MEMORANDUM

MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
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I. Executive Summary
This memorandum analyzes the insurance requirements set forth in the draft Loan Agreement and Mortgage circulated by Whitford Baines & Driscoll LLP ("WBD"), lender's counsel (Philip Tarrant Corporation, Partner, and Catherine Yee, Senior Associate), on December 19, 2022, on behalf of Pinnacle Atlantic Capital, LLC ("PAC" or the "Lender"), in connection with the proposed $160,000,000 first mortgage loan (the "Loan") to Coral Palms Resort Holdings LLC (the "Borrower"), a wholly owned indirect subsidiary of our client, Verimark Hospitality Group Inc. ("VHG").
The purpose of this memorandum is to compare the Lender's insurance requirements against VHG's existing insurance program for the Coral Palms Grand Resort & Spa (the "Property"), as currently brokered by Castlegate Risk Advisors LLC ("Castlegate"), through Monica Iglesias, Senior Vice President, and placed primarily with Southland Mutual Insurance Company ("Southland Mutual") for property, general liability, and windstorm coverages, and Bayfront Specialty Insurance Corp. ("Bayfront Specialty") for flood coverage. The existing program was established to satisfy the requirements of the current first mortgage lender, Tidewater National Bank, N.A. ("Tidewater"), which holds a first mortgage securing an outstanding loan balance of approximately $118,500,000.
Summary Conclusion. VHG's existing insurance program substantially meets the Lender's requirements across several key coverage lines, including property/all-risk, windstorm/named storm (where the existing deductible is actually more favorable than PAC's requirement), workers' compensation and employer's liability, automobile liability, and equipment breakdown. However, we have identified several gaps that will require endorsement modifications, increased coverage limits, and additional insured/mortgagee clause amendments before the Loan can close. The most significant gaps are as follows:
•  Business Interruption Coverage Period: VHG's existing coverage provides 12 months of projected gross revenue; PAC requires 18 months, which is above market standard for a stabilized hospitality asset.
•  General Liability Limits: VHG's existing program provides $5,000,000 per occurrence and $10,000,000 aggregate (inclusive of umbrella/excess); PAC requires $10,000,000 per occurrence and $25,000,000 aggregate.
•  Liquor Liability: VHG's existing coverage is $2,000,000 per occurrence; PAC requires $5,000,000 per occurrence.
•  Environmental / Pollution Liability: VHG does not currently maintain a standalone environmental/pollution legal liability policy for the Property. PAC requires $5,000,000 per occurrence / $5,000,000 aggregate on a claims-made basis. A new policy must be procured.
•  Excess Flood Coverage: The existing excess flood coverage through Bayfront Specialty must be confirmed as to current limits and deductibles, and will likely need to be increased to satisfy PAC's requirements.
In addition to these substantive coverage gaps, all policies will require endorsement modifications to add PAC as mortgagee, loss payee, and/or additional insured (as applicable), and to provide for 30-day prior written notice of cancellation, non-renewal, or material change directly to PAC. The existing mortgagee clause in favor of Tidewater will need to be removed upon closing and payoff of the existing loan.
Recommendation. We recommend a two-pronged approach: (1) prepare and transmit a compliance instruction letter to Castlegate Risk Advisors LLC directing Castlegate to procure the necessary endorsements, increased limits, and new coverage placements, together with updated certificates of insurance reflecting all lender requirements; and (2) include certain of the identified gaps—particularly the 18-month business interruption requirement, the $25,000,000 CGL aggregate requirement, and the $500,000 builder's risk trigger threshold—as negotiation items in the Issues Memorandum for loan document negotiation with WBD, with the objective of adjusting those requirements to market-standard terms where commercially reasonable.
The remainder of this memorandum provides a detailed analysis of each coverage requirement, VHG's existing coverage, identified gaps, and recommended actions.
II. Property Overview
The following summarizes the key characteristics of the Property that are relevant to the insurance analysis. These characteristics inform the scope and type of coverages required, the applicable regulatory framework, and the risk profile relevant to underwriting and premium calculations.
Key Physical Characteristics:
•  342 guest rooms and suites across multiple low-rise and mid-rise buildings
•  Approximately 28,500 square feet of meeting and event space, including a 12,000-square-foot ballroom and six breakout conference rooms
•  18,000-square-foot full-service spa facility with hydrotherapy and treatment areas
•  42-slip marina with fueling station, dock master office, and related facilities
•  Three (3) food and beverage outlets, including a fine-dining restaurant, casual oceanfront grill, and poolside bar
•  1,200-space parking structure (reinforced concrete, four levels)
•  Gross building area: approximately 412,000 square feet
•  Site area: approximately 22.4 acres (waterfront parcel with approximately 1,400 linear feet of ocean frontage)
Location and Risk Considerations. The Property is located in Key Largo, Monroe County, Florida, in the Florida Keys. This location presents several heightened risk factors that are directly relevant to the insurance requirements analysis:
•  Hurricane and Windstorm Exposure: The Florida Keys are among the most wind-exposed areas in the continental United States. The Property's oceanfront location and Monroe County's position in the Florida Keys wind-borne debris region subject it to significant hurricane and windstorm risk. The windstorm insurance market in the Florida Keys is highly constrained, with limited private-market capacity and correspondingly high premiums.
•  Flood Exposure: The Property is located in a FEMA Special Flood Hazard Area, designated as Zone VE (coastal high hazard area). Zone VE designations apply to areas subject to inundation by the 1-percent-annual-chance flood event with additional hazards due to storm-induced velocity wave action. Under federal law (42 U.S.C. § 4012a), flood insurance is mandatory for properties in Special Flood Hazard Areas securing federally related mortgage loans.
•  Florida Keys Area of Critical State Concern: Monroe County is designated as an Area of Critical State Concern ("ACSC") under Chapter 380, Florida Statutes. This designation imposes heightened environmental and land use restrictions that may affect the Property's ability to rebuild or restore improvements following a casualty event, particularly if pre-existing non-conformities exist or if post-casualty regulatory changes limit redevelopment. This consideration underscores the importance of ordinance or law coverage (Coverages A, B, and C) in the property insurance program.
•  Environmental Sensitivity: The Florida Keys ecosystem is environmentally sensitive, with extensive mangrove habitats, coral reef systems, and protected waters. The Property's marina operations and waterfront location present environmental liability exposure, including potential pollution risk from fuel storage, bilge water, and stormwater runoff.
