Larry Silverstein's $3.5B Definition

Dan Ackman, 07.23.03


NEW YORK - An overflow crowd gathered at the normally sleepy Second Circuit Court of Appeals to hear an extended argument on the meaning of the word "occurrence." Interest in the question was intensified by the fact that $3.5 billion could be riding on the answer.

The three-judge court sitting in Manhattan was hearing arguments in the World Trade Center insurance litigation in which Larry Silverstein, who holds a 99-year lease for the buildings that were destroyed in the Sept. 11, 2001, terror attacks, is claiming that he is entitled to recover $7.1 billion from the 22 insurers of the properties, twice the ostensible policy limit, on the ground that the attack of the center was two occurrences, not one. Otherwise, he would be stuck with the $3.55 face value of the policies.

Silverstein's lawyer, Herbert Wachtell, told the appeals court that the law was so clear that his client deserved summary judgment on the issue, which a lower court judge had denied. Though he insisted the result was inescapable, Wachtell's argument was highly nuanced and it drew some incredulous questioning from the judges.

Wachtell's argument goes like this: When Silverstein was negotiating with the insurance companies, his broker Willis Group Holdings propounded a form of insurance called the WilProp form. This form defined "occurrence" to mean "losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes." U.S. District Court Judge John Martin, whose decisions are on appeal, said this definition means that the attack was a single occurrence.

Wachtell disagreed, but he emphasized more his view that the WilProp form had been abandoned, and that Silverstein and the insurers were about to proceed with a form issued by Travelers Property Casualty. The Travelers form did not define occurrence at all and it was never formally agreed to by anyone. In fact, by Sept. 11, there was no final policy, just a series of preliminary agreements known as binders. But Wachtell insisted that the progress of the negotiations indicate that they would have adopted the Travelers form, and, without a definition, the court must enforce the definition supplied by New York law. That definition would define the World Trade Center attack as two occurrences.

At one point, Judge Jose Cabranes wondered how the law would bind insurers based on a to-be-negotiated contract that many of them had never seen. Wachtell, a founding partner of Wachtell Lipton Rosen & Katz, New York's most profitable law firm, held his ground. "That is exactly the law," he said. "That's what you say the law is," the judge answered.

Barry Ostrager, the lawyer for Swiss Re, the insurer with the most to lose, called Wachtell's entire theory "a lawyer-driven concoction." While it's possible for one insurance company to agree to the terms negotiated by a "lead" insurer, it never happened in this case, he said, adding that the Traveler's form never bound any company, except possibly Travelers. With no binding definition, Swiss Re has argued that a jury must decide what the parties meant.

Lawyers for three of the insurers, Hartford Financial Services, Royal & Sun Alliance Insurance and St. Paul Cos., played a stronger hand, as Judge Martin had ruled that they were definitively bound by the WilProp form. Their lawyers, including Charles Fried, a Harvard Law School professor and former United States Solicitor General, argued that the specific terms of the working agreement must govern. Fried said that allowing a court to delve into the "vague process" argument that Silverstein has forwarded would dramatically unsettle the law. (Two of the original 22 insurers are not part of the lawsuit since they have settled with Silverstein already.)

Wachtell countered that there was nothing vague about it. The ordinary custom is to not define "occurrence." Usually this lack of definition works against the policy holder because it frees the insurers to argue that a loss was caused by multiple events, with a separate deductible for each. Here, where the loss was total, the standard definition where there is no definition is supplied by past court cases. "Silence does not equal ambiguity," Wachtell said as the law itself imposes a definition that is unambiguous. That law defines "occurrence" as the "immediate, efficient, physical, proximate cause of the loss, not some indirect or more remote cause of causes," Wachtell noted. For him, the immediate cause were the airplanes, of which there were two, not the plot that set the airplanes in motion, of which there was one.

The judges didn't seem to find any of it all that clear. But even if he loses his appeal, Wachtell should get a chance to take Silverstein's case to a jury. After the argument, Silverstein repeated his insistence that all he wants is a fast resolution so he could put the money to work rebuilding the towers. If Wachtell manages to tell that to New York jurors in a courtroom about a mile from the site of the catastrophe, they may be inclined to care more about two towers falling than they do about 20 insurance binders passing.