Twin Occurrences? The $3.5 Billion Question

            

Michael F. Aylward, Esq.Morrison Mahoney & Miller LLP (2002)

The Obscure Issue of Multiple “Occurrences”

• A misunderstood and mixed-up area of insurance law.

• Few precedents/fewer for first party.

• Insurers reluctant to litigate.

Context of “Occurrences” Disputes

• Policyholder v. Insurer

• Primary insurer v. excess insurer

• Insurer v. reinsurer

First Party “Occurrence” Cases

• Many case“precedents” but very few involve first party property claims.

• Property insurers are no stranger to catastrophic losses that present the issue of whether separately damaged insured locations are one or multiple “occurrences.”

Catastrophic Property Losses

• Natural Disasters (Adjusted to 2001 $$$)

– Hurricane Andrew (1992): $20 billion– Northridge Earthquake (1994): $16 billion– Mississippi Floods (1993): $12 billion– Hurricane Betsy (1965): $7.4 billion– Hurricane Hugo (1989): $6.0 billion

(Source: Swiss Re, Insurance Information Institute-2001)

Man-Made Catastrophes: 9/11

World’s Top 10 Largest Insured Losses(Insurance Information Institute: 2002)

$ 4 0 .2

$ 1 9 .6$ 1 6 .3

$ 7 .1 $ 6 .1 $ 6 .0 $ 5 .9 $ 4 .6 $ 4 .2 $ 4 .2

$ 0

$ 5$ 1 0$ 1 5$ 2 0

$ 2 5$ 3 0

$ 3 5$ 4 0

$ B illio n s ; in 2 0 0 1 D o lla r s

* III E s tim a te ; In c lu d e s life , lia b ility a n d w o rk e rs c o m p e n s a tio n lo s s e s .S o u rc e : S w is s R e , In s u ra n c e In fo rm a tio n In s titu te .

Total Insured WTC Losses Projected To Exceed $40 Billion

Business Interruption: $11 billion

Liability Claims: $10 billion

Property Claims-----WTC Towers: $3.5 billion-----Other Losses: $6 billion

Aviation Liability: $3.5 billion

Life Insurance: $2.7 billion

Workers Compensation: $2 billion

Event Cancellation: $1 billion

Hull Losses: $500 million

The World Trade Center: Then…and Now

The World Trade Center DJs

• S.R. International v. World Trade Center Properties

• Silverstein v. Ace Bermuda, XL

• World Trade Center Properties v. Travelers

•

                

S.R. International v. WTC

• Filed by Swiss Re 10/22/01

• Seeks declaration concerning– Policy wording– One occurrence limit

• Silverstein cross-claim added other insurers

• Case consolidated with Travelers DJ, assigned to Judge John Martin

What’s At Issue?

• Policy Wordings– Travelers Primary Policy– Willis Proposed Wordings

• Meaning Of “Occurrence”– Single “Occurrence”– Separate “Occurrences”

WTC Policy Wordings

• Uncertainty re “occurrence” wordings

• Willis Placing Slip?– “all losses or damage that are attributable directly or

indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.”

• Travelers Primary Policy—no definition

Dispute Re “Occurrences”

• Multiple “Occurrences”– Each tower was separate insured location– Each tower was damaged as the result of a

separate event/hijacking

• Single “Occurrence”– World Trade Center was single insured entity– Towers were damaged through one closely

coordinated criminal plot.

Silverstein SJ Motion 1/17/02

• No definition of “occurrence” in policy.

• New York law focuses on “immediate physical cause” of loss.

• “Remote causes of losses are not relevant to the characterization of an insurance loss.” – Pan American, 505 F.2d at 896

• Could just as easily be four “occurrences”!

Judge Martin’s Question:

• Which of the two following statements best describes what caused the destruction of the World Trade Center on September 11, 2001?

1) In a single coordinated attack, terrorists flew hijacked planes into the twin towers of the World Trade Center.

2) At 8:46 am. on the morning of September 11th, a hijacked airliner crashed into the North Tower of the World Trade Center, and 16 minutes later a second hijacked plane struck the South Tower.

Judge Martin Rules: Motion Denied2002 WL 1163577 (S.D.N.Y. June, 6, 2002)

• Summary judgment premature

• Factual issues concerning parties’ intent

• None of the cases relied on by the insured “compels a finding that the term 'occurrence' has such an unambiguous meaning that, in its search for the truth, justice should blind itself to the wealth of extrinsic evidence concerning the parties' intentions that is available in this case."

