WTC Loss: The $3.5 Billion Question

Was the destruction of the Twin Towers on Sept. 11 one or two insurable occurrences? That is the key question facing a federal trial court in Manhattan. WTC leaseholders, principally Silverstein Properties Inc., and a number of insurers, excess carriers and reinsurers are battling over whether the insurance payout should be $3.5 billion or $7 billion.

The District Court recently ruled that it will hold a separate trial on which insurance policy controls the matter and on whether there was one or two occurrences. Jury selection begins Nov. 4.

The entrenched, opposing views on the occurrence issue make prediction of the outcome of the trial difficult.

Jacques DuBois, chairman, president and CEO of Swiss Re America Holding Corp., based in New York, maintains that a single occurrence is the only sensible and legitimate view. In fact, he said that any other conclusion would mean a revision “going forward of how property insurance is written.” A Swiss Re unit, SR International Business Insurance Company, Ltd., is a lead plaintiff in the WTC declaratory judgment litigation.

Mr. DuBois noted that the World Trade Center was insured as a single property, much the same way a home is insured. “You don't insure separate rooms,” he observed, adding that in such a context, “when property is destroyed, it is destroyed just once.”

The WTC was a single insured property subjected to a single coordinated attack, resulting in a single insurable loss, he emphasized. He said this is the approach under any property insurance form, and under any custom and practice relating to how property coverage has been written for “hundreds of years.”

In contrast, the Virtual University of the Independent Insurance Agents and Brokers of America, based in Alexandria, Va., has put out a paper entitled: “One vs. Multiple Occurrences” that concluded there were two occurrences. The authors described the paper as an objective examination of the occurrence issue “from an educational perspective.” In fact, the IIABA stressed that the paper “does not reflect the views of IIABA.”

Part I of the paper states that in the WTC case, a binder was issued by London-based Willis Group Holdings on a proprietary form. Coverage details had not been finalized when the binder was issued or when the WTC was destroyed.

The insurers have alleged that the Willis binder governs the claim, and that the proprietary policy treats as one occurrence all losses or damages attributable directly or indirectly to one cause, or one series of similar causes. But the WTC leaseholders have argued that the definition of “occurrence” in a policy issued by Travelers Property Casualty Corp. controls the claim, and that it allows a finding of two insurable events.

The paper said most standard policies do not define occurrence, and that occurrence instead “is defined when applied to a peril that can occur over time.”

The paper observed that in a 2001 case, Lexington Insurance Co. v. Travelers Indemnity Co., a federal appeals court in California ruled that four fires that occurred within 80 minutes of each other in four different counties constituted four separate occurrences although the same arsonist had set all of the fires.

Another case cited in the paper is a 1959 decision on which the Silverstein parties have relied. In Johnson Corp. v. Indemnity Ins. Co., a rainstorm flooded a construction trench, which in turn caused the basement walls of two adjacent buildings to collapse within 50 minutes. (Although the paper said a single party owned both buildings, Mr. DuBois said the buildings had separate owners.)

New York's highest court held that there were two “accidents” after noting, among other things, that the collapse of the first wall did not seem to have caused the failure of the second wall.

Mr. DuBois dismissed the Johnson case as having no bearing on the WTC dispute. He noted that in the 1959 case, the property owners had asked the contractor who had built the walls to replace them. The court's ruling defeated the contractor's attempt to make only one deductible payment under a liability policy, Mr. DuBois said.

The WTC insurers have emphasized that the WTC losses were caused by a coordinated attack by one organization. But the Virtual University paper sided with the opposing view that the losses were caused by two separate planes, controlled by two separate groups, that struck two separate buildings.

Even if the WTC losses arose out of a single plan of attack, the paper said, “the originators of the plan are too remote for this to be considered a single occurrence.” One reason for this conclusion, the paper said, is that because the exact cause and perpetrators may not be known for years, if ever, the only evidence on which to rely are the physical and factual circumstances of the losses.

Additionally, the paper stated, the al Qaeda terrorist cells apparently were unaware of each other's plans, indicating that “the immediate perpetrators of the losses” acted independently.

Noting that a tenet of insurance is that “a loss must be definite in time and place,” the paper suggested that it is appropriate to consider the “direct perils that resulted in the losses” as constituting the “occurrence(s).” The paper rejected as “illogical” and “ludicrous” the view that the originators of multiple attacks are the “occurrence”–a position the paper attributes to the WTC insurers.

The paper predicted that the WTC suit will result in a finding of two occurrences, if no specific contractual definition of the word is deemed to apply.

Robert S. Felton, owner of Felton Associates, a risk management consultancy in Baton Rouge, La., reviewed the Virtual University paper and also believes there were two occurrences at the WTC. Mr. Felton was professor of insurance at Louisiana State University for 25 years.

Based on the available information, he does not think the fact that the terrorists were from one organization has any effect on the occurrence issue. “They flew two separate planes and hit two separate buildings,” he said. However, he declined to predict the outcome of the trial.

Mr. Felton said he has testified as an expert in several cases involving the meaning of “occurrence” and that “no seems to agree what it means.”

(For more on this dispute, see “FC&S On Lines” on page 17.)

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 9, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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WTC Loss: The $3.5 Billion Question

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