WTC Leaseholder, Insurers Ready For Trial Of The Decade

Two issues remain unresolved for most of the carriers involvedwhether insurers are bound by the Willis Property form, which more specifically defined "occurrence," or the form by Travelers Property Casualty, and whether the twin aerial attacks by two planes smashing into the Twin Towers truly constitute two occurrences for the purpose of the $3.55 billion "per occurrence" policy covering the WTC and its retail mall.

In legal proceedings so far, there has been much heated dispute on which insurers had signed onto a particular "WilProp" form, which would limit insurers to a one-policy liability, or the Travelers form around the time of Sept. 11.

The point of contention originated in 2001, pre-Sept. 11, when Mr. Silverstein talked with Willis of New York to set up a multi-layered insurance program to provide for $3.5 billion in insurance on the WTC property on a "per occurrence" basis. But as of Sept. 11, the day of the terrorist attack, only one company–Allianz Group–had issued a policy, while others were still in the "binder" stage, thus creating the need for an individualized inquiry to determine the terms of each binder.

Joseph Kilbourn, an insurance law expert and an attorney with New York-based Bigham, Englar, Jones & Houston, told National Underwriter that the WilProp form, which was distributed to most insurers prior to their signing on under a binder, narrowly and explicitly defined "occurrence" to mean "all losses of damages that are attributable directly to one cause or to one series of similar causes" and that "all such losses will be added together" to be treated as one occurrence. The Travelers form, however, failed to define "occurrence."

Still, amid all this legal wrangling, some progress has been made toward a resolution. XL Capital Ltd. and ACE Ltd., both based in Bermuda, have settled with Mr. Silverstein for some $365 million on the basis of the one-occurrence policy with WilProp.

Meanwhile, three other insurers–The Hartford Financial Services Group Inc., The St. Paul Companies and Royal Indemnityhad a court determine that they are tied to the WilProp form, a decision which was later upheld by the Second U.S. Circuit Court of Appeals in New York. These three insurers may now be able to limit their total WTC payment to $112 million, rather than a figure double that amount sought by Mr. Silverstein.

But now, in a federal court trial scheduled to start Feb. 9 (barring a settlement that would satisfy both sides), Mr. Silverstein and 13 of his insurers will duke it out in front of a jury. Thus, it will be up to 12 ordinary men and women with a minimal understanding of the insurance business to decide who is right.

The 13 insurers represented in the trial are: Swiss Reinsurance Company, Lloyds of London underwriters, Great Lakes Reinsurance PLC in U.K., Houston Casualty Company, Wurttembergische Versicherung AG, Federal Insurance Company, Lexington Insurance, Royal Specialty Underwriting Inc., Zurich American Insurance Co., Employers Insurance of Wausau, QBE International Insurance Ltd., Copenhagen Reinsurance Co. Ltd. in U.K., and Twin City Fire Insurance Company.

In this trial, which will take place at the Daniel Patrick Moynihan U.S. Courthouse in Lower Manhattan–less than a mile and a 20-minute walk from the WTC site–the jury will just decide on whether the insurers represented in court are bound by the WilProp form or the one offered by Travelers. If jurors find that one or more of the insurers represented are not bound by WilProp and its specifically defined "occurrence," then those carriers will join Travelers in another, separate trial generally to determine whether the Twin Tower attack constitutes one or two occurrences for the purpose of insurance claims.

Its a battle both sides are ready to fight tooth and nail, and both told National Underwriter they expect to win.

"We are confident our case will prevail. We believe a jury will recognize that insurance companies should pay what they owe," said Gerald McKelvey, a representative for Mr. Silverstein. "The issue at this trial is whether the 13 insurers are bound to WilProp as they claim, or whether they are bound to Travelers as Silverstein claims, and the burden of proof is on insurers, not on Silverstein," Mr. McKelvey said.

But Jack DuBois, chief executive of Swiss Re, the largest player involved in the case, told National Underwriter that "in the end, the whole Silverstein case will prove to have been a grandiose waste of everyones time, money and energy. Silverstein is entitled only to a maximum of the policy limit of $3.5 billion."

While its hard to predict how long the trial will last, it is expected to take at least four to six weeks, and possibly more, according to Mr. McKelvey.

