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Industrial Risk Insurers v. Port Authority of New York

January 30, 2008


The opinion of the court was delivered by: Alvin K. Hellerstein, U.S.D.J.



This decision discusses an aspect of the ongoing proceedings to sort out the financial consequences of the destruction of Tower Seven ("7WTC") of the World Trade Center Complex. Two groups of insurance carriers paid losses of their insureds: Industrial Risk Insurers, Inc. ("IRI") paid the losses of Silverstein Properties Inc., the owner of the long term leasehold covering the tower; and Aegis Insurance Services, Inc. ("Aegis") paid the losses of The Consolidated Edison Company of New York ("ConEd"), the owner of the power substation beneath and adjacent to the tower. Both insurance carriers filed subrogated claims against the parties whose alleged faults they considered responsible for the continued burning and ultimate collapse of the tower, after the building caught fire from the flaming debris of Towers One and Two on September 11, 2001. Essentially, the insurance carriers claim that diesel oil tanks, generators and power systems within the structure caused the fires to continue to blaze uncontrolled until the building collapsed.

In separate lawsuits, IRI and Aegis sued the City of New York, Citigroup Inc. and Citigroup Global Market Holdings, Inc. (collectively, "Citigroup"), for maintaining and operating such independent fuel and generating systems, the Port Authority of New York and New Jersey, Inc. for various aspects of fault and responsibility that have not yet been litigated, and the architects, engineers, construction companies and vendors who were engaged to design and construct the fuel and generator systems for the City and for Citigroup.

In response to motions to dismiss filed in each case, I dismissed claims against several of the defendants on various grounds. See IRI v. The Port Auth. of New York and New Jersey, 387 F. Supp. 2d 299 (S.D.N.Y. 2005); Aegis Ins. Servs., Inc. v. The Port Auth. of New York and New Jersey, 468 F.Supp.2d 508 (S.D.N.Y. 2006); Aegis Ins. Servs., Inc. v. The Port Auth. of New York and New Jersey, 481 F. Supp. 2d 253 (S.D.N.Y. 2007). IRI appealed my dismissal of the Citigroup defendants to the United States Court of Appeals for the Second Circuit but, in light of an opinion deciding the appeal of different parties which dictated that my ruling be affirmed, amended its appeal to ask for vacatur of one of the three grounds of my order. The Court of Appeals, raising several concerns, remanded the issue to me for further consideration.

IRI now moves to vacate the third independent ground of my ruling, namely, that Silverstein Properties' involvement in every aspect of Citigroup's leasing of 25 of the 47 stories of 7WTC, including Citigroup's condition to install two diesel fuel tanks and a generator system to create an independent source of supply for full-time, seven day a week, twenty-four a day operation of its trading floor, and its approval of the plans and designs to create and maintain such a system, constitutes an acceptance of the risks thereby created, precluding Silverstein Properties, or IRI as the subrogated insurance carrier of Silverstein Properties, from suing Citigroup for risks arising from those plans and designs and the system erected from such plans and designs.

After careful review of the opinion of the Court of Appeals, of my previous decisions from which the appeal was taken, and of the additional submissions of the parties, I am not persuaded of any material error that should cause me to change my rulings. The rulings each determined issues tendered by the parties, and were necessary for my decision. Accordingly, I deny IRI's motion for partial vacatur and adhere to my previous decisions.

Background: The Destruction of Seven World Trade Center and Related Insurance Coverage

The IRI Lawsuit and Prior Ruling

As subrogee and assignee of Silverstein Properties, IRI sued The Port Authority of New York and New Jersey ("The Port Authority") as the owner of 7WTC and Citigroup, as well as the two airlines whose airplanes had been hijacked, and other aviation defendants. The issues before me involve only defendant Citigroup; the cases against the airlines and the other aviation defendants are proceeding along a different track, and the claims and defenses involving the Port Authority are not at issue in the present motion.

Salomon Brothers, later acquired by Citigroup and now part of Citigroup Global Market Holdings, had leased portions of floors 1 through 5 and floors 28 through 47 of 7WTC from Silverstein Properties, for offices and for a trading floor that was intended to operate 24-hours per day, 7 days per week. In order to provide the power that could sustain such continuing operations, Salomon designed an independent fuel-supply and generator system, based on two, 6,000 gallon diesel tanks in the basement and on the first floor, with pressurized transit of the fuel to seven generators on the fifth floor, and transmission of power from the generators to the trading floor. IRI alleged that Salomon was grossly negligent in the ways it designed and maintained its emergency fuel system, and that the heat and flames that were set off when the secondary fires in 7WTC ignited caused the building to burn out of control and collapse.

Citigroup moved to dismiss, on three grounds. I granted defendants' motion. First, I held that the lease between Silverstein Properties and Salomon specifically provided for Salomon's emergency fuel generator system, gave Silverstein Properties the right to have its engineers review and approve Salomon's plans, and provided that Silverstein Properties and Salomon released all claims against each other, including rights of subrogation by their respective insurers. Consequently, since IRI could have no better claim than Silverstein Properties, IRI was contractually barred from maintaining a claim against the party that Silverstein had released. Second, I held that even if IRI's claim could be understood as a claim of gross negligence, Silverstein Properties' release nevertheless applied, and further, under New York law, a claim of defective installation of a buildings system is not sufficient of itself to state a claim of gross negligence And, third, I held that Silverstein Properties had assumed the risks arising from Salomon's fuel and generator system, because Silverstein Properties knew that Salomon had made it a condition of the lease agreement and had accepted that condition, and because Silverstein Properties, from the review work of its engineers, had had intimate knowledge of Salomon's system and its relation to the structural support system of the building. I held that since Silverstein Properties had approved Salomon's system, it could not now complain (and IRI could not now complain) that the very features that Silverstein Properties had approved constituted gross negligence. Whatever the risks and deficiencies of Salomon's system, Silverstein Properties had assumed them when it accepted Salomon's condition of its fuel and generator system, and leased space to Salomon on that basis.

The facts and agreements, and the reasons supporting my rulings, are described in greater detail in my opinion and order, IRI v. The Port Authority of New York and New ...

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