As the litigation draws to a close on the WTC’s Property insurance program, reinsurers continue to evaluate how their reinsurance contracts respond. How have the issues brought to light over the last six years prepared claims analysts for similar events, and what claims service ...
On September 11, 2001, terrorists destroyed the World Trade Center (WTC) in a single, coordinated attack involving two planes that struck the WTC’s twin towers within minutes of each other. The WTC site and lease, purchased by Silverstein Properties from the Port Authority of New York and New Jersey for U.S. $3.2 billion in July 2001, was insured under a layered Property insurance program. In the Property program, 24 insurance carriers provided a total coverage of up to U.S. $3.5 billion per “occurrence.” However, as of September 11, with only one exception, actual insurance policies had not been issued – only binders, slips and confirmations of insurance were in place. These contained various wordings, opening the door to critical questions such as: was this one “occurrence” or two; what were the terms governing each of the 24 insurers’ coverage; and, how much were the insurance companies obligated to pay Silverstein Properties?
These questions took years to answer – the most recent development being the U.S. $2 billion settlement, on May 23, 2007, of the remaining WTC claims between Silverstein and the last seven insurers. We look at the complexities of this case and some of the underwriting and claims issues that it brought to light.
A Unique Loss Scenario
At the time, the WTC was the most costly event in the history of the insurance and reinsurance industry, and such an event had not been anticipated. The fact that two planes were involved, two towers were hit, the sheer size of the loss, the number of insurance carriers involved, and that almost no final insurance documentation was in place, set the scene for a long and complex litigious process.
High Stakes Coverage Issues
Adding to the complexity of the case was the contention of insurance carriers that they were bound by the Willis Property Form, known as the ‘WilProp 2000 Form’. This form, based upon a broad definition of "occurrence", would limit all WTC losses to one occurrence loss of U.S. $3.5 billion. Silverstein Properties contended that the ‘Travelers' Form’ applied, which did not contain an “occurrence” definition, and would respond to each of the WTC towers as a separate loss, resulting in a U.S. $7 billion loss payment.
Extended Litigation
Shortly after 9/11, coverage litigation began to determine:
- Which binder each insurer was bound to follow – the WilProp or Travelers Form;
- The meaning of “occurrence” contained in the binders; and
- The valuation of the property.
The phased litigation, resulting in verdicts and extensive opinions in New York federal trial and appellate courts, has been lengthy and costly. Court findings and jury verdicts included the following:
(i) under the WilProp Form, the destruction of the WTC was one occurrence; and those insurers found to have bound to the WilProp Form would be liable for only one occurrence limit;
(ii) the language used in the Travelers Form was found to be ambiguous regarding the meaning of an “occurrence”, requiring a jury trial. The jury determined that for insurers bound to the Travelers Form, the attack was two occurrences, exposing those insurers to two occurrence limits for WTC losses.
Finally, in October, 2006, the United States Court of Appeals upheld the New York District Court’s verdict that the bulk of insurance policies covering the WTC treated the terror attacks as a single occurrence under the WilProp Form; however, the court also upheld the “two occurrence” finding for those carriers subject to the Travelers Form.
Complex Valuations
As a result of the coverage litigation, Silverstein Properties’ payable losses totaled approximately U.S. $4.6 billion in available limits – much less than the U.S. $7 billion Silverstein initially sought, but more than the U.S. $3.5 billion single limit that the insurers initially contended they owed.
The next steps included appraisal proceedings to determine the replacement cost of the WTC, the actual cash value of the WTC as of September 11, 2001 and the lost rental values. Issues then also arose regarding the maximum amount of recovery from each insurer as established by the first and second phase jury verdicts, with several insurers taking the position that their coverage was in the “upper layers” of the Property program and therefore not triggered.
This final piece of the insurance puzzle between Silverstein Properties and the last seven insurers was settled by a U.S. $2 billion out of court settlement on May 23, 2007, aided by the efforts of New York Governor Elliot Spitzer and New York Insurance Superintendent Dinallo.
PartnerRe’s Approach
There were 24 different insurance carriers involved in the 12 layers of Property insurance coverage provided on the WTC towers, but there were far more reinsurance contracts and layers of contracts providing reinsurance recoveries for the loss. The complexities of this case and other complex property losses have raised challenging issues for the insurance and reinsurance industries, and specifically for claims analysts. Understanding that we have a responsibility to deliver an appropriate and timely response to cedants, PartnerRe engaged in the ongoing process of monitoring the losses and litigation. We reflect back on the critical factors that have enabled us to be responsive, manage expectations and meet the needs of cedants.
Ability to effectively monitor losses and apply contractual terms
The first step is to clearly understand the loss at the primary insurance level. With claims as complex as the WTC, our claims department actively monitored the litigation, examined the contractual language of the treaties and evaluated the impact to each reinsurance contract following each court decision. This helped us to accurately and appropriately apply the loss to the reinsurance contracts and to verify that our reserves were adequate.
Ambiguities of coverage, unclear contractual definitions and vague terms in contractual language create claims handling challenges, exacerbated by the tragedy and enormity of the WTC loss. As part of our technical underwriting approach, PartnerRe always looks for clear and well defined terms in our contracts. Our U.S. claims department examined the contractual terms in all of our reinsurance contracts for the WTC and in some cases, requested additional information from cedant underwriting and claim files and conducted on-site audits to provide needed backup and supporting information. This gave us a clear understanding of our claims duties and obligations under our respective treaties.
Strong and effective communication internally and externally
PartnerRe recognized the critical importance of a coordinated team effort and input to address the complexities of WTC losses. Over the last six years, there has been a steady stream of communication between and among the claims, underwriting, legal, actuarial, and finance departments and senior management to share knowledge and analysis on loss and liability data, as well as updates on the impact of court decisions on the number of occurrences. Externally, it is critical that we respond to our cedants and brokers, and pay covered losses on a timely basis. At PartnerRe, our claims and finance teams work closely together to deliver on our five-day standard for processing claims billings.
All these steps have positioned us well to meet our responsibilities to our clients as we face the uncertainties of future losses. As a reinsurance company, PartnerRe stands by its contractual obligation to pay covered losses as payments become due, and we are committed to resolving claims quickly and efficiently. That’s a significant part of the value we provide to our clients.