Extrinsic Sources of Intent

• 6/19/02: Insurers allowed to depose Willis brokers concerning statements on or after September 11 (2002 WL 1334821)

• 7/3/02: Insurers may obtain discovery from GMAC concerning its own WTC coverage investigation (2002 WL 1455346)

• 9/02: Willis ordered to turn over documents about E&O coverage and possible claims.

WTC Developments: Settlement

Ace-Bermuda and XL settled for single “occurrence” limits in February 2002:– Ace Bermuda: $298 million– XL Insurance: $67 million

– Policies contained broad definition of “incident”

– Silverstein’s Comment:• "No other insurer can make the same claim…The

insureds fully expect to recover from the remaining carriers on a multiple-occurrence basis."

WTC Developments: Appraisal• Parties are far apart concerning value of loss

– Silverstein: $82 billion– Swiss Re: $2.4 billion

• Allianz has moved to compel estimation• 8/19/02: Motion partially granted

– Policy wordings not preempted by federal terrorism legislation

• Nothing in ATSSA evidences intent to strip away substantive property rights of insured or insurers

– Estimation for one insurer and trial for others could pose practical problems, however.

• Parties directed to appoint appraisers but no umpire.

WTC: Motion Practice

• In late July 2002, Allianz and Royal Indemnity filed their own motion for summary judgment on meaning of “occurrence”

• Allianz policies reported contain broad “event” language and allow aggregation for various causes of loss, including vandalism and malicious mischief.”

• Royal’s binder references the broad Willis “occurrence” wordings.

WTC: Trial Schedule

• Trial was originally scheduled for September 2002 then postponed to November.

• On August 22, 2002 Judge Martin ordered that case be tried in two phases:– November 2002: Policy Wordings– March 2003: Number of “occurrences”

Finding The “Occurrence”

• Policy wordings.

• Guidance from third party case law?

• Applicable first party precedents?

First Party Wordings

• Policy wordings are limited

• Lack GL definition of “occurrence”

• Pertinent wording may be in insuring agreement but also in sections re policy deductibles.

First Party Wordings

• Pay “each and every loss”

• “Repeated exposure to conditions”

• “Series of acts or related acts”

• “All losses or damage that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.”

Casualty Case Law: “Cause”

• Majority Approach: The “Cause” Test– Is there a “single, continuous and uninterrupted

cause” of all the ensuing injuries or damage?

• Superseded earlier “effect” test that focused on number of damaged persons or property.

Searching for “Causes”

• “Cause” test not applied consistently

• Three basic approaches:– “Physical Cause” (proximate cause)– “Legal cause” (remote causative event)– “Root Cause” (common conditions)

Factors Affecting “Cause”

• Low limits or deductibles?

• Role of Insured

• All things being equal, losses that are closely grouped in time and space are more likely to be treated as a single “occurrence”

Common “Scheme” Cases: Failed Investment Strategies

• Some courts have ruled that D&O or E&O claims due to failed loans were one “occurrence”– Pennbank v. St. Paul Fire & Marine Ins. Co., 669 F.Supp. 122

(W.D. Pa. 1987)(the development of a plan for the repossession of separate properties only involved a single "occurrence”).

• Most have disagreed, however.– Eureka Federal v. American Casualty, 873 F.2d 229

(9th Cir. 1989)(claims against directors of failed savings and loan association due to 200 loans involved separate “occurrences” rejecting argument that loss was caused by one faulty lending strategy).

Common “Scheme” CasesDiscriminatory Guidelines

• In some cases, courts have ruled that insured’s adoption of a discriminatory guideline was the “cause” of the loss.– Appalachian Ins. Co. v. Liberty Mutual Ins. Co., 676 F.2d 56 (3d

Cir. 1982)(class action by female employees held to arise out of one “occurrence” since claims were all based on insured’s adoption of a particular discriminatory employment guideline)

– Village Management, Inc. v. Hartford Acc. & Ind. Co., 662 F.Supp. 1366 (N.D. Ill. 1987)(race discrimination claims against a landlord all arose out of one "occurrence," the insured's adoption of a discriminatory policy for selecting tenants).

Airplanes: One Pass or Two?

• Foust v. Ranger Ins., 975 S.W.2d 329 (Tex. App. 1988)– Crop duster sued by cotton farmer for negligent application of

herbicides. Plane had refueled and sprayed field several times that day.

– Insured argued that each “pass” was a new “occurrence” so as to trigger policy aggregate.

