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WTC trial takes form

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WTC trial takes form

by DOUGLAS McLEOD

* Published on Feb. 16, 2004

NEW YORK-Lawyers for Silverstein Properties Inc. and a dozen insurers offered clashing views of the World Trade Center's $3.5 billion property insurance program last week as a long-awaited trial got under way to determine whether the twin towers' Sept. 11, 2001, destruction was one occurrence or two.

In a packed federal courtroom only blocks from Ground Zero, the two sides are sparring over a single issue: whether the program is governed by a Willis Group Ltd. form that would treat the loss as one event, or by a Travelers Property Casualty Corp. policy issued after the attack that Silverstein says would entitle it to two policy limits, or $7 billion.

The insurers, led by Swiss Reinsurance Co., launched their case by confronting Silverstein Risk Manager Robert F. Strachan on a series of documents and statements that they say show WTC leaseholder Silverstein knew the Willis form, known as Wilprop, was in effect on the day the terrorists struck.

Mr. Strachan, for example, faxed sections of the Wilprop form the day after the attack to representatives of Silverstein's lender, General Motors Acceptance Corp., and the WTC's owner, The Port Authority of New York and New Jersey, with a note reading, "FYI, the occurrence definition and the insuring agreement and the exclusions in the Willis policy that we are working with."

"You didn't send any information about the Travelers policy, did you?" asked Barry Ostrager, a lawyer with Simpson, Thacher & Bartlett, representing Swiss Re.

"No, I did not," Mr. Strachan answered.

On the question of which form applies to the program, "Mr. Strachan responded loud and clear what form by faxing portions of the Wilprop form," Mr. Ostrager told jurors at the trial's opening.

Silverstein's case "not only conflicts with common sense but with all of the evidence," he argued.

Lawyers for Silverstein, however, countered that the program was in the process of being switched to the Travelers form in the weeks before Sept. 11 and that the various insurers were either aware of that or had waived approval of the form. Swiss Re in particular was unhappy with the Wilprop form and had fewer objections to the Travelers policy, said Herbert Wachtell, a lawyer with Wachtell, Lipton, Rosen & Katz, representing Silverstein.

It was only after the terrorist attack that the insurers realized the Wilprop form's occurrence definition would treat the loss as one occurrence, Mr. Wachtell told jurors.

"Post-9/11, that's what these insurance companies decided they wanted," he argued. "What you have here is the insurance companies trying to exploit that circumstance and take a position totally contrary to what they took before 9/11."

Mr. Strachan's fax of the Wilprop form after the attack, he maintained, was a mistake.

"Bob Strachan on Sept. 12 was not being all that clear...We can all remember the shock and horror of that day," Mr. Wachtell told jurors. "In the midst of that turmoil, Strachan was being pressured: 'You must tell me what the policy form is.' He didn't know."

The trial, which is expected to last eight weeks, is the latest stage of a battle that began soon after the terrorist attack, when Swiss Re filed a declaratory judgment action against Silverstein.

The ensuing coverage litigation, drawing in all 22 insurers on the 12-layer program, arose from the fact that the program's policy wording had not been finalized at the time of the Sept. 11 attack. Most of the insurers issued only binders allowing Silverstein to close on its 99-year lease of the WTC complex on July 24, 2001. A couple of the insurers-Allianz Insurance Co. and an Industrial Risk Insurers affiliate-issued actual policies using their own forms, which were not concurrent with either the Wilprop or Travelers forms.

Coverage questions for some of the insurers have been settled over the past two years. Hamilton, Bermuda-based ACE Ltd. and XL Capital Ltd., whose binders specifically cited the Wilprop form, settled with Silverstein on a one- occurrence basis in 2002. A federal appellate court last year upheld rulings that three other participants-Hartford Fire Insurance Co., Royal Indemnity Co. and St. Paul Fire & Marine Insurance Co.-are bound under the Wilprop form that Willis provided, even though the binders themselves do not mention Wilprop.

The appeals court also affirmed that the Wilprop form's definition of occurrence-losses attributable to one cause "or to one series of similar causes"-requires that the WTC's destruction be treated as a single occurrence.

The dozen insurers who have proceeded to trial against Silverstein represent the bulk of the program's $3.5 billion limit, including Swiss Re, which wrote $778 million of the total, and Lloyd's of London underwriters, who wrote $684 million.

The arguments the two sides offered last week follow the positions they have taken since the coverage litigation began.

Silverstein contends that by mid-July 2001, it had dropped the Wilprop form and acquiesced to Travelers' demand that its form govern the program. Facing its closing deadline, Silverstein needed Travelers to fill gaps in various layers while satisfying GMAC's demand for insurers with minimum AA ratings from Standard & Poor's Corp., Mr. Strachan testified.

A Willis broker e-mailed the Travelers form to Swiss Re on July 23, 2001, and a subsequent Swiss Re binder-while not mentioning a particular form-should be understood to incorporate the Travelers terms, Silverstein contends. Lloyd's underwriters, meanwhile, issued binders waiving approval of policy forms, Mr. Wachtell argued.

Swiss Re denies ever agreeing to the Travelers form, and the insurers charge that Silverstein and its lawyers developed the two-occurrence theory after the Sept. 11 attack. They pointed last week to several pieces of evidence suggesting that Silverstein believed that Wilprop was the operative form and that the loss was one occurrence. In addition to Mr. Strachan's Sept. 12 faxes of the Wilprop terms, these included:

c A Sept. 14, 2001, notice-of-loss from Willis reporting a single Silverstein deductible of $1 million for the WTC claim, indicating a single occurrence.

c Handwritten notes Mr. Strachan made soon after the attack. In one note, he calculates the amount Silverstein would recover from a single $3.5 billion limit after required payments to the Port Authority and GMAC. In another, he observed, "underinsured WTC, budget v. end of the world," which insurers argue shows that Silverstein knew its $3.5 billion limit was far below the complex's replacement cost.

In his testimony, Mr. Strachan said he had not seen the Travelers form before the attack and did not know it contained no occurrence definition.

"You certainly were not thinking you might get two limits at the time you made these notes?" asked Eric Roth, a Wachtell, Lipton partner.

"No, I did not think that," Mr. Strachan replied.

c Testimony that representatives of the Port Authority, GMAC and Silverstein lease partner Westfield America Inc. were never told anything about a switch from the Wilprop form to the Travelers form, even after Westfield's then-risk manager, Nancy Townsend, submitted the Wilprop form to her own broker, Marsh Inc., and contacted Mr. Strachan with Marsh's comments.

"I felt it was my decision, so I did not feel I needed to share that," Mr. Strachan testified.

Ms. Townsend took a different view in her own testimony.

"If Mr. Strachan wanted to change the form of the property insurance from the Wilprop form to a different form, you would want to have known about that?" Mr. Ostrager asked her.

"Yes, I would have," Ms. Townsend said.

Witnesses expected to testify this week include Willis brokers involved in the World Trade Center placement.