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In re September 11th Liability Insurance Coverage Cases

June 8, 2006


The opinion of the court was delivered by: Alvin K. Hellerstein, United States District Judge


This Opinion discusses whether the insurers who covered the lessees of Towers One and Two of the World Trade Center on September 11, 2001 against loss and liability, excluded defense costs from their coverage. I ruled earlier in this lawsuit that New York's insurance law did not prevent these insurers from asserting the exclusion of defense costs as a defense. See In re September 11th Liab. Ins. Coverage Cases, 333 F. Supp. 2d 111, 126 (S.D.N.Y. 2004). Having lost that motion, the lessees conducted a full course of discovery seeking to prove that the insurance binders and policies in effect on September 11, 2001 did not, in fact, contain the exclusion. The indisputable evidence shows, however, clearly and indisputably, that, with the exception of one excess insurer, the insurers refused to extend coverage for defense costs, and issued insurance binders or policies that explicitly excluded defense costs. Although the lessees continued to negotiate for defense costs to be included, and although the insurers did not foreclose the possibility that their policies might add defense coverage at a later time, the insurers did not bind to cover defense costs as of the date of liability and loss, September 11, 2001, when the terrorist-related aircraft crashes into Towers One and Two occurred. Since there are no material issues to be tried, and in the context of motions for summary judgment brought by all parties, I grant the insurers' motions for summary judgment, with one exception, and I deny the lessees' motion for summary judgment with regard to the issue of defense costs.


A. The Lease Agreements and Relevant Insurance Policies

In early 2001, the Port Authority of New York and New Jersey (the "Port Authority"), the owner and operator of the properties constituting the World Trade Center, entered into agreements with real estate developer Larry A. Silverstein, by and through various of his wholly owned companies (collectively the "Silverstein Entities" or "Silverstein"*fn1 ), to lease Buildings 1, 2, 4, and 5 of the World Trade Center. See Liab. Ins. Coverage Cases, 333 F. Supp. 2d at 120-21. Under the terms of these proposed lease agreements (collectively the "WTC Leases"), Silverstein was required to obtain liability insurance coverage. (See Zurich 56.1 Statement ¶ 7.) And so, working primarily with insurance broker Willis North America ("Willis"), Silverstein, acting through Silverstein Properties, set about obtaining the needed insurance at the primary, umbrella and excess levels.*fn2

On the eve of September 11, 2001, Silverstein had managed to secure various levels of insurance. Both primary and umbrella insurance coverage were obtained through Zurich American Insurance Company ("Zurich"), but the policies remained in binder form as of September 11. In addition to primary and umbrella coverage, the Silverstein Entities also secured seven layers of excess insurance above the primary and umbrella policies. However, not every excess insurer proceeded along the same track for negotiations, binding, and issuing of policies. Some excess policies were issued before September 11, 2001, and some after.

Thus, as of September 11, Silverstein had secured several layers of insurance coverage, aggregating $1 billion, best depicted as a "tower" of insurance:*fn3

LayerInsurerCoverageAggregate Coverage 8*fn4ACE Bermuda Ins. LTD100M xs 900M$1 billion 7ACE Bermuda Ins. LTD100M p/o 435M xs 465M$900 million  #Chubb Atlantic Indem. LTD60M p/o 435M xs 465M   Gerling-Konzern Allgemeine50M p/o 435M xs 465M   XL Insurance (Bermuda) Ltd.125M p/o 435M xs 465M   Zurich Int'l Bermuda100M p/o 435M xs 465M  6AXA Corporate Solutions Ins.20M p/o 200M xs 265M   National Surety Corp.30M p/o 200M xs 265M   Liberty Mutual Ins. Co.50M p/o 200M xs 265M$465 million  Ohio Casualty Ins. Co.50M p/o 200M xs 265M   Royal Ins. Co.25M p/o 200M xs 265M   St. Paul Indemnity Ins. Co.25M p/o 200M xs 265M  5Athena Assurance Co.25M p/o 115M xs 150M   Great American Ins. Co.50M p/o 115M xs 150M$265 million  Great American Assurance Co.40M p/o 115M xs 150M  4U.S. Fire Ins. Co.25M xs 125M$150 million 3General Star Nat'l Ins. Co.25M xs 100M$125 million 2Gulf Ins. Co.25M p/o 50M xs 50M$100 million  Lumbermens Mutual Cas. Co.25M p/o 50M xs 50M  1Zurich Umbrella50M p/o xs primary$50 million  Base Zurich Primary2M p/o and 4M aggregate$2 million

The essential question presented by the instant litigation is whether the various insurers have a duty to defend the Silverstein Entities, and any additional insureds, according to the specific language of each insurer's agreement, by binder or by the provisions of a final policy.

