The recent WTC trial has yet again highlighted lax practices in the placing process

Granted that the circumstances which brought down both towers of the World Trade Center on September 11, 2001, could hardly have been imagined by the most prescient author of nightmarish novels. But even more unimaginable is the chaos that has arisen from the insurance coverage of the buildings.

While the US government might have been able to foil the destruction on 9/11 if it had acted decisively on existing intelligence, certainly the controversy and costly litigation surrounding the multi-billion dollar insurance settlement for the destruction of the World Trade Center could have been avoided if all parties - broker, insurer, reinsurer and the insured - had examined thoroughly the language of the binder and forms as they were being prepared, and the terms negotiated.

Since September 2001, there have been a number of lawsuits to determine which insurance form was in effect for certain re/insurance companies when the two airplanes crashed into the Twin Towers. In a recent ten-week trial in federal court in New York, a jury decided that the WilPROP 2000 form, developed by Willis Group Holdings, the broker for WTC leaseholder Larry Silverstein, was in force for the majority of re/insurers on September 11, 2001, and not the Travelers form. If this verdict stands on appeal, the jury decision means that Mr Silverstein will collect considerably less from the WTC re/insurers than the $6.6bn he was seeking.

A previous court ruling had determined that the WilPROP form defines the destruction of the World Trade Center as one event, which would cost the re/insurers an aggregate $3.55bn in claims. The Travelers form has an unclear definition of occurrence, which, as Mr Silverstein argued, allows the two planes crashing into each of two towers to be considered as two events, and would entitle him to an insurance payout of close to $6.6bn. Previous to this trial, a number of insurers which had proved they were bound under the WilPROP form had already settled their portion of the claim and paid about $1.9bn.

What became excruciatingly obvious from the testimony during the trial of SR (Swiss Re) International Business Insurance Co Ltd v World Trade Center Properties LLC et al is that even with insurance contracts involving billions of dollars, the underwriting, binding and final policy wording are often handled in a haphazard, indifferent, and some might say nigh on negligent manner.

While the jury's decision in this trial determined which of the insurers involved were bound by the WilPROP form, a second trial will require those insurers found to be bound by the Travelers form to prove that the language in the form can be interpreted as limiting the destruction of the World Trade Center to one event, not two. Following that trial, a third one would assess how much those insurers would pay. Of course, the various parties - under political, governmental and societal pressure - may come to a decision to settle the claim to avoid further litigation and to provide funds to begin construction of the new buildings that will rise on the site of the former World Trade Center. And, of course, appeals could be brought by Mr Silverstein and those insurers which lost in this recent trial.

WilPROP 2000 initially

Essentially, the uncertainty as to which form was in force on 9/11 centres on Timothy R Boyd, the Willis' Assistant Vice President who was in charge of the WTC insurance placement for Mr Silverstein. There is no disagreement among the parties that a month or so prior to 24 July, 2001 (the date Silverstein Properties LLC and Westfield Properties LLC closed on the 99-year lease of the World Trade Center properties with its WTC owner, the Port Authority of New York and New Jersey), Mr Boyd sent out requests for submissions of insurance to a number of re/insurers and that this request contained the WilPROP form. Contended in the New York trial was when or if re/insurers were notified the WilPROP form had been replaced by the Travelers form, with high-priced legal teams totting up hundreds of millions of dollars in fees attempting to prove one form or the other was in force.

Early in the case of Swiss Re v Silverstein, which began 9 February, Mr Boyd stated that he was under extreme pressure to complete the colossal insurance package to satisfy the lending institutions that were providing financing for Mr Silverstein's purchase of the lease on the World Trade Center properties. He said he was averaging 40 phone conversations a day with underwriters in the US and Europe, plus answering numerous e-mails concerning coverage issues. He related he didn't have time to formally document each conversation, that gathering the necessary coverage from re/insurers was paramount, and he had little opportunity to discuss with each re/insurer which form was being used. Later testimony from re/insurers and insureds seemed to confirm that they also spent scant attention or time examining the form attached to the binder before or after they signed on to provide specific amounts of coverage.

