Order Code RS21158
Updated June 14, 2002
CRS Report for Congress
Received through the CRS Web
September 11 Insurance Litigation
Christopher Alan Jennings
American Law Division
Insurance litigation arising out of the events of September 11 is already underway.
Disputes involve claims for losses ranging from several thousand dollars to the billions.
While some claims are involved in litigation, many are being resolved through
alternative forms of dispute resolution. How much litigation will arise from September
11 remains unclear. At least two lawsuits deal with business interruption claims.
Another cluster of suits involves the World Trade Center itself; the legal issues
underpinning these cases will settle whether insurance companies owe $3.54 or $7.08
billion in coverage. This report summarizes these cases and will be updated.
While Congress responds to the wide spread exclusion of terrorism risks from
insurance coverage through “The Terrorism Protection Act,” H.R. 3210, placed on the
Senate Legislative Calender on December 3, 2001, and “The Terrorism Risk Insurance
Act,” S. 2600, laid before the Senate by unanimous consent on June 13, 2002, the courts
are responding to disputed insurance claims arising out the events of September 11.
Business Interruption. Business interruption insurance covers loss of income
resulting from the suspension of business operations. While property insurance pays for
damage to property, it does not pay for consequential damages stemming from that loss.
For example, if a candy store burns down the week of Valentines Day, its property
insurance will cover damage to inventory, equipment, display cases, and other insured
items, but it will not cover the loss of business income suffered as a result of ceasing
operations during a time when candy is in high demand. However, business interruption
insurance could potentially cover those losses. While the purpose and function of
business interruption insurance are straightforward, the technical issues raised by
interpreting the policies are complex. These complexities make it difficult to generalize,
in the abstract, about the scope of business interruption coverage and to determine
whether, in particular cases, an event is an insurable event and whether a loss triggers
730 Bienville Patner Ltd. v. Assurance Co. of America is a case before the Louisiana
Civil District Court of New Orleans. Case No. 2001-19830 (filed Dec. 3, 2001). The
case involves a claim for $203,000 in business interruption losses suffered by two New
Orleans hotels as a result of the federal government shutting down the nation’s airports.
Congressional Research Service ˜ The Library of Congress
The insurance company denied coverage on the grounds that the hotel sustained no
physical damage. The insured alleges, on the other hand, that it specifically purchased the
policy to cover losses that resulted from happenings off site. As of June 3, this case has
not been dismissed, nor set for trial.
Zurich American Insurance Co. v. ABM Industries Inc. involves a motion for
declaratory judgement. No. 01-Civ.-1246 (S.D.N.Y. filed December 12, 2001). ABM
Industries provided business services to clients at 1, 2, 3, 4, 5 and 7 World Trade Center,
as well as other buildings in lower Manhattan. It filed a claim in excess of $10 million
for its business interruption losses. In its petition for relief, Zurich maintains that its
exposure under the policy is capped at $10 million. On February 28, 2002, this case was
Coverage on the WTC Towers: World Trade Center Properties v.
Travelers Indemnity. The primary issue involved in this cluster of cases concerns the
meaning of the term “occurrence” as used in property insurance contracts covering the
World Trade Center. When underwriting a risk, insurance companies generally budget for
worst-case-scenario calamities. Reflecting this budget, property and casualty insurance
contracts set the maximum sum insurers are obligated to pay per insurable event.
Contracts tend to specify the limit as a cap “per event or occurrence.” The insurance
contracts covering the 99-year leaseholds on the World Trade Center Towers and
buildings 4 and 5 cap exposure at approximately $3.54 billion dollars per insurable event.1
At least $3.54 billion will be paid out under these contracts. Whether an additional $3.54
billion should be paid is the subject of this litigation.
Whether the events of September 11 should be construed as one event, or two is far
from certain. Part of the problem is that WTC Properties – the policy holder – took
control of the WTC in July, but at that time the insurance policies had not been finalized.
Though WTC Properties and the insurance companies had agreed on basic terms, they
were still negotiating over details on September 11. It is not clear what language will
control the cases – it may be that different contract language will be applied to different
The insured and the insurers interpret the events of September 11 very differently.