B. The Initial Issue as to the Scope of Insurance Coverage

Pursuant to section 405(c)(3)(B) of the Air Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) (codified at 49 U.S.C. §§ 40101 note), those who were injured in and around Towers One and Two, and the legal successors of those who were killed in the airplanes and in and around the Towers, were given a choice of seeking compensation from a specially-created Victim Compensation Fund, or filing suit in the United States District Court for the Southern District of New York. Approximately 300 lawsuits were filed by or on behalf of persons killed or injured in or around the Towers, alleging varying breaches of duties of care by the Port Authority or its lessees. These cases were assigned to me, and subsequently consolidated in In re September 11th Litigation, 21 MC 97.

The Silverstein Entities, defendants in those actions, then instituted a third-party action against Zurich seeking a declaration of Zurich's obligations to itself and to other asserted insureds, including the Port Authority. Zurich, in turn, filed a fourth-party action together with an original complaint against the Silverstein Entities, the Port Authority, the excess insurance carriers, and the Westfield Entities,*fn5 raising the same issues as to its obligations under the Primary and Umbrella policies. The Westfield Entities then brought their own claims against the excess carriers. These various actions were consolidated in In re September 11th Liability Insurance Coverage Cases, 03 Civ. 0332.

Following consolidation, the Port Authority and the Silverstein Entities brought motions for judgment on the pleadings pursuant to Rule 12(c), Fed. R. Civ. P., on basic issues concerning their insurance coverage: (1) whether the Port Authority was entitled to the status of an additional insured and the scope of that coverage; and (2) whether New York insurance law mandated that the Policies, which expressly excluded defense costs, required the insurers to provide for a defense. See Liab. Ins. Coverage Cases, 333 F. Supp. 2d at 111. I denied both motions.

Determining that Zurich's Binder, rather than the Policy it issued following September 11, was the operative document, I held that the Binder was ambiguous as to whether the Port Authority was intended as an additional insured. Liab. Ins. Coverage Cases, 333 F. Supp. 2d at 123. Silverstein also sought a declaration that, pursuant to New York State Insurance Regulation 107 ("Regulation 107"), 11 N.Y.C.R.R. § 71 (2003), Zurich was obligated to provide coverage for defense costs as a necessary consequence of providing coverage for loss or liability, regardless of any intention to disclaim coverage for defense costs. Id. I held that Regulation 107 did not require me to rewrite the Policy, and that to do so would "confer a windfall on WTCP, granting Silverstein that which he could not obtain in negotiations." I held that court intervention without a fully developed record was inappropriate. Id. at 126.

C. The Current Dispute as to the Duty to Defend

The parties then engaged in full discovery, following which all parties-the Port Authority, the Silverstein Entities, Zurich, and the various excess insurers-filed motions for full or partial summary judgment. The motions sought declarations as to the status of the Port Authority and the Westfield entities as additional insureds, the priority among the several towers of insurance, and whether Zurich and the excess carriers had assumed a duty to defend Silverstein and any additional insureds.

Following oral argument, several of the issues presented by the various motions dropped out of the case. The Port Authority reached a settlement with Zurich and the excess carriers recognizing the Port Authority's status as an additional insured under the binders and the subsequently-issued policies. See Amended Order, 03 Civ. 0332, dated October 31, 2005. Similarly, the Westfield entities reached a settlement with Zurich clarifying their status as additional insureds. See Order, 03 Civ. 0332, dated May 26, 2006. Finally, during oral argument, I concluded that a determination as to the priority of insurance between the tower of insurance led by Zurich and other towers of insurance covering the Port Authority and any related parties was premature, and therefore declined to consider this issue on the motions for summary judgment.*fn6 Thus, the issue remaining for my consideration in this Opinion is whether the coverage obtained by Silverstein in the Zurich tower provided for defense cost coverage.


Summary judgment is warranted if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56; accord Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A "genuine issue" of "material fact" exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Although all facts and inferences therefrom are to be construed in favor of the party opposing the motion, see Harlen Assocs. v. Village of Mineola, 273 F.3d 494, 498 (2d Cir. 2001), the non-moving party must raise more than just a "metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "[M]ere speculation and conjecture is insufficient to preclude the granting of the motion." Harlen, 273 F.3d at 499. "If the evidence is merely colorable or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (citations omitted).


