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SR International Business Insurance Co. Ltd. v. World Trade Center Properties

July 25, 2006


The opinion of the court was delivered by: Michael B. Mukasey, U.S.D.J.


Before the court are two sets of motions and cross-motions for partial summary judgment arising out of an ongoing appraisal proceeding in the litigation to determine the amount of insurance recoverable for the destruction of the World Trade Center complex ("WTC") on September 11, 2001 ("9/11"). The parties to the proceeding are, on the insurers' side, several of the companies that provided insurance coverage for the WTC on 9/11 ("the Appraising Insurers"*fn1 ), and, on the insureds' side, the Port Authority of New York and New Jersey ("Port Authority"), WTC Retail LLC (f/k/a Westfield WTC LLC), and the Silverstein Parties*fn2 (collectively, "the Insureds").

In the first set of motions, the Silverstein Parties move for a declaration that the full appraised value of tenant improvements affixed to the WTC and owned by the Insureds be included in the calculation of replacement cost, one of three quantities being determined by the appraisal panel. The Appraising Insurers cross-move in three different motions --- based on their similar but not identical policies --- for orders that would bar the Silverstein Parties from recovering the full replacement cost of the improvements; limit the Insureds' recovery to their "financial interest" in the improvements; declare that this financial interest is "the unamortized portion of the [Port Authority's] original contribution to the improvements"; and hold that replacement cost coverage is inapplicable to tenant improvements and should not be calculated as to the improvements.

In the second set of motions, some of the Appraising Insurers move for a declaration that the definition of actual cash value ("ACV") in one of the policies -- the Travelers form --- requires application of the "broad evidence rule," which allows the Appraisal Panel to consider any relevant evidence, including market value, tending toward an estimate of the loss caused by the destruction of the WTC. The Silverstein Parties cross-move for a declaration that ACV must be determined according to the plain language of the definition, starting with an estimate of "replacement cost new," deducting for the physical impairments of value specified in the policy, and avoiding any calculation that is based on or incorporates market value.

For the reasons set forth below, the Silverstein Parties' motion to include tenant improvements in replacement cost is granted and the Appraising Insurers' related cross-motions are denied. On the second set of motions, the moving Appraising Insurers' motion to use the "broad evidence rule" to define ACV is denied, and the Silverstein Parties' cross-motion relating to the exclusion of market value calculations is granted.


The following facts are drawn from the parties' submissions, as well as prior opinions in this litigation, familiarity with which is assumed.

In July 2001, the Silverstein Parties entered into 99-year leases with the Port Authority for the commercial space in the WTC, which comprised the North and South Towers, buildings 4 and 5, the retail mall, and related sub-grade spaces. Westfield WTC LLC, now known as WTC Retail LLC ("WTC Retail"),*fn3 entered into virtually identical leases for the complex's retail mall. In connection with these leases, the Silverstein Parties, on behalf of themselves, the Port Authority, and WTC Retail, purchased over $3.5 billion of "per occurrence" property insurance from a group of insurers. This group included, among others, Allianz Global Risks US Insurance Company (f/k/a Allianz Insurance Company), Gulf Insurance Company, Royal Indemnity Company, Travelers Indemnity Company, Zurich American Insurance Company, and Industrial Risk Insurers ("IRI"). After the destruction of the WTC, these six insurers, along with the Insureds, agreed to participate in an appraisal to determine various values under their policies (the "Appraisal"). The parties have stipulated (see Ex. 12 to TI Blatnik Decl.*fn4 ) that the purpose of the Appraisal is to determine three specific values: (1) the replacement cost of the WTC; (2) the actual cash value of the WTC; and (3) the rental value loss that resulted from destruction of the WTC. (See id. at 2-3) Questions regarding actual claims made on a replacement cost basis as reconstruction progresses are beyond the Panel's mandate; the provision of the stipulation that describes the replacement cost that the Panel must determine --- Section I.A.1 -- recognizes that "[t]he Insureds will be making claims on a replacement cost basis as moneys are expended to rebuild" but notes that "[t]hose claims are not part of the I.A.1 topic." (Id. at 3, n.5)

A. The Insurance Policies

The coverage provided by each of the Appraising Insurers is governed by one of three policies: Travelers, Insurance Services Office ("ISO"), or IRI.*fn5 Each is a "binder" policy, an interim form that covers the insured while the parties work out a final insurance agreement. All three policies provide for "replacement cost" coverage as a supplement to traditional "actual cash value" coverage through a form or collection of provisions called a Replacement Cost Endorsement ("RCE").*fn6

Although the three RCEs are not identical, their provisions and methods for determining the amount of replacement coverage are substantially similar.