For the insured, two events caused its losses: two separate airliners separately crashed into
each of the Twin Towers some eighteen minutes apart. They assert that these acts
resulted in separate fires that caused the separate collapse of each Tower and the
subsequent damage to buildings 4 and 5. For the insurers, one event caused the losses:
the attack constituted the execution of a plan to destroy an internationally recognized
symbol of Western and American culture – using a common methodology, two groups
acting under a unified purpose and intent carried out their objective in a relatively short
period of time.
Twenty-five insurance companies participate in a single program of property insurance for the
WTC. The name of the insurers and the extent of their participation in the insurance scheme
covering the WTC is detailed in the Appendix A. Major life, property and casualty companies
handling claims covering loses associated with the WTC are listed in Appendix B.
If alternative forms of dispute resolution fail,2 contract law will settle the dispute.
Under New York law, an insurance policy is a contract that the court will construe in light
of the mutual intent of the parties.3 The courts strive to ascertain the actual intent of the
parties. To do this, courts will first interpret the contract’s plain language and then
consider extrinsic evidence (e.g., market norms and negotiation history). If these methods
do not work, that is, if the contract’s language remains ambiguous, the courts will
construe the contract in a way that would be consistent with the reasonable expectations
of the insured at the time of contract.4 If this method does not work, then the clause is
generally construed against the party responsible for the imprecise language.
Though WTC Properties and its insurers agreed to a “per occurrence” cap on insurer
liability as a basic term, they had not agreed, by September 11, on its precise meaning.
If a court finds the plain language of the “per occurrence” clause ambiguous, it will
consider whether extrinsic evidence resolves what the parties meant by that clause. Some
WTC insurers, like Swiss Re, have offered extrinsic evidence as to what the parties
intended by the term “occurrence.” In their October petition for declaratory relief, Swiss
Re asserts that the term “occurrence” was understood to 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.5
Under this definition, the events of September 11 appear to constitute “one event or
occurrence.” However, whether this understanding accurately describes the mutual
understanding of the parties is far from certain.
If resort to extrinsic evidence does not resolve the ambiguity, the courts will turn to
default tests found in precedent. A variety of tests aid courts when construing ambiguous
“per occurrence” clauses.6 These tests include the “cause test,” the “effects test,” and
the “unfortunate event test.”7 The “cause test,” which is the majority rule, holds that
multiple injuries arising directly from one action or event are treated as one “occurrence,”
regardless of the number of injuries or harms that arise from that action or event. Under
this test, the court focuses on the underlying circumstances behind the claims, rather than
the claims in themselves. The cause test tends to minimize the finding of “multiple
occurrences.” The “effects test,” which is a minority rule, looks at the individual claims
or individual damage to property to determine the number of “occurrences.” This test
tends to maximize the number of “occurrences” found.
E.g., arbitration and negotiation.
See, e.g., Marino v. New York Telephone Co., 944 F.2d 109 (2d Cir. 1991).
See Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691, 697 (2d Cir. 1998).
See SR International Business Insurance Co., Ltd v. World Trade Center Properties LLC, No.
01-CV-9291, ¶ 31 (S.D.N.Y., filed October 22, 2001).
See Uniroyal v. The Home Insurance Company, 707 F. Supp. 1368, 1380 (2d Cir 1988).
See, Ostrager, INSURANCE, EXCESS, AND REINSURANCE COVERAGE DISPUTES 133, 140-156
New York has adopted the “unfortunate event” test – another minority rule – but has
not defined what constitutes such an event.8 Instead, New York courts resolve the
question by adopting the “average man” aphorism, asking whether an average person in
the shoes of the insured would regard the event as “unfortunate.” The number of
“unfortunate” events an “average man” would identify corresponds to the number of
insurable events under the test.
Under the test, the court examines a set of interrelated events and surrounding
circumstances leading up to the happening of the insurable event(s). Though the approach
is not entirely clear, it does appear to fall in between the “cause” test and the effects
“test,” neither minimizing nor maximizing the number of insurable events covered by a
general “per occurrence” clause.
While the test does not provide clear guidance, its use in prior cases suggests what
an “unfortunate event” is not. It is not the “injury to the victim,” nor is it the “negligent
act or omission” giving rise to the loss.9 In this regard, WTC Properties would not appear
to be able to characterize the events of September 11 as multiple, discrete “occurrences”
by counting the number of its injuries (e.g., “two towers collapsing equals two insurable
events”). Nor, would the number of “occurrences” multiply by counting the number of
wrongful or negligent acts (e.g., “two highjackings equals two insurable events”).
