BILA Colloquium, 16-17 May 2002
Post-11 September 2001: Brave New World?

The theme of the BILA colloquium was relevant legal and insurance issues following the September 11th terrorist attacks in the United States.

There were four main areas of discussion: (1) the impact of 09.11 on insurers; (2) insurable risks; (3) reinsurance and market issues; and (4) dealing with risk in the future. Speakers came from the insurance, academic and legal fields.

The following summaries of the main issues raised by each speaker over the two days were prepared by IUA researchers attending the congress, and are reproduced with thanks to BILA.

The Impact of 9.11 on Insurers

(i) Property and 1st Party Issues - Ken Erickson, Ropes & Gray
This talk looked at the critical property and coverage issues following the destruction of the World Trade Centre. Four areas were considered: Lower Manhattan, the Greater Metropolitan Area, US Airports and Nationwide. What follows is a brief synopsis of the main points:

Issues in Lower Manhattan - Types of Claim

• Material Damage - Significant claims have already been paid and there have been no real coverage disputes regarding what has actually been physically damaged or lost.
• Tenant Improvements - Many property policies in New York have provisions that allow for both the tenant and landlord to claim for damage to the property.
• Time Element - Claims are being made under business interruption insurance policies due to the closure of the Stock Market.
• Access - Claims are being made in two ways, firstly, where there is a physical impediment to the property and, secondly, where the civil authority has denied access to the location.

Issues in Greater Metropolitan Area

• Relevant Market - To what extent does coverage apply? For example, can the reduced tourism and lessened demand for products in Manhattan lead to a successful claim by entities in the Greater Metropolitan area?
• Building Codes - Following questions as to the adequacy of the WTC structure it is possible that new building codes or restructuring of building might be necessary?
• Period of Indemnity - Due to the lengthy planning, political and memorial process involved in deciding how to replace the WTC some insurers have extended their period of indemnity.
• Airline Relief Act - The federal government has granted aid to airlines, extended the limits of liability, established a fund for victims and, importantly, held that all lawsuits must be brought in New York.

Airports - Issues

• Airlines in the US were grounded for three days immediately following the WTC attack. Issues arise from the fact that the aircraft's, rather than airspace, was prohibited and whether therefore airlines were technically prohibited? Also, many businesses operating out of airports suffered lost profits due to the closures. Are these covered?

Nationwide Issues

• Contingent Business Interruption - e.g. cancelled business deals following the WTC attacks, the closure of the Stock Market and reduction in aerospace orders.
• Economic Downturn - Can this be attributed to the WTC attack?
• Jurisdiction - Where are disputes to be heard?

Court Cases

• Occurrences - The Silverstein case is due to be heard in autumn 2002. The major issue concerns whether the attack on both WTC towers represents a single occurrence. The Court will consider whether there is unity of time, location and motive.
• Business Interruption Extensions - An aerospace company, Goodridge has filed for business insurance following a severe downturn in orders following September 11th.

Liability and 3rd Party Issues - Steve Marcellino, Wilson Elser

In addition to the 2,819 deaths there has been around 325,000 cases of psychological injury, including a two to three fold increase in PTSD's. The speaker raised the issue of who was legally responsible for the attacks. Obviously Osama bin Laden and the Al' Qa'ida network are responsible, but also, under the Anti-Terrorism Act 1996, rogue states such as Afghanistan and Iraq have been identified. The 2001 US Patriot Act allows the assets of terrorists to be frozen. In October 2001 a New York court awarded the wife of a victim $5 million dollars in a civil action against Osama bin Laden. In February 2002 seven housewives brought a claim which names both Iraq and Iran among the defendants.

However, despite these legislative measures, problems of recovery remain, as the US government is reluctant to seize other countries assets for fear of their own assets being frozen. Thus, parties unable to recover from the perpetrators of the attack may look to claim in negligence against a range of defendants, airports, airlines and security firms in particular. A recent study confirming that the WTC structure met safety guidelines should make it far more difficult to bring actions against the WTC owners, landlords and the original designers and construction companies involved in building the WTC.

The US government has implemented a compensation fund, which has budgeted for $7 billion. So far only around 10% of victims have applied with an average payment of $1.85 million. There appears to be a wait and see attitude among victims to see what can be obtained through litigation before committing to the fund. The speaker noted that in other personal injury cases juries are tending to award lower damages, possibly recognising pain and suffering in a different way following September 11th.

Questions of Consequential Loss - Andrew Gordon, PricewaterhouseCoopers

PwC estimates that the WTC attacks will total $60-70 billion in insured losses. Unlike many other risks contingent business interruption is not regionally assessed and is not based upon the necessity for physical loss or damage to the insured property.

There are inherent difficulties in establishing whether losses are caused by business interruption or simply by the poor economic performance of the industry in question. For example, the airline industry was in poor economic shape prior to September 11th, which would contribute in some part to the poor economic performance of the industry post WTC. Similar trends have been evidenced in retail and media industries.

