Is Armageddon Insurable?
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IS ARMAGEDDON INSURABLE? PRESENTED BY NEIL S. KESSLER SCOTT B. OSBORNE Troutman Sanders LLP Graham & Dunn PC Bank of America Center 33rd Floor 1111 East Main Street, 23rd Floor 1420 Fifth Avenue Richmond, Virginia 23219 Seattle, Washington 98101 (804) 697-1450 (206) 624-8300 [email protected] [email protected] 2002 AMERICAN COLLEGE OF REAL ESTATE LAWYERS MEETING MAUI, HAWAII MARCH 22, 2002 1 What Has Happened Since The Events of September 11, 2001? · Approximately 22 buildings in and around the WTC were destroyed, damaged or made unusable o 20% of the downtown Manhattan office market (15.5 million square feet of office space) destroyed o More than 29 million square feet of office space destroyed, damaged or made unusable (equal to total square footage of office space of Downtown Houston) · Larry Silverstein headed a group that bought a 99-year lease on the WTC in August, 2001 (only 10 weeks before the attacks) from the Port Authority of New York and New Jersey for about $3.2 billion (reportedly including $100 million in cash as a deposit) · Silverstein wants to collect $7 billion in property and casualty insurance, but that depends on whether the insurance carriers will be required to treat the attacks as two separate occurrences; if the attacks are found to be one occurrence for insurance purposes, Silverstein will only recover approximately $3.5 billion o Swiss Re (which is obligated for 22% of the WTC insurance coverage) has filed for a declaratory judgment from the U.S. District Court for the Southern District of New York in Manhattan to determine if the planes crashing into the North and South Towers constituted one terrorist plot that destroyed two buildings or two separate incidents. At issue is whether the property policy limit of approximately $3.546 billion (with no aggregate limit) will be triggered once or twice. o Silverstein reportedly maintained business interruption coverage equal to three (3) years of rental income, or $1,105,935,000 o The WTC ground lease and the financing on the WTC complex require Silverstein to reconstruct the twin towers as two 110-story structures. Replacement cost insurance is payable only if the towers are reconstructed as two 110-story structures. CAN OR WILL THIS EVER BE DONE? o At the time of the 9/11 attack, certain insurance binders had been signed but policy wording had not yet been finalized and no policy had been issued. Among the wording not finalized was the definition of “occurrence”. One version of a specimen insurance form being considered, and the definition Swiss Re claims 2000 should apply (WilProp SM), makes “all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes … 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 ….” o But Silverstein claims that Swiss Re never formally committed to that policy wording. o The other specimen form being considered, and the one which Silverman claims is applicable, was a policy form issued by Travelers which did not define the term “occurrence”. o Swiss Re claims it never agreed to the terms of the Travelers policy claimed by Silverstein to be applicable. 2 Facts (and educated guesses) Relating to 9/11 o Although the litigation is ongoing, Swiss Re and 20 or so other insurers have reportedly paid Silverstein about $132 million in claims into a trust account to cover lost rents from tenants. o GMAC loaned Silverstein’s group about $563 million to take on the WTC lease, and has sued Silverstein in New York state court to clarify how the insurance money paid into the trust account should be split up. GMAC claims the insurance proceeds must be used to pay rents due to the Port Authority of New York and New Jersey and to pay interest to investors who bought bonds backed by repayments on GMAC’s loan to Silverstein. GMAC has asked the court to limit the amount of money going to Silverstein, who wants cash from the insurance proceeds to pay lobbying costs in Washington and management fees of more than $700,000 per month, “even though these properties have been destroyed.” o Silverstein and Boeing Co. (which manufactured the four planes) have been aggressively lobbying Congress for liability protection. Silverstein has told lawmakers that a flood of lawsuits from victims in and around the Twin Towers would prevent him from rebuilding on the site because he will be unable to obtain financing with a huge potential liability hanging over his head. The Wall Street Journal (October 25, 2001) quotes legal experts as estimating without a cap, Silverstein would be subjected to as much as $15 billion in claims, only $1 billion of which would be covered by insurance. The Port Authority faces similar claims and has only $650 million in coverage. The Size