Agent E&O Among WTC Legal Concerns

Although lawyers have been restrained in reacting to theterrorist attacks on America so far, there are plenty of issuesthat will be litigated down the road, legal experts warn.

Even insurance agents could conceivably become targets oflawsuits alleging errors and omissions as coverage issues play out,lawyers agreed when asked about the possibility.

“It depends on how comprehensive people were in thinking throughwhat their needs were,” said David Pegno, a partner with the lawfirm of Dewey Pegno & Kramarsky in New York.

“Very large, sophisticated companies have risk management peoplewho do nothing but make sure insurance issues are taken care of.But then you've got smaller businesses that don't take that kind ofcare,” he said.

In fact, “you may get a situation [where] insureds may belooking to their insurance agents and saying you should have gottencoverage for me on something like this,” he agreed.

“Certainly the initial litigation issues that might come up willlook to see who is ultimately liable for all of the damage here,”said Mr. Pegno.

“There's been a tremendous amount of restraint and distaste foranyone commencing any lawsuits–passenger lawsuits and lawsuitsagainst anyone else who might be blamed for this terrible tragedy.That's very appropriate,” he said. “But you have to figure thatsomewhere down the road, with all the money that's at stake andwith all the lawyers out there, that that type of litigation willbe coming.”

Potential targets, he added, would include airlines for lack ofsecurity. “Thats not to say that they would be liable for this–orthat such a lawsuit would be appropriate. But you could certainlysee them as a potential target of a lawsuit,” he said.

“Right now, the sentiment is that the terrorists are ultimatelyto blame, not security people at any of the airlines. But I'm surethat that's a thought on other lawyers' minds,” said Mr. Pegno, whohas represented insurance companies, among other clients.

Will there be litigation between different types of insurancecompanies–a property insurer, for example, seeking to recover froman airline insurer?

“Its certainly a possibility,” Mr. Pegno said, explaining thatsuch subrogation suits would be brought in the name of a businessto whom an insurance company has paid a claim.

Giving a typical subrogation example, he said that if an insuredhas a fire in its building that is caused by another buildingtenant, the insurer could pay the insured and then have the insured“essentially sign over” rights to recovery against the othertenant. That would allow the insurer to bring a suit in theinsureds name.

“Whether thats going to happen here or not is hard to tell. Thisis a very singular event,” he said.

Adam Klauber, managing director for Cochran, Caronia Securitiesin Chicago, sees potential for such terror attack-related suits.The liability limits on airline policies are $1.5 billion percrash, Mr. Klauber said. “The way those will likely be hit is byother insurance companies going after those limits,” he added.

The loss of 50 or more lives on a plane is horrible, “but itprobably doesn't add up to $1.5 billion,” he said. Noting thefinancial difficulties of the airlines, he also said “the airlinesjust don't have the money to pay much more than that,” suggestingthat some lawsuits would be a waste of time.

Jerry Oshinsky, a partner for Dickstein, Shapiro, Morin &Oshinsky in Washington, D.C., who represents policyholders in casesagainst insurance companies, said that while classic subrogationlawsuits are “conceivable,” he believes insurers “are all going totry to work things out through their industry associations.”

“A lot is going to depend on where the action really is. Who hasthe money on this? Is it really the property insurers money, theairline insurer's money, or somebody else–a reinsurer over inEurope who really has the ticket on this,” he said. “I would thinkthat they would really try to work this all out among themselves–totry to figure out some fair proportionate payment. But thats atotal guess.”

Mr. Oshinsky isnt alone in “guessing” about the extent ofliability issues.

“Our range of $5-$20 billion” for liability insurance losses “isessentially an educated guess,” consultants at Tillinghast-TowersPerrin wrote in a recent report. The report said: “The low end ofthe range reflects the basic facts of the situation: plaintiffswill be very sympathetic, and defendants with very deep pockets,while the high end assumes a broad set of actions, involving manyplaintiffs and many defendants.”

Mr. Pegno said other legal issues likely to arise as aconsequence of the terrorist attacks will focus on policylanguage–pointing, for example, to possible disagreements overact-of-war exclusions.

Noting that many companies have announced through the media thatthey're not going to try to invoke those exclusions, Mr. Pegno isntaltogether satisfied that the issue has been resolved. “You don'tknow what all the insurers are going to do. Some may bemore willing than others to step forward and cover these types ofevents,” he said.

