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Had the tragic events on 9/11/01 not occurred, we would have never learned
about negligence, mistakes, errors and omissions, inconsistencies, and confusion
that plagued the placement and negotiation of the property insurance program
for the WTC and brought to light during the WTC trial.
The primary parties involved in the litigation were 13 WTC insurers,
including Lloyd's syndicates, counted as one, the broker Willis and their client,
Silverstein Properties, the leaseholder. The insurers contended that they were
bound by the WilProp 2000 form, which defines "occurrence" and would limit the
WTC claim to $3.5 billion, while Silverstein's position was that the Travelers'
form applied, which does not define occurrence and would respond to the each
of the WTC towers separately, resulting in a $7.0 billion loss payment.
After the brilliant work by lawyers on behalf of the parties to this
litigation, determination of what form applied to the 9/11/01 claim was left
to a jury, unfamiliar with insurance, which was so confused early in the trial
that it sent a note to the judge asking, "what is this case about" and, during
their deliberations, asking whether Munich Reinsurance and Swiss Reinsurance
were a part of Lloyd's.
Although this was a complicated and large insurance placement that taxed
the world market capacity and there was pressure to complete it to meet the
7/24/01 deadline for the closing of the WTC lease, there is no excuse for the
failure of the parties to reach explicit agreement on which form applied when
coverage was bound, let alone by 9/11/01, almost two months after binding. By
no means was this a unique placement as there are many other large insurance
programs just as large and complicated, which must be placed in a relatively
short time frame. Undoubtedly, various issues and problems that led to litigation
in this case exists in many other instances but will remain hidden absent of
a claim and subsequent dispute about coverage.
As this article is written, jurors rendered verdict in favor of ten,
and against three of the 13 insurers. Regardless of the verdict, there are no
winners in this case. The causes of this litigation could have been avoided
and the fact remains that none of the parties to this case are blameless.
However, it is not the purpose of this article to castigate anyone involved
in the placement and negotiation process, rather, by highlighting key issues
that were the subject of the litigation, it is to identify some of the lessons
learned or should be learned and to prompt insurers, brokers and risk managers
to reexamine their role and involvement in the insurance placement and negotiation
process.
Based on trade press reports, the following are some of the key issues
that emerged during the trial:
- The broker's intention to switch
from the WilProp form, that was part of the underwriting submission, to the
Travelers form was not communicated properly to the insurers
- None of the insurers identified
the applicable form in their binders.
- Several insurers waived their
right to approve the form
- On 9/11/01, the final policy form
has not been agreed upon and the broker was still analyzing the Travelers
form
- Silverstein's risk manager authorized
to bind on the basis of the Travelers form in July without obtaining and reviewing
it and he did not have copy of it on 9/11/01
- When the form was requested from
Silverstein's risk manager on 9/12/01, he released the WilProp form
- None of the parties adequately
documented their negotiations
It is obvious, that clear agreement did not exist between the parties
as to what form applied on 9/11/01, almost two months after binding. The most
important lesson, applicable to each of the parties, simply boils down to the
need for documentation of all substantive communications to ensure that there
is a meeting of minds during the placement and negotiation process and, when
coverage is bound, all parties have an explicit agreement regarding the form.
Agreement to any subsequent form changes must also be fully documented.
Furthermore, each of the parties, by adhering to the following rather
elementary principles or procedures, can substantially reduce the potential
for disputes and litigation:
Insurers should:
- not bind coverage without obtaining
and reviewing the proposed form?
- indicate the applicable form
in their binders
- not waive their right to approve
form changes
- affirm their agreement in writing
to any form changes
Brokers should:
- indicate intent to switch or
change forms in writing
- not assume that lack of response
from insurers means agreement to form changes and follow up to obtain written
responses
- ensure that risk managers are
adequately engaged in coverage negotiations, understand the implications of
form changes and provided copy of forms and changes thereto
- work expeditiously to facilitate
finalization of policy wording
Risk managers should:
- actively participate in the negotiation
process
- be proactive and initiate corrective
action, if needed
- review and approve the form and
major form changes
- ascertain that coverage bound
by insurers is sufficiently clear and provides acceptable coverage
Unfortunately, the
clock cannot be turned back in this case but policyholders, brokers and insurers
should examine their procedures and controls pertaining to insurance placement
and negotiations and take corrective steps, if necessary, to prevent recurrence
of similar disputes.
By: Akos Swierkiewicz, CPCU
Email:info@ircosllc.com
The author is president of IRCOS in
Morrisville, Pa. He is also an expert witness in insurance and reinsurance underwriting
matters.
