Expert Commentary

Pro-Policyholder Broker Form Saved Insurer Millions

The September 11, 2001, terrorist attack on the World Trade Center was a tragedy of immense proportions. It has affected life in America in countless ways. It also spawned an enormous amount of property insurance coverage litigation, primarily venued in the U.S. District Court for the Southern District of New York.

Property Insurance
September 2005

The largest and most publicized of these cases, SR International v. Silverstein Properties, is litigation between Larry Silverstein and his property insurers for coverage for destruction of the World Trade Center, itself. The case has already resulted in two jury trials, two Second Circuit appeals, and a number of significant opinions on coverage issues widely affecting policyholders and property insurers.

The Opinion

In a June 8, 2005, opinion, the Silverstein Properties trial court ruled on the insureds' motion for summary judgment to compel SR International ("Swiss Re") to pay the actual cash value (ACV) of the loss immediately, as opposed to dribbling out Swiss Re's share of reconstruction costs as they are incurred over the next 5 to 7 years, saving Swiss Re millions of dollars in the time value of money. The trial court's opinion denied the policyholders' motion and highlights the importance of reading and understanding a broker's manuscript form. The holding should disabuse the insurance marketplace of the notion that brokers' forms are always more favorable to the policyholder than company forms. It also drives home the importance of always looking for practical solutions to legal problems.

The facts, drawn from the June 8 and earlier opinions, are as follows. Larry Silverstein and the various entities he controlled (the "Silverstein Parties"), undertook in their lease with the Port Authority of New York and New Jersey the responsibility to obtain property insurance for the World Trade Center office buildings (1, 2, 4, and 5 World Trade Center), and the World Trade Center Mall underneath those buildings. Swiss Re was the largest single participant in the $3.55 billion property insurance program, with a 22 percent quota share of all layers excess of $10 million, and an additional 3 percent in upper layers. Swiss Re's total coverage was roughly $877,503,000 per occurrence.

Shortly after the September 11 attack, Larry Silverstein announced his intention to rebuild the World Trade Center. On January 18, 2002, the Silverstein Parties submitted a supplemental Preliminary Proof of Partial Losses on a two-occurrence basis, claiming ACV of $3,234,223,518 for each occurrence. The preliminary proof was based on the Traveler's Insurance Company form, which the Silverstein Parties claimed controlled the entire program, as opposed to the Willis WilProp2000™ form, which Swiss Re and most other insurers claimed controlled. As one of the bases for rejecting the supplemental proof of loss, Swiss Re stated that the WilProp™ form provided for lump sum payment of ACV only where the insured decided not to repair, rebuild, or replace, and that, by claiming replacement cost value (RCV), the Silverstein Parties were entitled only to those sums actually expended as they were expended. Swiss Re did pay interim lost business income claims as quarterly proofs of loss were submitted by the Silverstein Parties and, by the time the summary judgment motion on ACV was decided, Swiss Re had paid some $81 million toward that aspect of the loss.

On August 1, 2002, Swiss Re submitted two expert reports. One was submitted on behalf of all the insurers and calculated ACV as of September 11, 2001, under the WilProp™ form at $3.666 billion. The second report, submitted only on behalf of Swiss Re, calculated ACV under WilProp™ to be $2.17 billion. The smaller number was not based on the cost to actually rebuild and replace what was at the site; it was based on 4 generic 50-story office buildings containing the same square footage as 1, 2, 4, and 5 World Trade Center.

The dispute between the insurers and the Silverstein Parties over which policy form controlled was decided by jury trial in mid-2004. The jury found Swiss Re and many other insurers had bound coverage under the WilProp™ form. Thereafter, the Silverstein Parties filed a motion for partial summary judgment seeking immediate payment of Swiss Re's share of the ACV under WilProp™. Other insurers had paid their full, one-occurrence policy limits before the trial. Even after trial, Swiss Re denied any obligation to pay ACV, claiming that the policy provided for paying ACV only where the insured elected not to rebuild. According to Swiss Re, since the Silverstein Parties affirmatively elected to rebuild, they were entitled only to RCV, and then only as the money was actually spent.

In addition, Swiss Re claimed that no binding proof of loss setting forth the full and final calculation of ACV had been submitted. Finally, Swiss Re argued that, under the terms of the controlling WilProp™ form, the claim was not due and payable until Swiss Re accepted the proof of loss or the amount of loss was determined in an appraisal or judicial proceeding.

The WilProp™ form specifically provided that payment for loss was to be on a replacement cost basis. However, it also provided that "in the event the insured decides not to repair, rebuild, or replace damaged property, this policy will pay for the ‘actual cash value of the property.'" The policy also provided for the insureds to collect partial payments by filing proofs of loss for such payments, pending final adjustment of the loss.