These location-specific factors have been taken into account in our analysis of PAC's insurance requirements and in our assessment of the adequacy of VHG's existing coverage program.
III. Summary of Lender's Insurance Requirements
The Lender's insurance requirements are set forth primarily in Article IX of the draft Loan Agreement and Section 4.04 of the draft Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the "Mortgage"), each prepared by WBD and circulated to our firm on December 19, 2022. The requirements are generally consistent with what we would expect for a hospitality balance-sheet or CMBS loan of this size ($160,000,000), but certain provisions are more aggressive than market standard from the borrower's perspective, as noted below.
We have organized the Lender's requirements by coverage line. For each coverage type, we identify the required coverage form, limits, deductibles, endorsements, and any additional insured or mortgagee requirements.
A. Property / "All-Risk" Insurance
PAC requires "all-risk" (now commonly termed "special form") property insurance covering all improvements, furniture, fixtures, and equipment ("FF&E"), and business personal property at the Property. The specific requirements are as follows:
•  Coverage Amount: Full replacement cost of all improvements and contents, without deduction for physical depreciation, determined by an appraisal or replacement cost estimate acceptable to the Lender.
•  Valuation Basis: Replacement cost.
•  Agreed Amount Endorsement: Required. The policy must include an agreed amount endorsement or equivalent waiver of coinsurance, such that no coinsurance penalty will be applied in the event of a partial loss.
•  Maximum Deductible: $250,000 per occurrence, exclusive of any named storm or windstorm deductible (which is addressed separately below).
•  Required Endorsements: The policy must include ordinance or law coverage (Coverage A — loss in value of the undamaged portion; Coverage B — demolition cost; and Coverage C — increased cost of construction), building code upgrade coverage, and demolition cost coverage.
•  Covered Perils: The policy must cover, at a minimum, the following perils: fire, lightning, explosion, windstorm, hail, smoke, aircraft and vehicle impact, riot, civil commotion, vandalism, malicious mischief, sprinkler leakage, water damage, collapse, earth movement (if applicable in the jurisdiction), and all other perils customarily covered under special form property insurance policies.
•  Mortgagee / Loss Payee: The Lender must be named as mortgagee and loss payee under a standard mortgagee clause (New York-style or equivalent), in the following form or substantially similar:
Pinnacle Atlantic Capital, LLC, its successors and/or assigns, as mortgagee and loss payee 200 Lexington Avenue, 38th Floor New York, NY 10016
Attention: Martin Drubeck, Managing Director – Real Estate Lending
B. Windstorm / Named Storm Insurance
Given the Property's location in Monroe County, Florida, windstorm and named storm coverage is of critical importance. PAC's requirements for windstorm coverage are as follows:
•  Separate Coverage: If windstorm or named storm perils are excluded from the all-risk property policy (as is common in coastal Florida), separate windstorm or named storm coverage must be maintained.
•  Coverage Amount: Full replacement cost of all improvements and contents.
•  Named Storm Sub-Limit: The named storm sub-limit must equal or exceed the greater of (i) the outstanding principal balance of the Loan ($160,000,000) and (ii) the full replacement cost of the improvements. This is a significant requirement, as many windstorm policies in the Florida Keys market impose sub-limits below full replacement cost.
•  Maximum Deductible: 5% of total insurable value per occurrence. We note that VHG's existing windstorm coverage carries a 3% deductible, which is more favorable than PAC's maximum threshold. Accordingly, no action is required with respect to the deductible; however, the 3% deductible on a property with a total insurable value in the range of $210,000,000–$230,000,000 still represents a substantial self-insured retention of approximately $6,300,000–$6,900,000.
•  Corvinael Property Insurance Corporation: PAC's draft acknowledges that the Property is in a wind-exposed coastal zone where Corvinael Property Insurance Corporation (the Florida state wind pool) may serve as a backstop insurer. However, the Lender requires private market placement to the extent reasonably available, with Citizens serving only as a supplemental or last-resort source.
C. Flood Insurance
Flood coverage requirements are particularly significant given the Property's location in FEMA Flood Zone VE. PAC's requirements are as follows:
•  NFIP Coverage: The Borrower must maintain flood insurance under the National Flood Insurance Program ("NFIP") in the maximum amount available for commercial properties, which is currently $500,000.
•  Excess Flood: Because the NFIP maximum is grossly insufficient for a property of this size and value, the Borrower must maintain excess or surplus lines flood coverage in an amount sufficient to bring total flood coverage (NFIP plus excess) to the lesser of (i) the full replacement cost of the improvements and (ii) the greater of the maximum flood coverage available in the commercial insurance market and the outstanding principal balance of the Loan.
•  Maximum Deductible: $100,000 per occurrence. This is a relatively tight deductible requirement for flood coverage in the Florida Keys market.
•  Insurer Requirements: The excess flood carrier must be rated no less than A-VII by AM Best (or equivalent rating by S&P or Moody's). PAC's draft also requires that any surplus lines carrier be eligible and authorized under applicable Florida law.
•  Current Placement: VHG currently maintains NFIP coverage at the $500,000 maximum, supplemented by excess flood coverage through Bayfront Specialty Insurance Corp., a Florida-domiciled surplus lines carrier. The current excess flood limit must be confirmed and, if insufficient, increased to meet PAC's requirements.
D. Business Interruption / Loss of Rents Insurance
•  Coverage Type: Business interruption or rental value / loss of rents coverage, covering loss of income sustained by the Borrower due to the necessary interruption of business operations caused by an insured peril.
•  Coverage Period: Not less than 18 months of projected gross revenue. We note that this requirement is above market standard for stabilized hospitality assets, where 12 months is the typical benchmark. This is a negotiation point, as discussed further in Section VIII.C below.
•  Extended Period of Indemnity: 180 days beyond the restoration period. This extended indemnity period is intended to cover the ramp-up period after physical restoration is complete but before the Property returns to stabilized occupancy.
•  Loss Payee: The Lender must be named as loss payee on the business interruption coverage.
•  Peril Scope: Coverage must attach upon the same perils as the underlying property policy, including windstorm and flood. This is an important requirement, as some business interruption policies exclude windstorm or flood sub-perils unless specifically endorsed.