Specifically, the Travelers form provides that, in the event of a covered loss, "the Company will determine the value of Covered Property at replacement cost as of the time and place of loss, without deduction for physical deterioration, depreciation, obsolescence and depletion, except as otherwise provided in this endorsement . . . ." (Ex. 1 to TI Munn Decl. at Willis 98580) This valuation is subject to several conditions, including that "[t]he Company will not pay for any loss or damage on a replacement cost basis until the property is repaired, rebuilt or replaced." (Id.) If the property is not replaced, the RCE provides that "the value of the property will be determined at 'Actual Cash Value,'" a term defined elsewhere in the RCE as "the cost to repair, rebuild or replace the lost or damaged property, at the time and place of the loss, with other property of comparable size, material and quality, less allowance for physical deterioration, depreciation, obsolescence and depletion." (Id. at Willis 98580, 98582). This definition is the subject of the parties' ACV motions discussed later in this opinion.

The ISO policy, as modified by applicable "Optional Coverages," provides replacement cost coverage (see Ex. A to TI Kattan Decl. at ROY 05550) whereby the insurer must "determine the value of Covered Property in the event of loss . . . at [Replacement Cost (without deduction for depreciation)] as of the time of loss or damage." (Id. at ROY 05548) However, as under the Travelers policy, the insurer "will not pay on a replacement cost basis for any loss or damage: (1) Until the lost or damaged property is actually repaired or replaced; and (2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage." (Id. at ROY 05550-51)

Finally, the IRI RCE, like the Travelers and ISO policies, conditions replacement coverage on repair, rebuilding, or replacement. (Ex. 3 to TI Munn Decl. at IRI 06719) However, the RCE contains a time limitation:

In consideration of the increased premium . . . the coverage under this policy applicable only to property as shown in paragraph D. below is hereby extended to cover such property to the amount actually expended by or in behalf of the Insured to repair, rebuild or replace within two (2) years from the date of loss or damage, at the same or at another site, such property which has been damaged. (Id. at IRI 06719-20)

That provision is subject to certain valuation conditions explained in more detail below.

Under all three policies, the actual amount of replacement cost proceeds payable is determined by reference to a set of "loss settlement" provisions. Under each, the insurer's liability is either the hypothetical cost of rebuilding what was destroyed, the amount actually spent rebuilding, or the policy limits, whichever is the least. Specifically, under Section A.1 of the Travelers Replacement Cost form, coverage is the least of:

a. The cost to repair, rebuild or replace, at the same site, the lost, damaged or destroyed property, with other property of comparable size, material and quality; or

b. The actual amount incurred by the Insured that is necessary to repair, rebuild or replace the lost, damaged or destroyed property; or

c. The Limit of Insurance . . . . (Ex. 1 to TI Munn Decl. at Willis 98580)

Similarly, pursuant to Section G.3.e of the ISO policy, coverage is the least of "(1) the Limit of Insurance . . . (2) The cost to replace the lost or damaged property [at the original premises] with other property . . . [o]f comparable material and quality and . . . [u]sed for the same purpose; or (3) The amount actually spent that is necessary to repair or replace the lost or damaged property." (Ex. 2 to TI Munn Decl. at ROY 95551) Finally, under the IRI RCE, the insured receives the lesser of "the cost to repair, rebuild or replace on the same site with new materials of like kind and quality, whichever is the smallest"; "the actual expenditure incurred in repairing, rebuilding or replacing on the same or another site, whichever is the smallest"; or the overall policy limits. (Ex. 3 to TI Munn Decl. at IRI 06719, 06720).