Meanwhile, Barry Ostrager, the lead attorney for Swiss Re and a senior litigation partner at the New York-based law firm Simpson Thacher & Bartlett LLP, said his side will have plenty of ammunitions, with "several dozen witnesses" testifying on behalf of the insurers. "It will be a long trial, and everybody will have their day in court," he said.

Mr. Ostrager also pointed out the strength of his case by noting that for all intents and purposes, five insurers not involved in the current trial already have been determined to be bound by WilProp, with The Hartford, The St. Paul and Royal Indemnity getting the favorable decision from the court of appeals, and ACE and XL having settled on the basis of WilProp.

"Swiss Re is of the view that its bound under the WilProp form, and thats what this trial will determine. I would agree that insurers are optimistic about the outcome of the case," he said.

Other legal experts and industry participants told National Underwriter that this is one of the most significant insurance coverage trials in recent times and that how the jury decides at the end could set important precedents for future cases.

Michael Gorelick, a law partner at New York-based Abrams, Gorelick, Friedman & Jacobson, PC, who has been practicing insurance law for more than 26 years, said this trial will be hard to top in terms of legal importance as well as sheer publicity. "I would have to say this is the most high-profile and widely covered and important insurance coverage case that I can recall," he said.

Mr. Gorelick noted that in their briefings, both sides used other cases in support of their arguments. "There have been cases with similar issues argued both ways, although not involving blowing up buildings by terrorists," he said. "But this case is really distinct, and its a very, very important case for a variety of reasons."

Some of the reasons that set this trial apart are obvious, such as the highly emotional aspect of the case–because so many people, including potentially some in the jury, are emotionally connected to what happened on Sept. 11. In financial terms, the decision will have an economic impact not only on Mr. Silverstein, but on the entire city of New York, Mr. Gorelick said.

Robert Hartwig, chief economist at the Insurance Information Institute in New York, up the block from the WTC site, also noted that "for commercial insurers and reinsurers, its potentially a very important trial."

"Given the world we live in now, where terrorist events could happen anytime, anywhere, an event like this could happen again. So its important to have a clear precedent set," according to Mr. Hartwig. He also noted that financially, a lot of the money at stake would be assumed by foreign reinsurers, so the effect on the U.S. primary market would be muted. But overall, if insurers were to pay an additional $3.5 billion in claims, that will add quite a few points to a small number of insurers combined ratios, he pointed out.

In the trial, Mr. Gorelick also commented, the jurors decision will carry considerable weight, because an appeal from a jury trial in the federal courts is not often successful. Indeed, an appeal is "only going to be successful if the judge allows or commits reversible errors, such as an improper charge to the jury or allowing evidence that is not only wrong and shouldnt be allowed in, but is so bad that it taints the trial to such a degree that it becomes unfair," he said. So while there certainly have been successful appeals from federal trial, they are "by and large the minority of the cases," he added.

Mr. Gorelick also noted some irony in this case because the WilProp form is a brokers policy form with an expanded definition of occurrence, which generally operates to the insureds interest. "Thats because it says all losses that result from a series of similar events constitute one occurrence, and the reason that benefits the insureds in most cases is because they only have to pay one deductible," he said.

But clearly Sept. 11 was no ordinary catastrophe, and in this particular case, the form works very much to the insureds detriment.

"While most insurers hadnt actually issued policies yet, they had issued binders, and we know as a matter of law already that the court has found that three insurers would have issued coverage under the WilProp form and they only have to pay one limit, and that was upheld by the court of appeals," Mr. Gorelick noted.

Some lawyers contend Mr. Silverstein now has to overcome twin hurdles to get the amount he wants for the Twin Tower attackfirst convincing jurors that these 13 insurers are bound by WilProp, and secondly that the WTC event was two occurrences. This may be a daunting challenge even for someone as deep-pocketed and determined as Mr. Silverstein, industry observers say.

"It is my opinion, although the matter is not free from doubt, that the first trial will result in a finding that all or most of the insurers bound the risk on the basis of the WilProp form and that coverage is limited to one occurrence," said Mr. Kilbourn from Bigham, Englar, Jones & Houston.

As for the separate trial to determine generally whether the WTC attack was one or two occurrences for insurance purposes, Mr. Kilbourn believes that the jury will find the destruction of the WTC buildings to be one event, and that Travelers and any remaining insurers will have their liability limited accordingly.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 6, 2004. Copyright 2004 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.