insurance coverage and world trade centers and binders and occurrence and travelers

The purpose of this and the next essay is to indicate issues with which you should be familiar with respect to the insurance coverage resulting from the destruction of the World Trade Center properties on 9/11. In essence what this essay tries to do is to create a richer factual and legal context to understand the insurance implications of 9/11. Thus, if I were writing an insurance case book, these are the kinds of "notes/question" I would put after the WTC case. Abraham is a good case book--indeed a very good one-- but he doesn't provide enough of a "context," I think, to understand his cases (recall our discussion on Vargas and Peter's pointing out the current state of aviation insurance; recall my essays differentiating representation and warranty).*

[*The insurance issues discussed here only relate to the property losses for the Silverstein properties. Silverstein was the lessee of the WTC properties. Other insurance-related issues include: (1) when and if "business interruption insurance" kicks in not only for destroyed businesses, but for surrounding businesses; (2) workers' compensation issues for injured workers. Is there, for example, workers' compensation coverage for workers in New Jersey who watched as the towers collapsed and were traumatized by seeing this disaster?; (3) automobile insurance coverage for damaged vehicles. Thus, even though this note covers loads of interesting issues, it itself is the tip of a large iceberg.]

The Major Issues

As we identified in class, the significant issues driving the entire litigation, which only concluded at the district court level in December 2004, were: (1) the ambiguity or clarity of the definition of "occurrence" in the WilProp form (the 37-page "rough draft" insurance policy issued by the insurance broker, Willis, as a negotiating tool); and (2) whether each of the 24 insurers was under the WilProp definition or the Traveler's definition of "occurrence." Answering these two questions explains why there were decisions of the District Court in 2002 and the Circuit Court in 2003, but that the jury trials did not begin until 2004 in the District Court. Let's lay out why.

The Issues: One at a Time

1. The first issue/cluster of issues you should know relates to events of June and July 2001. Silverstein secured a 99-year lease from the Port Authority of New York and New Jersey (one entity) on the four WTC properties (the towers and two other office buildings) to take effect on July 24, 2001. His lender, GMAC, required him to have $3.5 billion of insurance coverage on the buildings. The lease assured that Silverstein would have 10 million square feet of leasable space. Silverstein hired Willis, an insurance broker, to secure coverage. Willis' V-P, Boyd, was the point man for securing insurance company "buy-ins." The negotiations with various companies in June and July were complex; Boyd would try to get each of the insurers to buy a "layer" of coverage, or a portion of a layer. But each insurer seemed to be negotiating also on the basis of the WilProp form, which contained the following definition of occurrence:

"'Occurrence' shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the perior of time or area over which such losses occur."

It is natural that in issuing its proposed form and negotiating with insurers Willis would choose a definition of occurrence like the above--it clearly favored insurers. But you should know, also, that Travelers came into the picture sometime in July and demanded as a condition of its becoming the primary insurer (the one who insured the first "layer" of coverage) that other insurers "follow its form." The Travelers form, as we saw, only mentioned the idea of occurrence but never defined it at all. Thus, the factual question that ultimately would be decided by a jury in 2004 was whether each of the remaining 19 insurers at the time was under the Travelers or the WilProp definition of occurrence. So, by the end of July 2001, $3.5 billion of insurance coverage was "bound."

You should also know, still under this first point, what an insurance "binder" is. The binder is not a preliminary agreement or, in contract langauge, an agreement to agree. It is, rather a contract for insurance, even though it is only a "rough draft" of the policy itself. In this case the Travelers policy was issued on September 14, 2001 but binders were issued before 9/11. Here are a few statements on the nature of insurance binders you might want to know. From the case in the District Court.

"An insurance binder is a unique type of contract. While not all of the terms of the insurance contract are set forth in the binder, “[a] ‘binder’ is a present contract of insurance...” Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392, 396 (1928). A binder is “a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one.” Lipman v. Niagara Fire Ins. Co., 121 N.Y. 454, 458 (1890). The terms of a binder are not left to future negotiation."

The court went on to cite language in a promient case (Employers Commercial Union, 45 NY 2d 608, 612-13 (1978)):

"It is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance. Courts, recognizing that the cryptic nature of binders is born of necessity and that many policy clauses are either stereotypes or mandated by public regulation, are not loath to infer that conditions and limitations usual to the contemplated coverage were intended to be part of the parties' contract during the binder period."

Let's move on to other points now.

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