and Scope of WTC Disaster and Attack on the Pentagon Will Have a Permanent Impact on the Insurance Industry · Swiss Reinsurance Co. has recently estimated $90 billion in losses from damaged property and interrupted businesses resulting from attacks at WTC and the Pentagon. (12/20/01 The Wall Street Journal). · For the first time in modern history, a man-made event short of war has created catastrophe losses that will approach those stemming from natural disasters. From the property/casualty insurance perspective, the events of 9/11 will be the largest catastrophe--manmade or natural. · Only the 1995 earthquake in Kobe, Japan caused greater damage -- an estimated US $100 billion •BUT, ONLY ABOUT US $2.8 BILLION WAS INSURED · This time the insurance industry is taking a bigger hit because the damages in New York were relatively well-covered. · Estimates for all insurable losses range from $30 billion to $70 billion. 3 · Even so, insured commercial property and business interruption loss are estimated at $18.5 billion by Morgan Stanley Research (November 28, 2001) and $19 billion by Swiss Re (as reported in December 21, 2001 The Wall Street Journal). WTC Losses Are Spread Across A Number Of Commercial Property And Casualty Lines; Property Losses Are Only One Piece Of The Pie Aggregate WTC primary insurance losses by line* Aggregate WTC primary insurance losses by line* Workers' comp Aviation 14% 23% Business interruption 14% Property Commercial 31% liablity and other 18% *Does not include insurance industry payouts under life insurance policies; reinsurance losses could account for an additional $10.4BN; by-line reinsurance information is not available Source: Compilation of equity research reports estimating losses by line JPMorgan Investment Banking 4 History Shows That Catastrophes Are A “Growth Market” JPMorgan Investment Banking 5 Putting WTC in the Context of the 20 Most Costly Insurance Losses $billions, at 2000 prices Insured Damage Date Event Country $25 - $35 2001 World Trade Center United States 19.6 1992 Hurricane Andrew United States 16.3 1994 Northridge Earthquake United States 7.1 1991 Typhoon Mireille Japan 6.1 1990 Winterstorm Daria France, Great Britain 6.0 1999 Winterstorm Lothar Western Europe 5.8 1989 Hurricane Hugo United States 4.6 1987 Storm & Floods Europe 4.2 1990 Winterstorm Vivian Western/Central Europe 4.2 1999 Typhoon Bart Japan 3.7 1998 Hurricane Georges United States 2.9 1988 Explosion on Platform Piper Alpha Great Britain 2.8 1995 Great Hanshin Earthquake in Kobe Japan 2.5 1999 Winterstorm Martin France, Spain 2.4 1999 Hurricane Floyd United States 2.4 1995 Hurricane Opal United States, Mexico 2.1 1993 Blizzard, Tornadoes United States 2.0 1992 Hurricane Iniki United States 1.8 1989 Explosion in a Petrochemical Plant United States 1.8 1979 Hurricane Frederic United States 1.8 1996 Hurricane Fran United States JPMorgan Investment Banking 6 Other Catastrophic Events From Around the World Illuminate the Interplay of Private and Governmental Resources, Such As the Kobe Earthquake . Description: o The Great Hanshin Earthquake struck on January 17, 1995 at 5:46 a.m., with its epicenter at Akashi Strait, near Kobe. o Registering 7.2 on the Richter Scale, the quake lasted 14 seconds. o The devastation left 6,425 people dead, 28,000 injured and 300,000 homeless. In addition, 150,000 buildings were damaged or destroyed. o Total property damage was over US $100 billion, with only about US $2.8 billion insured. JPMorgan Investment Banking … the serin gas attacks on the Tokyo subway ... · Description o Lethal serin gas attacks struck the Tokyo subway system on March 21, 1995 at around 8 a.m. o The gas was released from boxes that were placed in trains and on platforms. o The attack left 12 people dead and injured 5,500 others, while inconveniencing 1.1 million people. JPMorgan Investment Banking 7 . and the L.A. riots Description: o L.A. riots lasted from April 29, 1992 through May 1, 1992. o Riots erupted after an all white jury returned a “not guilty” verdict in the Rodney King case. o Violence and destruction of property left more than 50 people dead, over 4,000 injured, 12,000 people arrested, and $1 billion in property damage. o The devastation and toll of the riots made them the worst civil unrest L.A. had experienced since the race riots of 1965. JPMorgan Investment Banking Catastrophes have also spawned more permanent governmental responses in the U.S., Including the formation of agencies, such as the CEA . · California companies are required to write earthquake insurance as part of all homeowners’ policies. In the wake of the 1994 Northridge Earthquake many insurers, not wanting to expose themselves to losses from another earthquake, stopped writing homeowners’ policies altogether.