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

October 31, 2006


The opinion of the court was delivered by: Harold Baer, Jr., District Judge.


The above-captioned action and related matters pertain to the ongoing dispute between those who had a property interest in the World Trade Center ("WTC") complex on September 11, 2001, and those who provided insurance for the properties. A subset of those insurers bring the current motion to prevent the policyholders from recovering more than it would cost to replace the covered buildings as they stood immediately prior to the September 11 attacks. The policyholders cross-move for a declaration that they can recover the additional amount it would cost to make the rebuilt WTC safe, modern, and politically palatable. Because the policies unambiguously support the insurers' position, their motion is granted in part. The policyholders' motion is denied.


The following facts are undisputed, except where otherwise noted. They are taken from the parties' submissions, as well as from previous Opinions issued in this litigation. Familiarity with these Opinions is assumed.

In July 2001, Silverstein Properties, Inc. and several related parties ("Silverstein") entered into 99-year leases with the Port Authority of New York and New Jersey ("Port Authority") for the commercial space in the WTC complex, which included the Twin Towers and two other buildings destroyed on September 11, 2001. Westfield WTC LLC ("Westfield"), now known as WTC Retail LLC, entered into virtually identical leases for the WTC retail mall. In connection with these leases, Silverstein obtained primary and excess insurance coverage on behalf of his entities, the Port Authority, and Westfield (collectively, the "Insureds") for the WTC*fn1 from a group of approximately two dozen insurers. The insurance was in the amount of slightly more than $3.5 billion on a "per occurrence" basis. See generally World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d 154, 159-60 (2d Cir. 2003)

Almost none of the insurers had issued final policies at the time of the September 11 attacks. Instead, the WTC was insured under multiple temporary contracts, known in the industry as "binder" policies. A binder typically does not contain the detailed terms of a final policy, but allows an insured party to have interim coverage while such terms are negotiated. It is a "fully enforceable present contract of insurance." World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d at 167 (citation omitted). Three such binder policies are at issue here: (1) the Travelers policy, which binds Allianz Global Risks US Insurance Company (f/k/a Allianz Insurance Company), Gulf Insurance Company, Travelers Indemnity Company, and Zurich American Insurance Company; (2) the Insurance Services Office ("ISO") policy, which binds Royal Indemnity Company; and (3) the IRI policy, which binds Industrial Risk Insurers ("IRI").*fn2

All three contracts provide coverage on a "replacement cost" basis.*fn3 Although precise definition of replacement cost is contested in the present motions, the basic concept is simple: it is the amount it would cost to replace or repair the covered property. This stands in contrast to "actual cash value" or "ACV" coverage, which, because it simply measures the value of the property as it existed before loss, takes depreciation into account. As the Honorable Michael B. Mukasey, to whom these cases were previously assigned, has explained,

Replacement cost policies provide greater coverage than traditional "actual cash value" policies by permitting the insured to replace damaged or destroyed property without any deduction. By paying an extra premium for replacement cost coverage, the insured can recover on a "new-for-old" basis instead of the "old-for-old" recovery provided by ACV coverage.

SR Int'l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props. LLC, 445 F.Supp.2d 320, 333 n.6 (S.D.N.Y. July 25, 2006).

The Insureds and the six insurers bound by the Travelers, ISO, and IRI policies (the "Appraising Insurers") are in the midst of an appraisal process (the "Appraisal") to determine certain measures of the WTC's value.*fn4 The Appraisal Panel, as provided for in the underlying insurance policies, will resolve disputes as to valuation of the Insureds' loss. See SR Int'l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props. LLC, 2002 U.S. Dist LEXIS 15272 (S.D.N.Y. Aug. 19, 2002) (granting insurer Allianz's motion to enforce its right to appraisal).*fn5 The parties subsequently stipulated that the Panel will place dollar figures on: (1) the replacement cost of the WTC; (2) the actual cash value of the WTC; and (3) the rental value that was lost through the destruction of the WTC. Although these values will almost certainly affect the amount of the Insureds' recovery, questions regarding actual claims that might be made under the policies are not part of the Appraisal. See SR Int'l, 445 F.Supp.2d 320, 326.

Here, regarding replacement cost, the Appraising Insurers move for summary judgment and seek a declaration that the Insureds' replacement cost recovery is capped at the amount it would cost to rebuild the WTC precisely as it existed on September 11, 2001.*fn6 The Insureds cross-move*fn7 for summary judgment and seek a declaration that, in determining replacement cost, the Appraisal Panel ("Panel") should consider the additional expenses that would be required to adapt the structures' design to the changed legal, physical, and political environment of post-9/11 New York. (For reasons explained below, the parties refer to these expenses as "Lease Section 6" costs.) The Insureds currently estimate that such costs will total approximately $700 million.*fn8 Measurement of these costs is complicated, however, by the fact that Silverstein does not actually intend to rebuild the Twin Towers or anything like them at or near Ground Zero. As a result, the Lease Section 6 costs are almost entirely hypothetical.

A. The Policies

1. Travelers

The Travelers policy describes its replacement cost coverage in a stand-alone document.*fn9 It provides, in relevant part:

In the event of a covered loss or damage, the [insurer] will determine the value of Covered Property at the 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 or as stipulated by any other endorsement(s) attached to this policy. This replacement cost valuation is subject to the following conditions:

1. The [insurer] will not pay more on a replacement cost basis than 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 applicable to the lost, damaged or destroyed property.

(Emphasis supplied.)

It also contains a provision expressly excluding from the calculation of replacement cost any increased expenses "attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property unless a Limit of Insurance is specified for Ordinance or Law in the Supplemental Coverage Declarations." In a separate form that is part of the binder, however, coverage for such expenses is added to the policy, subject to a sub-limit:*fn10 "[T]he [insurer] will pay for: ... The increased cost to repair, rebuild or construct the Covered Property caused by the enforcement of building, zoning, land use or any other ordinance or law when the Covered Property is insured for replacement cost."

2. ISO

The ISO Building and Personal Property Coverage Form states that the value of the covered property will be determined based on the "Replacement Cost (without deduction for depreciation) ... as of the time of loss or damage."*fn11 It further provides that the insurer will not pay more for loss or damage on a replacement cost basis than the least of (1), (2), or (3) ... below:

(1) The Limit of Insurance applicable to the lost or damaged property; or

(2) The cost to replace the lost or damaged property with other property:

(a) Of comparable material and quality; and

(b) Used for the same purpose; or

(3) The amount actually spent that is necessary to repair or replace the lost ...

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