Silversteins World Trade Center Claim Denied

Silversteins World Trade Center Claim

Denied $2 billion in potential payout vaporized by pair of jury verdicts

Although he might yet collect double-payments in phase two of his trial against a host of property insurers, World Trade Center leaseholder Larry Silverstein has definitely lost nearly $2 billion in potential payouts thanks to a pair of jury verdicts in a federal trial that wrapped up last week in New York.

On May 3, Mr. Silverstein found out that Swiss Reinsurance the largest single participant in the WTC property insurance program, with 25 percent of the overall coverage is bound under the Willis “Wilprop” form, which defines the Sept. 11 terrorist attack as only one insured event. With nine other insurers receiving a similarly favorable verdict on April 29, a grand total of over $1.9 billion of the $2.1 billion in play in phase one of the trial is now considered to be bound to a one-occurrence payout, not the two-event claim that Mr. Silverstein was angling for to double his payment.

In the verdict, the jury found only three insurers not bound under Wilprop, which still leaves open the possibility that Mr. Silverstein could be granted double-payments from them down the road but their coverage adds up to only $176 million. These three insurers Royal Specialty, Zurich American and Twin City are scheduled to enter phase two of the trial series to determine their obligations.

In phase two, they will work in tandem with six other insurers not involved in phase one. These other insurers, with $956.1 million in coverage at stake, have been preparing for their own day in federal court. The suggested starting time for phase two with the same judge at the same court, but with a different jury is slated for August, barring any settlements.

As for the phase-one verdicts that devastated Mr. Silverstein, legal experts and some of the attorneys who participated in the trial said an appeal is clearly possible. But they added that it's extremely unlikely an appeal will succeed for Mr. Silverstein in what was a carefully conducted federal jury case.

“We are supremely confident that the trial was conducted without error, and we are supremely confident that a three-month jury trial and two weeks of discriminating deliberations by the jury is not going to be set aside,” said Barry Ostrager, lead attorney for Swiss Re and a senior partner at the New York-based Simpson Thacher & Bartlett.

Several other insurers who received a favorable verdict also expressed their gratification with the outcome including Employers Insurance of Wausau, Federal Insurance Company, Houston Casualty, Lexington Insurance, Lloyd's of London and QBE International.

Swiss Re's Mr. Ostrager, however, admitted his team was a bit anxious when the jury delivered a verdict on April 29 on all insurers except his client. Apparently, one factor that held back the jury's decision on Swiss Re until May 3 was evidence involving the July 23, 2001 e-mail sent by Willis to a Swiss Re underwriter, with an attached Travelers form which Mr. Silverstein has been insisting was the governing form for the entire program.

The Swiss Re underwriter had discarded the form upon receiving it and had not responded to the e-mail, and the jury was apparently divided over whether the underwriter remaining silent should be treated as an agreement to switch to the Travelers form from Wilprop. The jury even sent a note to Judge Michael Mukasay for clarification.

But after one more day of deliberations, the jury also decided in favor of Swiss Re, “and we are delighted they came to their conclusion,” said Jack DuBois, chief executive of Swiss Re. “We believed from the start that we were bound to Wilprop, and the jury has agreed with us.” Mr. DuBois noted that Swiss Re had already reserved for a single occurrence in 2001, and that the verdict won't have any material impact one way or the other on the companys bottom line.

On the other hand, the three insurers that received an unfavorable verdict said they are naturally disappointed with the decision but will forge ahead to phase two. Some attorneys observed that these insurers had the weakest case in the trial. Mr. Ostrager also noted that Royal Specialty and Twin City were bound through Willis subsidiary Stewart Smith Group, and thus never received Wilprop in the underwriting submission.

Furthermore, Royal's coverage appears to have been based on a standard Insurance Services Office form until a final policy form was signed. “So those were some of the negative factors in the consideration,” Mr. Ostrager said. With Zurich, its underwriters had originally said under deposition that they hadn't bound on any form including Wilpropwhich they later recanted at the trial. This conflicting testimony might have hurt Zurich's chances, legal observers told NU.

“Our company is naturally disappointed. But this verdict doesn't change our company's position that the WTC attack was one insurable occurrence. That issue will be tried before a separate jury in phase two,” said Libby McLaughlin, a representative for Royal Specialty, which has $127.8 million in coverage on the line.

