A New York federal judge has hit Zurich American and its two law firms with a $1.25 million penalty for keeping evidence "buried in a box" for almost two years in an attempt to limit World Trade Center claims against the insurer.

The Schaumburg, Ill.-based carrier and the law firms Wiley Rein LLP and Coughlin Duffy LLP, "in their efforts to do away with evidence, to not produce evidence, and to slow up production of evidence...compounded the wrongdoing that they perpetrated," wrote U.S. District Court Judge Alvin K. Hellerstein.

His ruling imposing sanctions came in a dispute over whether World Trade Center Properties leaseholder Larry Silverstein had obtained liability coverage from Zurich American prior to 9/11 for the Port Authority of New York and New Jersey, as well as for Westfield Corp., which leased retail space in the twin towers.

The key evidence, which the judge said had been wrongfully withheld, was a 62-page printout made on the day of the terrorist attacks for Zurich American's chief underwriter, Mary Merkel.

"Wiley Rein attorneys obtained and copied the 9/11 document in March of 2003, but they left it buried in a box for nearly two years and failed timely to produce it," Judge Hellerstein wrote.

According to his opinion, the document included policy endorsements contradicting Zurich's claim that Westfield and Port Authority had no status as additional insureds.

Judge Hellerstein's opinion noted a 2002 e-mail from Zurich underwriter Lynn Maier asking that "the old version of the policy has been deleted from the Document Library and replaced with the final corrected policy."

A paper copy of the original document remained, but not until January and February of 2005 was it produced for pre-trial discovery, with attorneys explaining it was mistakenly not previously produced "due to counsel's inadvertence," the judge wrote.

It was not until Jan. 19, 2006, that Zurich acknowledged that the leaseholder had obtained the disputed coverage.

Judge Hellerstein found that Zurich's original contentions that no evidence existed and there had been no communications over what parties were to be insured "were either dishonest, or objectively unreasonable, or the product of a failure to make reasonable inquiries."

He said that based on the record, he cannot apportion the fine among Zurich and the law firms, adding that unless one of the parties makes an application, the split will "remain joint and several." Meaning it is up to the companies to decide amongst themselves what each should pay.

A spokesman for Zurich American said of Judge Hellerstein's action, "we are reviewing it and our options."

Wiley Rein said in a statement that, "The September 11th Liability Insurance Coverage Cases, over which JudgeHellerstein presided, were complex and hotly contested cases. Decisions made in that context are inevitably subject to varying interpretations. We have great respect for the Judge and are carefully studying his opinion and the available options."

According to the opinion, Zurich had agreed to provide aggregate commercial liability coverage of $50 million.

Special Reports /

Zurich, Law Firms Hit With $1.25M Penalty

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