Paper Trail Critical In Coverage Battles

It isnt surprising that litigation stemming from the destruction of the World Trade Center already is serving as an example to reinsurers, insurers and their lawyers of what is not the art of the deal.

When terrorists toppled the Twin Towers last Sept. 11, only insurance binders or notes, not the final insurance or reinsurance contracts, were in place.

Real estate developer Larry Silverstein is claiming that two separate attacks took place that day, with one airplane each taking down a tower. He is arguing that this entitles his companies, which hold the lease to the WTC site, to recover for two insurable occurrences.

But the insurers, excess insurers and reinsurers sued by Mr. Silverstein maintain that the destruction was due to one coordinated attack, therefore constituting only one insurable occurrence. (For more details and opinions on this legal battle, see NU, Sept. 9, pages 14 and 17.)

“Documentation traditionally in the reinsurance area has been poor at best,” said Nick Pearson, a partner in the insurance and reinsurance practice group of Edwards & Angell LLP in New York. The situation persisted because insureds, insurers and reinsurers are often interested in speedy transactions, he said.

A related problem is shoddily drafted documentation, which Mr. Pearson attributes in large measure to the fact that it is not lawyers who are preparing the reinsurance agreements. “You have brokers essentially pulling wording out of their drawers that has been used in other transactions and using it as a template for another transaction,” he explained. That wording is not always appropriate to the new transaction, and might create the very ambiguity and inconsistency that the parties wanted to avoid, he said.

A reinsurance legal expert who asked not to be identified also sees documentation issues arise when a contract has been lost years after its signing.

Mr. Pearson noted that, as the dollar values of deals increased, so did the number of disputes. This, in turn, led to greater scrutiny of reinsurance contracts “by responsible cedents and assuming companies,” he said. However, “there still is a fair amount of sloppy reinsurance contract drafting,” he declared.

Although past contracts cannot be corrected, Mr. Pearson said that the solution going forward is for the parties to have competent legal counsel “at least review all reinsurance contracts.” This will ensure that the business points to which the parties believe they have agreed are correctly expressed in the contract, he added.

At the same time, he noted that cedents and reinsurers no longer enjoy the stable relationships that existed in the past. Not only has a lot of new money come into the reinsurance business, he observed, there also are many new employees at cedent and reinsurance companies who were not involved in previous reinsurance arrangements. These new employees are taking a hard look at the losses facing their companies as well as at reinsurance arrangements, with an eye to finding a way to cut those “staggering” losses, Mr. Pearson said.

Even with an insurance policy in place that may be clear, “hard facts make for difficult decisions,” he said. This means, for example, that courts often reach different conclusions as to what constitutes one or two occurrences.

Using what happened on Sept. 11 as an example, Mr. Pearson suggested that a court extending the reasoning advocated by the defendants in the World Trade Center suit might question whether the attack on the Pentagon and the crash in Somerset County, Pa., also were part of one coordinated effort and therefore part of one occurrence.

He said the issue of one-versus-multiple occurrences arises because of the lack of unambiguous, non-conflicting definitions of the terms in the insurance and reinsurance contracts.

Settlements reached by insurers and claimants can lead to a host of other reinsurance disputes, Mr. Pearson said. Allocation–that is, deciding which reinsurer is responsible for which risk–is a key issue when there is a “global settlement” that is silent on this topic, he said.

“Generally speaking, if you settle five claims, you want to make sure the right amount is allocated to the right claimant and the right time frame,” added the legal expert who asked to remain anonymous. This is important because there may be different attachment points and retentions under various reinsurance contracts, noted the expert. Additionally, “there may be retentions for one class of business versus another class of business,” the expert said.

Another issue that arises is whether a payment under a settlement agreement is meant as redress for legitimate claims or merely as an inducement to settle, Mr. Pearson said. If a reinsurer suspects the latter, it could take the position that the cedent made ex gratia payments. (The reinsurance legal expert defined these as “any payment outside the policy limit,” adding that such payments generally are not covered by reinsurance.)

However, the reinsurance legal expert also pointed out that many reinsurance contracts include “extra-contractual obligation clauses” that specifically obligate reinsurers to pay.

Both the reinsurance legal expert and Mr. Pearson agreed that calling a payment ex gratia is sometimes a convenient way for a reinsurer to say it disagrees with the way a cedent settled a claim.

“Then the question is, who has the right to make that decision, and what are the standards you use to determine whether its an ex gratia payment or not,” the reinsurance legal expert stated. He said this type of dispute has come up when, after a major hurricane or earthquake, a state insurance regulator pressures insurers to pay claims promptly.

Mr. Pearson said one way to avoid these problems is for cedents and reinsurers to keep lines of communication open on settlements, with the cedent “keeping the reinsurer aware of what it is doing and why, and making a good effort to allocate across treaty years.”

But he has witnessed instances where reinsurers refuse to involve themselves in settlement proceedings, waiting instead to see what sort of settlement the cedent reaches. “Thats playing hard ball, and those instances often lead to reinsurance disputes,” Mr. Pearson said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 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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Paper Trail Critical In Coverage Battles

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