If the unfortunate event test proves ineffective in resolving the WTC claims, the
court would likely, as a last resort, strictly construe the ambiguity against the party
responsible for it, which is generally the insurer.10 However, this canon of construction
assumes that the insured did not play an active role in negotiating the terms of the
contract, which, in the case of WTC Properties, may not be a safe assumption. To avoid
this canon, insurance companies will have to “prepare a good factual case on negotiation,
economic duress, drafting, and who proffered the contested wording.”11
Current situation. On February 16, Larry Silverstein, head of WTC Properties,
announced a settlement with two major Bermuda-based insurers. Ace Bermuda and XL
Insurance agreed to pay $298 million and $67 million respectively, which, incidently, is
the full amount of coverage those companies owed for a singe disaster (see appendix A).12
On January 9, WTC Properties sought summary judgement against Travelers Indemnity
See Arthur Johnson Corp v. Indemnity Insurance Company 164 N.E.2d 704 (N.Y.
1959)(adopted the “unfortunate event” test for construing ambiguous uses of “accident.”) See
also, Hartford Accident and Indemnity Company v. Wesolowski 305 N.E.2d 907 (N.Y.
1973)(finding no material difference between the use of “occurrence” and “accident” in an
insurance contracts before the court.).
Uniroyal, 707 F. Supp at 1382, citing Arthur Johnson, 164 N.E.2d at 706 and Wesolowski, 305
N.E.2d at 912.
See Breed v. Insurance Co. of North America, 385 N.E.2d 1280 (N.Y. 1978)(“Well-recognized
is the general rule that ambiguities in an insurance policy are to be construed against the
Graydon Staring, LAW OF REINSURANCE §13:2 (1993).
See, Jonathan Glater, Holder of Trade Center Lease Settles with Two Insurers, THE NEW YORK
TIMES, B-3 (Feb. 16, 2002). Their contracts reportedly defined “occurrence” to include all losses
attributable “directly or indirectly to one series of similar causes.”
Co. and other insurance companies on the number of occurrences involved in the terrorist
attack.13 On June 3, the court ruled that the term “occurrence” as contemplated by the
parties negotiating coverage for the twin towers was ambiguous, and that extrinsic
evidence must be considered before deciding how much WTC Properties should be
compensated for the destruction. This ruling paves the way for a jury trial on the issue.
See, World Trade Center Properties LLC et al. v. Travelers Indemnity Co., et. al., No. 01 cv
12738 (S.D.N.Y., filed Jan. 9, 2002). In response, insurers argue that not only did the events
constitute one occurrence, but that they will try to prove that the second tower would have
collapsed or would have been rendered uninhabitable if only one plane had hit the World Trade
Appendix A: Insurance Carrier Coverage for Leaseholds on the WTC Towers and Buildings 3 and 4*
(in U.S. dollars)
% of total
Swiss Re UK
* Compiled from court documents filed by World Trade Center Properties, Ace, Swiss Re, XL, and Allianz with the United States District Court for the Southern District of New York.
Explanation: Insurance companies participating in the primary layer provide the initial $10 million in coverage per occurrence, with WTC Properties paying a $1 million deductible per
occurrence. When a particular loss exceeds $10 million, those insurance companies participating in the second layer of coverage provide excess coverage up to a set limit per occurrence for
that layer. As losses per occurrence increase, different layers of coverage trigger different payments by participating insurers. This process proceeds through 12 layers of coverage. Adding
the 12 layers of coverage together yields the maximum cap, $3.546 billion per occurrence.
Example: Assume a storm hit lower Manhattan damaging the WTC, causing $9 million in losses covered by the property and casualty insurance policy. Only those insurance companies
participating in the primary layer of coverage would be obligated to pay a proportionate share of the $9 million. Swiss Re, which covers 22% of the losses when a claim proceeds through all
12 layers of coverage, pays nothing because it does not participate in the primary layer of coverage. While Lexington, which provides .15% of aggregate coverage, pays $4.5 million or 50%
of the claim.