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SR INTERN. BUSINESS INS. v. WORLD TRADE CENTER

September 25, 2002

SR INTERNATIONAL BUSINESS INSURANCE CO. LTD., PLAINTIFF-COUNTERCLAIM DEFENDANT,
V.
WORLD TRADE CENTER PROPERTIES LLC, ET AL., DEFENDANTS-COUNTERCLAIMANTS. WORLD TRADE CENTER PROPERTIES LLC, ET AL., COUNTERCLAIMANTS, V. ALLIANZ INSURANCE COMPANY, ET AL., ADDITIONAL COUNTERCLAIM DEFENDANTS.



The opinion of the court was delivered by: Martin, District Judge.

  OPINION & ORDER

This litigation has already given rise to several opinions of the Court. Familiarity with those opinions and the background of this litigation is assumed.

At the time of the terrorist attack on the World Trade Center on September 11, 2001, over twenty individual insurance companies had signed binders which obligated them to provide property damage insurance, but, with minor exceptions, they had not issued formal insurance policies.

Presently before the Court are motions for partial summary judgment by Hartford Fire Insurance Company, Royal Indemnity Company and St. Paul Fire and Marine Insurance Company. In each of these motions, the insurer argues that at the time it issued its binder it agreed to be bound on the basis of a specific form of insurance provided by Willis of New York, Inc. ("Willis"), the broker for the Silverstein Parties, and that this form — the WilProp form — contained a definition of "occurrence" under which the terrorist attack on the World Trade Center is unambiguously a single occurrence. Accordingly, each of the insurers seeks to limit its liability to the Silverstein Parties to one single payment in the face amount of the policy.

While conceding that the insurers' reading of the WilProp occurrence definition is the most reasonable one, the Silverstein Parties argue that it is not the only reasonable reading, and that therefore the question of the number of occurrences under the WilProp form must be decided by a jury. More significantly, however, the Silverstein Parties do not concede that the WilProp definition of occurrence is incorporated into the binders. They assert that at the time these insurers signed the binders they were well aware that they were committing themselves to participate in a process in which they would ultimately agree to be bound to the contract terms negotiated by the insureds and the lead underwriter, which in this case became The Travelers Insurance Company. Thus, the Silverstein Parties argue that as of September 11th, each of these insurers was bound to the terms to which Travelers and the insureds had agreed as of that date.

I. THE TERMS OF THE BINDERS

In large measure, the position of the Silverstein Parties rests on the argument that the binders at issue here were what Judge Leval has characterized as a "binding preliminary commitment." As he explained in Teachers Insurance & Annuity Association v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987):

Preliminary contracts with binding force can be of at least two distinct types. One occurs when the parties have reached complete agreement (including the agreement to be bound) on all the issues perceived to require negotiation. Such an agreement is preliminary only in form — only in the sense that the parties desire a more elaborate formalization of the agreement. The second stage is not necessary; it is merely considered desirable.
The second and different sort of preliminary binding agreement is one that expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated. Although the existence of open terms generally suggests that binding agreement has not been reached, that is not necessarily so. For the parties can bind themselves to a concededly incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that has been settled in the preliminary agreement.
This obligation does not guarantee that the final contract will be concluded if both parties comport with their obligation, as good faith differences in the negotiation of the open issues may prevent a reaching of final contract.

See also Adjustrite Systems, Inc. v. GAB Business Services, Inc., 145 F.3d 543, 548 (2d Cir. 1998); Shann v. Dunk, 84 F.3d 73, 77-78 (2d Cir. 1996); Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 71-72 (2d Cir. 1989).

However, insurance binders are not either one of the types of preliminary contracts referred to by Judge Leval. An insurance binder is a unique type of contract. While not all of the terms of the insurance contract are set forth in the binder, "[a] `binder' is a present contract of insurance . . ." Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392, 396, 160 N.E. 651 (1928). A binder is "a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one." Lipman v. Niagara Fire Ins. Co., 121 N.Y. 454, 458, 24 N.E. 699 (1890).

It is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance. Courts, recognizing that the cryptic nature of binders is born of necessity and that many policy clauses are either stereotypes or mandated by public regulation, are not loath to infer that conditions and limitations usual to the contemplated coverage were intended to be part of the parties' contract during the binder period. (Matter of Seiderman v. Herman Perla, Inc., 268 N.Y. 188, 197 N.E. 190; Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392, 160 N.E. 651).

