The U.S. District Court for the Southern District of New York on Oct. 31, 2006, ruled that the contractual terms of insurance covering the World Trade Center (WTC) were unambiguous in providing only for the cost of replacing the downed buildings on an “as was” basis, as they previously stood, not rebuilding them in compliance with new requirements and regulations.  At stake was an additional $700 million WTC site leaseholder Larry Silverstein was seeking to improve the buildings, including efforts to make them more secure.  At the same time, as noted below, the improvements are hypothetical given that the WTC will not be rebuilt, but have its site redeveloped.

Judge Harold Baer held that if the intention of the insurance contract coverage was to "build a bigger and better building and thereby recover an additional $700 million, it stretches credulity to suggest they would not have made this understanding explicit."  Baer held: “Separately and together, the provisions unambiguously establish that the most the insureds can recover on a replacement cost basis is the amount it would cost to reproduce the WTC beam-for-beam, pane-for-pane, as it stood early on the morning of Sept. 11, 2001.”

But what Silverstein has argued is that replacement cost is just that, what it would cost to replace the buildings today, including meeting new building codes and safety and security regulations imposed by WTC site owner the Port Authority of New York and New Jersey.  Examples of changes required by the Port Authority include adding 200-foot blast walls to the base of each tower, eliminating the steel truss floor design, increasing the height of each floor, and replacing the windows with stronger glass.

But the court held that replacement cost coverage does not include “[i]nsurance against technological change and shifts in the political winds:”

In short, they claim the appraising insurers should be required to pay not just for brand new buildings, but for far better properties than the insureds would have owned if the attacks of September 11 had never occurred. Boiled down to its essence, the logic of the insureds' claim is that the WTC was considered safe, modern, and politically acceptable when it was built; therefore, the measure of replacement cost is the amount that would be required to erect safe, modern, and politically acceptable buildings today. This is incorrect. Insurance against technological change and shifts in the political winds may very well exist in the marketplace. But no court has ever found that such coverage is included in a replacement cost policy.

The court focused on whether the contracts, in this case not finalized but nevertheless set out in binders termed “binder policies,” actually spelled out concerns over, for example, changes in public policy:

Specifically, there is no mention in any of the contracts of pragmatic imperatives, contractual obligations to third parties, or public policy concerns. If the parties had intended to allow the insureds to take those factors into account – i.e., to build a bigger and better building and thereby recover an additional $700 million – it stretches credulity to suggest they would not have made this understanding explicit. Read as a whole then, the Travelers, ISO and IRI policies are each unambiguous with respect to the issue before me.

As a result, the court leaves it to the insured to cover necessary upgrades to meet security threats.

At the same time, the court pointed out that, in any event, the additional costs would be "almost entirely hypothetical" given that the actual intention is not to rebuild the Twin Towers as they previously stood.  Instead, a complex of new office buildings including a 1,776-foot Freedom Tower will be erected adjacent to memorial pools standing at the site of the old Twin Towers.

Despite being denied the additional requested amounts, Silverstein thus far has been awarded $4.6 billion in insurance payments, which he is sharing with the Port Authority of New York and New Jersey to help pay for the new project.

In other words:

•  insurance funds are being paid out as if the WTC towers were being rebuilt in their pre-Sept 11, 2001, form
   
• additional monies are not being rewarded to bolster security, i.e., to bring a hypothetically rebuilt Twin Towers up to current, evolving standards and requirements
   
• the funds that are being paid out are being applied towards what in fact is being built, the new development project featuring the Freedom Tower

Another issue raised during litigation was whether the Sept. 11, 2001, attacks were one attack or two, given that two separate planes were flown into the two towers.  Juries have found that the relevant insurance contracts offered different wording that should be applied in different ways, and have purported to strike a balance in the overall level of cash ordered to be paid, resulting in an amount “juggled” between two extremes.

The WTC insurance contracts at issue were with Travelers Indemnity Co., Allianz, Gulf Insurance Co., Zurich American Insurance Co., Royal Indemnity Co. and Industrial Risk Insurers.

Unrelated to the insurance litigation, and not necessarily receiving extensive public debate, is the sensitive question of precisely how to treat a site where rubble was commingled with the ashes and other human remains of the 2,749 victims of the WTC attacks.  As a general matter, New York law requires that human remains be given a decent burial. 

Less than two months after the attacks of Sept. 11, 2001, however, scuffles broke out between firefighters and police at WTC’s Ground Zero after then-New York City Mayor Rudolph Guiliani changed the Ground Zero operation, at least in part, to what critics called a “scoop and dump” operation carrying rubble to a separate location, simultaneous with scaling back the involvement of firefighters in the search for remains.

In contrast, the site of the Murrah Federal Building targeted by domestic terrorism on April 19, 1995, has been turned entirely into a memorial.

