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Zurich, attorneys sanctioned in 9/11 coverage case

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NEW YORK--Zurich American Insurance Co. and two law firms--Wiley Rein L.L.P. and Coughlin Duffy L.L.P.--must pay a total of $1.25 million for failing to produce a key document as part of insurance coverage litigation related to the Sept. 11, 2001, terrorist attacks, a New York federal court ruled this week.

The sanctions imposed on Zurich and its attorneys stem from Zurich employees' deletion of a 62-page electronic version of a primary liability insurance policy issued for the World Trade Center properties.

The version of the policy as it existed on Sept. 11, 2001, gave the Port Authority of New York and New Jersey and Westfield Corp. Inc.--a lessee of retail space in the Twin Towers--status as an "additional insured" under certain endorsements to the WTC policy, Judge Alvin K. Hellerstein said in his opinion.

But when Zurich in November 2001 issued its full, post-binder, primary liability insurance policy, it did not include those endorsements, Judge Hellerstein said.

In subsequent coverage disputes, Zurich denied that the Port Authority and Westfield were entitled to insurance coverage under the WTC policy.

"Zurich eliminated the electronic version of the policy as it existed on Sept. 11, 2001, but fortunately, the policy persisted in paper form in Mary Merkel's files," Judge Hellerstein wrote in his ruling. Ms. Merkel was chief underwriter-U.S. for Zurich.

Additionally, according to Judge Hellerstein's opinion, Zurich's attorneys took possession of the document from Ms. Merkel's office in March 2003, but failed to produce it until February 2005, "following pointed inquiries by opposing counsel."

"Zurich's decision to assert and maintain its denial and defenses regarding the Port Authority's status as additional insured multiplied proceedings, caused substantial expenses to the parties, caused substantial waste of court time, and insulted public and judicial expectations of the standard of conduct expected of attorneys and insurance carriers," Judge Hellerstein wrote.

"Counsel's failure to recognize the importance of this document, and to produce it timely, especially when alerted to its possible existence by opposing counsel, also constitutes a violation of discovery obligations," he wrote.

Of the total $1.25 million in sanctions, the Port Authority will receive at least $625,000 for attorney's fees and costs unreasonably incurred during discovery proceedings. Westfield also will receive at least $250,000 for the costs of discovery proceedings.

"We received the ruling (Tuesday) and are still in the process of reviewing it and weighing our options," a Zurich spokesman said in a statement.

"The Sept. 11 liability insurance coverage cases, over which Judge Hellerstein presided, were complex and hotly contested cases. Decisions made in that context are invariably subject to varying interpretations. We have great respect for the judge and are carefully studying his opinion and the available options," Wiley Rein said in a statement.

Calls to Coughlin Duffy were not returned.