As workers continue to disentangle a vast web of fallen steel and rubble, the insurance industry itself this week prepared to grapple with the impact of an unprecedented human and financial disaster from the attacks on the World Trade Center.
“The attacks will likely result in the largest insurance losses ever,” said David A. Sterling, CEO of Woodbury-based Sterling & Sterling, an insurance brokerage representing about $100 million in premiums.
The companies, which in some cases lost staffers, are expected to face massive claims, and have to grapple with a host of legal issues dealing with claim exclusions from acts of war.
“‘What is war?’ is going to be the central issue,” said our partner specializing in insurance law. Our firm typically represents insured individuals and businesses, said the event is likely to thrust insurers into relatively new territory that could result in a massive tangle of claims and counterclaims.
Some insurers, such as the Chubb Insurance Co., already said they won’t seek to exercise an act of war exclusion. Many others may do the same, but we believe insurers wouldn’t be able to evoke the act of war exclusions, even if they tried.
If policies describe exemptions due to “declared or undeclared war” or “war like action by a military force,” our partner said, the exemptions probably would not hold up in court. “The problem is these phrases are not explained or defined in the insurance policy. If they want us to use an exclusion to deny a claim, it is their burden to prove the exclusion gets them off the hook.”
If a clause is ambiguous, it is typically interpreted in favor of the individual or business-owner and against the insurance company.
Terrorism in the past has not been included under act of war provisions. In 1970, Pam Am flight 83 was hijacked and destroyed. A group of insurers invoked the war exclusion to avoid reimbursing Pan Am for its losses, and lost.
“The court found the insurance companies must pay,” said our partner.
A Federal appeals court in 1975 ordered insurance companies to pay and Pam Am received $25 million. With precedents like that and overtures by some insurers who say they will not invoke war exclusions, war clauses may go by the wayside.
“If the insurance company sends a denial letter, there will be litigation. There are many insurance companies out there. They may take different positions.” This could easily result in delays lasting several years in state court, but might last as little as a year in federal court. On the other hand, litigation from the 1993 World Trade Center bombing nearly a decade later remains largely unresolved.
Business interruption claims are likely to stretch far beyond the World Trade Center and to companies with buildings intact. That could result in some thorny issues, as claims reach far beyond ground zero.
“How many hundreds or thousands of businesses were in lower Manhattan, the section of the city that was devastated?” asked Joe Annotti, a spokesperson for the Chicago-based National Association of Property Casualty and Insurance Companies.
A problem is that many policies have clauses describing reimbursement only due to “direct physical loss or damage” to property.
That could mean that businesses shut down in the surrounding area may have difficulties collecting, even though they had no access to the structure.
In addition, insurers and insured companies may find themselves dealing with cases where the actual policy was destroyed.
We know insurers typically keep electronic copies of policies, rather than hard copies. “There are often mistakes and disputes whether a particular exclusion was issued” per our partner. “Insurance companies also will want to make sure that opportunists seeking to collect fraudulently aren’t duping them. The city could have a hard time certifying the deaths of some or even many people. There will be a delay issue.” Unfortunately, even after the last piece of steel has been picked up, it would take years to sort out insurance issues that arise.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
800-745-1755
ESS@schwartzlawpc.com