E. General Liability Insurance
•  Coverage Type: Commercial general liability ("CGL") insurance, including premises and operations, products and completed operations, personal and advertising injury, contractual liability, and broad-form property damage coverage.
•  Minimum Limits: $10,000,000 per occurrence / $25,000,000 aggregate. We note that these limits are above market standard for a single-property hospitality loan, where $5,000,000 per occurrence / $10,000,000 or $15,000,000 aggregate (inclusive of umbrella/excess) is more typical. This is a negotiation point.
•  Liquor Liability: Given the Property's three food and beverage outlets and resort bar operations, coverage must include liquor liability, either as an endorsement to the CGL or as a separate liquor liability policy. See Section III.L below for separate minimum limit requirements.
•  Marina Operators Liability: Coverage must include or be supplemented by marina operators legal liability for the 42-slip marina. See Section III.M below.
•  Additional Insured: The Lender must be named as an additional insured on all liability policies, and coverage must be primary and non-contributory as to the Lender's interest.
•  Umbrella / Excess Liability: An umbrella or excess liability policy is required to achieve the aggregate limit. The umbrella must follow form with the underlying CGL and must include the Lender as additional insured.
F. Workers' Compensation and Employer's Liability
•  Workers' Compensation: Statutory workers' compensation coverage for the State of Florida, as required by Chapter 440, Florida Statutes.
•  Employer's Liability Limits: $1,000,000 per occurrence / $1,000,000 disease per employee / $1,000,000 disease policy limit.
•  Waiver of Subrogation: A waiver of subrogation endorsement in favor of the Lender is required on the workers' compensation policy.
G. Automobile Liability
•  Coverage Type: Commercial automobile liability coverage for all owned, hired, and non-owned vehicles used in connection with the Property's operations.
•  Minimum Limit: $1,000,000 combined single limit per occurrence.
•  Applicability: This requirement is particularly relevant given the resort's shuttle services for guest transportation and the marina's vessel transport operations.
H. Boiler and Machinery / Equipment Breakdown
•  Coverage Type: Equipment breakdown insurance covering HVAC systems, boilers, chillers, electrical equipment, elevators, kitchen and laundry equipment, and all other insurable equipment at the Property.
•  Coverage Basis: Replacement cost.
•  Business Interruption Component: The equipment breakdown policy must include a business interruption component covering loss of income resulting from equipment breakdown.
•  Maximum Deductible: $100,000 per occurrence.
I. Terrorism and TRIA Coverage
•  Coverage Type: Terrorism risk insurance pursuant to the Terrorism Risk Insurance Act of 2002, as reauthorized ("TRIA"), or equivalent coverage.
•  Scope: The policy must cover both "certified" acts of terrorism (as defined under TRIA) and "non-certified" acts of terrorism. This dual coverage requirement is important, as many standard TRIA endorsements cover only certified acts.
•  Coverage Amount: Equal to the full replacement cost of the improvements.
•  Standalone Policy: A standalone terrorism insurance policy is acceptable in lieu of a TRIA endorsement, provided it meets the minimum coverage and scope requirements.
J. Builder's Risk / Course of Construction
•  Trigger: If any construction, renovation, or alteration work with a total cost exceeding $500,000 is undertaken at the Property during the term of the Loan, the Borrower must maintain builder's risk insurance in the amount of the total construction cost.
•  Current Status: This requirement is not currently triggered, as the comprehensive renovation of the Property was completed in August 2021 at a cost of approximately $47,000,000. However, future capital improvement projects should be evaluated against this threshold.
•  Negotiation Point: We note that the $500,000 trigger threshold is relatively low for a property of this size and type. Routine capital expenditures, furniture replacement programs, and minor renovations at a 342-room luxury resort could readily exceed $500,000. We recommend negotiating this threshold upward to $1,000,000 or higher, as discussed in Section VIII.C below.
K. Pollution / Environmental Liability
•  Coverage Type: Environmental or pollution legal liability insurance covering the Borrower's liability for third-party bodily injury and property damage arising from pollution conditions at, on, under, or migrating from the Property, as well as cleanup costs.
•  Minimum Limits: $5,000,000 per occurrence / $5,000,000 aggregate.
•  Coverage Basis: Claims-made, with a retroactive date no later than the date of Loan origination. The policy must remain in effect for the term of the Loan.
•  Relationship to Environmental Indemnity Agreement: This insurance requirement is separate from and in addition to the Environmental Indemnity Agreement to be executed by the Borrower and the guarantor in connection with the Loan. The insurance provides a funded backstop to the contractual indemnification.
•  Phase I ESA: Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore, Principal) prepared a Phase I Environmental Site Assessment for the Property in connection with the refinancing. The Phase I ESA data should be made available to underwriters in connection with the procurement of the environmental liability policy.
L. Liquor Liability
•  Coverage Type: Separate liquor liability insurance or an endorsement to the CGL policy.
•  Minimum Limit: $5,000,000 per occurrence.
•  Applicability: This requirement is applicable because the Coral Palms operates three food and beverage outlets that serve alcoholic beverages, including a fine-dining restaurant with a full bar, a casual oceanfront grill with a bar, and a poolside bar and lounge. Liquor liability exposure is significant for a full-service luxury resort of this nature.
M. Marina Operators Liability / Protection and Indemnity
•  Coverage Type: Marina operators legal liability and protection and indemnity ("P&I") coverage for the 42-slip marina.
•  Minimum Limit: $5,000,000 per occurrence.
•  Scope: Coverage must include damage to vessels in the care, custody, or control of the resort (including while moored at the marina slips), wreck removal, and fuel spill liability. Given the marina's fueling station, pollution liability associated with marina operations should also be addressed.
N. Insurer Rating Requirements
PAC requires that all insurance carriers maintaining coverage for the Property meet the following financial strength criteria:
•  AM Best Rating: All insurers must be rated no less than A-VII (Excellent, Financial Size Category VII) by AM Best Company, or hold an equivalent rating from S&P Global Ratings or Moody's Investors Service.
•  Southland Mutual Insurance Company: VHG's primary property and casualty carrier. Its current AM Best rating must be confirmed as meeting the A-VII threshold. Based on our preliminary review, Southland Mutual is believed to carry an AM Best rating of A (Excellent), Financial Size Category VIII, but this must be verified against current data.