Mr. Oshinsky, on the other hand, said, “I don't really thinkthere's going to be a great deal of litigation over traditionalcoverage issues” like war exclusions. He did say, however, thatthere are questions with respect to terrorist exclusions. “If thereis a terrorist exclusion, it is conceivable, if not likely, that itonly applies to terrorism overseas,” he said.

Turning to a very different set of coverage issues, Mr. Oshinskysaid, “There's an interesting property insurance question thatarises if your building was not physically damaged, but you can'taccess the building because part of New York is closed down.”Noting that a company might lose business if its workers could notget into their offices, he wondered aloud whether businessinterruption insurers would cover such situations. (For a relatedarticle, see “FC&S Ponders Business Income Claims” in lastweek's edition, page 51.)

Shifting gears from simply raising the question to actuallyarguing the case, he said: “I would argue, number one, thatcertainly the losses you have incurred are as a consequence ofphysical damage.” He went on to point out that there are policiesthat expressly cover the loss of business caused by an order of agovernmental authority.

What if you don't have that provision in your policy? “Then youhave to look at your policy and see what it says. Is the businessinterruption coverage freestanding or is it tied to damage to yourproperty?” he said.

“Sometimes you have contingent time element businessinterruption coverage–where you can't operate because something hashappened to somebody who is in business with you,” he continued.For example, he noted that he had once successfully represented amagazine publisher that was unable to put out its magazine when itsprinters facility was shut down by an ice storm.

“There was no physical damage to my client, but my client wasout of business for a few days because of the physical lossincurred by its supplier,” he said. “I'd want to look at that issuein connection with business not specifically and directlyphysically damaged” in the World Trade Center attacks, he said.

Asked about the possibility of finding coverage for a clientwith contingent business interruption coverage whose supplier wasnot in the World Trade Center, but blocks away (shut down by anorder of the city of New York), Mr. Oshinsky said he could findarguments for coverage. In such a situation, the policyholderslawyer would argue that his potential client would be covered fordamages that “arise out of” physical damage.

Suggesting that physical damage to a building that housedneither of the parties involved in the business relationship couldtrigger coverage anyway, he drew an analogy to a case in which abuilding owner recovered lost-time damages under a commercialgeneral liability policy. In that case, he said, employees of asubcontractor had suffered injuries on the job.

“It cost the owner more money to have the building built,” hesaid, explaining that “even though the building owner did notsuffer bodily injury, his claim arose out of bodily injury that hadbeen suffered by employees of the subcontractor.”

Mr. Oshinsky said a big issue in determining businessinterruption insurance losses from the World Trade Center attacksis likely to be valuation. “The question is not always whetherthere's coverage, but how much. What did you really lose? I couldsee that as a fertile area for discussion, if not litigation,” hesaid.

Here, he said, insureds have to supply documentation on severalquestions: How many sales would they have made? What customers didthey lose? Did customers go elsewhere? What was gross revenuebefore and after the event? What did they make in the first sixmonths of the year? The last six months?

He went on to describe the complexity of such cases, using anexample of a generic pharmaceutical manufacturer that he hadrepresented. Noting that the drug maker had to try to substantiatehypothetical projections of income it could have made had culturesfor drugs in the process of being brought to market not beendestroyed in a fire, he said that coverage valuations can takeyears to play out.

“The business interruption claims here are going to be massive,”Mr. Pegno said, adding that insureds will face problems in provingsuch claims where records were totally destroyed or completelyinaccessible for extended periods of time. “You could conceive ofthere being possible litigation along those lines,” he said.

While some firms in the area of the World Trade Center arereported to have had centralized off-site record-keeping, thats notalways the case, he said, using his own law firm as an example.“Our records, of what we've been doing in terms of business, arehere. It would be tremendously difficult for us to establish withany real amount of precision what the [value of a] businessinterruption” was if the premises were destroyed, he said.

“You certainly have to figure that a lot of people are going tofind out that they didn't have the kind of coverage that theythought they would have,” Mr. Pegno said, addressing whether therewill be coverage for firms shut down by government actions or forextended periods of time.

“Companies are always looking to cut costs and insurance is acost. People may be unpleasantly surprised in terms of what theircoverage is,” he said.

Mr. Pegno believes that property coverage will be another majorarea of coverage litigation. “These are going to be incrediblycomplex property damage claims, complicated by the loss ofrecords,” he said.

“They always tell you when you get insurance on your house tovideotape everything–to walk through the house and make a list.Here, you're going to be in a situation where a lot of data hasbeen lost. And there will be questions of what exactly has beenlost because documentation that might establish that has also beendestroyed,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 15, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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