WTC Litigation

There are many opinions as to what constituted The Trial of the last century. Was it the Scopes "Monkey Trial," Sacco and Vanzetti or O. J. Simpson? The debate will likely rage for a long time. We, on the other hand, would like to nominate an early candidate for The Trial of the current century, at least from a risk management point of view, and that would be the litigation over the insurance coverage for the World Trade Center. We say the litigation because it has already involved more than one trial, with more in the offing.

The one that recently concluded was to determine which Property insurance policy form is to be applied to the loss. Then, there will probably be a trial to interpret that form. This may sound like pretty dry stuff, and to those outside the insurance industry it probably is, but there was high drama, implications of nonfeasance and threats of contempt citations. Okay, maybe "high drama" is a bit of an overstatement, but there have been some revealing disclosures.

For those of you who may need a refresher on the issues, the two policy forms in question were the WilProp form fashioned by Willis of New York, the insurance broker for leaseholder Larry Silverstein, and a Travelers form. It appears that the Travelers form could have been interpreted to cover what happened to the two buildings as two occurrences so that the $3.55 billion limit would be paid twice, while an appeals court has already ruled that the WilProp form would treat it as one related occurrence such that the limit would only be paid once.

The coverage was placed in time for the closing on the lease between the Port Authority and Mr. Silverstein in July 2001, but the policy had not yet been issued at the time of the tragedy. Consequently, coverage was evidenced by binders of insurance that, apparently, did not specify in any detail what policy forms would be used.

What is interesting here is that neither the lead broker at Willis nor his assistant, nor even the risk manager for Mr. Silverstein had read the Travelers policy form prior to September 11, 2001. Mr. Silverstein testified that he left such details up to his risk manager and his broker. And several insurers in London and elsewhere signed off on the coverage without specifying any particular form.

We find it nothing short of amazing that a real estate deal of this magnitude was concluded on such a nebulous basis. We are always harping on the fact that an insurance policy is a contract, just as a lease is a contract, and we are certain that the World Trade Center lease itself, as well as the financing agreements were gone over and negotiated in great detail. Those documents obviously contained insurance requirements that had to be met prior to closing, and we can imagine how this probably contributed to some last minute confusion. Nevertheless, it was incumbent upon the risk manager in the first instance, and his broker secondarily, to learn what sort of protection was being afforded by the insurance they were purchasing.

Just as you rely on your legal professionals to hammer out the best lease terms available, you should be able to rely on your insurance professionals to at least familiarize themselves with the terms of the relevant insurance contracts.

Of course, if the policy had been issued before September 11, everyone would have known which form applied because it would have been incorporated in the physical document. But the terrorist attack occurred nearly two months after the coverage was bound and, sadly, it is not unusual to wait at least that long before a policy is issued. In fact, we have seen instances where the actual policy is not sent to the insured until after it has expired.

If anything good has come out of this litigation it is a recognition that timely policy issuance is in everyone's best interest. How to achieve this is another question. Some risk managers with large companies are withholding premiums until policies are received, but that tactic runs the risk cancellation for non-payment. Others will pay a deposit with the balance to be paid upon delivery of the policy, but you need to have some leverage with the insurance company to do this. Whatever you decide to do, you should clearly communicate in advance what your expectations are with regard to policy issuance.

-- Christopher B. Ashton, CEBS

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