The court's holding featured a two-pronged analysis. The first prong was the policy language, which specifically provided that ACV was payable only if the insured elected not to repair or replace. The trial court compared the WilProp™ form with a standard Insurance Services Office, Inc. (ISO), form and the Travelers' form, both of which specifically provided that an insured may make a claim for loss or damage on an ACV basis and, after collecting ACV, make a supplemental RCV claim for any monies over and above ACV. The WilProp™ form did not contain this language. In fact, the trial court noted that the WilProp™ form, on its face, does not condition recovery of RCV on the completion of reconstruction. It conditions it only on acceptance of a proof of loss or determination of value through appraisal or litigation.

The court next turned to the proof of loss requirement in the WilProp™ form, which allowed submission of partial proofs of loss for partial payments. Here, the court held that, because the Silverstein Parties' January 2004 proof of loss was based on the Travelers form and a two-occurrence theory, it was neither sufficient nor relevant to insurers bound to the WilProp™ form. Moreover, because even the insurers' calculation of ACV was vastly different under the WilProp™ and Travelers forms ($3.666 billion under WilProp™ and $1.787 billion under Travelers), and both of these calculations were far less than that of the Silverstein Parties, there was a significant dispute between the parties as to the amount of ACV.

Therefore, because WilProp™ specifically provided for payment of loss only after the amount of loss had been agreed to, appraised, or adjudged, there was no breach of contract and Swiss Re had no obligation to pay ACV immediately.


The trial court's holding is technically correct and based on the policy language. As noted above, unlike ISO and most company forms, the broker manuscript WilProp™ form did not specifically provide for payment of ACV immediately upon a determination of that amount with the right to make a later claim for the difference between RCV and ACV. In this regard, while the WilProp™ form is a broker manuscript form, it turned out to be significantly less favorable to the insureds than an ISO or company form. This highlights the importance of risk managers carefully reviewing broker manuscript forms to see how they differ from company forms and whether those differences are really more favorable to the insured.

On a very practical level, the Silverstein Parties could have obviated need for this motion by submitting an amended proof of loss after Swiss Re rejected the January 2004 proof. There is nothing in the policy which would have prevented the Silverstein Parties from submitting an amended proof of loss and making claim based on one occurrence, under WilProp™, fully reserving all rights to pursue their two occurrence claim under the Travelers form. By designating it is a proof for partial replacement cost, and designating it as a one occurrence claim, it would have obviated Swiss Re's objections. This strategy would have been particularly effective, at least up to the $2.17 billion of Swiss Re's ACV estimate, because there would have been no legitimate basis for Swiss Re to contend that the RCV was less than its own ACV estimate.

By using Swiss Re's ACV number, the Silverstein Parties would have had a very strong argument that there was an agreement as to the amount of loss, at least as to the $2.17 billion. As to full RCV, absent agreement, that might have required appraisal or fact-finding litigation. Of course, the Silverstein Parties may have decided against this course of action because of concerns about its effect on their credibility at trial.

No one is suggesting that Swiss Re or any of the other World Trade Center insurers who have not paid at least one limit are in any way acting in bad faith. However, Swiss Re's ultimate liability for one full policy limit seems crystal clear as it is hard to imagine a circumstance where the insureds' business income loss and the amount spent to rebuild the World Trade Center will not exceed the program's one occurrence limit. Swiss Re's failure to pay that one limit stands in sharp contrast to the position taken by many of the other insurers which paid one full limit before the trial, which determined that those insurers, along with Swiss Re, bound coverage under the WilProp™ form.

The advantage to Swiss Re is clear: tens of millions of dollars a year in interest. Moreover, even if Swiss Re's legal position was not justified and was without merit, under New York law, the only available sanction would be assessment of pre-judgment interest which is small recompense to a policyholder which needs the money to proceed with rebuilding. See New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 662 N.E.2d 763, 639 N.Y.S.2d 283 (1995) (severely limiting circumstances where punitive damages are available for insurer's bad faith); Streamline Capital, L.L.C. v. Hartford Cas. Ins. Co., 2003 WL 22004888 (S.D.N.Y.) (severely limiting availability of consequential damages for breach of insurance contract).

Conclusion and Practical Suggestions

The Silverstein Parties obtained over $2 billion of property insurance on their broker's manuscript form, with the remaining $1 billion plus on company forms. The common view in the insurance industry is that a broker's manuscript form is invariably more favorable to the insured than a company or ISO form. Silverstein Properties proves to the contrary on a very basic issue: the insured's entitlement to be paid ACV at an early date. This case highlights the importance of carefully reviewing policy forms with different potential claim scenarios in mind, so that the risk manager and the policyholder have a very clear understanding of what is covered, what is not covered, how the loss will be valued, and how and when payment will be made by the insurer in the event of loss.

While the result in this case may seem harsh, because the policy was strictly construed against the policyholder in a way contrary to common practice in the insurance industry, the policy language was enforced as written. This result would not have been a surprise had the policy been reviewed in advance of binding, so this issue could have been raised and discussed. Indeed, had the issue been flagged at the outset, the policy language likely could have been easily rewritten to match the more favorable, standard policy language on this issue.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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