Exec's Scribbles May Cut
Payout for WTC Claim

Feb. 4, 2004 -- NEW YORK -- In the blockbuster insurance trial that will decide how much money will be available to rebuild Ground Zero, New York developer Larry Silverstein will be taking on some of the world's largest insurance companies. But one of his biggest headaches may come from an unlikely source: his own top insurance executive.

On Sept. 12, 2001, with four colleagues killed in Silverstein Properties Inc.'s World Trade Center office and the company's midtown office in turmoil, Robert Strachan, Silverstein Properties' risk manager, twice faxed a form that -- if the court finds he was right -- would doom most of Mr. Silverstein's case. Mr. Strachan scribbled on the fax sent to a lawyer for a key government agency: "FYI, the 'occurrence' definition," pointing to insurance-contract language that would entitle Mr. Silverstein to only one insurance payment of $3.5 billion, and not the double payment he is seeking for the two airliner attacks on the Twin Towers.

In addition, during a conference call right after the attacks, Mr. Strachan scribbled a series of notes that included this phrase: "Underinsured WTC."

For more than two years, Mr. Silverstein has strenuously claimed that two planes hitting the World Trade Center's towers represent two "occurrences" -- insurance language that entitles his development group to a double payment of the face value of its insurance policy. But the critical first phase of the three-part trial hinges on a much narrower question: Which insurance language were the parties working from before and after the attack?

The stakes are high: They include Mr. Silverstein's future role at Ground Zero and what ultimately gets built on the site. If Mr. Silverstein wins the case, observers believe he should have as much as $6.6 billion, not quite double the face value since some insurers have already won rulings in the case, but enough to put him well along in building the 10 million square feet of office space required under his 99-year lease with the Port Authority of New York and New Jersey, Ground Zero's landlord. If he loses, a growing number of observers believe Mr. Silverstein will have to accept a much-diminished role -- or even face the possibility of default.

Peter Herman, chairman of Regional Plan Association, a leading New York civic group, says that without a Silverstein insurance victory, what is built at Ground Zero will depend on market demand and won't necessarily include a huge office complex -- at least not immediately. "If the demand for office space isn't there, and the $7 billion doesn't come through, then things would be subject to change," he says.

In contrast to the upbeat display of cooperation surrounding plans for the World Trade Center memorial and Freedom Tower, the legal and public-relations battle over insurance proceeds has been bruising and marked by an unusual degree of personal rancor. Swiss Reinsurance Co., the Zurich-based giant leading the fight for insurers, in a release last year called Mr. Silverstein's two-occurrence theory a "self-motivated hoax," conjured after the developer realized he had underinsured the Trade Center.

In reply, Mr. Silverstein accused Swiss Re of "cynical and manipulative" tactics and "scurrilous" personal attacks and of shirking its responsibilities to both policyholders and lower Manhattan. The judge, U.S. District Judge Michael B. Mukasey, has noted the level of "bile" in the case and reminded the parties to stick to the facts and the law.

Tensions bubbled Tuesday at a pretrial hearing in a lower-Manhattan courtroom packed with more than 50 lawyers. Struggling to control what he called a "metastasizing" trial, Judge Mukasey at one point interrupted Swiss Re's lead lawyer, Barry Ostrager, and John Gross from the Silverstein camp, who were bickering with each other over materials the two sides had agreed to exchange. "Nominally, people are supposed to address me," Judge Mukasey said, wryly. "If you want to fight, you can go outside and fight."

The dispute dates to the spring of 2001, when Mr. Silverstein and his closely held company were preparing for the July 24 closing on their $3.2 billion purchase of the Trade Center's leases. It hired Willis Group Holdings, a New York-based insurance brokerage, to buy property insurance, a condition of the lease.

According to court documents, Willis and its primary broker, Timothy Boyd, began approaching insurance companies in June, using WilProp, a form that explicitly defined the word "occurrence" as damages attributable to a "series of similar causes." The Second Circuit Court of Appeals later ruled that under WilProp the Sept. 11 attacks were a single occurrence as a matter of law, requiring a single payment.

Ultimately, 23 insurers preliminarily agreed to provide coverage totaling $3.5 billion, pending the final signing of the formal policies. The temporary policies, known as "binders," are informal and often include handwritten scribbles but are nonetheless binding contracts.

In court papers, Swiss Re and other insurers assert that it and at least 19 other insurers had committed by July 19, and the only form they had seen was WilProp. But a wrinkle was added on July 9. A unit of Travelers Property Casualty Corp., Hartford, Conn., rejected the Willis form and two days later sent its own form that didn't include a definition of occurrence.

According to the court record, Mr. Boyd reluctantly agreed to accommodate Travelers on July 12. "Unless advised otherwise, I intend to bind as follows: Use Travelers and accept its form," he wrote in an e-mail to colleagues at Willis.

The Silverstein camp argues that most other insurers ultimately agreed to use the Travelers form before they finally committed to their portion of the insurance. Indeed, the Silverstein camp says that Swiss Re in particular had been told of the switch and received the Travelers form before it finally committed.

But Swiss Re and other insurers argue that all parties -- including Mr. Strachan -- knew that the Travelers form applied only to Travelers, while WilProp governed the rest. Swiss Re says that in its own case it had committed to its policy long before it had even seen the Travelers form.

The second phase of the trial will focus on whether the Sept. 11 attacks were one or two occurrences under those insurers found to have committed under Travelers. The final phase would attach values to the actual losses from each occurrence.

In a deposition, Mr. Strachan described the scene at Silverstein Properties' midtown offices on Sept. 12, 2001, as chaotic, with representatives of a big lender, GMAC Commercial Mortgage Corp., and the Port Authority calling to ask for copies of the relevant insurance language.

"These people were obnoxious," Mr. Strachan testified, "We had lost four or five people." On one of the faxes, he circled the WilProp occurrence definition.

In court papers, Mr. Silverstein's lawyers argue that Mr. Strachan was "confused" and "acting under extreme stress" when he faxed the forms Sept. 12. The Silverstein side also says that Mr. Strachan, a 40-year insurance veteran, was "out of the loop" generally on the critical question of which contract language governed the policy, having delegated the details to Willis.

"He himself had no day-to-day involvement in the process," a Silverstein brief says. "Rather, he focused on the big picture, business-related aspects of the placement."

In its own briefs, Swiss Re counters that Mr. Strachan was in fact "singularly responsible" for the Trade Center insurance, and by his own testimony spent "75% to 80%" of his time on the matter during the summer of 2001. Swiss Re says he talked to Willis brokers daily.

At a hearing in December, Mr. Silverstein's lead lawyer, Herbert Wachtell, argued that Mr. Strachan's testimony and faxes should be excluded from the trial.

"He's the one who was so upset and was out of the loop and can't be relied on and so on?" Judge Mukasey asked.

Mr. Wachtell said the main issue was that insurers had already agreed to provide coverage under certain language, so Mr. Strachan's actions were irrelevant. "That argument should be addressed to people who will be sitting 90 degrees to your left," Judge Mukasey said, and denied the motion.

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