All three policies provide coverage for the kinds of property that comprise tenant improvements. The Travelers "Property Coverage" form states that coverage is provided "for Covered Property . . . for which the Insured has an insurable interest" and then defines such property to include "Buildings . . . including: (1) Completed additions; (2) Fixtures, including outdoor fixtures; [and] (3) Machinery and equipment permanently attached to the building . . . ." (Ex. 1 to TI Munn Decl. at Willis 98514) The ISO "Building and Personal Property Coverage Form" likewise extends coverage to "Covered Property" and defines such property in an almost identical manner. (See Ex. 2 to TI Munn Decl. at ROY 05539) The IRI policy covers in its "Property Damage" section "real property in which the Insured has an insurable interest" and then, in Paragraph D of the RCE, gives replacement coverage only to "[b]uildings and structures, building equipment, plant equipment, machinery, machine parts, office furniture, office equipment, . . . and leasehold Improvements and Betterments except all such property which is obsolete or useless to the Insured . . . ." (Ex. 3 at TI Munn Decl. at IRI 06616, 06720) This "obsolete or useless" language is unique to the IRI policy.

Finally, the Travelers and ISO policies --- but not the IRI policy --- contain an additional clause in their general coverage provisions limiting the insured's recovery to its "financial interest" in the property covered by the policies. (See Ex. 3 to TI Munn Decl. at WILLIS 96576 ("The Company will not pay the Insured more than the Insured's financial interest in the Covered Property."); Ex. 2 to TI Munn Decl. at ROY 05547 ("We will not pay you more than your financial interest in the Covered Property.")) Neither policy defines the term "financial interest" or mentions the term in the RCEs.

B. The Master and Tenant Leases

The Insureds' interests in tenant improvements are defined in two sets of leases: (1) the various leases between the individual WTC space tenants and the Port Authority (the "Tenant Leases") for the renting of office and retail space within the WTC; and (2) the 99-year leases between the Silverstein Parties, WTC Retail, and the Port Authority (the "Master Leases") for the leasing of the WTC. Under these latter leases, the Silverstein Parties and WTC Retail assume the various obligations held by the Port Authority under the Tenant Leases, as well as additional obligations to the Port Authority itself.

1. The Tenant Leases

Under the Tenant Leases, non-removable improvements affixed to the premises by tenants become the property of the Port Authority upon installation, and the tenants lose any right to remove them. For example, the lease between the Port Authority and tenant Harris Beach & Wilcox, LLP, one of over 400 tenants in the WTC (TI Appraising Insurers Rule 56.1 Statement ¶ 12), provides that Harris Beach could not erect any "structures, . . . [or] improvements, . . . or install any fixtures in or on the Premises (other than [removable] trade fixtures) without prior consent of the Port Authority" and that, regardless of whether consent was obtained, "the same shall immediately become the property of the Port Authority, and the Lessee shall have no right . . . to change or remove the same either during the term or at the expiration thereof." (Ex. 17 to TI Blatnik Decl. at 15; see also Ex. 5 to TI Munn Decl. (Rosenberg & Estis Report for Market Insurers) at 5 (noting that "once improvements are installed within the demised premises, the office space leases provide that the same become the property of the landlord"); id. at 6 (reaching same conclusion for retail leases))

The Tenant Leases establish also that the Port Authority must repair or rebuild the premises, including such improvements, in the event of certain casualty losses. For example, the lease between the Port Authority and tenant Regus Business Centre states that in the event of a casualty loss, the Authority will, depending on the time it would take to repair the damage to the premises, either repair the damage, terminate the lease as to the damaged portion of the premises, or terminate the lease entirely, with corresponding rent abatements. (See Ex. H to TI Appraising Insurers Rule 56.1 Statement at 8) The lease provides also that if the damage will take over 90 days to repair, and the tenant is so notified, the tenant may terminate the lease as well. (Id.) The Port Authority's obligations under this and other Tenant Leases are assumed by the Silverstein Parties and WTC Retail through the Master Leases. (See, e.g., Ex. F. to TI Appraising Insurers Rule 56.1 Statement at 171-72)