•  Bayfront Specialty Insurance Corp.: VHG's excess flood carrier. As a surplus lines insurer, Bayfront Specialty must be confirmed as eligible and authorized to write surplus lines insurance in the State of Florida, and its financial strength rating must be confirmed.
•  Florida-Admitted vs. Surplus Lines: PAC's requirements distinguish between admitted carriers and eligible surplus lines carriers. Surplus lines carriers are acceptable provided they meet the AM Best threshold and are listed on the Florida Surplus Lines Service Office eligible insurer list.
O. General Policy Requirements
In addition to the coverage-specific requirements outlined above, PAC's loan documents impose the following general requirements applicable to all insurance policies:
•  Notice of Cancellation: All policies must provide for not less than 30 days' prior written notice of cancellation, non-renewal, or material change directly to the Lender (10 days for non-payment of premium).
•  Primary and Non-Contributory: All policies must be primary and non-contributory as to the Lender's interest.
•  Waiver of Subrogation: Waiver of subrogation endorsements in favor of the Lender are required on all property policies, workers' compensation policies, and equipment breakdown policies.
•  No Self-Insurance: The Borrower may not self-insure any portion of the required coverages without the Lender's prior written consent.
•  Annual Renewal Certificates: Certificates of insurance evidencing renewal of all required coverages must be delivered to the Lender not less than 30 days prior to the expiration of each policy.
•  Policy Delivery: Original or certified copies of all insurance policies must be delivered to the Lender prior to closing.
IV. Summary of VHG's Existing Insurance Program
VHG's existing insurance program for the Coral Palms Grand Resort & Spa is brokered by Castlegate Risk Advisors LLC, a full-service commercial insurance brokerage firm located at 701 Brickell Avenue, Suite 1400, Miami, Florida 33131. VHG's primary contact at Castlegate is Monica Iglesias, Senior Vice President, who has managed VHG's hospitality insurance program for the past seven years.
The primary property and casualty carrier is Southland Mutual Insurance Company, a Florida-domiciled admitted carrier headquartered at 400 North Ashley Drive, Tampa, Florida 33602. Excess flood coverage is placed with Bayfront Specialty Insurance Corp., a Florida-domiciled surplus lines carrier, supplementing NFIP coverage. The existing program was designed to satisfy the insurance requirements of the current first mortgage lender, Tidewater National Bank, N.A., and was last renewed at its most recent policy anniversary.
The following summarizes VHG's existing coverages, on a line-by-line basis, as they relate to PAC's requirements.
A. Existing Property / All-Risk Coverage
•  Carrier: Southland Mutual Insurance Company
•  Coverage Form: Special form / all-risk
•  Coverage Amount: Replacement cost basis; the current scheduled value for the Coral Palms property is to be confirmed with Castlegate but is estimated in the range of $210,000,000–$230,000,000, reflecting the original construction cost, the $47,000,000 comprehensive renovation completed in August 2021, and current replacement cost estimates.
•  Current Deductible: $100,000 per occurrence (exclusive of named storm deductible)
•  Agreed Amount Endorsement: In place; coinsurance waived
•  Ordinance or Law Coverage: Coverages A, B, and C are included in the existing policy
•  Compliance Status: Substantially compliant. The $100,000 per occurrence deductible is below PAC's $250,000 maximum, and the agreed amount endorsement is already in place. The primary action required is to confirm that the scheduled replacement cost value meets or exceeds the Lender's requirements and to add PAC's mortgagee clause to the policy.
B. Existing Windstorm / Named Storm Coverage
•  Carrier: Southland Mutual Insurance Company (windstorm is believed to be covered under a separate windstorm endorsement or policy, as is typical in the Florida Keys market)
•  Deductible: Currently 3% of total insurable value per occurrence. At a total insurable value of approximately $210,000,000–$230,000,000, this represents a self-insured retention of approximately $6,300,000–$6,900,000.
•  Sub-Limit: To be confirmed with Castlegate. Must meet or exceed $160,000,000 (the outstanding Loan amount) per PAC's requirements.
•  Compliance Status: PAC's requirement permits a maximum deductible of 5% of total insurable value; VHG's existing 3% deductible is more favorable and is therefore compliant. The principal action item is to confirm the named storm sub-limit and ensure it equals or exceeds $160,000,000. The PAC mortgagee clause must also be added.
C. Existing Flood Coverage
•  NFIP Coverage: $500,000 maximum commercial coverage is in place, representing the statutory maximum available under the National Flood Insurance Program.
•  Excess Flood Carrier: Bayfront Specialty Insurance Corp.
•  Current Excess Flood Limit: To be confirmed with Castlegate. This is a critical data point, as PAC requires total flood coverage (NFIP plus excess) equal to the lesser of the full replacement cost of improvements and the greater of the maximum available coverage and the outstanding loan balance.
•  Current Deductible: To be confirmed. PAC requires a maximum deductible of $100,000 per occurrence, which is tight for excess flood coverage in the Florida Keys market.
•  Compliance Status: The NFIP component is in place at the maximum available limit. However, the excess flood component requires confirmation of limits and deductible. Based on our understanding of the Florida Keys flood insurance market and the typical coverage levels maintained by similarly situated resort properties, there is a significant likelihood that the current excess flood limit is below the full replacement cost of the improvements, and an increase may be required.
D. Existing Business Interruption / Loss of Rents
•  Carrier: Southland Mutual Insurance Company (endorsed to the property policy)
•  Current Coverage Period: 12 months of projected gross revenue
•  Extended Period of Indemnity: To be confirmed; may not include the 180-day extended period required by PAC
•  Compliance Status: GAP IDENTIFIED. PAC requires 18 months of projected gross revenue, which is 6 months in excess of VHG's current 12-month coverage period. This gap must be addressed either by increasing the coverage period to 18 months (which will result in additional premium cost) or by negotiating with PAC/WBD to reduce the requirement to 12 months, which we believe is the market standard for stabilized hospitality assets. We also need to confirm whether the existing policy includes a 180-day extended period of indemnity.