Before sending a copy of the Travelers form to the re/insurers, Mr Boyd said he was waiting for the final terms to be worked out. It was re/insurer 'industry practice' to not send the final form until all negotiations with the lead insurer had been completed, he said. One of the attorneys asked Mr Boyd about a specific placement with an insurer where the insurer was not told which form was being used. The lawyer questioned if this was common practice for an insurance company to "commit $254m" of its capital and not see or even know what the terms and conditions were.

"That is correct," said Mr Boyd.

"Do you think that's custom and practice in the insurance industry, sir?"

"Sadly, it is," responded Mr Boyd.

As confirmation, on 24 September, 2001, a fax from an underwriter at Employers Insurance Co of Wausau to one of his colleagues seemed to back up this industry practice. In the fax, the underwriter said he had never signed off on a policy form because he was leaving it up to Mr Boyd on 19 July to get "the lead underwriter's feedback and then incorporate ours if needed as is customary."

Formal approval

Daniel Bollier, a managing director at Swiss Re, which has the largest share - 22% - of the policy limits, testified that he arranged insurance coverage on the World Trade Center based on the WilPROP form. Mr Bollier said he had made a number of changes to the form, but had never rejected it. Requesting changes in wording and additions is "quite standard" when drawing up an insurance policy, he said. But he emphasised it was always the WilPROP form that he was dealing with. When asked if he thought the form might be switched, he was adamant. "No. No. Not at all," he stated with strength.

However, on 23 July, 2001, an e-mail from Willis to Mr Bollier contained a copy of the Travelers form as an attachment. Mr Bollier related he had opened the attachment, thinking it was a document addressing another issue and when it wasn't, "I closed it."

Testimony from Willis showed that the broker had sought Mr Bollier's formal approval when making several changes to the policy terms. In each case, a fax was sent requiring Mr Bollier's signature of approval. No e-mail or fax was presented, however, that asked for Mr Bollier's approval to replace the WilPROP form with the Travelers form. Mr Bollier testified he never realised the form had been switched until receiving a Notice of Loss statement from Willis following the September 11 terrorist attacks.

Willis official Nicholas Dunlop later testified that on 3 October, 2001, Mr Bollier, in a conversation, asked him to insert an occurrence definition into the Travelers wording. Mr Dunlop said that Mr Bollier had not appeared surprise about receiving the Travelers form in late September 2001 and had not stated that he was bound to WilPROP.

No material differences

During his testimony, Mr Boyd said he had been under the impression that he wasn't required to inform insurers that the form had been changed if it didn't deviate from the terms and conditions in the original binder.

He later discovered after September 11 that individual insurers could claim to be bound by the WilPROP form unless each was told of the change.

Timothy Crowley, an account executive at Willis, testified he never saw the Travelers form, nor did he know if any of the insurers had been notified of the change. Further, he admitted that he wasn't aware of anyone at Willis who had informed the insurers of the switch. Relying on others at Willis to review the form, Mr Crowley said he was told there were "no material differences" between the Travelers and WilPROP forms.

According to testimony at the trial, UK insurers, including Lloyd's of London which provided 19% of the coverage, signed preliminary documents waiving their right to approve the final policy form. Silverstein attorney Herbert Wachtell said that meant Willis was free to substitute the Travelers form, while David Boies, representing Lloyd's, said his clients would have had to be notified of such an important change.

Further confusing the situation, Silverstein's risk manager, Robert Strachan, gave testimony that on 12 September, 2001, he had faxed the WilPROP form to representatives of the Port Authority of New York and New Jersey and GMAC Commercial Mortgage Corp, Silverstein's principal lender. As explanation for this action, Mr Strachan said he had been under pressure to get a form out, and didn't have a copy of the Travelers form, so sent WilPROP.

Testimony of Douglas Johnson from Royal Specialty Underwriting revealed that he assumed the WilPROP form would be the one used in the policy because it was the form that had been sent in the original submission documents.

A lawyer for Mr Silverstein then provided a document showing Mr Johnson had indicated another form from the Insurance Services Office (ISO) on the slip. This form does not define the word 'occurrence' as the WilPROP form does.

Confronted with this evidence, Mr Johnson said the ISO form had been automatically inserted in the form space on the binder by a software program he was using. He said the ISO form was the only option offered by the system for a manuscript policy. "I never intended ISO to be used" on the submission, he said.

