The litigation is all but over and rebuilding has begun. Helen Yates asks what lessons have been learnt from the claims disputes arising from the World Trade Center loss.

“There will undoubtedly be interesting and complex questions involving millions of dollars in claim indemnity arising from these events,” wrote lawyer Michael Skay in the November 2001 edition of Global Reinsurance. “One currently debated issue is whether or not the September 11 tragedy at the World Trade Center was a single or multiple occurrence under both direct policies and reinsurance contracts.”

Looking back almost six years to the events of 9/11, the scale of the attacks on the World Trade Center still feels overwhelming. For Paul Moss, head of claims at QBE, it was a time when the insurance industry had to “cut through the emotion” – which was overwhelming – and figure out how it was going to respond. “This loss scenario was off the scale as far as underwriters were concerned,” he says. “Nobody had ever anticipated this sort of atrocity would ever happen and it was a cruel wakeup call for mankind.”

The lengthy case between the World Trade Center leaseholder Larry Silverstein and the insurers and reinsurers involved has been widely documented. For the most part it has now been resolved. The final settlement took place on 23 May, resulting in a payout of $2bn by the seven insurers and reinsurers involved in phase 2 of the trial. The total payments of $4.55bn by insurers and reinsurers for the WTC loss is, according to New York governor Eliot Spitzer and NY superintendent Eric Dinallo, the largest claims payment in regulatory history.

The seven insurers in the settlement were Travelers, Zurich American Insurance, Swiss Re, Employers Insurance Company of Wausau, Allianz Global Risks US, Industrial Risk Insurers and Royal Indemnity Company. After all the lengthy and expensive litigation (Silverstein is said to have spent close to $100m) mediation was the means by which all parties finally reached an agreement.

One occurrence or two?

The crux of the argument was whether the attacks on the WTC constituted one or two events. Silverstein Properties only had in place enough insurance for one of the towers and was therefore keen to argue that the attacks had been two separate events. Given this interpretation the policies would respond twice. “The Silverstein mantra in the phase 2 trial against domestic insurers was that there was two planes and two buildings, therefore it was two occurrences,” says Kenneth Erickson, a partner at Boston law firm Ropes & Gray and the lawyer who represented the London insurers who prevailed in the phase 1 trial.

The insurers disagreed, but it came down to the wording on the slips. It quickly became apparent that in such a layered programme with so many different slips, the definitions of “occurrence” also differed. A number of insurers (including London insurers) were bound by the Willis insurance form (Wilprop). The interpretation of Wilprop’s occurrence wording was that the attacks should be considered one event. “The Court of Appeal said the contract wording at the time the risk was placed in London was unambiguous,” explains Erickson. “The real fight was over which insurers were on the Willis wording and which weren’t.”

Travelers, which took the primary layer for the WTC, did not have a definition of occurrence on its slip. “There was confusion over which loss occurence definition would apply and under which wording,” explains Moss. “Because a final wording hadn’t been agreed (and there were numerous wordings in play) Silverstein sought to capitalise on this inconsistency.”

On 9 October 2006, Swiss Re celebrated winning its case against World Trade Center properties, saving the reinsurance giant from paying double its already hefty remuneration. “The second circuit affirmed a unanimous jury verdict finding that the destruction of the WTC on September 11, 2001, was a single occurrence under the terms of Swiss Re’s coverage. Silverstein’s two-occurrence claim against Swiss Re gave rise to five years of protracted litigation,” said Jacques Dubois, CEO, Swiss Re America Holding Corporation. “Today’s decision resolves Silverstein’s two-occurrence claim once-and-for-all in Swiss Re’s favour.” Under the agreement, Swiss Re’s payment could not exceed 25% of the total $3.5bn loss.

After “five years of protracted litigation” there was bound to be frustration for many involved. Despite London being the first to settle in phase 1 of the trial, Erickson believes the scope of the coverage for the loss might well have been resolved sooner had the parties “not overreached in what they sought”. “Most insureds worked with their insurers following 9/11 to achieve sensible results and other very sizable claims were settled commercially, some within a year of the event,” he adds. “The Silverstein insureds chose a different course, and the litigation history followed directly from that decision.”