There is a necessity for business interruption wordings to be tightened up and issues of cyber liability ought to be considered. Several key issues need to be addressed by risk managers and insurers.

(i) There is an increased risk due to the fact that there are fewer suppliers in the market.
(ii) The key suppliers must be identified.
(iii) Necessity for up to date contingency/business continuity plans to be in place.

Government as Insurer of Last Resort: Pool Re, a UK Perspective; Troika and Other Post 11/9/01 Responses -
Colin Croly, Barlow, Lyde & Gilbert

Impact of 11/9 on Insurers:

• Capacity crisis - at least in the short term
• Possible insolvencies
• A contraction and consolidation of the market
• Hardening of rates - average increases of 30% across the market, even more in some sectors
• Arguably the need for state backed terrorism reinsurance has heightened

Additionally, in the UK market there have been restrictions on cover. Many property owners have been left without terrorism cover due to exclusions implemented by reinsurers. Also, reinsurers have threatened to withdraw unlimited liability and terrorism cover for compulsory third party motor coverage. Finally, insurers are considering the exclusion of terrorism coverage for compulsory employers' liability policies. This would leave policyholders in contravention of UK law and liable for fines.

Due to these possible gaps in available coverage the UK Treasury are considering extending the scope of Pool Re, the mutual reinsurance company which provides UK government backed reinsurance for loss and damage caused by fire and explosion to property. Proposed extensions would cover flood, impact and aircraft perils in relation to property and business interruption coverage. There have been Pool Re type initiatives in other countries:

• Germany - Negotiations are ongoing between the government and insurance market. The German government appears to be willing to cover terrorist risks in the short term only. In the private sector five reinsurance companies have created the Special Risk Insurance & Reinsurance Luxembourg (SRIR) which is limited to buildings cover.
  
  
• France - Creation of reinsurance pool (GAREAT) for terrorist losses up to $1.5 billion Euros. Losses over 1.5 billion Euros are covered by the State reinsurer, Caisse Centrale de Reassurance (CCR).
  
  
• Spain - Existing company based pool in operation, Consorcio de Compensacion de Seguros, covers extraordinary losses such as terrorism and natural phenomena. The fund is self-financing but state guaranteed.

There is a need to consider amending the definition of terrorism following 11/09, particularly given that the existing statutory definition of terrorism is not as wide-ranging as those introduced to the market post 11/09 (IUA G51A/57, NMA 2918-2921 clauses).

Aviation Initiatives:

Troika, a UK Treasury body underwriting third party liability for war and terrorism for UK carriers has been established. It provides coverage for the difference between the underlying limit available in the market and the pre-September 11th limits, has been established.

In conclusion Pool Re has been a success prior to September 11th and the framework is in place to allow for an expansion of coverage. Further developments in applying an international approach to addressing the current gaps in coverage would be beneficial.

Reinsurance and Market Issues:

Legal Issues from a US Cedant's perspective - Mary Kay Vyskocil, Simpson Thatcher

Brief synopsis of business placement

The World Trade Centre was made up of 7 buildings. The buildings involved in the Swiss Re vs. Silverstein Properties case are 1,2,4 and 5. These buildings are subject to a 99-year lease won by Silverstein Properties in the summer of 2001, and are insured under a single insurance. Willis acted as brokers on the insurance cover for the buildings and in consultation with the Port Authority, approached insurers to get coverage for the full risk. They circulated to insurers an underwriting submission. This contained information on such things like the engineering specifications of the World Trade Centre. A schedule was then sent to insurers of $300 per square foot ($3.9 bn.) plus business interruption, etc. written on a 3-year basis. The total cost ended up at $5bn. The placing slips amount were driven by the banks to ensure that their financial interests were protected, and had a $3.84 bn. limit per occurrence.

Background of claim

On Tuesday, 11th September 2001 two planes flew into the World Trade Centre 1 and 2. This resulted in the collapse of towers 1 and 2, and later the collapse of tower 7. Access to everything south of 14th street was subsequently blocked, and many buildings within the vicinity of the incident had structural damage and had to be destroyed including buildings 4 and 5. On the day of the attack only Allianz had issued a policy.

When circulating the risk to insurance companies Willis attached their own property form, which has a broad definition of 'occurrence', under which the events of 11th September 2001 would be considered one occurrence. However, as no policy was issued prior to the attack(s), the relevance of this wording as legally binding is being challenged as Silverstein Properties attempts to claim the limit of $3.84bn. twice by arguing that each impact is suitably separated to be considered two occurrences.

The matter is further complicated by the fact Travelers Property Casualty Corp., a primary insurer on the risk, issued a policy for the WTC on the 14th September 2001 where they did not define occurrence. Mr Silverstein has asked the court of New York to rule that under the terms of the Travelers form the events of September 11th there were two occurrences. If Silverstein Properties succeed in obtaining a ruling in favour of their arguments, they will then argue that this definition should be applied to all other insurers on the risk as they believe that all insurers were informed that the Travelers terms would replace the Willis form. However, these negotiations were ongoing at the time of the attacks. Swiss Re therefore argue that they were not bound by the Travelers form, but by the Willis form.

