Like the back splash from a boulder thrown through the surface of a calm lake, the aftereffects of September 11th are creating ripples in diverse and far-flung economic sectors well after the initial terrorist strike. The world is turning from its initial shock to practical issues, including, “Who is going to pay for all of this?” Not surprisingly, individuals and corporations are now seeking help from their insurance companies, who are, in turn, seeking help from their partners in the risk-transfer mechanism, the reinsurers. Never before have the insurance and reinsurance industries faced the nature and extent of issues and claims triggered by September 11th. Emerging differences may significantly impact not only claims related to September 11th, but also the future of insurance and reinsurance coverage and claims handling.
“Is This Covered?”
Much ink has been spilled on the question of whether insurance companies will assert certain exclusions in their policies -- particularly the “war exclusion” -- to deny coverage for losses arising from September 11th.Because it appears no foreign government or quasi-governmental entity orchestrated the terrorism of September 11th(a common prerequisite for the “war exclusion”), several major insurance companies have announced that they will not assert that exclusion. But if future revelations suggest overt involvement by the Taliban regime or some other governmental entity, some insurers may change that coverage position. Also, some “war exclusions” go beyond the standard definition and incorporate terrorism-related actions by other entities. As always, an experienced review of the relevant policy language and the circumstances of the loss is necessary to determine its applicability to the claim.
Another coverage question is whether losses by entities outside the targeted areas, such as losses from governmental shutdowns of airports and city streets or from temporary inactivity of essential business partners, are covered by business interruption (“BI”) insurance. Again, contract language is the key. A prerequisite in many BI coverages is physical damage to the insured’s property. Under such policies, BI coverage would be afforded to the tenants of the World Trade Center, but possibly not to the proprietor two blocks away whose undamaged store was closed while lower Manhattan was cordoned off. Some policies, however, provide broader BI coverage, tying coverage to interruptions resulting from government actions and/or interruption of ingress/egress to the insured’s property, regardless of whether the property suffered physical damage. Similarly, some policies cover BI losses caused by the interrupted delivery of essential goods or services from certain business partners whose own property was damaged or destroyed, regardless of whether the insured’s own property was physically damaged. Thus, depending on the particular policy provisions and the nature and cause of the BI loss, insurance coverage may be available for businesses throughout the world for BI losses related to September 11th.
In addition, questions exist as to whether coverage exists for more attenuated claims, such as expenses for mental health treatment for traumatic stress suffered by airline personnel flying between other cities on September 11th or by people who work in the vicinity of the airline crashes but who were not physically injured. Responsible resolution of coverage issues on such attenuated claims will be particularly important at the reinsurance level, as reinsurers will likely be closely examining billings related to September 11th to ensure that cedents (insurance companies submitting reinsurance billings arising from underlying claims) are not paying unmerited claims.
“What Is An ‘Occurrence’?”
Many insurance policies or reinsurance contracts cap the amount the insurer or reinsurer will pay each insured or cedent on a per “occurrence” basis. The policies or reinsurance contracts also may require the insured to absorb per “occurrence” deductibles or self-insured retentions (“SIR’s”) before recovering under the policy or reinsurance contract. Whether (and how much) an insurer or reinsurer will be obligated to pay, and how much a claimant will be entitled to receive, on claims related to September 11th therefore will depend heavily on a determination of how many “occurrences” were involved in those claims. If all of the losses arose from a single “occurrence,” an insured or cedent would more easily satisfy the deductible or SIR requirement, but would be more likely to reach higher layers of, or exceed, available coverage. On the other hand, if the losses arose from multiple occurrences - for example, if each airplane crash is deemed a separate “occurrence” - then the insured or cedent would have to satisfy the applicable deductible or SIR for losses from each “occurrence,” but may have full separate limits available for each occurrence (presuming the policy/reinsurance contract does not impose an aggregate limit on recovery for all “occurrences” during the policy period).
A key ease to watch on this issue is SR Int’l Bus. Ins. Co. Ltd. v. World Trade Center Properties LLC (S.D.N.Y. 1:01cv09291), filed in federal court in the Southern District of New York on October 22, 2001. Plaintiff Swiss Re is one of 25 property insurers on World Trade Center Buildings 1,2,4 and 5 under an insurance program that incepted in July 2001 and provided approximately $3.55 billion in coverage per “occurrence.” As is common in large commercial insurance programs, the final contract wording had not been prepared as of September 11th. Instead, the insurance policy was evidenced by “binders” issued by the participating insurers. Swiss Re contends the binder it issued contained a broad definition of “occurrence:” “all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes.” Citing this language, Swiss Re seeks a declaration that the loss to the Buildings 1,2,4 and 5 and the retail mall beneath the World Trade Center arose out of one “occurrence” and thus constituted a single insurance loss. The leaseholder on those properties disputes that it contracted for that definition of “occurrence,” and contends that the losses arose out of two separate “occurrences” -- two distinct terrorist attacks. The court’s eventual resolution of this dispute, and how the court applies that definition to the World Trade Center losses, may be significant precedent on the “number of occurrences” issue for pending and future insurance and reinsurance claims.
“Who Will Resolve All These Coverage Disputes?”
The impact of the Swiss Re lawsuit could be magnified by a second suit filed regarding the World Trade Center properties. In World Trade Center Properties LLC v. ACE Bermuda Ins. Ltd. (S.D.N.Y. 1:01cv09731), the leaseholder seeks a ruling that an insurance dispute over coverage for World Trade Center property losses must be resolved judicially, in Federal Court, rather than in a London arbitration, as the insurers argue is required under their policies. A ruling for the leaseholder could subject all insurance claims related to September 11th to resolution in the U.S. District Court for the Southern District of New York. The leaseholder relies on the Air Transportation Safety and System Stabilization Act, P.L. 107-42 (Sept. 22, 2001), (“ATSSSA”), which provides at §408(b)(3):
The United States District Court for the Southern District of New York shall have original and exclusive jurisdiction over all actions brought for any claims (including any claim for loss of property, personal injury, or death) resulting from or relating to the terrorist-related aircraft crashes of September 11, 2001.
Notably, however, and contrary to the leaseholders’ argument, that jurisdictional provision appears in a statute addressing airline liability, not insurance coverage disputes. Further, interpreting the jurisdictional language in that new statute the way the leaseholder suggests might raise Constitutional questions. Such a construction would mean that the statute eliminates, without due process, the parties’ contractual rights to resolve claims related to September 11th through arbitration. Indeed, such an interpretation could conflict squarely with the Federal Arbitration Act (9 U.S.C.A. §1 et seq.) and its cousin, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (9 U.S.C.A. §201 et seq.), which have been consistently interpreted to enforce contractual arbitration rights as broadly as possible.
At this stage, it is too early to predict whether a ruling for the leaseholders would spill over into areas distinguishable from insurance coverage disputes, such as cedent-reinsurer disputes over billings for underlying claims related to September 11th. However, this litigation and its almost inevitable appeals - will be important for policyholders, insurers, and reinsurers to watch, as it likely will be an important benchmark for future forum disputes involving claims related to September 11th.
The coverage fallout from September 11th has barely begun. Policy language, politics, and public relations may all play a role in resolving these issues. For now, however, it is crucial for claimants, insurers and reinsurers to take proper steps to evaluate thoroughly and monitor the continuing developments on these issues.