SR International Business Insurance Co Ltd v World Trade Center Properties United States Court of Appeals (for the second circuit) Lead Docket 04-4500-cv(L)

THE FACTS

In the Spring of 2001, Silverstein Properties Inc (and related entities) acquired a 99 year lease over the World Trade Centre (WTC) owned by the Port Authority of New York and New Jersey. The lease required Silverstein Properties to take out insurance cover. Silverstein Properties retained Willis as its insurance broker. Willis negotiated a multi-layer insurance program by circulating a Property Underwriting Submission attaching, in some cases, a copy of Willis’ own broker form (or policy wording) known as the WilProp Form. The insurance program provided for total cover of $3.5billion on a "per occurrence" basis. The WilProp Form contained a definition of "occurrence" which treated all losses attributable to "a series of similar causes" as a single "occurrence". The definition was designed to benefit an insured by grouping together related events as one occurrence, meaning only one deductible was payable. Prior to September 11, 2001, some of the insurers had bound coverage on an interim basis with the WilProp Form, while others had bound coverage with their own company form. At 8.48am and 9.03am on September 11, 2001, terrorists flew 2 commercial passenger jets into the north and south towers of the WTC, resulting in the total destruction of both buildings and the deaths of thousands of people.

THE LITIGATION

One month after the attack, Swiss Re sought a judicial declaration of its rights and obligations to the insureds under its policy, and a declaration that the damage to the WTC was one insurance loss. That suit was met with a counterclaim by the Silverstein parties seeking a declaration that "the events of September 11 constituted more than one occurrence under the coverage that the [insurers] agreed to provide to the Silverstein parties". Various parties subsequently litigated various motions and in an early decision, Judge Martin of the United States District Court, Southern District, New York, held that under the definition of "occurrence" in the WilProp Form, the destruction of the WTC was one occurrence as a matter of law. Perversely, the WilProp definition of "occurrence", designed to benefit the insured, in fact favoured the insurers due to the size of the overall loss. The Silverstein parties appealed this decision. On 26 September 2003, the US Court of Appeals affirmed the judgment.

Subsequently, a 2 phase jury trial took place in the District Court, Southern District, New York to adjudicate on:

Phase 1: Whether insurers claiming to be bound to the "single occurrence" WilProp Form were actually bound to that form. Twelve insurers and 20 Lloyds of London syndicates participated in Phase 1.

Phase 2: Where the WilProp Form did not govern, whether cover provided by the remaining insurers treated the attack as a one or 2 occurrence situation.

The jury held:

Phase 1: Nine of the 12 participating insurers, and all 20 of the Lloyd syndicates were bound to the WilProp Form. The 3 insurers found not bound to the WilProp Form were then subject to adjudication under Phase 2. Issue #51 25 October 2006 Phase 2: The jury determined that all 8 insurance binders, and the final policy issued by Allianz, contemplated a 2 occurrence treatment of the attack on the WTC.

The Silverstein parties challenged the verdict in Phase 1. The Phase 2 insurers challenged the verdict in Phase 2. The US Court of Appeals consolidated the parties’ appeals.

THE APPEAL

The appellants on both sides argued that:

  • They were entitled to judgment as a matter of law.

  • The verdicts against them were tainted by evidentiary errors.

  • The verdicts against them were tainted by prejudicial instructions to the jury.

Phase 1 Appeal

The Appeals Court upheld the jury verdict on the number of insurers able to rely on the WilProp Form. [N.B. The decision was made more significant by the fact that the Phase 1 insurers included Swiss Re, which alone provided 25% of the coverage].

Phase 2 Appeal

Only 8 of the 9 Phase 2 insurers appealed. Tokio Marine reached a settlement with the Silverstein Parties after the jury trial. Three of the 8 insurers were bound by forms with no definition of "occurrence". Five of the 8 were bound by forms which defined "occurrence" to mean a loss, disaster or casualty, or a series of losses, disasters or casualties arising out of one "event" (or a single event).

With those forms where occurrence was not defined, evidence was lead by a Geoffrey McKinley on behalf of the Silverstein Parties that in the absence of a contrary definition, the practice of insurers was to tie the definition of occurrence to a physical cause of loss, with each physical cause of loss constituting a separate occurrence, so maximising the number of deductibles that an insured would be required to pay. He testified that otherwise insurers used "hours clauses" when they wanted to aggregate losses associated with specific perils [eg. an hours clause may provide that all losses arising from hurricane, flood or earthquake, would be considered one occurrence if sustained within a 72 hour period]. The Court accepted that the Silverstein Parties had lead sufficient evidence to establish that insurers generally use a narrow definition of "occurrence" in their industry form.

The Phase 2 insurers bound by the forms where "occurrence" was defined to be linked to an "event", argued that the attack itself was one event and therefore one occurrence. These insurers argued that the definition of "occurrence" was not made ambiguous by the word "event" not being defined. The Court disagreed and read the policy in favour of the insured. It held that the separate collisions by separate aircrafts into separate buildings were to be treated as separate "events" under the policies.

Judge Walker said:

"Obviously the meaning of the term ‘event’ is of critical importance. If ‘event’ is interpreted to mean all related phenomena then the insurers’ definition of ‘occurrence’ would aggregate all losses associated with all related phenomena, such as the coordinated terrorist attacks of September 11, and treat them as one ‘occurrence’. If, on the other hand, ‘event’ is defined to mean ‘a physical phenomenon’, then the insurers’ definition of ‘occurrence’ would treat all losses associated with a single physical phenomenon, such as a single aircraft collision, as one ‘occurrence’.

Unfortunately for the insurers, on the facts of this case, a narrow reading of ‘event’ – defined as ‘a physical phenomenon’ – would entitle the Silverstein parties to two separate recoveries: one recovery for each airplane crash, limited to all losses associated with each crash.

We conclude that the defined term ‘occurrence’ is not sufficiently unambiguous, because the word ‘event’ is susceptible to more than one reasonable interpretation. As a result, the insurers are not entitled to judgement as a matter of law."

No person should rely on this information without first obtaining advice from a qualified legal professional. Barry & Nilsson Lawyers are not responsible for the consequences of any action taken on the basis of this information nor for any error in, or omission from it. Barry & Nilsson Lawyers expressly disclaims any liability and responsibility to any person or entity regarding anything to be done or omitted to be done by any person or entity in reliance (wholly or partially) upon the contents of this information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.