The law of New York with respect to binders does not look to the negotiations of the parties to see what terms might ultimately have been incorporated into a formal policy. Nor does it suggest that the parties will not be bound if they fail to agree on important terms after negotiating in good faith. To the contrary, the New York Court of Appeals has made clear that when a binder is signed, "the contract of insurance [is] closed and the binder [becomes] in effect the same as a regular insurance policy. . . ." Seiderman v. Herman Perla, Inc., 268 N.Y. 188, 190, 197 N.E. 190 (1935). To consider a binder merely a preliminary agreement could deprive the insured of "protection pending the execution and delivery of a more conventionally detailed policy of insurance." Employers Commercial Union, 45 N.Y.2d at 612-13, 412 N.Y.S.2d 121, 384 N.E.2d 668.*fn1

While there is evidence indicating that, had the terrorist attack of September 11, 2001, not occurred, the insurers would all have ultimately agreed to policies that did not define the term "occurrence", that possibility is irrelevant. Under New York law, the question to be determined here is not, "What were the terms to which the parties might ultimately have agreed to become bound?" but rather, "What were the terms to which they were bound?"

Where, as here, there is no completed written contract setting forth the entire agreement between the parties, the court must look to extrinsic evidence of the circumstances surrounding the negotiation and drafting of the agreement as well as correspondence between the parties in order to ascertain the terms of the parties' complete agreement. U.S. West Fin. Servs., Inc. v. Tollman, 786 F. Supp. 333, 342 (S.D.N.Y. 1992); Joseph Victori Wines, Inc. v. Vina Santa Carolina S.A., 933 F. Supp. 347 (S.D.N.Y. 1996). In making this inquiry, the reasoning in Martin v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 249, 417 N.E.2d 541 (1981), applies. In that case, Judge Fuchsberg stated:

[B]efore the power of law can be invoked to enforce a promise, it must be sufficiently certain and specific so that what was promised can be ascertained. Otherwise, a court, in intervening, would be imposing its own conception of what the parties should or might have undertaken, rather than confining itself to the implementation of a bargain to which they have mutually committed themselves. Thus, definiteness as to material matters is of the very essence in contract law. Impenetrable vagueness and uncertainty will not do (1 Corbin, Contracts, s 95, p. 394; 6 Encyclopedia of New York Law, Contracts, s 301; Restatement, Contracts 2d, s 32, Comment a).

52 N.Y.2d at 109, 436 N.Y.S.2d at 249, 417 N.E.2d 541.

Thus, this Court does not have a roving commission to impose its conception of what is fair upon the parties before it. Nor may the Court consider the public interest in the rebuilding of the World Trade Center in deciding the question of whether the binders issued by these insurers entitle the Silverstein Parties to recover twice the face amount of the insurance they purchased.

What the Court must do is examine the facts with respect to the negotiations between the brokers for the Silverstein Parties and each of these insurers to determine what the terms of their binders were on September 11, 2001.

1. Hartford Fire Insurance Co.

A. Facts

On June 7, 2001, Willis broker Timothy Boyd sent a property underwriting submission, including a copy of the WilProp form, to Hartford underwriter John Gemma. On June 28th, Gemma issued a quote to Boyd authorizing limits of $50 million excess of $75 million. After the heading, "FORM", the quote stated, "Manuscript Forms Submitted With Attached Amendments." Gemma attached specific pages of the WilProp form, which he had amended, in addition to two pre-printed policy clauses excluding coverage of certain pollution and electronic data recognition problems. Next to the heading, "SUBJECT TO," Gemma typed the following: "Policy Forms Must Be Received Within 60 Days of Inception Otherwise HSC Forms Will Be Used."

On July 7th, Boyd e-mailed Gemma to see if Hartford would agree to "drop down" from its quoted $75 million attachment point to $50 million, and thereby participate with Travelers in the proposed layer of $400 to $450 million excess of $50 million. Boyd also forwarded an e-mail to Gemma that he had sent to Travelers the previous day, which noted the need to "sort our non-concurrent terms and conditions" as commitments are made. In response to Boyd's request for a modification of Hartford's participation, Gemma issued a new quote calling for $50 million as part of a $450 million layer excess of $50 million. After the heading, "FORM," the quote stated, "Manuscript Forms Submitted With Attached Amendments."

On July 12th, as a result of objections from his superiors to the extent of the participation, Gemma sent Boyd an e-mail retracting Hartford's modified quotation and seeking to limit Hartford's participation to $25 million. In response, Boyd called Gemma and said that it was too late to limit Hartford's participation. According to Boyd, he informed Gemma at this time that the Travelers form would be used and Gemma requested a copy of the Travelers form once it was finalized. After speaking with Boyd, Gemma sought authorization from his supervisors to increase Hartford's participation from $25 million. Hartford's Boston office authorized Gemma to quote $32 million of a $50 million layer excess of $75 million. Gemma advised Boyd of this revised quotation by phone and e-mail.

On July 17th, Boyd sent an e-mail to Gemma binding Hartford's $32 million in coverage. Boyd's e-mail stated: "We [Willis] will issue formal documentation soonest."

On July 18th, Boyd e-mailed Gemma and Gemma's assistant, urgently requesting Hartford's policy number for the Silverstein program. The following day, Gemma sent a one-page document entitled "outline of our property BINDER." This document was prepared on the same form as Hartford's June 28, 2001 and July 9, 2001 quotations. Like those prior ...


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