December 13, 2004

"Occurrence" under WTC v. HFIC

Predictions of rate increases emerged from some insurance industry sectors immediately following the 12/6/04 jury verdict that certain of the World Trade Center insurers must pay two limits of insurance, a decision with an impact exceeding $1 billion. While that may be true for some, the decision of the Second Circuit in 2003 offers a clear alternative for coverage written today: define “occurrence” as did the Willis policy form known as “WilProp.” In WTC v. Hartford Fire, 345 F.3d 154 (2d Cir. 2003), the “WilProp” definition was found to be unambiguous. Applying it, the destruction of the WTC was one, not two occurrences, as a matter of law.

Some notes on the case follow below.

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World Trade Center Properties v. Hartford Fire Ins. Co.,
345 F.3d 154 (2d Cir. 2003)

Holders of interests in the World Trade Center (WTC) (the "Silverstein Parties") and various insurers sought delaratory judgments whether the events of September 11, 2001 constituted one or two "occurrences" under first party insurance coverage on the WTC property. At stake was about $3.5 billion in coverage, the total of the insurer's combined "per occurrence" policy limits . If the events constituted two separate "occurrences," the Silverstein Parties could recover about $7 billion; if they constituted only one "occurrence," the total recovery would be only about $3.5 billion. Both sides sought summary judgment. The court affirmed that the defined term "occurrence" used by some of the insurers was not ambiguous and meant that the events of September 11 were one occurrence. It also affirmed that the undefined term "occurrence" used by another insurer was ambigous, so that whether there was one occurrence or two must be decided by a jury or other trier of fact.

The factual situation was complicated by the fact that at the time of the attack on the WTC, the insurers had issued binders, but not final insurance policies. As starting points for negotiation, the binders issued by the first three of the insurers included references to the "WilProp" policy form and the binder issued by Travelers referred to Travelers' own commercial property form.

The court of appeals recognized that insurance binders are necessarily incomplete in some respects and that New York courts have long recognized that terms must be implied in them, citing Hicks v. British Am. Assurance. Co., 56 N.E. 743, 744 (N.Y.1900). One way of implying terms is by examining the terms that are used in the usual policy issued by the company. The court also allowed reliance upon extrinsic evidence of the parties' pre-binder negotiations to determine which terms are to be implied in the binder. It disqualified as of "no import to this case" proferred evidence of post-binder negotiations over what language would be used in the final policy to be issued. It relied in part on New York law that the binder and the policy to be issued are "two separate contracts of insurance, containing two separate sets of terms," citing Springer v. Allstate Life Ins. Co., 731 N.E.2d 110 (N.Y. 2000) and Rosenblatt v. Washington County Coop. Ins. Co., 594 N.Y.S.2d 456 (App.Div. 1993)

Regarding three of the insurers (Hartford Fire, Royal and St. Paul), the court of appeals upheld an award of summary judgment against the Silverstein Parties, based on the finding that the binders the three insurers issued before the disaster were governed by the "WilProp" policy form. Those binders referenced the WilProp form as a starting point. The court upheld the finding that the definition of "occurrence" in that form was not ambiguous and ruled that under its terms, the destruction of the WTC was one occurrence as a matter of law. This was the definition in the "WilProp" form:
"'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."

The court of appeals agreed with the district court that "no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack was, at the least, a 'series of similar causes.' Accordingly, we agree with the district court that under the WilProp definition, the events of September 11th constitute a single occurrence as a matter of law."

Regarding the fourth insurer (Travelers), the court of appeals dealt with a binder referencing a form in which the term "occurrence" was not defined. The Silverstein Parties had argued that as a matter of New York law, the term was not ambiguous and its meaning was legally established by various precedents. Further, they had argued that the legally established definition meant that the September 11th events were only one occurrence as a matter of law. The district court had disagreed, applying a test found in Curry Road Ltd. v. K Mart Corp., 893 F.2d 509 (2d Cir. 1990). Accordingly, the district court denied summary judgment and decided that the interpretation of "occurrence" had to be determined by extrinsic evidence, to be considered by the trier of fact. See SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 2002 WL 1163577 (S.D.N.Y. June 3, 2002)("Travelers Dec.").

As it did for the first three insurers, the court of appeals allowed consideration of extrinsic evidence of the parties' intentions with respect to the incomplete binder terms, citing Underwood v. Greenwich Ins. Co., 55 N.E. 936 (N.Y. 1900), even though extrinsic evidence would not be allowed to contradict language that was clearly unambiguous, citing Am. Sur. Co. v. Patriotic Assurance Co., 150 N.E. 599 (N.Y. 1926).

The Silverstein Parties argued that under New York law, "occurrence" means the direct, physical cause of a loss and not more remote causes; because the WTC destruction was the result of two impacts from two planes, there were two occurrences as matter of law. They relied on Arthur A. Johnson Corp. v. Indem. Ins. Co., 164 N.E.2d 704 (N.Y. 1959) and other cases involving third-party liability insurance.

The court of appeals decided that the construction used in such cases is not necessarily applicable in cases involving first-party property insurance, such as that covering the Silverstein Parties. For such cases, the court of appeals found most applicable Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127 (2d Cir. 1986). In Newmont Mines, the court of appeals found that "occurrence" had no special meaning in the context of property insurance, and that its meaning must be interpreted in the context of the specific policy and facts of the case.

In reaching this conclusion, the court of appeals looked at the fundamental differences between liability policies (that protect an insured against liability for causing loss) and first-party policies (that protect an insured against loss resulting from events). The court pointed out that the Johnson line of cases follow a New York rule for determining the number of occurrences that was expressed in Stonewall Ins.v. Asbestos Claim Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995) : “[A]lthough a single ‘occurrence’ may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain.” 73 F.3d at 1213.

Unlike in cases of third-party coverage, in which the trigger of coverage “event” is the insured’s negligence, in the case of the WTC first-party coverage the trigger of coverage is “direct physical loss or damage to Covered Property at premises … caused by or resulting from a Covered Cause of Loss. Covered Cause of Loss means risks of direct physical loss unless the loss is excluded … or limited [in other policy language].” (as quoted by the court from the Travelers policy form).

“A jury,” said the court, “could find that the words ‘direct physical loss or damage’ does not refer to the ‘event’ that triggers coverage at all, but rather sets forth the scope of damage resulting from the ‘event’ that the insurer will pay for, namely, direct physical damage as distinct from remote or incidental damage.”

As a result, the court of appeals affirmed the district court's ruling that the definition of "occurrence" under the Travelers policy was ambiguous, and that its interpretation would be left to the fact finder. "To be sure, a jury could find two occurrences in this case, as it did in Newmont Mines, or it could find that the terrorist attack, although manifested in two separate airplane crashes, was a single, continuous, planned event causing a continuum of damage that resulted in the total destruction of the WTC, and, thus, was a single occurrence."

On December 6, 2004, a jury found that under versions of “occurrence" not used by the "WilProp" form, the destruction of the WTC was two separate occurrences, triggering two separate limits of insurance. Subject to the results of any appeal, the insurers affected by the verdict face obligations totaling $2.2 billion instead of $1.1 billion. See "Silverstein Wins Two-Occurrence Verdict in Second World Trade Center Trial," Insurance News Network (Dec. 7, 2004).

Posted by dougsimpson at December 13, 2004 10:20 AM | TrackBack