James Coyle, an underwriter for Travelers, said he told Willis that Travelers would be bound to the primary coverage only if it used its own form. Then Mr Coyle surprised the court by saying he had been unaware of any other re/insurers agreeing to be bound by the Travelers form before 9/11, and no one from Willis had ever told him otherwise.

Mr Coyle also commented that he was surprised that Travelers was considered the lead insurer on the WTC placement. He said Mr Boyd hadn't told him that such was the case.

Lessons learned?

Do the raw, behind-the-scenes confusion and contradictions that were revealed during the recent trial reveal a nonchalant practice and procedure common to most insurance placements? There is a feeling in the re/insurance community that the misunderstandings, squabbles and errors that surfaced in this trial may bring about changes in how slips and binders are prepared and approved, policy wordings and forms agreed to, and that the final policy needs to be delivered before the completion of a merger/acquisition or the closing of a property deal. A broker, who spoke under conditions of anonymity, acknowledged that often not "all the bells and whistles" defining the terms and conditions of a policy are properly in place before the inception date; in fact, sometimes the policy isn't even issued before its expiration.

Howard Epstein, Partner, insurance and environmental law, Schulte Roth & Zabel, noted that the property coverage for the World Trade Center was unusual because it involved so many different "re/insurance companies coming together to insure a risk. With so many, I am sure there were communications problems that developed," he said. "Usually placements are done very efficiently. I've never experienced a contract that is this confused, and I have negotiated policies with limits in the hundreds of millions of dollars."

A primary reason for the confusion is the complexity of the program and the fact that the loss occurred before all the inclusions and exclusions had been settled. "It isn't unusual to close a deal with a binder only," Mr Epstein said. "Usually a business transaction moves faster than the final insurance arrangements. This case has brought out the danger of having insurance trail a business transaction, such as a merger or acquisition or purchase of property. I think there is some thought that this case may change business practices in the future. It is advantageous to at least have a pro forma agreed-on-form before the deal closes."

Sean Mooney, Vice President, Guy Carpenter, said the proceedings at the trial have raised concerns that the speed of transactions and the processing of the paperwork have to be improved. "Often the final arrangements of a policy are not up to the brokers, but depend on the insurers and reinsurers coming to terms with each other."

Clearly it will have ramifications for reinsurers as to 'follow the fortunes' practice. A reinsurer needs to know what it is reinsuring, according to Ralph Tortorella III, Senior Partner and member catastrophic insurance practice, Ropers Majeski Kohn Bentley. "I would say that everyone wants an insurance policy to be issued before its inception date," he said.

"The question this case brings to light is that with insurance programs that are tremendously complex, it may not be practical to have the policy delivered at the time coverage begins. But the binder should certainly reflect the limits and conditions at the time the insurance is agreed to by all parties."

William Graham IV, CEO, The Graham Co, a broker in Philadelphia, said: "I see very little change in the way business has been conducted since 9/11."

"I would say both sides were sloppy considering the amounts of money we are talking about," said Andy Barile, reinsurance consultant. The trial "shows our industry must change the ways it does business. I think there will be more formalise documentation after this."

Jury decision in SR (Swiss Re) International Business Insurance Co Ltd v World Trade Center Properties LLC et al

Insurers bound by WilPROP2000 (destruction of World Trade Center on September 11, 2001, constitutes one claim):

- Swiss Reinsurance Co, $877.5m

- Lloyd's of London syndicates, including Wurttembergische Versicherung AG, $679m

- Chubb Corp (Federal Insurance Co), $254.3m

- Employers Insurance of Wausau US, a unit of Liberty Mutual Group, $64.9m

- Great Lakes Reinsurance plc of London, $38m

- QBE International Insurance Ltd, UK, $12.5m

- Lexington Insurance Co, US, a unit of American International Group Inc $5m

- Copenhagen Reinsurance Co, UK, $4m

- Houston Casualty Co, $2.4m Total $1,937.6m

Insurers not bound by WilPROP 2000:

- Royal & Sun Alliance Insurance Group plc (Royal Indemnity Co), $127.8m

- Twin City Fire Insurance Co, US, a unit of Hartford Financial Services Group Inc, $2.5m

- Zurich Financial Services AG (Zurich American Insurance Co), US, $45.7m Total $176m.