– Texas appellate court ruled one “occurrence”

Are Casualty Cases A Useful Guide? Newmont Mines, 784 F.2d 127 (2nd Cir. 1986)

• Newmont Mines operated giant copper mining “concentrator” facility in British Columbia

• Two separate sections of the roof collapsed a few days apart due to snow accumulation.

• Insurers argued that both losses had one “cause”• Insured argued that the losses were not the result of

a single, continuous event and that the insurers therefore must pay a separate “occurrence” limit for each collapse.

• Applying New York law, the Second Circuit ruled….

Newmont Mines: The Holding

• A liability policy is intended to protect an individual or a business from liability for their tortious conduct. Consequently, since that is the "business purpose sought to be achieved by the parties," it is eminently reasonable to look to the underlying conduct or cause of that liability.”

• “On the other hand, when construing a property damage policy, as we are here, the business purpose sought to be achieved by the parties is considerably different. The goal of such a policy, simply stated, is to provide financial protection against damage to property. In accordance with this purpose, the parties here must have intended to provide coverage for property damage each time it occurred unexpectedly and without design, unless the damage occurring at one point in time was merely part of a single, continuous event that already had caused other damage”

First Party Case Precedents?

• Very few first party “occurrences” cases

• Several are distinguishable– Fidelity Policies: “related acts” wordings.

• Less than a dozen construe coverage for property losses resulting from a criminal scheme or conspiracy.

Embezzlement Cases (I)Eott Energy v. Store Brand (Cal. App. 1995)

Employee conspired to steal diesel fuel from petroleum processor on 650 occasions over the course of one year

Policy had $100,000 per occurrence deductible

Insured wanted only one “occurrence”

California Court of Appeals agreed:• In view of “continuous or repeated exposure to conditions”

language, the term “occurrence” “reasonably contemplates that multiple claims could, in at least some circumstances, be treated as a single occurrence or loss.”

Embezzlement Cases (II)B.H.D., Inc. v. Nippon Insurance (Cal. App. 1996)

Jewelry store employee stole goods totaling $117,000 over 3 months

$10,000 deductible for “each claim for loss or damage (separately occurring)”

Insured wanted one “occurrence” Court of Appeals found multiple “occurrences”– Unlike Eott, no carefully organized conspiracy.

• Although the thefts were similar, each one was a completed crime that would support a separate count and a separate punishment in a criminal proceeding. “If a thief commits larceny on each of several successive days, there are many occurrences

Is There A Moral Here?

• Organized crime does not pay

• But petty thievery does.

The Roving Felon Cases

• Goose Creek (Tex. App. 1983)

• Lexington (9th Cir. September 11, 2001)

• Jonas (Wis. App. 2001)

Goose Creek (Tex. App. 1983),

• 5:53 a.m. San Jacinto Elementary School fire• 7:29 a.m. Baytown Junior High School fire• Fire Dept. suspected common arsonist• $100,000 deductible “each and every loss occurrence”

• Court held insured must pay two deductibles:– [T]he facts in our case show that the subject fires were not part of

a process of continuum, but were set at different places and at different times. Whether they were set by one or different individuals or groups of individuals is of no consequence.

Lexington 2001 WL 1132677 (9th Cir. 2001)

• Richard Stevens: four-time loser• Burns four courthouses in Contra Costa County:

8/28/95-9/15/95• $14 million combined loss• $5 million primary/$10 million excess• Ninth Circuit found multiple occurrences• Each fire created separate criminal liability.• No 72 hour aggregation language for arson.

Jonas Builders v. USF&G 623 N.W.2d 182 (Wis. App. 2001)

– Repeated thefts of copper from scrap dealer/different locations.

– Policy contained “continuous or repeated exposure” language.

– Wisconsin Court of Appeals affirmed the jury’s finding of a single “occurrence.”

– Acts of theft were all part of a single “common scheme”

Property Scorecard?

• Single “Occurrence”’ Finding– Eott (Cal. App. 1995)(embezzlement)– Jonas (Wis. App. 2001)(theft/vandalism)

• Multiple “Occurrences” Finding– Goose Creek (Tex. App. 1983)(arson)– B.H.D. (Cal. App. 1996)(embezzlement)– Lexington (9th Cir. 2001)(arson)

Beyond the World Trade Center

• This Isn’t Just a 9/11 Issue.

• Heightened scrutiny for insured/brokers.

• Precedent for future first party claims.

Twin “Occurrences”? The $3.5 Billion Question