E. Existing General Liability
•  Carrier: Southland Mutual Insurance Company (CGL and umbrella/excess)
•  Current Limits: $5,000,000 per occurrence / $10,000,000 aggregate, inclusive of umbrella/excess liability coverage
•  Liquor Liability: Included in the CGL policy or as a separate endorsement, with a current limit of $2,000,000 per occurrence
•  Compliance Status: GAP IDENTIFIED. PAC requires $10,000,000 per occurrence and $25,000,000 aggregate, which is significantly in excess of VHG's current $5,000,000 / $10,000,000 program. VHG will need to procure additional umbrella/excess liability coverage to meet these requirements, or we will need to negotiate the limits downward. Additionally, the liquor liability limit of $2,000,000 is below PAC's separate $5,000,000 per occurrence requirement (discussed in Section IV.E and further below).
F. Existing Workers' Compensation
•  Coverage: Statutory workers' compensation coverage for the State of Florida, as required by Chapter 440, Florida Statutes
•  Employer's Liability Limits: $1,000,000 per occurrence / $1,000,000 disease per employee / $1,000,000 disease policy limit
•  Compliance Status: Compliant. The existing coverage meets PAC's requirements in all respects. A waiver of subrogation endorsement in favor of PAC will need to be added to the policy.
G. Existing Automobile Liability
•  Coverage: Commercial automobile liability for owned, hired, and non-owned vehicles
•  Current Limit: $1,000,000 combined single limit
•  Compliance Status: Compliant. The existing coverage meets PAC's $1,000,000 CSL requirement.
H. Existing Equipment Breakdown
•  Coverage: Equipment breakdown insurance is in place, covering HVAC, boilers, chillers, electrical equipment, elevators, and kitchen equipment
•  Coverage Basis: Replacement cost
•  Current Deductible: $50,000 per occurrence
•  Compliance Status: Compliant. The current deductible of $50,000 is below PAC's maximum threshold of $100,000. We should confirm that the policy includes a business interruption component, as required by PAC.
I. Existing Terrorism / TRIA Coverage
•  Coverage: TRIA coverage is in place as part of the property policy
•  Scope: Covers certified acts of terrorism. Coverage for non-certified acts of terrorism must be confirmed.
•  Compliance Status: The TRIA endorsement is in place, but we must confirm whether the policy extends to non-certified acts of terrorism. PAC requires coverage for both certified and non-certified acts. If non-certified act coverage is not currently included, VHG will need to procure either an endorsement to the existing policy or a standalone terrorism policy that covers both categories.
J. Existing Environmental / Pollution Liability
•  Coverage: None currently in place.
•  Compliance Status: GAP IDENTIFIED. VHG does not currently maintain a standalone environmental/pollution legal liability policy for the Coral Palms property. PAC requires $5,000,000 per occurrence / $5,000,000 aggregate on a claims-made basis, with a retroactive date no later than the Loan origination date. A new policy must be procured. This represents the most significant new coverage requirement arising from the refinancing. Castlegate should be instructed to obtain quotes from qualified environmental liability insurers, using the Oakridge Environmental Consulting Group Phase I ESA as underwriting data.
K. Existing Marina Operators Liability
•  Coverage: To be confirmed with Castlegate. Given that the Property includes a 42-slip marina with a fueling station, specialized marina operators legal liability and P&I coverage should be in place. However, we do not have confirmation of the current coverage limits and scope.
•  Compliance Status: Must be verified. PAC requires $5,000,000 per occurrence of marina operators legal liability and P&I coverage, including coverage for damage to vessels in the care, custody, or control of the resort and wreck removal. If the existing coverage is deficient, additional or new coverage must be procured.
V. Gap Analysis — Summary Matrix
The following matrix provides a summary comparison of PAC's insurance requirements against VHG's existing coverage program for each coverage line. Items identified as gaps requiring action are highlighted.
As indicated in the matrix above, there are five primary coverage gaps requiring immediate attention (business interruption period, CGL limits, liquor liability limits, environmental liability, and excess flood), along with several administrative and endorsement actions required across the broader program. The following sections address the mortgagee and additional insured requirements, Florida-specific regulatory considerations, and our detailed recommended actions.
VI. Mortgagee and Additional Insured Requirements
A. Mortgagee / Loss Payee Clause
PAC must be named as mortgagee and loss payee under a standard (New York-style) mortgagee clause on all property, windstorm, flood, and business interruption policies. The standard mortgagee clause provides the Lender with independent policy rights that survive the Borrower's default or policy violation, and is a fundamental requirement of all commercial mortgage loans.
The mortgagee clause must reflect the Lender's full legal name and notice address as follows:
Pinnacle Atlantic Capital, LLC, its successors and/or assigns As Mortgagee and Loss Payee 200 Lexington Avenue, 38th Floor New York, NY 10016
Attention: Martin Drubeck, Managing Director – Real Estate Lending
Upon closing of the Loan and payoff of the existing Tidewater National Bank, N.A. mortgage (outstanding balance of approximately $118,500,000), the existing mortgagee clause naming Tidewater National Bank, N.A. must be removed from all applicable policies. Coordination with Tidewater's loan administration department (contact: Alan Prescott, Senior Vice President – Commercial Real Estate, 600 Waterside Drive, Norfolk, Virginia 23510) will be required to confirm payoff and authorize release of the mortgagee clause. We recommend that Castlegate be instructed to process the removal simultaneously with the addition of the PAC mortgagee clause, effective as of the Loan closing date.
B. Additional Insured
PAC must be named as an additional insured on all liability policies, including the CGL policy, umbrella/excess liability policy, liquor liability policy (whether endorsed to the CGL or standalone), automobile liability policy, and marina operators liability/P&I policy. The additional insured endorsement must provide that coverage is primary and non-contributory as to PAC's interest, meaning that PAC's own insurance (if any) will not be called upon to contribute before the Borrower's policies are exhausted.
The additional insured endorsement must use the same legal name and address set forth in Section VI.A above.
C. Waiver of Subrogation
PAC requires waiver of subrogation endorsements in its favor on the following policies:
•  All property insurance policies (including all-risk, windstorm, and flood)
•  Workers' compensation and employer's liability policy
•  Equipment breakdown policy
The waiver of subrogation prevents the insurer, after paying a claim, from seeking recovery against PAC. This is a standard requirement in commercial mortgage lending and should not present difficulty with the existing carriers, though each policy must be specifically endorsed to reflect the waiver.
