world trade center and insurance reimbursement and silverstein and reimbursement

In your preparation for class on 1/18/06, you should read excerpts from the Sept. 26, 2003 decision of the 2nd Circuit Court of Appeals on insurance payments on the WTC in NYC resulting from the 9/11 terrorist attacks. (World Trade Center Properties, LLC v. Hartford Fire Ins. Co., 345 F3d 154 (2nd Circuit, 2003)). This case only has to do with the insurance on the WTC properties themselves by the lessee Silverstein Properties; many other private suits were pursued by individual tenants. The purpose of this essay is to put the 2nd Circuit decision into context so that you will see it as part of the flow of events and litigation in the wake of this most deadly one-day attack against the United States on our soil in our history. My point is that when all the dust had cleared, many of the major issues that remain are insurance law issues. Indeed, as I will mention in class, you can tell your friends at parties when the conversation lapses that the major impediment toward rebuilding (haven't you asked yourself why rebuilding hasn't even begun on the priciest island on earth?) is uncertainty regarding insurance settlements. You should know five significant insurance-related events in the wake of 9/11 (various web sites and case opinions describe these in much more detail).

Event # 1--The DEC Action

About six weeks after 9/11, in October 2001, the largest insurer of Silverstein, SR International (on the hook for $870 million at least) brought a declaratory judgment action in federal court to begin to sort out the insurance tangle in the Silverstein properties. As you know, Silverstein began a 99-year lease from the Port Authorities of NY and NJ, who owned the WTC, beginning in June 2001. He was required by his lenders to get $3.5 billion of insurance on the properties, even though previous lessees only had to be insured for a little over 1/3 that amount. Silverstein had more than 20 insurers for the properties; each would take a "slice" or "layer" of the coverage pie. Travelers ended up being one of the major insurers, and they will be a significant player in some of the lawsuits. When this DEC action was brought, it was brought by an insurer against the properties so that the court would "declare the rights and liabilities" of all parties in the case. Hence, the defendant would then implead by way of counterclaim a ton of other defendants...hence the lineup at the District Court as portrayed in this essay. As the case worked its way along, there got to be four categories of insurance defendants. More about that below. At stake was whether the insurers should be on the hook for $3.5 billion or $7 billion. That is, since insurance proceeds are paid out by "occurrence," the legal question would be whether the two attacks, 16 minutes apart, on the two towers on 9/11 were one or two occurrences under insurance law.

Event # 2--The DEC Decision

On Sept. 22, 2002, the US District Court for the SD of NY, handed down the ruling in the DEC case. It concluded that three defendants (Hartford, St. Paul, Royal Indemnity) should be granted summary judgment. This means that they would only be liable for the amount of one occurrence under their policies. This amounted to about $112 million. The reason they were dismissed from the case at this point (leaving still about 20 insurance companies on the hook) is that their attorneys successfully argued that the draft policy by the insurance broker Willis, which circulated during June and July 2001, had a definition of occurrence which, as a matter of law, would include attacks against both towers as one occurrence. But, the waters became murky for the others because Travelers Insurance Co., which also came into the picture in early summer 2001, seemingly had a much more major role to play in the total insurance picture for the WTC, and there was the sense that their policy provisions would provide the basis for the other insurers to follow. This is vague at this point, but so was the case. In any case, by Sept. 22, 2002, three defendants were out.*

[*The final essay, here, speaks about how two other defendants got "out" by early 2002.]

Event # 3, The 2nd Circuit Affirms

One year later, on September 26, 2003, the Second Circuit affirmed the District Court as to the three defendants. But, with respect to Travelers, they opened the door for the case to continue. It happened in this way. While Willis, the insurance broker, had a draft policy with a definition of occurrence which enabled the first three defendants to get out of the case (because they relied on that definition) it also was entering into negotiations with Travelers so that the latter would assume one of the basic (and not upper layers) policies of the insurance coverage. In order to do this Travelers insisted that the other insuring companies needed to have policies that "followed form," i.e., that imitated Travelers in all its major provisions. The concept of "occurrence" appeared in Travelers policy, of course, but it remained undefined, in contrast to the Willis draft policy. Silverstein argued that the notion of "occurrence" was unambiguous under New York law. For Silverstein it meant that, for the sake of this case, two occurrences had taken place (hence a big insurance recovery). Travelers argued that the term "occurence" was ambiguous. The court concluded that whether there was one or two occurrences was an issue of fact, which required the court to remand for jury decisions on whether or not the policy's language of "occurrence" would suggest that two or one occurrences took place in the 9/11 attacks on the Trade Towers.

Event # 4, May 2004

A jury decided, with respect to about 10 of the remaining insurance companies, that only one occurrence had taken place, and that therefore they were only obligated to the tune of $2.0, rather than $4.0 billion. However, in what must have been ominous news for the remaining defendants, the jury said that three of the defendants had to pay double on their claims ($178 million X 2). This left about 9 or so insurance companies still in the mix. Thus, by the Fall of 2004, about $2.4 or $2.5 billion in insurance proceeds had been awarded to the Silverstein properties, with 9 defendants remaining. The outstanding claims were either for $1.1 or $2.2 billion.

Event # 5, December 2004

A second federal jury decided on the liability of the remaining group of insurers and held that two occurrences had taken place under the policies they insured, thus holding them liable for $2.2 billion. By the dawn of 2005, then, $4.6 billion was awarded in insurance settlements. This is a far cry from what Silverstein originally wanted ($7 billion), but is much more than what many pundits thought he would recover ($3.55 billion). Both of the 2004 verdicts have been appealed to the 2nd Circuit. It is only after they are decided and the insurance companies pay up (there will be the ritual appeals to the US Supreme Court, but they will deny certiorari), that the WTC planning and building process can continue. With the reconstruction of all the towers and the Freedom Tower expected to cost in excess of $9 billion, this last billion or so of insurance money is quite crucial.

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