A representative from Zurich American confirmed that its legal team is planning for phase two, while Twin City officials said the second phase will decide for their company whether the WTC attack was one or two occurrences. (Twin City s parent company, Hartford, had already won a summary judgment last year for its own $32 million coverage, now deemed as one occurrence.)

What Went Wrong On WTC Claim?

By Michael Ha

Why didn't the jury back World Trade Center leaseholder Larry Silverstein in his claim that his insurers were bound by a form defining the Sept. 11 terrorist attack as two events, which would have doubled his claims payments?

Mr. Silverstein spared no expense to pursue his claim, reportedly spending some $100 million during his previous legal battles even before the latest trial started and then spending about $2 million more per month during the course of this trial to retain Herbert Wachtell and his all-star legal team from Wachtell, Lipton, Rosen & Katz.

(The firm is known for inventing the corporate “poison-pill defense” strategy to prevent hostile takeovers during the 1980s, and one of the numerous attorneys from the firm participating in the WTC trial was Bernard Nussbaum, President Bill Clinton's first White House counsel.)

However, some legal observers told NU that in this case, no matter how good Mr. Silverstein's attorneys might have been, the insurers in the end probably had better facts on their side.

“Lawyers from both sides did a good job in their own way, but I think Mr. Silverstein had a tough time trying to make two occurrences out of one,” said Joseph Kilbourn, an insurance law expert and an attorney with New York-based Bigham, Englar, Jones & Houston who, to his credit, had correctly predicted the outcome of this trial in NUs preview coverage in February.

He also observed that Mr. Silverstein's lawyers had a hard time with the WTC's risk manager, Robert Strachan. “He made some strange remarks about the 9/11 event as if he considered it as one event. I think thats what killed them myself,” Mr. Kilbourn said.

“From what I have seen, insurers' attorneys did a magnificent job,” added Michael Gorelick, a partner at New York-based Abrams, Gorelick, Friedman & Jacobson. “On the other hand, Mr. Silverstein's attorneys had a very difficult case factually. I would have to assume their very renowned firm of litigators did the best with the case that the facts would allow.”

As for phase two expected to start this August, unless a settlement is reached Mr. Silverstein will continue to fight an uphill battle, with much of what's at stake already having been decided against him. Mr. Kilbourn again went out on a limb and predicted that “Mr. Silverstein's going to end up with only half of what he's looking for, except maybe from Travelers.”

(Travelers, one of the insurers scheduled for phase two, offered no comment for this story. Their form, which Mr. Silverstein had argued governed the entire program, is less definitive in its occurrence definition than Wilprop, leaving open the possibility of a two-event finding.)

Mr. Ostrager from Swiss Re also forecast that the insurers in the next round have an excellent chance of prevailing. “You must understand that both Allianz and IRI actually have occurrence definitions that are similar to Wilprop, so this verdict would certainly suggest that the prospects of the insurers in phase two would be very excellent,” he said.

“It's going to depend a lot on how the judge instructs the jury,” said Mr. Kilbourn.

Mr. Silverstein, in a statement, said he is “disappointed,” but is “ready to move on to the second phase.” However, Bud Perrone, a representative for Mr. Silverstein, acknowledged to NU that there is “always a chance for settlement” before the next round.

For now, insurers slated to appear in phase two are saying they are confident they will win. “Our attorneys have been working on the case we are very optimistic that we will prevail,” said Sabia Schwarzer, speaking for Allianz, which has $432.6 million in coverage at stake. “We were the only insurance company that had actually issued a policy prior to 9/11, with our own form.”

Dean Davison, speaking for IRI part of General Electric Company said that “we've obviously been preparing for some period of time. We welcome the opportunity to explain our coverage and our process to the jury.”

As Mr. Silverstein, his insurers and other legal and industry observers perform their post-mortems on phase one, are there any lessons to be learned?

“Yes, a lesson that can be learned from this is the importance of prompt and thorough documentation of coverage,” said Mr. Gorelick. “Granted, this was a highly unusual situationbut had all the i's been dotted and the t's crossed, there wouldn't have been this lawsuit.”

Robert Hartwig, chief economist at the Insurance Information Institute in New York, agreed with that assessment, adding that on complex risks like the WTC, the final terms, conditions and definitions “eed to be sewn up more quickly to avoid any misunderstanding and unnecessary litigation costs.”

Reproduced from National Underwriter Edition, May 10, 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.