A. Procurement from Zurich of the Primary Policy*fn7

Silverstein, acting through his company, Silverstein Properties, engaged Willis to counsel it and procure the insurance required by the Port Authority and Silverstein's financers and investors. Craig D. Simon, Willis' casualty practice leader in its New York office, led the negotiations for Silverstein Properties, along with Robert Strachan, Risk Manager for Silverstein Properties. They began their efforts in March and April of 2001, meeting with Barry Glick, a member of the Port Authority's Law Department. Simon advised Strachan and Glick that coverage for defense costs might be difficult to obtain, for potential insurers would want accurate loss history data dating back "at least five years," (Kelly Affirmation, Ex. B at 89:16-25 (the "Simon Dep.")) and that the available data was "woefully lacking." (Simon Dep. at 113:24-114:5.)*fn8 Simon told Strachan and Glick that he believed that Silverstein would be "unable to provide allocated loss expense in the program," and thus would be unable to secure defense cost coverage.*fn9 (Simon Dep. at 164:5-10.)

Simon opened negotiations with Zurich, working with Zurich underwriters Dennis Zervos, Lynn Maier and Mark Elias, among others. The Zurich team told Simon that without more accurate loss history data, defense cost coverage would not be provided-the very problem that Simon had anticipated. (See Kelly Affirmation, Ex. C at 215:21-216:22 ("Maier Dep."); Ex. D at 148:17-25 ("Zervos Dep.").) Zervos made clear that Zurich would not cover defense costs, explaining that "the coverage of the allocated loss adjustment would be outside the program[,

o]utside the SIR endorsement and totally the insured's responsibility." (See Zervos Dep. at 225:17-20.)

On June 8, 2001, Willis submitted Silverstein's application for insurance coverage to Zurich and other potential insurers. The submission sought defense cost coverage and provided additional loss history data. (See Kelly Affirmation, Ex. E at Willis-LIA 00302-00314.) Zurich responded by an email to Simon on June 20, 2001, asking if Silverstein's submission indeed sought coverage for defense costs: "[w]ill CGL's $100K SIR*fn10 (ea/every) include defense within limits?." (See Erlandson Decl., filed July 11, 2005 (Erlandson Decl. II), Ex. 5 at Zurich (M) 1163-66.) Simon answered, "No. Defense is outside the limits and outside the SIR." (Id. at Zurich (M) 1164.)

On July 6, 2001, Zervos emailed Simon with the two options that Zurich was willing to provide. (See Kelly Affirmation, Ex. F.; Erlandson Decl. II, Ex. 28, Simon Deposition, 345:9-14.) Neither option included coverage for defense costs. Both options provided a self-insured retention of $100,000 (i.e., the first $100,000 of claims of loss were not to be insured); and each option offered a greater, or lesser, deductible and consequent difference in premium. The email provided as follows:

As per our conversation, the quote is as follows:

Option #1: $100,000 SIR & $150,000 Deductible Total Retention $250,000 Excluding Allocated Loss Adjustment Expense.

Total Policy Premium $1,033,581. with 10% commission.

Option #2: $100,000 SIR & $400,000 Deductible Total Retention $500,000 Excluding Allocated Loss Adjustment Expense.

Total Policy Premium $692,569. with 10% commission.

Lynn will be sending a formal quote letter on Monday July 9, 2001 addressing the following:

* Coverages

* Exclusions

* RIMS Additional Charges

* Loss Funds (escrows)

* Letter of Credit -- Need the Silverstein financial's

* TPA quote from ZSC

The clause, "Excluding Allocated Loss Adjustment Expense," meant that "allocated loss adjustment expense was not going to be covered, would not be something that would be paid by Zurich." (Kelly Affirmation, Ex. B., Simon Dep. at 351:24-352:3.) Meanwhile, the closing date for the World Trade Center lease was fast approaching and, without offers from any other insurers, Silverstein decided to proceed with the primary coverage offered by Zurich.

On July 10, 2001, Maier sent a quote to Simon providing for "each occurrence" limits of $2 million and a "general aggregate" limit of $4 million. As to defense costs, the quote provided:

Defense Cost in addition to the Limit of Liability

ALAE-Outside the SIR/Deductible and paid / reimbursed 100% by the insured. The quote provided also that general liability coverage form CG 00 01 (07 98) would be used for the text of the policy. The standard text of the form, which was not attached to Maier's quote, included a duty to defend. The form contained a clause providing that the insurer would "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage,'" and would "have the . duty to defend the insured against any 'suit'" seeking such damages. Commercial General Liability Coverage Form, CG 00 01 10 01, Section I, 1 (July 1998).

