Swiss Re WTC Lawsuit Analyzed

The insurer, which designated itself as "Swiss Re" in the federal complaint, has asked the court to declare that the collapse of the twin towers constitutes one insurable loss. If the argument succeeds, Swiss Re would have to pay only $3.5 billion, not the $7 billion reportedly sought by real estate executive Larry A. Silverstein.

Mr. Silverstein, whose companies hold a 99-year lease on some of the WTC properties, has claimed that each airplane crash into the towers was a separate attack. The Silverstein companies entered into the leases with owner Port Authority of New York and New Jersey in July 2001.

A legal twist in this case is that Swiss Re had not yet issued final insurance policies on Sept. 11.

It is not unusual in the reinsurance and high-level insurance industries for final policies not to be in place before prospective insureds begin operating at a site that is the subject of the insurance, said attorneys Vince Vitkowsky and Laurie Kamaiko, partner and counsel, respectively, at the New York office of Edwards & Angell, LLP.

In fact, "many cases involve incomplete documentation," revealed Mr. Vitkowsky. This occurs because insurers believe that speedy transactions with little documentation are administratively and economically advantageous, he said.

In the absence of a formal policy, the courts look to preliminary contract documents such as "slips and binders" when a loss occurs, Mr. Vitkowsky said.

He explained that "a slip is a document signed by the insurer or reinsurer that evidences its intent to be bound" by certain essential terms until the final policy is issued.

In contrast, a "note," also known as "cover note" or "binder," is a document prepared by an intermediary such as a broker, advising the prospective insured that coverage has been secured. Because a cover note is not signed by the insurer or reinsurer, those entities, strictly speaking, are not bound to provide coverage, Mr. Vitkowsky stated.

In the complaint, Swiss Re said it would honor "placing slips" under which it agreed to underwrite 22 percent of the WTC lessees' coverage in excess of the primary $10 million layer.

According to Swiss Re, the slips defined the term "occurrence" as "all losses or damages that are attributable directly or indirectly to one cause or one series of similar causes." Further, the slips allegedly say that "all such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur."

Mr. Vitkowsky said that shortly after Sept. 11, Travelers Insurance Co. issued a primary policy. He believes that Mr. Silverstein and the other leaseholders will argue that the excess insurers, including Swiss Re, are bound by the terms of that underlying primary policy.

But according to the complaint, Swiss Re made changes to a pre-printed proposed placing slip from the lessees' insurance broker to clarify that Swiss Re would not be bound by "the agreement of another insurer." Swiss Re also claims that it "conditioned its undertaking to insure" on the "absolute right" to approve the coverage terms.

The insurer is also asking the court to sort out who among the numerous potential claimants would be entitled to share in the insurance proceeds.

"Between the financing companies, the management companies, the real estate companies and the other people with interests, Swiss Re is asserting that it would need some guidance as to who should actually get paid whatever proceeds there are," explained Mr. Vitkowsky.

In determining whether there was one or more losses at the WTC, Ms. Kamaiko suggested in a recent article for her law firm that courts might consider:

Whether one airplane could have caused damage to all of the WTC buildings.

Whether the collapse of Building 7 hours after the twin towers fell was another, separate occurrence.

The question of which collapsed tower caused physical damage to nearby properties attributable.

The proximity in time and location of the acts giving rise to the losses are just some of the factors the court could weigh, Ms. Kamaiko added.

But she pointed out that there is no uniform application of the term "occurrence" for a court to follow. This is because the cases always turn on the particular language used in the insurance documents, on the practice of the parties involved and, sometimes, on industry custom, she indicated.

Mr. Vitkowsky said that in interpreting a contract, a court first looks at the words of the agreement. If this is not possible, the court then looks at the so-called course of dealing, or how the particular parties have acted toward each other under the current or past contracts. When all else fails, a court then generally considers custom and usage in the industry, Mr. Vitkowsky stated.

But as Ms. Kamaiko pointed out, the WTC represents "such a high-level, large risk" that there are few, if any, points of comparison.

Even the 1993 bombing of the WTC is unlikely to provide much guidance in the Swiss Re case, Ms. Kamaiko indicated. Not only did few litigated insurance cases result from that attack, but there was also only one bomb affecting one building. Moreover, different interested parties and insurance policies were involved, she noted.

Because the United Kingdom has more loss experience from terrorist attacks, Mr. Vitkowsky suggested that the court in the Swiss Re case could look overseas for guidance.

Still, Ms. Kamaiko doubts that any terrorism in the U.K. matches what occurred in New York on Sept. 11.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 5, 2001. Copyright 2001 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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