2. The Master Leases

Under Section 11 of the Master Leases, "[a]ll improvements, fixtures, machinery, apparatus, and fittings affixed to the Premises . . . shall be a part of the Premises and shall be, or become, the property of the Port Authority on the Commencement Date, or upon installation thereof . . . and legal title thereto shall be and remain in the Port Authority." (Ex. 6 to TI Munn Decl. at 151; see also Ex. 7 to TI Munn Decl. at 149) This property is part of the "premises" leased by the Port Authority to the Silverstein Parties and WTC Retail for 99 years (see Ex. 6 to TI Munn Decl. at 59-60) and is among the property that the Silverstein Parties and WTC Retail have an obligation to rebuild. Section 15 of the Master Leases sets out the rebuilding obligation: In the event that any portion of the WTC is destroyed by fire or other casualty "or by reason of any cause whatsoever," the Silverstein Parties (or WTC Retail) at [their] sole cost and expense, and whether or not such damage or destruction is covered by insurance proceeds sufficient for the purpose . . . shall rebuild, restore, repair and replace the Premises . . . and any structures, improvements, fixtures and equipment, furnishings and physical property located thereon substantially in accordance, to the extent feasible, prudent and commercially reasonable, with the plans and specifications for the same as they existed prior to such damage or destruction or with the consent in writing of the Port Authority . . . make such other repairs, replacements, changes or alterations as is mutually agreed to by the Port Authority and [the Silverstein Parties (or WTC Retail)] . . . . (Ex. F to TI Appraising Insurers Rule 56.1 Statement at 171-72)

The parties agree, at least for the purposes of these motions, that the Silverstein Parties are in the process of rebuilding the WTC.*fn7 (See, e.g., TI Appraising Insurers Mem. 10-11; TI Appraising Insurers Reply Mem. 7, 8)


Whether the terms of an insurance policy are ambiguous is a question of law for the court to decide. Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir. 1998). Ambiguity exists when a contract term suggests "more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." World Trade Ctr. Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 184 (2d Cir. 2003) (internal quotation marks omitted); see also Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 164 (2d Cir. 2005). When the terms of an insurance policy, whether a binder or final policy, "are clear and unambiguous, the court should look no further than the language of the policy" itself. Citigroup, Inc. v. Indus. Risk Ins., 336 F. Supp. 2d 282, 287 (S.D.N.Y. 2004), aff'd, 421 F.3d 81 (2d Cir. 2005); see also World Trade Ctr. Props., 345 F.3d at 184. However, "extrinsic evidence is admissible to determine the parties' intentions with respect to the incomplete and unintegrated terms of a binder." World Trade Ctr. Props., 345 F.3d at 184.

This court has jurisdiction to resolve the parties' present dispute despite the ongoing appraisal proceeding because the Appraisal Panel may not decide questions of law. See Duane Reade Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 389 (2d Cir. 2005) ("It is well established that the scope of coverage provided by an insurance policy is a purely legal issue that cannot be determined by an appraisal, which is limited to factual disputes over the amount of loss for which an insurer is liable."). In other words, an "appraisal resolves only a valuation question leaving all other issues for resolution at a plenary trial." Penn Cent. Corp. v. Consol. Rail Corp., 56 N.Y.2d 120, 127, 451 N.Y.S.2d 62, 66 (1982); see also Kawa v. Nationwide Mut. Fire Ins. Co., 664 N.Y.S.2d 430, 432 (Sup. Ct. Erie County 1997) (observing that "appraisal extends merely to the specific issues of cash value and the amount of loss").

Although a court generally reviews disputed questions of law after an appraisal is complete, this timing is not mandatory. Here, the Appraisal Panel has asked unanimously that the court resolve the pending motions while the proceeding is ongoing. (See Ex. 1 to TI Miller Reply Decl.) In the interests of efficiency, I will do so, but this should not be read to invite a demand for immediate adjudication of every dispute the parties may have over the interpretation of the Travelers, ISO, and IRI policies. Rather, in cases where the parties' dispute implicates the values the Panel is determining under the stipulation, the court will decide whether the dispute is appropriate for immediate disposition. This result is consistent with the stipulation, which provides that the Panel's sole purpose is to determine replacement cost, actual cash value, and rental loss, and not, for example, to ...

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