Resurrection-First Steps to WTC Resurrection as Coverage Fight Continues

With the selection of the design submitted by Berlin-based architect Daniel Libeskind, rebuilding of the World Trade Center site has begun. Walking around the 16 acres of open space in the heart of New York one finally begins to comprehend the enormity of the destruction wrought on Sept. 11; it is now one huge construction zone. Riding the subway downtown on Friday morning at 8 a.m. gives a more poignant perception of the human and economic cost.

“No way you’d have been able to get a seat [before Sept. 11],” said New Yorker Daphne Harden, surveying the half-empty car, as it stopped at the Canal Street Station. “Fifty thousand people used to work there [the WTC] and another fifty thousand all around it. Now they’re just gone.”

Libeskind’s design leaves the center of the space, where the twin towers stood, open, a monument to all those who perished there. The area will be surrounded by glass towers of differing shapes and sizes, and above all will stand a 1,776-foot spire, taller than the original towers. The exact form of the new construction is still an open question. “The buildings that will be built will be decided not based on this plan necessarily,” Mayor Mike Bloomberg told the New York Post, ” but by who wants to build them and where the money comes from and who wants to rent them or live in them or shop in them. It’s certainly not cast in stone.”

While the complete plans are still being debated, there’s no doubt that rebuilding on the WTC site is an urgent priority both in the general sense—to resuscitate downtown Manhattan—and in a very specific sense. “It’s the place I work, I want it back,” said a lawyer who works for a government agency. He requested anonymity, but he was nonetheless emotional about what happened on Sept. 11, an understandable reaction. He was walking to work—at his office in the WTC complex—when the first plane hit.

He sees the event as a “defining moment” both for New York and for the U.S. “Rebuilding means we’ll get it back.” and it’s been a long and arduous process. “It’s taken quite a while for things to even approach getting back to normal,” he said. “For the first month or so no one could go lower than 14th Street unless they lived there. Military personnel were everywhere, and for months the fires and the smell were overwhelming.” From his temporary office overlooking the construction site he’s watched the transformation occur. “By June of last year, they’d finally finished [removing the debris],” he continued. “After that things got more normal, as there wasn’t the daily reminder of it [the attacks].”

Mary Florin McBride, first vice president and deputy manger of credit risk management at Credit Lyonnais, watched the tragedy unfold from her midtown office with a sense of disbelief. She remembers thinking “this can’t be happening.” She had many friends who worked at the WTC, but fortunately none of them were lost. As a banker she’s also seen the economic consequences first hand. “You now look at every file in the context of 9/11,” said McBride. “There isn’t a single one that doesn’t have some potential exposure, some additional risk in the event of another attack.”

Some enterprises are more at risk than others—airlines, tourist industries like hotels and restaurants, and financial enterprises. Office routines have changed as well. “We used to have ’emergency planning’ sessions,” McBride said, “but it was mainly what we should do if the lights went out. Not any more; now we have ‘disaster recovery meetings,’ and we have real recovery plans, including a site in New Jersey we can move to almost immediately; and [people in] Paris can do our work, they have as much information as we do.” She also indicated that the “ripple effect” from 9/11 was still being felt throughout the U.S. economy.

Pressure mounts for resolution
With the decision made as to what is to be built on the site the pressure will increase to conclude the ongoing legal disputes over insurance coverage. The most high profile lawsuit pits Swiss Re and a number of other insurers against Silverstein Properties and Larry Silverstein. It’s centered on the question of whether the attacks that caused the collapse of the twin towers constituted one occurrence or two, and has received extensive media attention, due in large part to the relentless barrage of press releases and statements both sides have issued in defense of their respective positions.

Essentially, Swiss Re asserts that the language used in the binders that it and 21 other insurers signed to cover the WTC with a $3.5 billion policy limit were those prepared by the lead broker Willis, called the “WilProp” form. They contained the following language: “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.” If they’re correct, it would indicate that the events of Sept. 11 should be seen as one loss.

Silverstein contends that as two airplanes hit and destroyed two buildings at two separate times, there were two occurrences. The company and its partners as the master lease holders on the WTC complex are therefore entitled to recover maximum policy limits—$3.5468 billion to be precise—for each loss, a little under $7.1 billion.

The lawsuit’s focus has increasingly centered on which form the parties intended to use as a binder—none of the actual policies had been issued at the time of the attacks—the WilProp form, or one prepared by Travelers which does not contain any reference to “occurrence.” A more recent development concerns the assertion by Swiss Re and a number of Lloyd’s syndicates that Silverstein purposefully underestimated the WTC’s replacement value, by billions, as Swiss Re stated in a Feb. 8, 2003 bulletin.