Simon circulated Zurich's July 10 quote to Strachan of Silverstein Entities and to Nancy Townsend, Westfield's District Manager. Simon's cover memo explained that Zurich still viewed the loss data as "not credible by the insurance marketplace" and that it therefore declined to provide defense cost coverage, (Kelly Affirmation, Ex. I at WILLIS 32149) but that it might be amenable to providing defense costs at some later point after clear loss data became available. (See id.)

Despite Simon's explanation in his circulation of the July 10 quote that defense costs were excluded, Townsend stated the opposite, writing, in an email of July 13, 2001, after she received Simon's explanation of July 10, that the Zurich policy did "include defense costs and expenses in excess of the retention." (Erlandson Decl., filed June 14, 2005 ("Erlandson Decl. I"), Ex. 11 at Zurich 4088.) Townswend's email led to a response by Cynthia Glist, from Westfield, interpreting Zurich's quote as not "indicat[ing] whether defense expenses erode the SIR or not." (Id. at 4086.) The email was ultimately sent to Maier at Zurich as part of an email chain from Townsend addressing various aspects of the primary policy. (Id. at 4085.) Zurich did not respond further.

Simon's subsequent email of July 17, 2001 to Strachan and Townsend, explained why Zurich excluded defense costs:

. The only way carriers would provide ALE within the SIR would be to actually audit the Port Authority files. .

With loss data seen as not credible by the underwriters and NO ALE information, underwriters would be working in a vacuum and the resulting premium would be many multiples of the current premiums. Please keep in mind that the terrorist bombing in 1993 is seen as the MFL [maximum foreseeable loss] and we were not provided any information to share with underwriters.

Zurich has been very agreeable to revisit their position after they have some time on the risk. . (Kelly Affirmation, Ex. L at WTC2 022273.)

The Zurich binder was issued on July 18, 2001 under the terms set forth in the July 10 quote, effective July 19, 2001 through July 19, 2002, for $2 million each occurrence, with a general aggregate liability of $4 million. (Kelly Affirmation, Ex. M at WILLIS-LIA 02083-02085 ("Primary Binder").) The Binder excluded defense costs:

Defense Cost in addition to the Limit of Liability

ALAE-Outside the SIR/Deductible and paid / reimbursed 100% by the insured. The Binder also contained reference to General Liability Coverage Form CG 00 01 (07 98), as in the July 10 quote. Simon explained to his client, Strachan, and to Townsend of Westfield why he was not able to obtain defense cost coverage: "the insurance marketplace could not develop a loss projection based on the loss data provided to us from the NY/NJ Port Authority." (Kelly Affirmation, Ex. N.)

Strachan expressed once again Silverstein's desire for defense cost coverage, (see Kelly Affirmation, Ex. B, Simon Dep. at 601:6-20), this time in a conference call on August 1, 2001 with the various representatives of Willis, Silverstein's insurance broker, and Zurich: Craig Simon, Robert Grella (the producer at Willis responsible for the Silverstein account), and Timothy Crowley (the Willis account executive managing the Silverstein account), and Zurich's Maier, Elias, and Curcio-Elias. Simon told Strachan that he could not obtain defense cost coverage, that Zurich needed a "a history, we would need to see a track record about what the allocated claim expenses actually were before we could consider changing the way the program was either for this year or for the subsequent year." (Kelly Affirmation, Ex. Y, Elias Dep. at 223:10-20.) Maier's notes from the call state:

-- Strachan -- wanted to know why Zurich would not provide ALAE coverage if we would reconsider.

Zurich did not provide ALAE coverage due to the following:

-- No loss history fo[r] ALAE. Port Authority handled claims. -- Port Authority had immunities that Silverstein does not have.

It was agreed to entertain coverage for ALAE in the future -- after ALAE data on this year's program became available for review.

Elias of Zurich made it clear that Zurich would not agree to pay defense costs under the Primary Policy. (Kelly Affirmation, Ex. Y, Elias Dep. at 223:21-224:4.)

On November 16, 2001, two months after the terrorist-related aircraft crashes of September 11, 2001, Zurich issued its Primary Policy. (See Kelly Affirmation, Ex. P ("Primary Policy") at WILLIS-LIA 02246.) The ...

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