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'Wilprop' case changes the industry

WTC occurrence dispute teaches some tough lessons


The consequences of the Sept. 11, 2001, attack on New York's World Trade Center are many, but a significant legacy for the risk management and insurance world is the ongoing contentiousness and litigation surrounding the structures' property coverage.

Years of courtroom wrangling over applicable forms and definition of terms have led to an increased commitment to timely delivery of policies and contract certainty.

The property policy crafted by Willis Group Holdings for Silverstein Properties Inc. when Silverstein leased the twin towers and two other World Trade Center buildings from the Port Authority of New York and New Jersey in summer 2001 was massive. Assembling the capacity for the $3.55 billion program involved a complex array of layers and insurers.

In large part as a result of that complexity, and fueling the subsequent coverage disputes, was the fact that final policy wording on much of the program still was unfinished when the terrorists attacked months later.

“The reason the policies weren't issued was was a very complicated process to get all this insurance,” said Thomas McKay III, a partner with law firm Cozen O'Connor in Cherry Hill, N.J.,

“It certainly created a situation where there was ambiguity at the time of contract binding,” said Aaron Davis, managing director in the national property practice at Aon Corp. unit Aon Risk Solutions in New York.

Following the attack, leaseholder Larry A. Silverstein argued that the twin towers' destruction constituted two separate occurrences, requiring the insurers on the property program to pay the $3.55 billion limit twice.

Mr. McKay represented Chubb Corp. in the so-called “Silverstein Phase I” trial to determine the form on which insurers bound their portion of the WTC coverage. Chubb, along with eight other insurers, were found to have bound under a form Willis had crafted that came to be known as “Wilprop,” which established the Sept. 11, 2001, attack as a single occurrence.

“The biggest difference between the Wilprop form and all the other potential forms was that the Wilprop form had a very broad definition of the word "occurrence,'” Mr. McKay said. Silverstein's property package had a fairly high deductible, he said. When Willis devised the form, it tweaked a stock form to broaden the definition of occurrence to include a series of events.

“They did that with the "93 (World Trade Center) bombing in mind,” Mr. McKay said. “They didn't want to have multiple deductibles.”

Meanwhile, other forms' definitions of occurrence were sufficiently vague enough to allow the event to be deemed multiple occurrences, a position taken by a jury regarding a separate group of insurers.

Ultimately, following various payments and settlements, insurers on the property program paid Silverstein approximately $4.55 billion.

Since the attack, timely delivery of insurance policies and achieving certainty about the contract terms have become high priorities for insurance buyers and their brokers. Insurers also recognize the importance of eliminating the sort of ambiguity that existed in the WTC case, many industry participants say.

“I think everyone is much more aware that they have to have proper policy documentation in place prior to policy renewal and review that documentation for completeness and accuracy,” said Janice Ochenkowski, managing director at real estate services and investment management firm Jones Lang LaSalle Inc. in Chicago and chair of the international committee of the Risk & Insurance Management Society Inc. “They certainly all have a stake in it.”

“Certainly, the lessons that have flowed from the World Trade Center litigation have been fully adopted and ingrained from a policy placement perspective,” said Aon's Mr. Davis. “The intent is to have contract certainty at the time of binding.”

“The market has definitely evolved since the events of 2001,” said Mike Nardiello, U.S. property placement leader at Marsh Inc. in New York. Contract delivery has become a central element of the binding process, he said, adding, “The form is the product.”

Mr. Nardiello said depending on the complexity of the form, there still are accounts where binding occurs without the actual form in hand, “but the form is agreed to.”

“Before 9/11 it was a looser environment when it came to delivery of policies,” said David Finnis, North American property practice leader at Willis North America in Atlanta. “And following that event, even if you didn't have the agreed issued policy in your hands at time of binding, you had the full policy nailed down and finalized in e-mail form.”

Mr. McKay noted contract certainty expectations for property/casualty policies and reinsurance contracts put forward in 2008 by then-New York Insurance Superintendent Eric R. Dinallo. “That doesn't apply outside of the state of New York, but the New York insurance commissioner is a leading commissioner in the country,” he said.

“The London market made some significant changes as an effort to get policies issued much quicker than they were,” Mr. McKay said.

“London, which was notoriously slow in issuing forms, they've moved to contract certainty in a big way,” Mr. Nardiello said.

A policyholder attorney had a different view of progress toward contract certainty and timely policy delivery.

Finley T. Harckham, partner at Anderson Kill & Olick P.C. in New York, recalled a property loss and business interruption case he was involved in for a client that operated retail stores in the World Trade Center. The insurer, he said, sought to calculate his client's business interruption loss based on business activity if its stores had survived the Sept. 11 attack and remained in business at the site “with all the smoldering rubble around it.”

“Ultimately the court ruled in our favor,” Mr. Harckham said. “They said you can't calculate it that way. You have to assume there were no attacks.”

“This is an issue that I think is going to recur,” he said. “You ask if there's greater contract certainty, and my answer would be no.” Policies, he said, still “tend to be silent” on that issue of calculating lost business income after a catastrophe.

Timely delivery of insurance policies also is “still very much a problem,” Mr. Harckham said. “From our experience, there has been no improvement in getting policies issued in a more timely manner. And the problem that occurred with the World Trade Center is recurring all the time.”

Mr. Davis noted that while major catastrophe losses may still lead to litigation, “the majority of litigation that we have seen, at least on an anecdotal basis, what is at issue is not the actual contract wording; it's the interpretation of the meaning of that contract wording.”

His group frequently deals with complex placements. The key there is achieving consistency across the contract, he said. “The focus is really on having terms and conditions that are agreed to across the board, by layer.”

“Obviously what you want to do is avoid surprises” by making sure the insurer, broker and insured are all aware and in agreement with “the four corners of the contract,” Mr. Davis said.

That can take time, said Mr. Nardiello.

“It starts with the prerenewal process and getting the submission into market with a good amount of lead time,” he said. But insurers know that achieving contract certainty is in their best interests as well. “Nobody wants to get taken to court,” he said.

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