A senior partner at a London law firm sees it slightly differently. “The client genuinely believed that given the amounts at stake he could use litigation as a tool for achieving his commercial objectives,” he says. “Looking at New York law it is easy to see how they had very significant points in their favour.”

“Nobody had ever contemplated this sort of atrocity would ever happen and it was really a wakeup call for mankind

Looking back

So what are the main lessons of the trial? The causes of dispute stemming from the WTC placement is one of the most commonly used arguments in favour of contract certainty. Silverstein’s legal team, with some success, went to great pains to expose the poor practices they said were endemic in the industry. “You had probably the most expensive piece of real estate in the world, yet because of the anomalies arising post placement, underwriters took different positions which eventually led to different outcomes,” says Moss. “This World Trade Center placement and subsequent issues arising is a textbook example for underwriters, it has to be. The challenge for the market in terms of delivering on contract certainty all spin out of this. Underwriters must learn from this and brokers must learn from this.”

Moss is incredulous at the lack of detail in the various slips and documentation for the WTC. “For your own fire policy on your own house you get a document which is about 20 pages long – there was nothing like that in the placement for the twin towers,” he says. “It’s quite staggering really.” Silverstein’s lawyers’ efforts to undermine the workings of London led to some embarrassing days in court. One respected London underwriter apparently admitting the sole contents of his underwriting file had been the front cover of the Willis submission – a photo of the twin towers.

So have these lessons been learnt? On 1 January 2007 London celebrated exceeding its contract certainty targets – as set out by the Market Reform Group. The market had been challenged in 2004 by the Financial Services Authority to end the “deal now, detail later” practices in the market. Wordings databases have also been set up and in June, Lloyd’s announced it was introducing new slip checking technology. “The LMP [London Market Principles] reforms and contract certainty initiatives are a very good starting point,” says Peter Schwartz, partner at Mayer Brown Rowe & Maw. “It’s a mechanism for encouraging and spoon-feeding the market.” But there is still room for improvement and, given the potential for unrecognised and unevaluated exposure, “reviews of wordings are often still given too little focus at too late a stage.”

In addition, the contract certainty drive hasn’t yet been exported. Schwartz says some people were surprised New York had not come up with its own initiative. But Erickson thinks the WTC case would have been litigated even if there had not been contract certainty issues. “Every case is a different case, but one thing people need to understand is that contract certainty is in the eye of the beholder,” he explains. “The court held that the definition was unambiguous but it didn’t change the Silverstein parties’ approach at all, because the insureds were pressing for a large recovery.”

He likens it to the litigation that followed Hurricane Katrina where, despite having many flood exclusions; insurers were pressed to “pay all claims”. “Even when there is agreed language in these contracts, disagreeing parties still quarrel about it,” warns Erickson. “Having a document doesn’t solve the problem. The problem arises when people decide to go after the brass ring.”

Other lessons surrounded the handling of claims in a large disaster and the communication between cedants and their reinsurers. Moss says there was a more unified response after Katrina than 9/11, with dedicated claims teams set up to deal with the flood of claims. “At Lloyd’s we set up a Katrina claims management group because we knew this was going to be absolutely huge,” he says.

Moss also notes that the primary markets and their reinsurers have developed a greater understanding of each others’ needs in terms of the information required to assist in the claims evaluation process. “This was another lesson learnt from WTC,” he says. “There was a lot more collaboration between the primary markets and their reinsurers to ensure that nobody was financially prejudiced by delays occurring in payment requests, particularly as the losses started to flow through.”

But that increase in transparency hasn’t stopped subsequent disputes arising between reinsurers and cedants. SCOR recently queried Allianz’s involvement in the recent $2bn settlement. Other litigation continues, largely for business interruption claims. From a life and health perspective there are concerns that survivors who inhaled the dust and toxic fumes during the attack could develop breathing problems many years from now. It is argued that the death count has already gone up due to deaths from respiratory failures of ground zero survivors. “There’s a time bomb ticking,” states Moss. “It is generally considered that there are a vast number of people out there who are starting to develop or who will develop very significant respiratory problems.”

Helen Yates is editor of Global Reinsurance.