Coverage disputes are putting wordings back under the spotlight. By Ronald Gift Mullins.

For want of a nail, the shoe was lost;
For want of the shoe, the horse was lost;
For want of the horse, the rider was lost;
For want of the rider, the battle was lost;
For want of the battle, the kingdom was lost,
And all for the want of a nail.
Seventeenth Century proverb

Again proving the axiom that small, trivial actions can have complex, lcatastrophic ramifications is the confusing state of affairs involving the re/insurance coverage of the destroyed World Trade Center (WTC). For want of a clear definition of `occurrence', billions of dollars are at stake.

Whether Larry Silverstein, the leaseholder of the WTC property or Swiss Re and 20 or so other re/insurers win the lawsuits, one of the parties is going to lose billions. Silverstein asserts that the two planes that destroyed the towers were two occurrences and thus wants re/insurers to pay $7.1bn for the loss. Swiss Re and the other re/insurers claim that the two planes were a series of losses but one occurrence generating a payout of $3.55bn.

Because no formal insurance policy was in place on September 11 2001, the various lawsuits now in progress are to determine which definition of occurrence was in effect. Swiss Re and other re/insurers maintain they took on the risk after seeing a binder from Willis Group, the broker for Mr Silverstein and partners. This binder included WilProp 2000, which stated "occurrence shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur."

Mr Silverstein, however, argues that coverage was bound by a Travelers policy issued three days after the WTC destruction, but five months after he and partners took over the lease and sought insurance protection. The Travelers policy doesn't define `occurrence'. Claiming that the definition of occurrence in the Travelers policy prevails, he maintains that two planes hit the two towers separately and should count as two claims, or $7.1bn.

Most of the controversy and litigation involving the definition of occurrence and settling the claim could have been avoided if all parties - broker, insurer, reinsurer and the insured - had examined the language of the binders thoroughly as they were being prepared and the terms negotiated. Given the mega-dollar limits provided in the insurance policy, certainly the terms and conditions of the policy should have received careful attention.

The National Association of Insurance Commissioners (NAIC), in its `Handbook on Reinsurance', tries to assign some logic and consistency to the preparation of reinsurance contracts, but adds: "It might seem to be self-evident that the contract will clearly define exactly what business is to be covered, how claims will be dealt with, and what happens in the event of cancellation of the treaty. Unfortunately, unintended ambiguities do occasionally arise, and the time and effort needed for close review at the outset is a very worthwhile investment to resolve confusion or inaccuracy before a claim has been presented for settlement....

"The drafting of reinsurance contract language is probably more of an art than a science... Many contracts will be very well drafted, and present no difficulty..., but others may be models of obscurity and confusion. Whether this is the result of inept drafting rather than a conscious effort to camouflage actual intent is sometimes difficult to determine...."

Greed all around
A former CEO of a US reinsurance company, who requested to remain anonymous, suggested that essentially the WTC complex was considerably underinsured, compelling Mr Silverstein to push for the double payout. Early in the insurance negotiations, it was reported that Mr Silverstein had said the entire WTC property was worth about $5bn, but decided to insure it for only $3.2bn to lower the total premium. The primary and reinsurance underwriters and the broker went along with this gross undervaluing of the risk.

"Why?" the CEO said. "Because of greed all around. We're talking millions in premiums and commissions here. Everyone wanted a piece of this golden pie as quickly as they could get their hands on it. Greed, but more powerfully superseding the tried and true principals of underwriting was the impossibility of ever imagining that not one, but both towers of the WTC would fall to the earth in minutes. This towering risk looked like a gigantic pile of easy money, so the rules were bent a little here and there, and we see the unfortunate result."

While the sheer magnitude of the WTC insurance limits and premiums may have been leverage enough to wink at some underwriting and policy procedures, does the re/insurance industry adhere more closely to these principals on less stellar risks? Is standard policy language being accepted without further scrutiny? Are policies being delivered within a reasonable amount of time? Do reinsurers examine the primary insurance policy to make certain of the terms for which they are issuing reinsurance?

Post-risk paperwork
"I am amazed at how often insurance policies are not issued until sometimes after the policy has expired," said Michael Cahill, executive vice president and director of Carvill America, a reinsurance broker. "This makes no sense and shouldn't be tolerated by the insured. We have a corporate mandate that says the covernote has agreed wording at inception, and then the actual reinsurance contract is issued within the first 90 days after inception."

He continued: "In my days of running a technology company, an industry executive observed that we are slower now with issuing paperwork than we were 250 years ago."

Some years ago, a risk manager at a major bank in Canada said she had become so exasperated with not receiving the policy documentation until months after their inception that she informed her broker there would be no premium until the policy had been delivered. "It was amazing how quickly that policy materialized," she said.

Debra Hall, senior vice president and general counsel at the Reinsurance Association of America, said that reinsurers often enter into accepting a risk from slip data. "The slips used to be one page, but have become more detailed in later years. Reinsurers accept a risk from the information on the slip." She noted that sometimes a reinsurance contract does not necessarily follow what is in the primary insurance contact, so there are gaps and these can be a factor in misunderstandings later.

