law, or in equity. VHG expressly reserves all claims, including but not limited to claims for breach of contract, declaratory judgment, bad faith, statutory violations, and any other claims or causes of action arising from or relating to Sovereign Re's handling of this loss, its coverage determination, or its failure to make timely payment.
VHG further reserves all of its rights against all other carriers in the insurance tower — including Ironclad Indemnity Corporation, Pinnacle Surplus Lines Inc., and Montclair Assurance Company — as well as any other potentially responsible parties, including but not limited to reinsurers, managing general agents, and any other entities with obligations related to the Hurricane Callista loss.
VIII. REQUEST FOR RESPONSE AND CONTACT INFORMATION
VHG requests a substantive written response to this demand within thirty (30) days of the date hereof. Any response should address Sovereign Re's position with respect to coverage, the amount of the claim, and the timeline for payment.
All correspondence, notices, and communications regarding this matter should be directed to the undersigned at the following address:
Elaine Forsythe, Partner Calderwood & Harkness LLP 333 SE 2nd Avenue, Suite 4400 Miami, Florida 33131 Telephone: (305) 555-7200
Email: eforsythe@calderwoodharkness.com
Please reference Matter No. 1021-00003 in all correspondence and communications regarding this claim.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Elaine Forsythe Partner
cc: Nathaniel Driscoll, General Counsel, Verimark Hospitality Group Inc. Sandra Pellegrini, Vice President of Risk Management, Verimark Hospitality Group Inc. Franklin Orde, Account Executive, Tidewater Risk Advisors LLC
Encl.:
1. Sworn Statement in Proof of Loss (dated November 15, 2022)
2. Summary of Business-Interruption Loss Calculations by Property
Layer | Carrier | Domicile | Policy Number | Limits | Attachment | Annual Premium
Primary | Ironclad Indemnity Corporation | Connecticut | IIC-PRP-2022-07541 | $25,000,000 | $500,000 deductible | $980,000
First Excess | Pinnacle Surplus Lines Inc. | Texas | PSL-XS1-2022-3390 | $15,000,000 | xs $25,000,000 | $410,000
Second Excess | Montclair Assurance Company | New York | MAC-XS2-2022-09817 | $10,000,000 | xs $40,000,000 | $265,000
Third Excess | Sovereign Re Ltd. | Bermuda | SRL-XS3-2022-5102 | $10,000,000 | xs $50,000,000 | $185,000
Property | Business-Interruption Loss
Verimark Grand Key Resort | $31,400,000
Verimark Harborview Hotel & Conference Center | $18,700,000
Verimark Sunset Shores | $9,900,000
Total | $60,000,000

CALDERWOOD & HARKNESS LLP Attorneys at Law

VIA FACSIMILE AND EMAIL

I. THE INSURED AND THE INSURANCE PROGRAM

III. NOTICE AND PROOF OF LOSS

V. DEMAND FOR PAYMENT

VI. CONSEQUENCES OF FAILURE TO PAY

VII. RESERVATION OF RIGHTS

VIII. REQUEST FOR RESPONSE AND CONTACT INFORMATION

CALDERWOOD & HARKNESS LLP

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