D. Notice of Cancellation / Non-Renewal
All policies must provide for not less than 30 days' prior written notice of cancellation, non-renewal, or material change directly to PAC at the address set forth in Section VI.A above. In the case of cancellation for non-payment of premium, 10 days' prior written notice is required. This notice obligation runs from the insurer directly to the Lender, independent of any notice provided to the insured.
We note that certain carriers and certain policy forms include a standard notice of cancellation provision that provides notice only to the named insured, not to mortgagees or additional insureds. To ensure compliance, each policy must include an endorsement specifically obligating the insurer to provide the required notice directly to PAC. Castlegate should be instructed to confirm that Southland Mutual and Bayfront Specialty will provide such endorsements on their respective policies.
VII. Florida-Specific and Monroe County Regulatory Considerations
The Property's location in Key Largo, Monroe County, Florida, implicates several state-specific and county-specific regulatory considerations that bear directly on VHG's ability to comply with PAC's insurance requirements. These considerations also inform the negotiation strategy with PAC/WBD, as certain of the Lender's requirements—while appropriate in a general context—may need to be modified to account for the realities of the Florida Keys insurance market.
A. Florida Windstorm Requirements
Monroe County is located entirely within the Florida Keys wind-borne debris region, as designated under the Florida Building Code. Properties in this region are subject to enhanced building code requirements for wind resistance, including impact-resistant glazing and high-velocity hurricane zone ("HVHZ") construction standards. The Property's 2006 construction date and 2021 renovation should mean that the improvements were built or upgraded to meet then-current wind resistance standards, which is a favorable factor for windstorm underwriting.
However, the private-market availability of windstorm insurance in the Florida Keys remains severely constrained. Corvinael Property Insurance Corporation, the state-run wind pool of last resort created under Section 627.351, Florida Statutes, serves as the primary windstorm insurer for many Florida Keys properties. PAC's loan documents require private-market windstorm placement to the extent reasonably available, with Citizens serving only as a supplemental source. Depending on market conditions at the time of closing, it may be necessary to utilize a combination of private-market and Citizens coverage to achieve the required limits. Castlegate should be consulted regarding current capacity and pricing in the private windstorm market for Florida Keys resort properties.
The cost of windstorm coverage in Monroe County is among the highest in the state. Premium increases of 30%–50% or more have been reported across the Florida property insurance market in the 2022–2023 renewal cycle, and the Florida Keys have been disproportionately affected. These cost considerations should be factored into the refinancing pro forma.
B. NFIP and Excess Flood
The Property is located in FEMA Flood Zone VE, a coastal high hazard area subject to storm surge and velocity wave action. Under the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. § 4012a), flood insurance is mandatory for properties in Special Flood Hazard Areas that secure federally related mortgage loans. While PAC's loan may not be "federally related" within the meaning of the statute (as PAC is a private lender), PAC's loan documents independently require flood insurance at levels far exceeding the statutory minimum.
The NFIP maximum coverage for commercial properties is currently $500,000, which represents less than 0.25% of the Property's estimated replacement cost. This extreme inadequacy of NFIP limits for high-value commercial properties necessitates the use of excess or surplus lines flood coverage. Bayfront Specialty Insurance Corp. currently provides excess flood coverage for the Property, and this coverage is essential to meeting PAC's requirements.
The excess flood market in Florida, particularly for Zone VE coastal properties, has experienced significant tightening in recent years. Capacity constraints, rising reinsurance costs, and an increase in flood loss frequency have driven premiums upward and, in some cases, reduced available limits. Castlegate should be instructed to confirm current excess flood capacity for the Property and, if the current limit is insufficient to meet PAC's requirements, to pursue additional capacity from alternative markets.
C. Florida Keys Area of Critical State Concern
Monroe County has been designated as an Area of Critical State Concern ("ACSC") under Section 380.0552, Florida Statutes, since 1975. This designation reflects the environmental sensitivity of the Florida Keys ecosystem and imposes comprehensive land use and development restrictions administered by the Florida Department of Commerce (formerly the Department of Economic Opportunity) in coordination with Monroe County.
The ACSC designation has direct implications for the Property's insurance program in the following respects:
•  Rebuilding Restrictions: In the event of a major casualty, the ACSC designation and associated land use regulations could impose limitations on rebuilding, including restrictions on the footprint, density, or intensity of redevelopment. Monroe County's comprehensive plan and land development regulations include building permit allocation systems (the ROGO/BPAS system) that limit the number of new residential and commercial permits issued annually. While reconstruction of existing structures following casualty is generally exempt from the permit allocation system, the regulatory framework introduces uncertainty into the restoration timeline.
•  Ordinance or Law Coverage: The potential for regulatory constraints on rebuilding underscores the critical importance of ordinance or law coverage (Coverages A, B, and C) in the property insurance program. Coverage A addresses the loss in value of the undamaged portion of a building that must be demolished due to building code requirements; Coverage B covers the cost of demolition; and Coverage C covers the increased cost of construction required to comply with current building codes. PAC's requirement for ordinance or law coverage is appropriate and is already included in VHG's existing Southland Mutual policy.
•  Environmental Restrictions: The ACSC designation may also result in environmental permitting requirements for post-casualty restoration activities, particularly for marina repairs, shoreline stabilization, and construction in or near mangrove habitats and nearshore waters. These factors can extend restoration timelines, which further supports the need for adequate business interruption coverage and an extended period of indemnity.
D. Florida Insurance Market Conditions
The Florida property insurance market has experienced significant disruption in 2022 and early 2023, driven by a confluence of factors including increased hurricane loss frequency and severity, rising reinsurance costs, carrier insolvencies, and legislative and litigation dynamics unique to the Florida market. Six Florida-domiciled property insurers were placed into receivership or liquidation in 2022 alone, and several national carriers have reduced their exposure to the Florida market.
These market conditions have direct implications for VHG's ability to comply with PAC's insurance requirements at commercially reasonable cost:
•  Premium Increases: VHG should anticipate material premium increases upon renewal of the existing program, particularly for property, windstorm, and flood coverages. Premium increases of 25%–50% or more are common in the current market for coastal Florida resort properties.
•  Capacity Constraints: The availability of high-limit coverage in certain lines—particularly windstorm, excess flood, and umbrella/excess liability—may be constrained, requiring Castlegate to access multiple carriers and layered programs to achieve the required limits.