That statement coincided with Swiss Re’s appeal to the U.S. 2nd Circuit Court of Appeals of Judge John Martin’s ruling that a jury must decide the occurrence issue. It contends that it has established sufficient evidence to show as a matter of law that there was only one occurrence. The bulletin, issued to accompany the filing, stated: “Silverstein deliberately insured the WTC as a single property for billions of dollars less than its full replacement value. Notwithstanding that fact, he seeks to convert a USD 14 million equity investment into more than a USD 1 billion potential insurance windfall, by claiming that he is entitled to twice the USD 3.5 billion total loss limit of his property insurance. Contrary to the express understanding of insurance professionals…Silverstein and his representatives trumpet at every opportunity that the attack on the WTC was two separate occurrences.”

Jacques Dubois, Swiss Re America Holding Corp. chairman and CEO, added, “In our view, Silverstein Properties knowingly and deliberately underinsured the WTC complex. We believe the record establishes that in order to save on premium dollars, Silverstein intentionally refused to insure against the risk of loss in excess of USD 3.5 billion. Rather than face this uncomfortable fact, Silverstein has led an aggressive media campaign aimed at rewriting history and inappropriately seeking to obtain funds in excess of the coverage he purchased. Despite his posturing that a double recovery insurance windfall is for the good of New York City, Silverstein’s fantastic story is to no one’s benefit but his own.”

Finally Swiss Re’s attorney, Barry Ostrager of Simpson Thacher & Bartlett, weighed in with the statement that “The evidence produced in discovery shows without a doubt that Mr. Silverstein’s elaborate two-occurrence argument is a hoax. In this filing, we believe we have compiled a record that establishes with meticulous detail—including names, times and places—that the entire Silverstein case is a fiction conceived by lawyers and public relations advisors immediately after Sept. 11, 2001.”

Two days later 20 Lloyd’s Syndicates filed a brief with the Court of Appeal in support of Swiss Re, Travelers and the other insurance companies. Reuters quoted the Lloyd’s brief as stating that the Silverstein interests had valued the full replacement cost of the twin towers at $3.945 billion, while “at the same time, they chose to insure the entire property as one insured location for $3.546 billion.” The brief was prepared by David Boies, a well known attorney, who first rose to prominence for his handling of the Justice Department’s case against Microsoft, and has recently represented Adelphia Communications Corp. and Tyco International.

The Lloyd’s brief was filed jointly by a number of companies, including Chubb and AIG, in support of their interest in limiting the amount of the recovery to one occurrence. It also asserts this position on behalf of Lloyd’s syndicates run by ACE Limited (which has already settled Silverstein’s claim against the company as one occurrence), General Electric’s reinsurance operations, Hiscox plc and Amlin plc, and other Lloyd’s syndicates. Also joined in the filing were Great Lakes Reinsurance, a division of Munich Re, Wurttemburergische Insurance, HCC and Australia’s QBE, all of whom do business in the London market.

Silverstein suffered a setback last September when Judge Martin ruled that Hartford Fire Insurance Co., Royal Indemnity Co. and St. Paul Fire & Marine Insurance Co. had made a sufficient showing that they had relied on the WilProp form language when they agreed to bind coverage that the terrorist attacks should be seen as a single event, resulting in only a single payment. Silverstein promptly announced that he would appeal that decision.

Lately, however, the rulings have been more favorable to the master leaseholder. Judge Martin hasn’t let any more companies out of the case, has determined that a jury should decide the “occurrence” question, and, at the end of January, he ordered Swiss Re and Allianz to produce their notes of meetings held after Sept. 11 at which Silverstein claims a Travelers executive told them that his company’s form controlled the coverage of the twin towers, and not the WilProp form.

Silverstein’s attorney, Howard Rubenstein of Rubenstein Associates Inc. responded for his client by calling Swiss Re’s statements “a cynical and manipulative attack on Silverstein Properties’ efforts to collect the insurance bought and paid for on the World Trade Center, and in turn, an attack on the rebuilding [of] lower Manhattan.” He launched his own barb, stating, “To compensate for the weakness of their legal position, Swiss Re has engaged in a scurrilous personal attack on Mr. Silverstein and his legal counsel, and has twisted the facts. The barrage of misleading press releases by Swiss Re reveals the depths of its concern about its case.”

Rubenstein also asserted that “Silverstein did not underinsure the WTC complex.” He pointed out that the Port Authority, the owner of the WTC site and buildings, had in fact carried only $1.5 billion “per occurrence,” whereas Silverstein had raised those limits to $3.5468 billion. “The insurance companies sold Silverstein ‘per occurrence’ coverage,” he continued. “In doing so, they took the risk that two separate ‘occurrences’ might result in the destruction of the Twin Towers—thereby subjecting them to liability for two ‘per occurrence’ limits. That’s simply the way ‘per occurrence’ coverage works, as these sophisticated insurance companies well understood.”

After repeating Silverstein’s position that as two attacks were involved there were two “occurrences” Rubenstein added, “New York insurance law provides that, in determining the number of occurrences, courts are to look to the immediate event that caused the insured’s injury, and not some earlier event in the causal chain. Thus, under New York law, there were two separate occurrences on Sept. 11.”