Conclusion

The arguments on both sides are ongoing although recently it was reported in Insurance Day (6th June 2002) that US District Court judge John Martin has denied Silverstein's request to rule the attack as two occurrences under the terms of the property policy issued by Travelers. Although this is a severe set back for Silverstein Properties, it does not mean that the events of 11th September 2001 will now be considered one occurrence as the matter is still to go to court in th e Swiss Re vs. Silverstein Properties case.

Aggregation/ coverage issues - Mark Howard QC, Brick Court Chambers

In matters of aggregation each clause must be considered separately given the situation; if the policy is unclear, then it is unlikely to be held as a single occurrence. Recently the English Courts have been favouring a more commercial line in its decisions.

The question that must always be asked is what is the unifying factor? What links a series of events to one another? Is it superficiality of time and location, or is there a deep-rooted cause behind the event(s)? Is the time and location sufficiently linked to the causation to justify aggregation? For instance an event such as World War 2 can be considered to have a single cause or series of causes in its entirety, but it can not be aggregated to a single occurrence in insurance/reinsurance terms.

To look in more detail at this issue we shall consider three instances of possible aggregation before turning our attention to the event(s) of 11th September 2002.

(a) Dawson's Field

Facts:
Four planes were hijacked by various members of a terrorist organisation from various organisations from various locations. One was blown up in Cairo and the others flown to Dawson's Fields where they too were blown up.

Cover:
Excess of loss reinsurance limited by reference to ultimate net loss in respect of 'each and every loss…and/ or occurrence and/or series of occurrences arising out of one event'.

Decision:
The presiding arbitrator ruled that the planes that were blown up at Dawson's Field constituted an event that arose from a single occurrence, but that the first aircraft to be destroyed was not a part of this single occurrence. This was because the three aircraft destroyed at Dawson's Field had a unity of time, location and cause that the first aircraft did not share. In the judgement the judge said,

" Whether or not something which produces a plurality if loss or damage can properly be described as one occurrence therefore depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and if initiated be human action, the circumstances and purposes of the persons responsible…"

(b) Kuwait Airlines

Facts:
During the Iraqi invasion of Kuwait on 2 August 1990, Iraqi forces seized Kuwait airport. On the ground at the airport were fifteen planes belonging to KAC. Fourteen places were flown out of Kuwait by the Iraqis by 8 August and the last later in August or in September. KAC made a claim on their war risk insurers for a total of $692m in respect of the aircraft and $300m in respect of spares. The insurers were only prepared to pay $300m.

Cover:
War risks insurance subject to a limit expressed as "Maximum Sum Insured in respect of Ground Risks in US$300,000,000 - any one occurrence".

Decision:
Rix J held that there was one occurrence (at its broadest, the Iraqi invasion of Kuwait; at its narrowest, the capture of the KAC fleet at Kuwait airport). Therefore the insurers were only liable to pay $300m.

(c) Indonesian Riots

Facts:
An Indonesian businessman owned a number of shops in various locations in Jarkarta. During the rioting over two days a number of shops were damaged and looted. The businessman paid claims per shop as did its London reinsurer. When the reinsurer then claimed that on its own London retrocessionaire on a per location basis, this was met with an argument that all losses caused by the rioting were to be aggregated and subject to a aggregate limit of $5m as they were a single occurrence.

Cover:
Proportional reinsurance under which the reinsurers had retroceded a percentage of the risk reinsured in return for a share of the premium for limits of "USD 5,000,000 per occurrence but in the annual aggregate separately for Flood and Earthquake" and a deductible of "2,50% of adjusted claim subject to a minimum …each location any one occurrence". The reinsurance was "except as otherwise provided herein" subject to the same terms and conditions as the original insurance. It provided cover for limits defined in terms of "each and every loss, each and every location".

Decision:
It was decided that although there was a singularity of cause i.e. the rioting, there was not sufficient unity of time or location to warrant it being considered a single occurrence.

11th September 2001

By looking at these previous decisions we are able to see at first glance that the attack(s) of 11th September 2001 on the World Trade Centre have a unity of time, location, and cause. As set in the Dawson's Field case we can not consider the hijacking of the planes themselves to be unified, but both the destruction of the planes, and the damage inflicted on New York arise from a single occurrence unified by time, location and cause

However this is not so clear when considering business interruption. The closing down of US airspace was a single occurrence arising from both the attacks on Washington and New York, as well as potential attacks elsewhere. Therefore it is up for argument whether this constitutes a single time and location, even though the cause is the same. In this case there is room for argument either way.

Conclusion:

Under English Law the attacks on New York pass the test of unity established by the cases of Dawson's Field and Kuwait Airlines, however this may not be true for US courts. There is also room for argument concerning the unity of causation between the business interruption caused by the closure of US airspace.