Liability Limits: One Event or Two?

Did the September 11 terrorist attacks on the World Trade Center constitute one loss or two? The resolution to this question is far from simple. Controversy surrounding this issue illustrates the ambiguities inherent in some business insurance contracts.

When the two hijacked airplanes struck the World Trade Center towers on the morning of September 11, 2001, the insurance and reinsurance contracts for the property were still under binder agreements. Thus, the wording of the binder agreements became the central issue of this case. At the time of the attacks, real estate executive Larry A. Silverstein's company had only recently acquired a ninety-nine-year lease on the World Trade Center and had not yet finalized insurance coverage, which provided up to $3.5 billion in property and liability damage per occurrence. With policies of such size, which have large reinsurance requirements, it is not uncommon for the final policies not to be in place when the insured begins operations.

The United Kingdom-based reinsurer Swiss Re had agreed to underwrite 22 percent of coverage on the property once the loss exceeded $10 million, translating into $3.5 billion per occurrence in this case. After the attacks, Swiss Re argued that its preliminary agreement with the lessee defined occurrence as "all losses or damages that are attributable directly or indirectly to one cause or one series of similar causes" and that "all such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur." Silverstein, however, argued that each of the airplane crashes was a separate occurrence and his company was due more than $7 billion for the two attacks.

The fuzziness of the language has been very problematic. This led to two opposing verdicts in separate court cases. In Phase I, the insurers prevailed. In Phase II, Silverstein did. The first jury found that "the form used by broker Willis Group Holdings Ltd., rather than a rival form used by Travelers or other forms, and that the Willis form, known as WilProp 2000, had specific language that defined what happened to the World Trade Center as a single occurrence." Under this WilProp form, occurrence means "all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses are added together and the total amount of such losses is treated as one occurrence irrespective of the period of time or area over which such losses occur."

In the second case, the jury agreed with Silverstein that there were two occurrences, at least as defined by the temporary insurance agreements that bound the group of insurers that were involved in the second case. As a result of the second ruling, Silverstein had an open door to collect "as much as twice the $1.1 billion aggregate insured amount per occurrence for which the nine insurers were liable."

These two contradictory rulings stem from three tests:

1. The cause test-The question is, Was there more than one cause underlying the loss? As such, it can be determined that the fall of the twin towers resulted from one conspiracy by Osama bin Laden.

2. The effect test (less prevalent)-The question is, Was there more than one distinct loss? As such, the test looks at each injury or damage to determine the number of losses.

3. Unfortunate events test-This test combines the cause test with elements of the effect test; here, proximity of the cause of loss is important. Because there were two planes causing the loss, the loss is regarded as two separate losses.

The World Trade Center cases were heard in a federal court-the U.S. District Court for the Southern District of New York in Manhattan. Ultimately, however, the matter was settled out of court. In March of 2007, New York Insurance Superintendent Eric Dinallo requested that two representatives from Silverstein Properties and each of the seven insurers involved in the WTC settlement dispute attend a meeting with the state insurance department to bring closure to the ongoing litigation. After weeks of tense negotiations, then-New York Governor Eliot Spitzer and Superintendent Dinallo announced on May 23, 2007, that an agreement between the parties had been successfully brokered. Travelers, Zurich, Swiss

RE, Employers Insurance of Wausau, Allianz Global, Industrial Risk Insurers, and Royal Indemnity Company agreed to settle all outstanding court cases and related proceedings for a total of $2 billion. Spitzer and Dinallo described this as the largest settlement in regulatory history. Specific amounts paid each company were not disclosed due to confidentiality agreements. The resolution to this dispute removes the last major obstacle to World Trade Center redevelopment as planned by Silverstein Properties and the New York and New Jersey Port Authority.

To address the underlying problem in the long-delayed loss settlement, Superintendent Dinallo issued a bulletin on October 16, 2008, requiring insurers to provide contract certainty for coverage agreements. This contract certainty called for contract language in insurance policies to be firmed up within thirty days of issuance and the delivery of the policy before, on, or promptly after the policy's inception date. This would ensure that policy provisions, like the question as to whether the destruction of the twin towers was one insured event or two, are definitively established before a loss. Insurance carriers were given twelve months from the date of Dinallo's bulletin to bring policies and procedures into compliance with the rule. When asked by the Risk and Insurance Management Society (RIMS) what would happen if carriers failed to meet the compliance deadline, the New York Insurance Department responded that it would "consider regulations spelling out more detailed rules. Regulations have the force of law and penalties can be assessed on licensees." Willis Group Holdings Chairman and CEO Joe Plumeri praised the contract certainty rule, saying, "There is absolutely no excuse for policies to be delivered months after their inception, an all too commonplace practice in this business.... We're in the business of keeping promises, and the insurance industry as a whole can do no less. We believe that the industry should police itself, take a principled approach to doing business, and adopt these measures as soon as possible."

The protracted settlement of the World Trade Center destruction provides a high-profile example of the problems that can arise due to uncertain policy terms. This is not typically an issue with most insurance policies written on standardized forms approved by the state insurance department. In the case of large commercial clients, excess and surplus lines, and reinsurance markets, however, it is likely to come up due to complexity of business scope, degree of risk, and lack of regulatory authority. Should the contract certainty rule in New York prove successful in curtailing disputes, RIMS anticipates that additional states will follow suit in passing similar requirements.

Questions for Discussion

1. Which ruling do you agree with in this complex case? What is the justification for the ruling against the leaseholder in this case, and the one in favor of the leaseholder? Do you think this ruling is ethical in light of the massive loss?