•  Carrier Stability: The financial stability of Florida-domiciled carriers has come under heightened scrutiny. PAC's A-VII AM Best rating requirement provides a floor for carrier quality, but VHG should also consider the long-term stability and claims-paying capacity of its carriers in light of current market conditions.
•  Legislative Developments: The Florida Legislature enacted Senate Bill 2-A in December 2022, which includes tort reform measures, assignment of benefits reform, and other provisions intended to stabilize the Florida property insurance market. While these reforms may improve market conditions over time, their near-term impact on premium pricing and capacity is uncertain.
Castlegate Risk Advisors should be alerted to the current market dynamics and instructed to begin marketing the required coverages as early as possible to secure competitive quotes and adequate capacity.
VIII. Identified Gaps and Recommended Actions
A. Critical Gaps Requiring Immediate Action
Based on our comparative analysis of PAC's insurance requirements and VHG's existing coverage program, we have identified the following five critical gaps that must be addressed prior to closing. For each gap, we provide our recommended course of action, including both compliance and negotiation strategies.
1. Business Interruption Coverage Period
PAC requires business interruption coverage for not less than 18 months of projected gross revenue, plus a 180-day extended period of indemnity beyond the restoration period. VHG's existing coverage provides only 12 months of projected gross revenue. The 6-month shortfall represents a significant gap.
Discussion: The 18-month requirement is above market standard for stabilized hospitality assets. Based on our experience with comparable transactions, the prevailing market standard for business interruption coverage on CMBS and balance-sheet hospitality loans is 12 months of gross revenue, reflecting the typical restoration timeline for a major casualty at a resort property. We have seen 18-month requirements in select transactions involving properties with particularly long restoration timelines (e.g., properties in remote locations or with highly specialized improvements), but the 12-month standard is far more common.
Recommendation: We recommend first attempting to negotiate with PAC/WBD to reduce the business interruption requirement to 12 months plus a 180-day extended period of indemnity, on the basis that this is the market standard and that the Property's Florida Keys location, while presenting elevated casualty risk, does not necessarily extend restoration timelines beyond 12 months given the availability of construction resources in South Florida. If PAC declines to reduce the requirement, Castlegate should be instructed to obtain quotes for 18-month coverage. The estimated incremental annual premium for extending from 12 to 18 months is approximately $75,000–$125,000, depending on the insurer's pricing and the Property's projected gross revenue.
2. General Liability Limits
PAC requires CGL coverage with limits of $10,000,000 per occurrence and $25,000,000 aggregate. VHG's existing program provides $5,000,000 per occurrence and $10,000,000 aggregate, inclusive of umbrella/excess coverage. The shortfall is $5,000,000 per occurrence and $15,000,000 aggregate.
Discussion: The $10,000,000/$25,000,000 requirement is above the typical range for a single-property hospitality loan of this size. The more common market standard is $5,000,000 per occurrence / $10,000,000–$20,000,000 aggregate, depending on property type, scale, and amenity profile. However, the Coral Palms property has a complex risk profile—342 rooms, three F&B outlets, a marina, a spa, and a conference center—that may justify somewhat elevated liability limits.
Recommendation: We recommend instructing Castlegate to procure additional umbrella/excess liability coverage to achieve the required limits. Simultaneously, we should explore with PAC/WBD whether a $5,000,000 per occurrence / $20,000,000 aggregate limit would be acceptable as a compromise. The estimated incremental annual premium for increasing from $10,000,000 to $25,000,000 aggregate through additional umbrella/excess layers is approximately $40,000–$80,000.
3. Liquor Liability
PAC requires separate liquor liability coverage (or an endorsement to the CGL) with a minimum limit of $5,000,000 per occurrence. VHG's existing liquor liability coverage has a limit of $2,000,000 per occurrence, resulting in a $3,000,000 shortfall.
Discussion: The $5,000,000 liquor liability requirement is reasonable given the scope of the Property's food and beverage operations, which include three outlets serving alcohol in a resort setting where alcohol consumption is typically elevated. Liquor liability claims can be significant, particularly in connection with dram shop liability under Florida law. We do not view this as a strong negotiation point.
Recommendation: Instruct Castlegate to increase the liquor liability limit to $5,000,000 per occurrence, either by endorsement to the CGL policy, through a separate liquor liability policy, or by extending the umbrella/excess liability coverage to include liquor liability. The estimated incremental annual premium is approximately $15,000–$30,000.
4. Environmental / Pollution Liability
PAC requires environmental/pollution legal liability coverage with limits of $5,000,000 per occurrence / $5,000,000 aggregate on a claims-made basis, with a retroactive date no later than the Loan origination date. VHG does not currently maintain any environmental/pollution liability policy for the Property. This represents the most significant new coverage requirement arising from the refinancing.
Discussion: Environmental liability insurance requirements have become increasingly common in commercial real estate lending, particularly for properties with environmental sensitivity or known environmental conditions. The Coral Palms property, while not known to have active contamination based on the Oakridge Phase I ESA, presents environmental exposure by virtue of its oceanfront location, marina operations (including fuel storage and dispensing), and proximity to environmentally sensitive habitats in the Florida Keys.
The claims-made coverage form is standard for environmental liability policies. The retroactive date requirement (no later than the Loan origination date) is intended to ensure that claims arising from pre-existing conditions that are first discovered during the Loan term are covered.
Recommendation: Instruct Castlegate to procure a pollution legal liability policy meeting PAC's requirements. The Phase I ESA prepared by Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore) should be provided to prospective underwriters as part of the application process. We should confirm with PAC/WBD that a claims-made policy form is acceptable (as opposed to an occurrence form, which is rare in the environmental liability market). The estimated annual premium for a $5,000,000/$5,000,000 pollution legal liability policy for a property of this type is approximately $35,000–$60,000, depending on the underwriter's assessment of environmental risk.
5. Excess Flood Coverage
The current excess flood coverage provided by Bayfront Specialty Insurance Corp. must be confirmed as to limits and deductible. PAC requires total flood coverage (NFIP plus excess) equal to the lesser of the full replacement cost of improvements and the greater of the maximum available coverage and the outstanding Loan balance ($160,000,000), with a maximum deductible of $100,000 per occurrence.
