At Trade Center, Conflicts Arising Over Insurance

At 7:53 p.m. on July 12 of last year, Timothy Boyd, an insurance broker working for developer Larry Silverstein, e-mailed a memo to a colleague. At the time, Mr. Silverstein was racing to close a $3.2 billion deal to lease the World Trade Center. Mr. Boyd was assembling a cartel of companies to insure the massive investment.

Mr. Silverstein was wrangling with the banks backing his bid, Mr. Boyd explained in the memo, a copy of which was obtained by The Observer . The banks wanted $5 billion in coverage. Mr. Silverstein’s team, which then valued the complex at $3.9 billion, argued that a total catastrophe was “outside the realm of possibility.” Mr. Silverstein himself had dismissed the cost of such insurance-$25 million a year-as “far too expensive,” the memo said.

Ultimately the banks settled for less, $3.5 billion in coverage. Twelve days later, Mr. Silverstein closed the deal.

Then the impossible happened.

Seven months later, Mr. Silverstein and his insurance companies are engaged in a bitter battle in federal court in Manhattan over those insurance billions-money that could end up determining what’s rebuilt on the 16-acre World Trade Center site, and whether Mr. Silverstein builds it.

The developer says he’s owed $7.2 billion-double his insurance policy, because in his view, the Sept. 11 attacks constituted two separate catastrophes, not one. Mr. Silverstein’s insurers say he bought too little coverage back in July and is overstating the complex’s value now. They dismiss the “two planes, two catastrophes” thesis. Mr. Boyd’s memo stands to become Exhibit A in their case.

Silverstein attorney Eric Roth said the developer bought as much insurance as he could. “There just wasn’t enough capacity in the world,” he said. If the insurance companies thought Mr. Silverstein was underinsuring the building, he asked, why didn’t they say so at the time? “One reason may be that … [$3.5 billion] is probably the highest amount of insurance ever purchased on a single property,” he said.

The insurance companies have a different point of view. “Larry Silverstein is seeking to portray himself as a statesman,” said Barry Ostrager, an attorney representing the Swiss Reinsurance Company. “Statesmen don’t represent the replacement-cost value [of a property] to be less than $4 billion and then, after there’s a loss, claim that [it's worth] almost twice that.”

Legal experts have split over the significance of the July 12 memo. Several said that Mr. Silverstein is mounting a convincing case that he is entitled to two payouts. But it may not be that easy for Mr. Silverstein: He must not only win, but win quickly.

Think of the redevelopment of lower Manhattan as a high-stakes poker game, with a variety of interests-the Mayor, the Governor, the Port Authority-arrayed around the table. The huge insurance payouts, or the promise of them, are what Mr. Silverstein brings to the game. But he’ll have to prove he can ante up to stay in it.

Meanwhile, Mr. Silverstein must hold together a fragile coalition of partners that is already showing signs of strain. His bank sued him last month, saying he’s used the money his insurance company advanced him on things like lawyers, lobbyists and architects-the tools he needs to keep his rebuilding bid going.

His insurers, employing some hardball tactics of their own, are now talking about reducing the amount of money they advance to him. Paradoxically, without the advances, Mr. Silverstein could find himself hard-pressed to finance his lawsuits against the insurers.

“To the extent that the process drags on, he’s going to run out of money to play the game,” said one real-estate attorney who has been following the cases.

Legal experts say the lawsuit presents a fairly garden-variety issue. But with so many billions at stake, the adversaries are preparing for the legal equivalent of trench warfare. In the emotionally charged political atmosphere of lower Manhattan, no one can confidently predict what will happen.

“There’s never been anything quite like this, and any precedent there might be is nothing close to terrorist attacks knocking down two buildings,” said George Priest, a Yale law professor who specializes in insurance issues.

Here’s the big problem: 25 insurance companies signed contracts to insure Mr. Silverstein’s purchase without ever formally writing down what they would cover. Terrorists destroyed the Trade Center while they were still quibbling over details, setting the stage for a lawsuit in which the two sides disagree about everything from which contract they signed-there are two versions floating around-to the identity of the lead underwriter.

With billions at stake, a judge may have to reconstruct the insurance agreement from the old e-mails and hazy recollections of the dozens of people involved in negotiating the deal.

“How could they be so sloppy?” asked Keith Buckley, managing director at Fitch Ratings, a company that analyzes insurance deals. “You’ve got me. People don’t always do smart things.”

The insurance industry is tradition-bound and highly competitive, and the major players often know one another well. That makes for lots of handshake agreements, Mr. Buckley said. People want insurance immediately, but sometimes it takes a year or more to hammer out a policy. Sometimes the worst happens in between, and things get messy.