Weighing in
The actual parties aren’t the only ones interested in the outcome. A recent poll on the question on the Insurance Journal Web site elicited a response from 3,197 readers—by far the largest number to respond to any poll by the IJ. Sixty percent expressed the opinion that the destruction of the WTC was one occurrence. However, as the vast majority of the site’s readers are insurance professionals, it’s interesting to note that a significant minority viewed the WTC attacks as two occurrences.

Both sides have accused the other of lying, of trying to cover up potentially important facts and of using the media to try to discredit the other’s position. Perhaps it’s inevitable with so much at stake for the two camps to take their arguments outside of Judge Martin’s court room, but accusing your opponent of manufacturing a “self-motivated hoax” in order to double his recovery, or calling your opponents’ statements “cynical and manipulative” is hardly language conducive to settling an argument. The two sides appear to be further apart than ever with no settlement even remotely possible. The case will eventually go to trial, and probably through a lengthy appeals process after that.

Swiss Re, et al., are not the only ones wrangling over WTC issues. Zurich American Insurance Company took Silverstein to court in January over the terms of his liability policies with the company. According to Keith Owens, ZAIC’s PR Manager, the company originally concluded a binder followed by two policies—issued after Sept. 11—that provided for liability coverage through a primary policy with $2 million limits and a “commercial umbrella policy with $50 million policy limits.

ZAIC doesn’t dispute the coverage, but is seeking a declaration that it has no duty to defend Silverstein, or 24 other parties he claims are “additional insureds,” against liability claims related to Sept. 11. Owens pointed out language in ZAIC’s complaint that “unlike many other commercial general liability policies,” the ZAIC policies “do not provide for an insurer-funded and arranged legal defense to claims of liability or for reimbursement of the costs of such defense.” He noted that this was agreed to by Silverstein when the binder was executed.

As an indication of just how much remains in the pipeline, one of the first big settlements was concluded last November when Lehman Brothers agreed to accept $700 million from its six insurance companies. The investment bank employed 6,000 people at its, headquarters in the World Financial Center, across the street from the WTC. Its offices were unavailable for 14 months. The last payment on the settlement, negotiated by William Kramer & Associates, a loss adjustment specialist with offices in Avon, Conn. and Boston, Mass., was made in January. There are hundreds more such claims that are still being negotiated, and many of them will wind up in the courts.

While the World Financial Center has reopened, many other buildings in the area remain sealed. They’re too badly damaged and/or unstable to be reoccupied without a lot of reconstruction work, but the amount of asbestos and toxic chemicals released by the collapse of the twin towers has rendered them too dangerous to work on. As a result downtown Manhattan remains a ghost of its former self. “Restaurants that you couldn’t get into on a bet [before Sept. 11], are now half empty,” said the lawyer. Many businesses have in fact closed or relocated elsewhere in the city.

Other employers may have gone for good as well. Westchester County, parts of Long Island and New Jersey have all provided space for companies displaced by the destruction of Sept. 11. A recent survey by Colliers ABR, a real estate broker, showed declining occupancy rates in Manhattan. While midtown vacancies were slightly less in February, 9.5 percent, as compared to January, 9.8 percent, they were still higher than the 7.9 percent vacancy rate one year ago.

Downtown vacancy rates, which were 11.7 percent in February 2002 rose to 14.9 percent at the end of the month in 2003. Rental rates had decreased from an average $41.76 a square foot last year to $36.91 at present. Given those conditions one has to wonder how New York is going to find tenants for the million-plus square feet of office space a rebuilt WTC complex will put on the market.

Continuing departures are exacerbating the problem. The city’s Economic Development Corp. and the Empire State Redevelopment Corp. are currently in negotiations with Prudential to try and save 2,700 jobs in lower Manhattan. Prudential has agreed to merge its brokerage operations with Wachovia Corp., and the two companies hope to realize some $200 million in cost savings, a large proportion by moving the operation to Wachovia’s facilities in Richmond Va. While the two have said that the employees will be offered jobs in the new location, the move would be a further blow to the area.

Can New York really ever recover from Sept. 11? The attorney is optimistic. “New York will continue to be the center, it’ll come back,” he said. He pointed to the recently inaugurated Ritz Carlton complex at the end of Battery Park as an example. “The minimum price [for an apartment] is $3.5 million. New York will continue to build tall buildings, too, mainly because it has to.”

He’s confident that eventually people will live and work in the area again, although he is concerned that security measures aimed at preventing another WTC type attack might not be sufficient to envision and interdict different threats such as truck and bus bombs. Mary McBride is confident too, but she added that “another attack is possible; everything really depends on whether there’s another one.” Neither New York nor the rest of the U.S. will have fully recovered until the fear that it could happen again has been permanently dispelled.