The NAIC has formulated an accounting rule that requires a reinsurance contract to be signed and issued within nine months following the inception of the policy, and provides a penalty if the rule is not adhered to. The ceding company must treat the reinsurance arrangement as a retroactive reinsurance agreement and is not allowed to take credit for reinsurance, which can affect operating results. However, this time requirement does not apply to facultative reinsurance contracts.

When asked if they had ever failed to deliver a reinsurance contract within the nine-month period, several reinsurance sources said they had not themselves been at fault, of course, but did know of others who didn't adhere to the time frame. It was not deliberate, but the contract became bogged down in the administrative, processing and legal departments and time just slipped by. They seemed to think that few - if any - bothered to report the lapse, and it would be to the advantage of the cedent not to note it.

"What seems inexplicable to me about Travelers issuing a policy three days after the destruction of the risk," the former reinsurer CEO said, "is that no one looked at the definition of occurrence in the policy before sending it out. The policy for this property would not have been boiler plate, but that manuscript would have involved lots of discussions between the parties, especially lawyers on all sides. That could be one reason the final policy had not been delivered by 9/11. But I doubt even if it had been examined again and again, anyone would have been too concerned about describing what occurrence meant rather than just what usually was normally included in a property policy. Again, the chance of the buildings being destroyed just didn't enter the consciousness of the parties. The delivery of the policy just a few days after the destruction is one of those weird concoctions of fate."

This lapse by Travelers to define `occurrence' was noted by US District Court Judge John S Martin in his decision of June 2002, which denied summary judgment to Silverstein and partners, holding that there is an ambiguity with respect to the meaning of the term `occurrence' in the context of the insurance policy covering the WTC. Lawyers for Silverstein and partners stated in arguments that they intended to use an affirmative judgment against other insurers to argue that the Travelers form governs the entire insurance program and the attack on the WTC constitutes two occurrences entitling the insureds to double recovery.

In his decision, Judge Martin wrote: "Despite the fact that the media had already reported the controversy over whether the attack on the World Trade Center constituted one or two `occurrences', for insurance purposes, the policy Travelers issued did not define the term `occurrence'."

Closer scrutiny
Increasingly, reinsurers and retrocessionaires are looking closely at the language of insurance contracts before signing on, said Carvill's Mr Cahill. "I have almost 25 years of experience working in large brokers. I've settled over $2bn in claims, a lot of them large accounts with reinsurers," he said. "Generally speaking, auditing the insurance policy used to be after coverage was in force. Reinsurers agreed to provide protection according to the underwriting guidelines of that particular ceding company which usually reflected the requirements of the company being insured. Now, however, some re/insurance companies are no longer accepting the large brokers' standard forms. They are looking more carefully at making sure they have their own insurance wording on the slips or contracts, rather than just going with the brokers' manuscript language."

This increased attention to detail in reinsurance contracts was starting to happen before September 11, but the big-ticket lawsuits involving Silverstein, Swiss Re and others, along with the tightening of the reinsurance market, the increasing complexity of the losses and their enormity, and continuing depressed investment returns, have accelerated its pace and made it an important issue.

"Without question, insurance companies are looking more closely at the language they are offering, and there is a greater burden on brokers to check out the terms and conditions of a policy or contract before signing off on it," said Mr Cahill. "Anyone today who does not have all the terms and conditions of a reinsurance contract spelled out fully and completely is playing a fool's game."

Not having clear definitions and terms in reinsurance policies can result in misunderstandings and a greater chance of having to settle differences settled by arbitration, mediation or litigation. This new combatant posture is in sharp contrast to the `follow the fortunes' practice that reinsurers generally adhered to in earlier years. Follow the fortunes meant that reinsurers paid their share of a claim to the ceding company usually without investigation, assuming the insurance company had investigated and determined that the claim was legitimate and the payment fair.

"A lot of industry leaders have noted recently that reinsurers are in a greater number of disputes," said Ms Hall. "The fact is that there is an increasing number of arbitrations, many more between reinsurers and cedents than there were just five years ago. One reason is that the terms of a contract are being enforced more stringently."

Roger M Deitz, an independent arbitrator/mediator, said it had become more difficult for parties to independently settle their controversies. Why? Firstly, insurers have been under increased financial pressure as investment portfolios have declined substantially leaving fewer funds to pay claims. Secondly, with big dollar claims, it is hard politically for one company executive internally to take responsibility for the settlement. If one company settles a case directly with another company for a big payout, there is no one to blame. "If the dispute is settled with arbitration, then there are all sorts of additional reasons to be cited for an unfavourable result - witness didn't testify, session was unanticipated, arbitrator failed to appreciate significance of evidence and so forth," said Mr Deitz.

As of early October 2002, only two insurers had settled their WTC claims with the approval of Silverstein and partners. Ace Bermuda Insurance Ltd agreed to pay $298m, and XL Insurance (Bermuda) Ltd agreed $67m. The two Bermuda insurers apparently were the only insurers that had signed binders which included only the WilProp 2000 form.

Three other insurers - Hartford Fire Insurance Co, Royal Indemnity Co and St Paul Fire and Marine Insurance Co - won a ruling from Judge Martin that allowed them to make only one payment for their WTC losses, a total of $112m. However, Silverstein and partners are appealing that ruling.

This case could go on for years, and all for the want of a clear definition.

  • Ronald Gift Mullins is a re/insurance journalist based in New York City.