Mr. Silverstein’s insurance policy was mostly put together over an intense few weeks last July. At the time, Mr. Silverstein faced a July 24 closing date on his deal to lease the complex from the Port Authority.

“We had enough problems putting the papers together,” said Leonard Boxer, an attorney who was one of Mr. Silverstein’s negotiators. “We didn’t have time to negotiate the intricacies of the insurance.”

That job fell to Mr. Boyd, an assistant vice president at Willis of New York, Mr. Silverstein’s insurance brokerage.

Mr. Silverstein kept needing more and more insurance. GMAC Commercial Mortgage Corporation, which was lending him $563 million, was pushing for $5 billion worth.

Bob Strachan, a Silverstein executive who was also an engineer, thought the bank was being unreasonable. He had projections that predicted the cost of all kinds of disasters. (For instance, they estimated a plane colliding into the building would do about $700 million worth of damage.) Five billion seemed too high. As it was, Mr. Roth said, “they had a damn hard time getting up to $3.546 billion.”

A Willis broker looked into “nontraditional” coverage that didn’t involve insurance companies, which Mr. Silverstein considered too costly.

Meanwhile, Mr. Boyd was trying to get nearly two dozen insurance companies to sign “binders”-stopgap legal contracts that obligate the insurers to cover losses while the policy details are being negotiated-before the closing date. There was a lot of back-and-forth about the wording of the binders, but it wasn’t a big deal; details could be worked out later.

It wasn’t until Sept. 14 that one of the insurers, Travelers, rushed out a final version of the policy. But by that time, the other insurers were already saying they had never agreed to a crucial bit of wording in the contract.

Fight Over a Word

It was clear there was going to be a fight over the meaning of the word “occurrence.” What destroyed the World Trade Center: two planes hitting two towers 18 minutes apart-or one coordinated attack? This question of causality might sound like an argument for philosophers or logicians. But it’s one of the most basic issues in insurance law.

“This occurrence question appears all the time,” said Mr. Priest.

The only difference was the amount of money involved. Mr. Silverstein’s policy was for $3.5 billion “per occurrence.” So slight differences in contract wording took on a multibillion-dollar importance.

Many of the companies signed binders based on wording that defined “occurrence” as damage “attributable directly to one cause or to one series of similar causes”-a definition that would not seem to favor Mr. Silverstein. But Mr. Silverstein claims that a second subsequent contract, that was accepted by all but two of the companies before Sept. 11, does not define the term.

(Mr. Silverstein is close to settling with those two companies, which did not receive an e-mail containing the second contract, for one payout, The Wall Street Journal reported Feb. 5.)

A judge will now have to sort through the confusing circumstances and determine precisely what the sides agreed to. “[The judge] is going to have to get in and really look at it,” said Joseph Finnerty III, an insurance-law specialist at Piper, Marbury, Rudnick & Wolfe.

“Intent is everything in contract law,” said Kyle Logue, a law professor at the University of Michigan. It is in this context that the July 12 memo, which valued the Trade Center at $3.9 billion, could be crucial.

Many legal experts think Mr. Silverstein will win the case. “New York case law is quite settled on this point,” said Mark Geistfeld, a law professor at New York University. “If [the word] was left undefined, it’s going to be two occurrences.”

Courts tend to side against insurance companies in these sorts of disputes, experts said. And some speculate that no Manhattan judge would mind bringing several billion more in insurance money into the city.

But Mr. Silverstein is fighting two enemies: his courtroom adversaries, and time. The public officials in charge of lower Manhattan’s redevelopment are pressing ahead. Mr. Silverstein has annoyed some of them at times with his haste in presenting redevelopment plans. Soon he’ll have to show them he’s going to get money, or risk being left behind.

Mr. Silverstein still owes the Port Authority $120 million a year in rent, and GMAC $36 million a year in debt service on his loan. Right now, he appears to be relying heavily on advances from his insurance companies-about $75 million a quarter-to keep going.

But last month, GMAC sued him in State Supreme Court in Manhattan to get control of that insurance money. Mr. Silverstein, the lawsuit claimed, was spending the advances, and a $25 million reserve fund, on redevelopment expenses. According to the lawsuit, he also wants a $700,000 monthly fee for managing the destroyed complex.

GMAC’s chief executive, David Creamer, declined to go into details about the lawsuit. “We want it resolved quickly, without any great fanfare,” he said.

Mr. Ostrager, seizing on the claims in the lawsuit, now says the insurers might cut back on their advances. “Now that GMAC has raised these issues, we have to evaluate whether or not $75 million a quarter is the right number, or whether that’s inflated, in which case we’ll propose a lower number,” he said.

“If they were to take that position,” Mr. Roth promised, “we will fight them tooth and nail.”

A trial is scheduled for Sept. 3, meaning that Mr. Silverstein may spend next Sept. 11 in court.