Plans for the redevelopment of the WTC site do include memorials proximate to, or underneath, commercial space.  The bases of the Twin Towers themselves are not being built upon, although clearly the devastation and scattering of remains went beyond those geographic confines.  Moreover, concern over the extent to which the mammoth task of locating remains, and treating them respectfully, has been exacerbated by the fact that as recently as October 2006, more than five years after the attacks of Sept. 11, 2001, remains still are being found, scattered in apparently unexpected places.  One is left to wonder whether, real estate values or no, the entire WTC site simply should have been encased as a memorial.  Perhaps the need to rebuild, to demonstrate the indefatigable spirit of New York City and America, arguably could have been accomplished on other land.

Other insurance issues

One goal of terrorism apparently is to terrify and disrupt, to have a chilling effect on how a society carries out its affairs.  After Sept. 11, 2001, one compelling issue in counterterrorism preparedness has been how to minimize economic and societal disruption by providing insurance against the possibility of future terrorist attacks.  Under the Terrorism Risk Insurance Program (TRIP), following the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA) (Pub. L. 107–297, 116 Stat. 2322)(PDF) and adoption of related regulations, the federal government is to share some of the burden and offer ways to help manage related litigation.

It is unclear how long the private-public partnership will continue, but on Dec. 22, 2005, President George W. Bush signed into law the Terrorism Risk Insurance Extension Act of 2005, which extends TRIA through Dec. 31, 2007.

One consideration that conceivably can be raised is, when some insurance seeks to exclude damage from war, how to view insurance in the light of fundamental questions about whether terrorism by private non-state actors is a crime, an act of war, a war crime, or all of the above.

But on a fundamental level, with the attacks of Sept. 11, 2001, breaking a sense of security springing from a long period of the mainland United States being spared attack by international foes, how the U.S. society can go about its affairs while taking into account the risk posed by terrorism, in a way that permits the business of the nation to not be “chilled” by terror in a manner that would simply accomplish what is a fundamental goal of terrorism, to terrify and disrupt.

Links and additional reading:

Chad Bray, “Silverstein Can't Recover WTC Redesign Costs,” Dow Jones Newswires, Nov. 1, 2006, http://www.nysun.com/article/42654

Paul D. Colford, “Six insurers off hook in WTC security payouts, judge says,” New York Daily News, Nov. 1, 2006, http://www.nydailynews.com/news/local/story/467045p-393060c.html

“Court Affirms Limit on Replacement Cost for World Trade Center,” Insurance Journal, Oct. 31, 2006, http://www.insurancejournal.com/news/national/2006/10/31/73805.htm

Audrey Gillan, “Firefighters in Ground Zero clash: We want to dig our pals out, say protesters,” The Guardian, Nov. 3, 2001, http://www.guardian.co.uk/wtccrash/story/0,1300,587170,00.html

David M. Levitt and Bob Van Voris, “World Trade Center Insurers Get Mixed Appeal Ruling (Update1),” Bloomberg, Oct. 16, 2006, http://www.bloomberg.com/apps/news?pid=20601087&sid=
auOTgFhjTxwQ&refer=home

“More Bone Fragments Found at WTC Site,” AP, Nov. 7, 2006, http://www.military.com/NewsContent/0,13319,118504,00.html

Lon Slepicka, Heather Caspi and Dave J. Iannon, “New York Memorial Service Postponed: IAFF Cites Arrests, Rift with City; FDNY Says Families Wanted Delay, Join Mayor Against Unions,” Firehouse.com News, Oct. 26, 2001, http://www.firehouse.com/lodd/2001/fdny_memorial/

Jonathan Stempel, “UPDATE 2-US judge caps insurance payout for 9/11 WTC attack,” Reuters, Oct. 31, 2006, http://today.reuters.com/news/articleinvesting.aspx?type=
bondsNews&storyID=2006-10-31T205831Z_01_N31226079_RTRIDST_
0_FINANCIAL-WTC-RULING-UPDATE-2.XML

Silverstein Properties, http://www.silversteinproperties.com/

“Trade Center Insurers Win Payout Ruling,” Hartford Courant, Nov. 1, 2006, http://www.courant.com/business/hc-wtcinsure1101.
artnov01,0,5616735.story?coll=hc-headlines-business

World Trade Center, www.wtc.com

World Trade Center Site Overview, Lower Manhattan Development Corporation, http://www.renewnyc.com/plan_des_dev/wtc_site/Sept2003Overview.asp

“WTC-Build Insurers Win $700 Million Battle,” Associated Press, Nov. 1, 2006, http://www.nypost.com/seven/11012006/news/regionalnews/
wtc_build_insurers_win_700m_battle_regionalnews_.htm

“Sept. 11: Bearing Witness to History: Staten Island recovery site material,” Smithsonian Institution, http://americanhistory.si.edu/September11/collection/record.asp?ID=86

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