Discussion: Given the Property's Zone VE flood designation and the NFIP maximum of only $500,000, the adequacy of the excess flood program is critical. If the current Bayfront Specialty limit is below PAC's requirement, an increase will need to be procured. The excess flood market for Zone VE coastal properties in the Florida Keys is tight, and additional capacity may come at significant cost. The $100,000 deductible requirement is also relatively stringent for excess flood in this market, where higher deductibles (e.g., $250,000 or a percentage of insurable value) are more common.
Recommendation: Instruct Castlegate to confirm the current Bayfront Specialty excess flood limit and deductible within five business days. If the current limit is below the required threshold, Castlegate should immediately begin marketing for additional excess flood capacity. If the current deductible exceeds $100,000, we should discuss with PAC/WBD whether a higher deductible (e.g., $250,000) would be acceptable for flood coverage specifically, given market conditions in the Florida Keys.
B. Endorsements and Administrative Actions Required
In addition to the critical coverage gaps identified above, the following endorsement and administrative actions are required across VHG's existing insurance program to achieve compliance with PAC's requirements:
1.  Add Mortgagee / Loss Payee Clause: Endorse all property, windstorm, flood, and business interruption policies to add Pinnacle Atlantic Capital, LLC, its successors and/or assigns, as mortgagee and loss payee under a standard (New York-style) mortgagee clause, at the notice address set forth in Section VI.A above.
2.  Add Additional Insured: Endorse all liability policies (CGL, umbrella/excess, liquor liability, automobile liability, and marina operators liability/P&I) to add Pinnacle Atlantic Capital, LLC as additional insured, with coverage primary and non-contributory as to PAC's interest.
3.  Waiver of Subrogation Endorsements: Obtain waiver of subrogation endorsements in favor of PAC on all property policies (including windstorm and flood), the workers' compensation and employer's liability policy, and the equipment breakdown policy.
4.  Notice of Cancellation / Non-Renewal / Material Change Endorsements: Endorse all policies to provide for 30 days' prior written notice (10 days for non-payment of premium) of cancellation, non-renewal, or material change directly to PAC at the notice address set forth in Section VI.A above. Confirm that Southland Mutual and Bayfront Specialty are willing to provide such endorsements on their respective policies.
5.  Remove Existing Mortgagee Clause: Upon closing and payoff of the existing Tidewater National Bank, N.A. mortgage, remove Tidewater as mortgagee and loss payee from all applicable policies. Coordinate with Alan Prescott, Senior Vice President – Commercial Real Estate, Tidewater National Bank, N.A., 600 Waterside Drive, Norfolk, Virginia 23510, to confirm payoff and authorize release.
6.  Confirm Non-Certified Terrorism Coverage: Confirm whether VHG's existing TRIA endorsement covers non-certified acts of terrorism. If not, procure a standalone terrorism policy or endorsement that covers both certified and non-certified acts at the full replacement cost of the improvements.
7.  Confirm Marina Operators Liability: Confirm the current scope and limits of marina operators legal liability and P&I coverage for the 42-slip marina. If the current limit is below $5,000,000 per occurrence, or if the scope does not include damage to vessels in care, custody, or control and wreck removal, increase or supplement the coverage as necessary.
8.  Confirm Windstorm Sub-Limit: Confirm that the named storm sub-limit under the windstorm policy or endorsement equals or exceeds $160,000,000.
C. Negotiation Points with PAC/WBD
We recommend including the following items in the Issues Memorandum for loan document negotiation with WBD. Each item represents an area where PAC's draft insurance requirements exceed market standard or where modification would be appropriate in light of the specific circumstances of this transaction:
1.  Business Interruption Period. Argue for a reduction from 18 months to 12 months of projected gross revenue as the market standard for stabilized, full-service hospitality assets. The 180-day extended period of indemnity should be accepted as reasonable. Supporting data: review of comparable recent hospitality loan closings showing 12-month standard; potential citation to industry publications and Mortgage Bankers Association / ACLI model provisions.
2.  CGL Aggregate Limit. Argue for a reduction of the aggregate limit from $25,000,000 to $20,000,000, or alternatively to $15,000,000, as sufficient for a single-property loan. The $10,000,000 per occurrence limit may be more difficult to negotiate downward given the Property's complex amenity profile, but a reduction to $5,000,000 per occurrence with a $20,000,000 aggregate would be a preferable outcome.
3.  Pollution Liability Form. Confirm with PAC/WBD that a claims-made form is acceptable for the environmental/pollution legal liability policy (as opposed to occurrence form). This should not be controversial, as claims-made is the industry standard for environmental liability. Discuss the retroactive date requirement and confirm that a retroactive date equal to the Loan closing date is acceptable.
4.  Deductible Thresholds. VHG's existing deductibles are generally at or below PAC's maximum thresholds. No negotiation appears necessary on this point, with the possible exception of the flood deductible, which may need to be discussed if the current excess flood deductible exceeds $100,000.
5.  Builder's Risk Trigger Threshold. The $500,000 trigger is low for a property of this size and type. Routine capital expenditure projects, periodic furniture replacement programs, and minor renovations at a 342-room luxury resort could readily exceed $500,000. We recommend negotiating this threshold upward to $1,000,000, or alternatively to $1,500,000, to avoid triggering the builder's risk requirement for ordinary-course capital projects.
IX. Estimated Costs of Compliance
The following table summarizes the estimated incremental annual premium costs associated with the coverage modifications and new placements required to achieve full compliance with PAC's insurance requirements. These estimates are preliminary and based on general market data for comparable Florida Keys hospitality properties. Actual quotes from Castlegate Risk Advisors and the applicable carriers will be required to confirm pricing.
These estimates do not include the cost of any potential excess flood increase, which could be significant depending on the gap between current and required limits. In the current Florida Keys flood insurance market, excess flood premiums for Zone VE coastal properties can range from $15,000 to $50,000 or more per $1,000,000 of coverage, depending on the property's elevation, construction type, and loss history.
Pro Forma and Reserve Implications. The incremental insurance costs should be factored into the refinancing pro forma and reserve calculations. We note the following considerations:
•  Insurance Reserves: The Loan documents are expected to require upfront reserves totaling approximately $4,800,000, which include insurance reserves among other reserve categories. The incremental premium costs identified above should be reflected in the calculation of the insurance reserve and monthly escrow deposit.
•  NOI Impact: VHG's trailing 12-month net operating income ("NOI") for the Property as of September 30, 2022, is approximately $18,400,000. At the midpoint of our estimated premium increase range (ap