Although the notion of a binding agreement between two parties dates back to ancient times, the doctrine of contracts has evolved through the years to meet the needs of modern times.
In 1911, Judge Learned Hand defined this legal principal: “A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent.” Today, almost everything we do and need in our lives involves a contract of some sort—mortgages on our homes, car leases, employment agreements, credit cards and our beloved internet and cellular services.
Similarly, insurance policies — contracts between an insurance company and a policyholder — are absolutely necessary in protecting our business and personal interests. The fundamental precepts of entering into, and enforcing, contracts serve as the bedrock of the insurance industry.
One of the most tragic events in our nation’s history, the terrorist attack on the World Trade Center on September 11, 2001, served to illustrate the very essence of contract formation: a meeting of the minds as to the terms and conditions of the insurance agreement.
In order to finalize the 99-year lease of the World Trade Center property to the Silverstein companies in late July 2001, numerous insurance companies bound comprehensive property insurance with an aggregate of $3.55 billion in per occurrence limits of coverage.
Prior to the September 11 attack, almost all of the insurers had issued binders setting forth their general agreement to provide insurance, but no policies were issued. Not surprisingly, coverage litigation ensued over what constituted the terms and conditions of the insurance agreement.
One of the main issues was whether the WTC attack constituted one or two “occurrences.” The documented negotiations between the parties became the critical focus in making that legal determination.
To resolve the dispute, one trial addressed whether certain parties were governed by either: (a) a Travelers insurance policy issued after the event, which did not define the term “occurrence,” or (b) a broker form called the “WilProp” form, which contained a definition of “occurrence” that treated the September 11 attack as a single occurrence.
The case then progressed to a second trial for those insurers that followed the Travelers form. Because that form did not define “occurrence,” and the documented negotiations did not establish any contrary intent, Silverstein successfully argued that the events on September 11 should be treated as two separate occurrences.
The jury’s verdict stressed the importance of what may seem, to a casual observer, to be a minor difference in policy terms, but turned out to be the crux of a multi-billion dollar insurance dispute.
The WTC litigation highlighted important lessons to be learned by brokers, risk managers and insurance companies as to negotiations leading to insurance placement for all types of policies.
Perhaps the most important lesson, applicable to each party, simply boils down to documenting all essential communications to confirm that a meeting of minds was reached during the insurance placement. The more objective indicators of the parties’ agreement, the easier it is to later recount, if necessary, the terms and conditions upon which the agreement was made.
The WTC litigation also reiterates that a lack of a response during negotiations does not correlate to an agreement by the other side to wording or form changes.
In addition, to avoid the evidentiary issues the insurers and policyholder faced in the WTC litigation, parties should insist on receiving the policy wording in a timely manner, and must clearly document any attempts to modify the policy’s terms and conditions or change policy forms. Finally, the parties should be proactive and not leave open any questions about the placement and negotiation process.
The old adage of “prevention is better than cure” was never more apropos than in the instance of the September 11 property insurance dispute. The lessons learned are important to the relationship between insurers and the insured.
Our present insurance market is evolving quickly. New, complicated risks, ranging from cyber breaches to climate change, make the importance of understanding and documenting the insurance agreement more important than ever.
Michael A. Hamilton is a partner at insurance law firm Nelson Levine de Luca & Hamilton. He has more than 20 years of experience handling insurance coverage claims and litigation on behalf of major insurers throughout the U.S. He focuses his practice on environmental, professional liability and business torts/advertising injury claims. He can be reached at 215-358-5712 or firstname.lastname@example.org.